negotiable: instrumehf^ ilww

die receipt so for as they are written although the amount

ofdie said charge Is not stated.
%

W hen W arehouseman fees and charges cease to

accrue

Reasons which a w arehousem an m ay invoke to

legally refuse to effect delivery o f thegoods:

The warehouseman fees and charges cease to accrue from

the date of rejection by the warehouseman to heed the
lawful demand by the endorsee of the quedan for the
release ofthe goods (PNB v. Sayo,Jru Supra)

' 1.

That the holder of the receipt does not satisfy the

conditions prescribed in Section 8 of the WHR Law.

2.

That the warehouseman has legal tide in himself on

the goods, such tide or right being derived directly or
indirectly from a transfer made by. die depositor at
the time of or subsequent to the deposit for storage,
o r from the warehousemans lien (WHR Lew, Sec 16).

NEGOTIABLE INSTRUMENTS LAW

Negotiable Instrum ent (1992, 1993, 1996*1999,
2002,2005,2007 Bar)
It is a written contract for the payment of money which is
intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a
holder in due course the right to hold die Instrument free
from defense? available to prior parties (Sundiartg Sr. A
Aquino, 2011) For an instrument to be considered as a
negotiable one. It must comply with Section 1 of the
Negotiable Instruments Law, to w it

3.

That the warehouseman has legally set up the title or

right of third persons as lawful defense for non
delivery of the goods as follows:
a. Where the warehouseman .has been requested, by
or on behalf of the person lawfully entitled to a .
right of property of Dispossession in the goods, not
to make such delivery (MW?Law, Sec 10). in which
case, die warehouseman may, either as a defense
to an action broughtagainsthim for nondeliveiy of
. the goods, or as an original su it whichever is
appropriate, require ad known dahnants to
interplead (WHR Law, Sec. 17);
b. Where the warehouseman .had information that
the delivery'about to 'b e made was to one not
lawfully entitled to the possession of the goods '
(WHR Law, Sec. 10% in which case, the
warehouseman shall be excused from liability for
refusing to deliver tire -goods; either to the
depositor or person claiming under him or to the
adverse claimant; until the warehouseman has had
a reasonable time to ascertain the validity of the
adverse claims or to bring legal proceedings to
compel ail claimants to interplead (WHR Law, Sec.
18); and
c Where the goods have already been lawfully sold
to third persons to satisfy a warehousemans lien,
. or have been lawfully sold or disposed of because
of their perishable or hazardous nature (MW?Law,

(a) It must be in writing and signed by the maker or

drawer;
(b) Must contain an unconditional promise o r order to
pay a sum certainin money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, ie

m ust be named or otherwise indicated therein with
reasonable certainty. .
A negotiable instrument is characterized by negotiability
(capability of being transferred from one person to
another so as to make film a holder who Is entitled to the
payment thereof) and its accumulation of secondary
contracts resulting 'from indorsements at the bade
thereof.

SeC 36).
4.

That the warehouseman having a Uen valid against

the person demanding the goods refuses to deliver
the goods to him until the Uen is satisfied (WHR Law,

Negotiable instrum ent v. Non-negotiable Instrum ent

t

Sec. 31).
5.

That the failure was not due to any fault bn the part
of the warehouseman, as by showing that, prior to
demand for delivery and refusal, the goods were
stolen o r destroyed by Are, flood, etc. without any
negligence on his part; unless he has contracted so as
to be liable in such case, or th a t the goods have been
taken by the mistake of a third person without the
knowledge or implied assent of the warehouseman,
o r some other justifiable ground for \non-
deliveryfPWWppfrie NationalBanovs. Hon. Marcelino

Basis

Governing
Law

NON-NGGOTIARi.l. 'INSTRHMKNT
The Civil Code or
pertinent
special
laws should apply

(GSISv. CA,
G.R. No. 1-40824,
Februaty23,1989).
M annerof
Transfer-

L Sayo, JR, In fils capacity as Presiding Judge o f the

Regional Trial Court o f Manila (Branch 45), et al, G.R
No. 12^918,July9,1998).

21

:NI-GOTIARI,K
INSTRUMENT
NIL

Can
be Can be transferred
transferred by., only by assignm ent
negotiation or
by
assignment

Un i v e r s i t y of S anto T omas
JL
-------------------------
X

------------

Mercantile
Status o f
Transferee .

The transferee
can
be
a
holder in due
course if all
the
requirements
of Section 52
of the NIL are
complied with.

Defenses
Available-

Laws governing a negotiable instrument

[
1. NIL -For instruments which meet the requisites of
negotiability.
I
2. New Civil Code (NCC) - Applies suppletoriiy in cases
of assignment and demand for payment of an NIL.

The transferee can

never be a holder in
due course but
remains to be an
assignee.

rw

3. Code o f Commerce (CC) - Applies suppletoriiy to NIL

in cases of crossed checks.
All
defenses
available to prior
parties may be
raised against the
last transferee.

rkl

Incidents in the life of a negotiable instrum ent .

1.
2.
3.

Issue
Negotiation
Presentment foracceptance (in certain kinds of
BOEs)
|
>
4. Acceptance
5. Dishonor by non-acceptance
6 / Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Protest in case of foreign bill10. Discharge;..

(Sundiang Sr. &Aquino, 2014).

Q: D iscuss th e negotiability o r non-negotiability o f th e
follow ing n o tes (1993 B ar) *
t
.
1)
M anila, S eptem ber 1,1993
P2,500.00

Negotiable instrum ents are not legal tender -

I prom ise to pay Pedro San Juan o r o rd e r th e sum of

P2,500.

Negotiable instruments, are neither money nor legal

tender; they are mere substitutes for money (ACTA, Sec.
60).
|

(Sgd.) N oel C astro

- GR: The delivery of a negotiable instrument does not by

itself produce! the effect of payment (Roman Catholic
Bishqp ofMalolosvs. Intermediate Appellate Court, G.R. No.
72110, November 16; 1990).

2)
M anila, June 3,1993
P10,000.00
For value received, I prom ise to pay Sergio Dee o r
o rd e r th e sum o f P10,000.00 in five (5) installm ents,
w ith th e firs t in stallm en t payable on O ctober 5 ,1993
and th e o th e r installm ents on o r before th e fifth day
o f th e succeeding m onth o r thereafter.

XPNs: Negotiable instruments shall produce the effect of

payment when:

(Sgd.) U to Villa

of

S anto T omas

1 1 .
;b
.: f..
;o r '

2.

$ R'
: r

Characteristics or features of a negotiable instrum ent

1.

22,

VI

A: B. Wheh negotiated, negotiable instruments can be

used to pay indebtedness.

2) The instrument is negotiable because it complied with

the requirements provided by section 1 of the NIL. The
fact that it is payable in installments does not make the
instrument ndh-negotiable as long as it is stated
installments and the maturity of each Installment must be
fixed or determinable (NIL, Sec 2(b)).

1.. When they have been cashed,'or when through the

fault of the creditor they have been impaired (NCC,
A rt 1249).
If a check representing demand deposit has been
cleared and credited to the account of the creditor,
such shall be equivalent to delivery to the creditor
of cash (ACTA, Sec 60).
I
Q: Negotiable instruments are used as substitutes for
money, which means - (2012 Bar)

A:
1) The instrument is negotiable because it complied with
die requirements provided by section 1 of die NIL namely
that it is in writing signed by the maker or drawer,
contaips^n unconditional pgqmjse or order to pay a sum
certem fn money, payable oh demand or at a fixed or
determfnale future time and payable to order or to bearer.
It is signed by Noel Castro as maker or drawer, it contains
an unconditional promise to pay a sum certain in money
in the amount of P2.500 and it is payable on demand since
there was no date stated.

Un i v e r s i t y

law

Negotiability - The note may pass from hand to

hand similar to money so as to give the holder in
due coiirse (HIDC) the right to hold the instrument
and collect the sum payable for himself free from
any infirmity in theinstrument or defect in the title
of any of the prior parties or defenses available to
them aimong themselves.

if
A

I
M
'-

k *\ t
UL .
mon

'W
4 ..
m ya
;1 j

e.
. noon

-Li I
Fora
An ii

f~Mov
: n

I r
3.

ft

f
4. i i,

NEGOTIABLE INSTRUMENTS LAW

2.

Accumulation

o f secondary contracts- A
characteristic of a negotiable instrum ent where
additional parties become involved as they are
transferred from one person to another. Once an
instrum ent is issued, additional parties can
become involved (De Leon, 2010).

5.

Where the Instrument is Addressed to a drawee, he

must be named or otherwise indicated therein with
reasonable certainty {NIL, Seel).

NOTE: A NI heed not follow the exact language of NIL as

long as the term s arb sufficient which dearly indicate an
intention to conform to the requirements of the law (NIL,
Sec 10).
.

a. I prom ise to p ay A o r b ea rer Phpl00,000.00 from

m y Inheritance which I wffl g et alltOTthe d eath o f my
father.
'

The requirements stated bi Sec 1 m ust appear on the face

of the Instrument otherwise die instrument would not be
negotiable.

b. I prom ise to pay A o r b earer PhplOO,000 plus th e

Interest ra te o f ninety (9(Q - day treasu ry bills.

R ules governing th e use o f phrases In th e negotiable

instrum ents

c. I prom ise to p ay A o r b earer th e sum ofP hpl00,000

ifA passes th e 2012 b ar exams.

1.

d. I prom ise to p ay A o r b em er th e sum ofPhplQ 0.000

on o r before D ecem ber30,2012.

o. I prom ise to payA o r b earer th e sum o f PhplOO,000.

As to promissory note
a.

The word 'promise* need not be used. Any

expression equivalent to a promise is sufficient

b.

Mere acknowledgment of a debt is not a

prcmissoiynote.
'

(2012 Bar)

c.
A:

a. Non-negotiable. It is based on a contingency and not

an unconditional promise or order to pay sumi certain in
money. (Nil* Sec 1 [b])

2.

w ritten,

It m ust contain an order for payment as

distinguished from a mere request

b.

c. Non-negotiable. The instrum ent is' not an

utkoncfttional,promise or order to pay a sum certain in
money since paym ent depends upon the happening of ah
event(M L Sec t(b ])

The order is not invalidated berause itcontains

words of dviliiy. Thus^ fnser^on of polite wordd
like please" does not alter the character of the
instrument; as long as the language eg resses the
drawer's wiR th at the money be paid. .
a

Q: A prom issory n o te which does n o t have th e w ords

"or ord er* o r *or bearer" w in re n d er th e prom issory
n o te non-negotiable^ and therefore - (2012 Bar)

d. Negotiable. There is certainty in payment since it is

payable on or before a fixed or determinable future time
specified.
Sec 4(b]}

' e. Negotiable. It Is a bearer instrum ent th at is payable =

upon demand. (NIL, Sec. 7 [b] and Sec 9 [bj)

FORM.S AND INTKRlMtKTATlUN

Form of negotiable instrum ents (R equisites o f

negotiability).
An instrum ent to be negotiable m ust conform to the
following requirem ents: (SUn-DOrA)
1. It m ust be in writing and Signed by the maker or
drawer;

A: b. The note can still be assigned and the m aker made

liable '
R ules o f construction in case o f am biguities In a
negotiable instrum ent
1.

Words prevail over figures

2.

If date from which interest is to run is unspecified,

interest runs from the date of the instrument; if
undated, from the issue thereof

^ .
If undated, instrument is considered dated as of the'
time it was issued

*
3.

2.

Must contain an Unconditional promise or order to

pay a sum certaih In money;

3.

Must be payable on dem and, or at a fixed or .

determ inable future time;

4.

Must be payable to fltd er or to bearer; and

A.: W ritten provisions prevail over printed

23

5.

t-

As to bill of exchange
a.

b. Negotiable. The instrum ent Is negotiable despite the

indtision of interest since the sum to be paid with said
- interest is still certain. (Nil, Sec 2 [a])

Language. used m ust indicate

undertaking to pay

If there is doubt whether it is abfllornote,the holder

may treat it as either ath is election

U n i v e r s i t y of S anto T oma s
F aculty op Civil Law

I
&

Mercantile L aw
6.

When not d ear in what capacity it was signed,

deemed signed as an indorser

7.

When two or more persons signed a negotiable

instrum ent stating T promise to pay/in case of
liability, they shall be deemed to be jointly and
severally liable [NIL, Sec 17).
Ki-:QiJisrn-;s o k

nhg otiabiuty

1.

Ah indication of particular fund out of which

'reimbursement is to be made or a particular account
to be debited with toe amount; or

2.

A statem ent of the transaction which gave rise to the

instrum ent But an order or promise to pay out of a
particular fund is condItional(WL, Sec 3).

Indication o f jparticular fund for reim bursem ent v.

Indication o f particular fund for paym ent '

Factors to determ ine th e negotiabUity fPR/?

1.

Words th at appear on toe ace of negotiable

!: m

F U N D F O R
m I l l s i- m

F U N D

F O R

iA Y M F ' N T

h n t

.instrum ent
2.

Requirements enum erated in Section 1 o f NIL

3.

Intention of the parties by considering the whole of

toeinstrum ent
f

NOTE: In determ ining the negotiability of an instrum ent

consider toe instrum ent in its entirety and only what
appears on its face. It m ust comply with the requirem ents
under Section 1 of toe NIL (Sundiang Sr. & Aquino, 2014

dting Caltex Phils, v. CA, G.R 97753, August20,1992).

H ie Instrum ent m ust be In w riting

There is only one act* toe

drawee pays directly
from toe particular fund
indicated.

<

Particular fuind indicated Particular fund indicated

is not the dir ect source of Is toe direct source of.
payment
paym ent

:j *'

1. The draw ee pays the

payee from1 his own
funds.
2. T he' dra wee pays
the
himself
from
particular fuipd indicated.

Instrum ent ijs negotiable.

[
i

It m ust be reduced in writing or in tangible form. The

negotiability or non-negotiability of an instrum ent is
determined from the w riting on the face of toe instrum ent
itself (De Leon, 2010).
T he instru m en t m ust b e signed b y th e m aker o r
draw er
It is . placed a t toe lower right hand com er of toe
instrum ent Nonetheless, it may appear in any part of toe
instrum ent w hether a t the top, middle o r bottom o r a t toe
margin (De Leon 2010}.
However, w here a signature is so placed upon the
instrum ent th at it is not clear in w hat capacity toe person
malting toe sam e intended to sign, he is to be deemed ah
indorser
Sec. 17 [f]).
NOTE: H ie signature is valid and binding as long as it
appears th at a person intended to make toe instrum ent
hisow n. The signature is prima fade evidence of a
person's intention to be boundas either maker or drawer.

G ertaiiity as to sum (1993,2002 Bai^

A sum is certain within the contemplation of Section 1(b)
of toe NIL if toe amount that is to be unconditionally paid
by the maker lor drawee can be determined oh toe face of
the instrumjent even .if it requires mathematical
computation [Sundiang Sr. &Aquino, 2014).
The sum payable is a sum certaih within the meaning of
this Act; although it is to be paid: (ISDEA)
1.
2.
3.
4.

An unqualified order or promise to pay is unconditional

though coupled with:

t
.i

Sundiang Sr. &Aquino, 2014).

U nconditionai prom ise o r o rd er to pay

The word 'promise* or "order* need not appear In the
instrum ent to satisfy toe requirements of Section 1(b) of
toe NIL (Sundiang Sr. & Aquino, 2014). The promise or
order to pay m ust not be subject to any condition or
contingency. An instrum ent payable upon a contingency
is not negotiable even if toe condition thereon has been
fulfilled.

Instrument is
nonnegotiable. The fund
specified is toe direct
source of payment;
therefore, it is subject to
toe availability of fund,
hence conditional.

5.

With Interest; or
By Stated installments; or
By stated installments, with a provision upon Refault
in payment of any installment or of interest, the
whole shall become due ( acceleration dause);
With Exchange, whether at a fixed rate or a t the
current rate; or
With cost of collection or an Attorneys fees, in case
payment shall not be made at maturity (NIL, Sec 2).

Paym ent w ith interest

Interest at fixed rate or at increased or reduced rate will

not destroy negotiability because toe presence of such
interest does not make uncertain the sum payable.

i
In the absence of a date as to which interest is to run, it

NEGOTIABLE INSTRUMbN 11> LAW

shall be from die date of Instrument; or In the absence
thereof, a t Ihe date of issue. In die absence of interest rate,
it shall be the legal rate.

ceases to be negotiable in die full commercial sense (De

Paym ent by installm ent

Payable in Philippine Peso

Payment by installm ent Is certain if the dates of each

Installment are fixed and the amount to be paid for each
installment is stated (NIL, Sec 2; Sundlang Sr, & Aquino,

The "money* referred into may be .our legal tender or

foreign currency. An instrum ent is still negotiable
although the amount to be paid is expressed In currency
that is not legal tender so long as it is expressed In money
(PNB vZulueta, G.R. Wo, L-7271, August30,1957).

Leon, 2010).

2009).;
Paym ent w ith an acceleration clause

NOTE: An agreement to pay In foreign currency is valid

(RA 8183).

Acceleration idause Is a provision, th at upon default in

payment of any installment o r interest; the Whole shall
become due(NH, Sec2[cf).

Effect If a b ill o r note is payable oth er than in money

1. if die opdon to accelerate die m aturity is on the

maker,whether such option is absolute or conditional,
it is negotiable.
' '

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

in goods wares; or merchandise, or in property, the same
is not negotiable.

2. Where acceleration is a t the'opdon of die holder and

Can only be exercised upon the happening of the
specified event, still negotiable.

XPNs: Negotiability is not affected if the note contains an

additional provision whfdi; (SECo law )

3. But where die holders right to accelerate is

unconditional, the time of payment Is rendered
uncertain, the instrum ent would not be negotiable.

1.

Authorizes die sale of collateral Securities in case die

Instrument be notpaid a t maturity; or

2.

Gives the holder an Election to require something to

be done in lieu of payment of money; or

Extension Clauses are provisions extending die tim e of

paym ent

3.

Authorizes a Confession of judgment if the

instrument be not paid a t maturity; or

GR: An extension clause does not affect the negotiability

of the instrum ent

4.

Waives die benefit of any Law intended for die

advantage orprotection of the obligor (NILSec 5f

XPN: Where a note with afixed maturityprovides that the

maker has the option to extend time of payment until the
happening of a contingency, die date is uncertain and the
instrum ent is non-negotiable.

Payable on dem and o r a t a fixed o r determ inable

fu tu re tim e
.

.Extension d a u se

1.
Payable on demand - The holder may call for
payment any time, likewise, the maker may also pay any
time and the refusal of die holder to accept paynjent shall
stop die running of interest should there be any, but
obligation to pay die note subsist

Sum to be p aid w ith exchange

The exchange is the charge for die expense of providing
funds a t the place where th e instrum ent is payable to
cover $uch instrum ent which is issued at another place.
It may be a t a fixed rate or a t the current rate. It is
applicable only to foreign bills (De Leon, 2010).

An instrument is payable on demand: '

a. When it is so expressed to be payable on demand, or at
sight, or on presentation; or
.
b. In which no time for payment is expressed (NIL, Sec 7).
c. Where an instrument is issued, accepted, o r indorsed
when overdue, ft is, as regards die person so issuing
accepting or indorsing it, payable on demand (ibid).

Inland BOEv. Foreign BOE

An inland BOE is one which is, or on its face purports to
be, both drawn and payable within the Philippines and
any other bill is a foreign bill.

3. At a fixed time - A term or time instrument is payable

only upon the arrival of the time for payment

NOTE: Unless the contrary appears on the face of the bill,

the holder may tre a tit as an inland bill (NIL, Sec 109).

3.
At a determinable future time-An instrum ent is
payable a t a determinable future time which is expressed
to be payable:
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future time
specified therein; or
c. On or a t a fixed period after the occurrence, of a
specified event which is certain to happen, though

Sunk to b e paid w ith costs of collection an d /o r

attorney's fees
It does not affect the certainty of the amount payable at
m aturity since the increase in the amount due, even if
uncertain, takes place after m aturity when the instrum ent

25

U n iv ersity of S a n to Tomas
-----------------F aculty . of C iv il L aw

Jm

Mercantile Law
tlie time of happening be uncertain (Nil, Sea 4).
Payable to o rd er
The instrum ent is payable to order where It is drawn
payable to the order of a specified person .or to him o r to
his order, (t m aybe drawn payable to the order oh (PaDD

JofnSH)
1. A Payee who is n ot a m aker, drawer* or drawee;
2. The firatoer or m aker; o r
3. The firawee; or
4. TWo orm ore payees Jointly; or
5. One or some ofSeveral payees; or
6. The Holder of an office for the time being (Sea 8, NIL).
Payable to b ea rer (1997,2002 Bar) (ENaFPaLa)
When it is Expressed to b e so payable; (e.g. tjjrom ise to
pay to bearer P10.000.00)
2. When it is payable to a person Him ed therein or bearer;
(e.g. Pay to P or b earer P1Q,000.Q0)
3. When it is payable to th e order of a fictitious person or
non-existing person,, and such fact was known to the
person making it so payable; (e.g. Pay to John Doe o r
. order) .
4. When the name of th e Payee does not purport to be thenatne of any person; (Pay to cash)
5. When tile only o r the la s t indorsement is an
indorsement in blank (NIL, Sec 9).

Illustration:
Back of NF(indorsement)
PaytoA

Sgd.P

* w Pay to B

Sgd.A
Sgd.B

Q: A. MP bought a u sed cell phone from f i t JR

preferred cash b u t MP is a friend so JR accepted
MR's prom issory n o te fo r PlOfiOO. JR thought o f
converting th e n o te In to cash by endorsing It to h is
b ro th er KR. The prom issory n o te is a p iece o f p ap er
w ith th e following h and-printed notation: MP WILL
PAY JR TEN THOUSAND PESOS IN PAYMENTFOR HIS
CELLPHONE 1 WEEK FROM TODAY. Below th is
notation. MP's sig n atu re w ith 8 /1 /0 0 next to it,
indicating th e d a te o f th e prom issory n o te W hen JR
presented M Fs n o te to KR, th e la tte r said It w as n o t a
negotiable in stru m en t u n d er th e law and so could n o t
be a valid su b stitu te fo r cash. JR took, th e opposite
view, insisting on tire n o te's negotiability. You a re
asked to referee. W hich o f th e opposing view s is
correct?
B.
TH is an in d o rsee o f a prom issory note th a t
sim ply states: - PAY TO JUAN TAN OR ORDER 400
Un iv e r s ity

of

S anto T omas

PESOS. The note has no d a te do place o f paym ent and

n o consideration m entioned. It was signed by MK and
w ritten under: h is letterhead specifying th e address,
w hich happens to be his residence. TH accepted the
prom issoiry n o te as paym ent for services rendered to
SH, w ho in tu rn received th e note from Juan Tan as
paym ent fo r a prepaid ceil phone card w orth 450
pesos. The payee acknowledged having received the
n o te on August 1,2000. A Bar review ee had told TH,
w ho happens to be your friend, thatTH is n o t a holder
In due course under Article 52 o f th e Negotiable
n stn u n en ts Law (Act 2031) and therefore does not
enjoy th e rig h ts and protection u n d er th e statute.
TH asks fo r o u r advice spedficalfy in connection with
th e n o te being undated and not m entioning a place of
paym ent and any consideration. W hat would your
advice be? (2000 Bar)
j
A:
a.
The view of KR is correct The.note is payable to a
specific person hence it is not negotiable. The law
provides th at for an instrument to be negotiable, it must
comply with die requirements of section 1 of the NIL
pertaining to the part that a note mUstbe payable to order
or bearer. In th e given case, there were no words of
negotiability and ft is silent as to whether it is payable to
order o r bearer. Hence; the instrument is non-negotiable.
b . The place and date are not essential to the
negotiability Of the instrument except in certain cases
when the date Is necessary say to determine when the
note is due or tire interest is to run when the payment of
interest has been stipulated or whether the holder is
barred by the; statute of limitations from enforcing the
note. The fact that there is no mention of consideration is
n ot essential because it is presumed
D ifference betw een having a check payable to a
fictitious payee and payable to a specified payee
If a check is payable to a specified payee, it is an order
instrum ent, which requires indorsement from the payee
o r holder before it may be validly negotiated; but it may
nevertheless be considered as a bearer instnunent if it is
payable to tiie order ofa fictitious or non-existing person,
and such fact Is known to the person malting it so payable.
Thus, checks issued to "PrinsipeAbante* or "Si Malakas at
si M aganda/who are well-known characters in Philippine
mythology, are bearer instruments because the named
payees are fictitious and non-existent (De Leon, 2010%
Fictitious-Payee rule
A check is a p ill of exchange" (B0E) drawn on a bank
payable on dem and It is either an order or a bearer
instrum ent put when the payee is fictitious or not
intended to be the true recipient of the proceeds of the
Check, the check is considered as a bearer instrument and
as such it does not require indorsement to be validly
negotiated It is negotiable by mere delivery (PNB v.

Rodriguez, G.R No. 17032S, September26,2008 in Divina,

2010).

IXfctoOnAbi-fc. INS I KUMfcNTS LAW

Q: Which o f th e following stipulations o r features of a
prom issory note (PN) affect o r do n o t affect Its
negotiability, assum ing th a t th e PN Is otherw ise
negotiable? Indicate your answ er by w riting th e '
paragraph num ber o f th e stipulation o r feature of the
' PN as m own below and your corresponding answer,
either-A ffected o r-N o t affected. Ej^IahL

Application o f th e flctitious-payeenile
A "fictitious payee is not limited to person having no real,
existence; An actual, existing, andliving payee may also be
"fictitious" if the maker of the checkdid not intend for the
payee to in feet receive the proceeds ofthe check (PNB v,
Rodriguez, supm).
t
, As to w h o b ears th e loss in a fictitious-payee situation

a ) The date o fth e PN is-F e b ru a ry 30,2002,

In a fictitious-payee situation, the .drawee bank , is

absolved front liability and the drawer bears the loss.
When freed with a check payable to a fictitious payee, it &
treated as a bearer instrum ent that can be negotiated by
. delivery. The underlying theory Is th at one cannot expect
. a fictitious payee to negotiate the check by placing his
indorsem ent thereon. And since the m aker knew tills .
limitation, he m ust have intended for'the instrum ent to be
negotiated by m ere delivery. Thus; in case of controversy,
th e drawer of the check will bear the loss (Ibid).

b) The PN bears In terest payable o n th e last day of

each calendar q u arter a t a ra te equal ,to five
percent (5% ) above th e then prevailing 91-day
Treasury Bill ra te as published a t th e beginning
o f such calendar quarter.
c) The PN gfares th e m aker th e option to m ake
paym ent eith er in m oney o r in quantity o f palay
o r equivalent value.
d) The PNgives th e holder th e option eith er to re q u ire'
p a p e n t in money o r to req u ire th e m aker to
serve as th e bodyguard o r escort o f th e bolder for
30 day* (2002 Bar)

Exception to th e fictitious-payee ra le
A showing of commercial bad frith on the p art of the
drawee or any transferee of the check for thatm atter, will
w orkto strlp ft of this defense (HrfrfJ.

As
a. Paragraph!: NOTAFFECTED. Date is not one ofthe
requirements for negotiability therefore it is not essential
except when the date is necessaiy to determine when the
note isdue

. W hen draw ee m ust be nam ed w ith reasonable

certain ty
1.

In a BOE, tile drawee m ust be named o r otherwise

designated with Reasonable certainty (NIL, Sec 1).

2.

A bill may be addressed, to two or more drawees

jointly, bu t not to two or more drawees in the
alternative o r in succession (NIU Sec 127). Eg. An
instrum ent m aybe addressed fcoAand B" but not "to
AorB".

3.

b. Paragraph 2: NOT AFFECTED. An instrument

. payable with interest determinable' a t a fixed, tim e is .
negotiable. The law provides under section 2a ofthe N1LI
asum is still considered as certain although It isto b e pain
within interest- It dpes not make the. promise
unconditional
c.
Paragraph 3: AFFECTED. An option given to the
maker makes the promise conditional

An Instrum ent payable ?to the order o f ttie hearer^

has been held to be an Instrument payable to "order"
(10 CJ.S. 575-576).
1

d. Paragraph 4: NOTAFFECTED. An option given to

the holder does not m ate the promise conditional

Provisions th a t d o n o t affect th e negotiability, o f an

in stru m en t (OVNo S. CurSECo Law)

Q:B borrow ed P h p l m illion from Land offered to him

h is BMW car w orth Php 1 M illion as collateral. B then
executed a prom issory note tihat reads: L B*prom ise '
to pay L o r b earer th e am ount o f P h p l M illion and to
keep m y BMW car (loan collateral) free from any
o th e r encum brance. Signed, B. is th is note
negotiable? (2011 Bar)

. 1. Omission offiate
- 2. Non-specification of Xalue given or th at any value, had .
been given
3. Non-spedfication of place where itisdraw n or payable
4 . B earsaeaI
5. Designation of particular kind of Currency in which
payment is to be m ade (Sec. 6, NIL)
Additional provisions which:
1. Authorizes the sale of collateral Securities on default
2. Gives tiie. h o ld er an JEIection to require something to
. . be done in Heu of payment of money.
3. Authorizes Confession ofjudgment on default
4. Waives th e benefit of the Lawintended for the
. p ro tectio n o fth e obligor (NIL Sec. 5).

' A: No,, since it contains a promise to do an act in addition

to the payment of money.
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives an
election to require something to be done in lieu of
payment ofmoney.

27

Q: A w rites a prom issory note in fovor of his creditor,

B. It says: Subject to my option, I prom ise to pay B
P h p l Million o r his order or give P h p l Million w orth
of cem ent or to authorize him to sell my house w orth
U n i v e r s i t y of S a n t o T o m a s
__________ F aculty of C ivil Law

*5
L

MERCANI ILfc law

P h p l M illion. Signed, A.* Is th e n o te negotiable? (2011
B ar)
Ai No, because the exercise of the option to pay lies with
A, th e m aker and debtor/
Note: In order not to affect die negotiability of die
instrum ent; the option m ust be with die holder/creditor.
Q: A ntonio issued th e follow ing Instrum ent:
A ugust 10,2013
M akatiCSty
P100,000.00
Sixty days after d ate, I prom ise to pay Bobby o r h is
designated rep resen tativ e d ie sum o f ONE HUNDRED
THOUSAND PESOSfP 100,000.00) from m y BPl A cct
No. 1234 if, by th is due d ate, d ie sun stills e ts in d ie'
w est to u sh er in th e evening and rises in th e east d ie
following raoniing to w elcom e th e day.

f .

The
subject.
m atter is a sum
certain
in
money
Capable
of
accumulating
Capability o f secondaiy
Accumulatin 9 contracts
.Secondary
resulting from
Contracts
indorsements
at tiie bade
'thereof

Subject
Mutter

Actually stands
for the goods it
covers
Not capable of
accumulating
secondaiy
contracts
resulting from
Indorsements
at the back
thereof.

KINDS OF NEGOTIABLE INSTRUMENTS

Kinds o f negotiable instrum ents

' (Sgd.) Antonio Reyes

Explain each req u irem en t o f negotiability p resen t o r
ab sen t in d ie in stru m en t (2013 Bar)
A: The instrum ent contains a promise to pay arid wassigned by die maker, Antonio Reyes (NIL, Sea 1(a))
The promise to pay is unconditional insofar as the
reference to the setting of the sun in the west in the
evening and its rising in the east In the morning are
concerned Thesevare certain to happen (NIL Sea 4(c). The
promise to pay is conditional because the money wfll be
taken from a particular fund, th e BPI Account No. 1234

(NIL Sea 3).

The instrum ent contains a promise to pay a sum certain
in money, P100,000.00 (NIL Sea 1 [b])
The money is payable a ta determinable future time, sixty
days after August 10,2013 (NIL Sea 4[aJ).
The instrum ent is n ot payable to order or to bearer (NIL

Sea l(d]).
Q: .D istinguish a n egotiable docum ent from a
negotiable instru m en t (2005 Bar)
NEGOTIABLE/
US-NEGOTIABLE
DOCUMENT
/ /INSTRUMENT
A
written Held to be noncontract which negotiable in
is intended as a the technical
Substitute fo r substitute for sense because
money
money
like they do not
have
the
prom issory
notes and bill of requisites
under the NIL
exchange
It may either be It has various
a
bill
of forms such as
.
Foriris *'- exchange or a but not limited
to bill of lading,
prom issory
note
stock

V " BASIS

certificates,
warehouse
receipts
and
pawntickets.

1. Promissory notes (PN) - An unconditional promise in

writing made by one person to another, signed by the
maker, engaging to/pay on dem and.'or a t a fixed or
determinable future lime, a sum certain in money to
order or to bearer (NIL Sea 184).

2. Bill o f exchange (BOE) - An unconditional order in writing

addressed by one person to another signed by the
person giving it; requiring the person to whom it is
- addressed to pay on demand or a t a fixed or
determinable future time a sum certain in money to
order or to bearer (NIL Sec 126).
NOTE: A dieck is a bill of exchange drawn on a bank
payable on deihand (NIL, Sec 185).
j

Prom issory n ote v. Bill of exchange

PROMISSORY
HILL OF FXCflAfXdF
NOTE
.
Promise to pay . Orderto pay
3 parties (upon
teto n u m b ero f
2
parties
acceptance of the
arfginalpdrties
drawee)
As to liability o f Maker
is- Drawer
is
parities:'
1 t primarily liable secondarily liable
i.
Only
1 2 presentments (for
4s tonum ber o f
presentment
acceptance and for
presen tm en ts(for payment) is payment)
are
hieeded'
- F.
generally needed
needed
BASIS "

A b ill of exchange is not considered as an assignm ent

o f ftinds in th e hands o f th e draw ee
A bill of exchange itself does not operate as an assignment
of the funds in the hands of the drawee available for the
payment thereof, and the drawee is not liable on the bill
unless and until he accepts the same [NIL Sea 127).

A bill o f exchange m ay be addressed tp m ore than one

draw ee

which hits to comply with the requirements set forth

under Sec 1 of the NIL It is merely considered as a
negotiable docum ent..that does not result in the
accumulation of contracts.

A bilt of exchange may be addressed to two or more

drawees jointly, whether partners or not; but not to two
or more drawees In the alternative o r in succession (Nib

e. A treasury w arrant require appropriations from the

national government which means that the particular
fund may or may not exists which renders it conditional,
thereby non-negotlable.

Sec 128).
Instances w hen a bill o f exchange m ay be trea ted as
prom fssoiynote

P arties to a negotiable instrum ent and th eir

liabilities

1. Where In a bill die drawer and die drawee are the same
person (NilSec 130)

BA.SIS X PARTI KS

2. The drawee is a fictitious person (NIL, Sec. 130)

M aker

2. The drawee does not have the capacity to contract (NIU

Sec 130)

' -VV M

* *aLVa

4. W hether die Instrum ent is,so ambiguous th at there is

doubt whether it is a bill or a note, die holder may treat
it either a t his election (NIL, Sec 17(e);1998Bar)

X & l;

Payee

v .^ s v .

Q: State an d explain w hether d ie following -a re

negotiable instrum ents un d er th e Negotiable
Instrum ents Law:

D rawer

a. Postal M oney O rder

b. A certificate o ftin ie deposit which states T h is Is
to certify th a t b ea rer has deposited In th is b an k
d ie sum o f FOUR THOUSAND PESOS (P4,000)
only, repayable to th e depositor 200 days afte r
date.
c. L etters o f Credit
d. W arehouse R eceipts
e. T reasury w arran ts payable from a specific fond
(2005 Bar)

'-Xv
Drawee

::H:
****** *.***. ?*/

Payee

:.*:** *'*

As ..
a. Postal Money Order is not a negotiable instrum ent
because, as held in PM EducationCo. vs Soriano, there are
many restrictions which make them incompatible with
concepts of negotiable instruments, thereby making the
order conditional, in contrast to Sec. 1 of the NIL
Furthermore, such is governed by postal rules and
regulation and it may only be negotiated once.
b. The certificate of time deposit is a negotiable
instrum ent because it is an acknowledgement in writing
by the bank of the amount of deposit with a promise to
repay the same to the depositor or bearer thereof at a
specific time (Caltex v. CA, supra.).

Acceptor

) \ i:t i o \"
One who
makes the
promise and
signsthe
instrum ent
The party to
whom
payment is
originally
payable.
r

The person
who issues
and draws
the bill
The party
upon whom
the bill is
drawn.
The party to
whom
payment is
originally .
payable.
The acceptor
is the drawee
who accepts
the bill

I.I.ABH.ITV
Primarily .
liable

Secondarily
liable, except
when drawee
refused to
accept
. Not liable *
until he .
becomes
atceptor I
The party ty
whom
payment is
originally
payable.
Prim arily.
liable

Referee in case o f need

Referee in case of need is the person named by the drawer

or indorser in the N1 ds the one to whom the holder may
resort in case the BOE is dishonored by non-acceptance or
non-payment

NOTE: It is the option of the holder to refer to the referee

in case of need or not as he may see fit {NIL, Sec 131).
Acceptance of th e bill of exchange by th e draw ee is not
an im portant requisite for the instrum ent's
negotiability

c. A letter of credit is not negotiable because it is

generally conditional and has limited negotiability
because it is issued in favor of a specific person. But the
Supreme Court held in Lee v& Court o f Appeals, that the
drafts issued in connection with the letters of credit are
negotiable instruments.

The acceptance of a BOE Is not Important in the

determination of its negotiability The nature of
acceptance is im portant only in the determination of the
kind of liabilities of the parties involved (Philippine Bank

d. A warehouse receipt is not a negotiable instrum ent

because the obligation of a warehouseman is not to pay
bu t to deliver the goods under the warehouse receipt

o f Commerce v. Aruego, G.R. Nos. L-25836-37, January 31,

1981).

29

U n i v e r s i t y of S a n To T omas
F achltv op f ivii. Law

*4*i

MERCAN l iL t L-AW
D raw erv.M akeif
-.

BA S I S

DRAWEE

involved
L ia b ility _

. M AKER*-"V

IssuesaBOE

Issues a PN

Only secondarily
liable

Primarily liable

Can lim it his

. U m ita tio n o f ' liability
by
Liability
putting "without
Recourse"

course, then it is valid and effective for all purpose in his

hands because the defense of not filling it up in
accordance with the authority given is only a personal
defense that cannot be raised against a holder in due
course. Based | on the foregoing, Jun is liable to Marie,
being a holder in due course, for the incomplete
instrum ent wiilch he delivered to Ruth.

Cannot
liability

b. No. Hie check is. an incomplete instrument not

delivered in | contemplation of law. An Incomplete
Instrum ent not delivered is not a valid contract in die
hands of any holder .'as against any person whose
signature was placed thereonbefore delivery. As such, Jim
is hot liable to Marie since he does not assume any
responsibility whatsoever upon the said check (Nil* Sec

limit

COM 1I.KTION AND DELIVERY

IS)

Steps In th e issuance o f a negotiable instrum ent

V arious situations Involving negotiable instrum ents

1. The mechanical 'act o f uniting th e' instrum ent

completely and in accordance with Sec l o f NIL.

1. Incomplete!instrument
a. Delivered j
\ i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ih Without forgery aiid alteration

2, Delivery of the complete instrum ent by the maker or

th e draw er to the payee o r holder with the Intention
. of giving effectto i t
D elivery

2. Complete instrument
a. Delivered
L With forgery and alteration
iL Without forgery and alteration
b. Not delivered
L With forgery and alteration
ii. Withbut forgery and alteration

It refers to the transfer of possession, actual or

constructive, from one person to another (NIL, Sec 191),
w ith the intent to transfer title to payee and recognize him
as holder thereof.
Incom plete in stru m en t
An instrum ent is incomplete when it is wanting in any
materia] particular (NIL, Sec. 14).
<

R ule w hen an instrum ent is com plete and delivered

If an instrum ent is complete and delivered without
forgery and alteration, all parties are bound.

Q: fu n w as ab o u t to leav e fo r a business trip . As h is

u sual practice, h e signed several blank checks. He
in stru cted Ruth, h is secretory^ to fill them aspaym ent
fo r b is obligations. R uth filled one check w ith ho*
nam e as payee, placed P 30,000.00thereon, endorsed
an d delivered i t to Maries. She accepted th e check in
good faith a s paym ent fo r goods sh e delivered to Rnth.
Eventually, Ruth re g retted w h at she did and
apologized to Jun. Im m ediately h e directed th e
draw ee b an k to dish o n o r th e check. W hen M arie
en cash ed th ech eck ftw asd id to n o red ;
a.
Is fun liable to M arie?
b.
Supposing th e check w as sto len while, in R uth's
possession a n d a th ie f filled- th e blank, check*
endorsed and delivered it to M arie in paym ent fo r th e
goods h e purchased from her, is fun liable to M arie if
file check is dishonored? (2006 B ar)

I NS E RT I O N OF DA T E

N ecessity o f a d ate in o rd e r to m ake an instrum ent

negotiable
GR: The date is. not essential to the negotiability of the
instrum ent (not one of the requirements underSec. 1)..
NOTE: If the negotiable'instrument is dated, such date is
deemed a primafade proof that it is the true date of the
making, drawing acceptance or indorsement of the
instrum ent (NIL, Sec 11).
XPNs: Date is important to determine maturity:
1. Where the instrument is payable within aspetified
period after date, or after sight
2. When the instrument is payable on demand, date is
necessary to determine whether the instrument was
presented within a reasonable time from issue, or from
the last negotiation.
3. When the instrument is an interest-bearing one, to
determine when the interest starts to run.

A:
a. Yes. When a delivered instrum ent is wanting in any
m aterial particular (NIL, Sec 14), the person in possession
thereof has prim a fecie authority to complete ft by filling
up the blanks. But if it was n ot filled up strictly in
accordance with the authority given, it cannotbe enforced
against any person who became party there to prior to its
completion. However, ifit is negotiated to a holder in due
University

of

S anto T omas

30

NEGOTIABLE INSTRUMENTS LAW

Q: Cana biU of exchange o r a promissory note qualify
as a negotiable instrum ent iff
A. ft is not; dated;
B. . o r th e day and th e month, b a t n o t the year o f its
maturity, ts given; o r
C it is payable to -c a s h
D. It nam es two alternative drawees (1997 Bar)

CO.MPUTIOX OK-1! I.A:\KS

Meaning of a m ato ial particular

It is any particular proper to be inserted in a negotiable
instrument to make it complete.

Prima fa d e authority to fill up the blanks

A:
A. Yes. Date is not an essential requirement for the
negotiability of an instrument as provided for in section 1
oftheNIL

A signature on a blank paper delivered by the person

making the signature in order that the paper may be
converted into a negotiable instrument operates as a
prima fade authority to fill it lip as such for any amount
(Ibid).

B. No. Since the year is not deteimined, the time; for

payment is not determinable

NOTE: In order, however^ that any such instrument when

completed may be enforced against any person who
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given
and within a reasonable time (Ibid)
. .

C. Yes. When the name of the payee does not purport to

be the name of any person, the law provides fn Section 9d
of the NIL that the maker or dpawer intends die same to
be payable to bearer, hence the instrument qualifies as a
negotiable instrument

Effect if a completed instrum ent was negotiated to a

holder in due coarse

D. No. When the bill is addressed to two or more payees

.in the alternative, the law provides fn section 128 of the
NIL that it is conditional and therefore non-negotiable.
The objection to the drawers being ip the alternative or in
succession is the difficulty in determining die exact date
of dishonor of die bill inasmuch as it cannot be said that
the bill is dishonored until all of the drawers have
dishonored ft and if the presentment takes place for a
period covering several days when the last dishonor is
made, the first drawee who dishonored it may have
already been released from his secondary liability due to
the lapse of time before notice of dishonor was made by
die holder. Notice of dishonor could not have been made
earlier by the holds* since there is. still a remaining
drawee, who has not yet didionored i t

After completion, ihe completed instrument which was

subsequently negotiated to an HIDC, Is vaHd 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
NOTE: Hence, the defense that the blanks were filled up
beyond the authority given and/ or beyond the
reasonable' time, is not available as against a HIDC. This
defense ismerefy a personal one.
/
iNCO.Mri.rii-: i:;ot
i: \s i im:vjf.-\!ts
(Nil.. S c r . l 1)

(1997,2005,2008Bar)
Instance w hen a holder tnay in sert the date in an
instram ent

,,

Person authorized to fill up the blanks in an

incomplete but undelivered instrum ent

1. Where aninstrumentexpressed to bepayableatafbeed

period after date is issued undated, or
2. Where die acceptance of an instrument payable at a
fixed period after sight is undated [Nil, Sec 13).

The holder has a primafa d e authority to complete it (NIL,

Sec 14)
0
x
Difference between Sec. 14,15, and 16

Effect of insertion of a wrong date

SEC H

The insertion of a wrong date does not avoid the

instrument in .die hands of a subsequent holder in due
Course, but as'to a HIDC, the date so inserted ts to be
regarded as the true date (ibid.)

Incomplete
Instrument
which has been
delivered by the
maker or the
drawer to the
payee or holder.
1. Where the
instrument is
wanting in any
material
particular,
the
person
in
possession has
prima
fade

NOTE: With respect to the person who inserted the wrong

date, however, the instalment is avoided (Bank o f
Houston v. Day, 145 Mo. AppL 410,122 SW 756). .
Effect of ante-dating o r post-dating an instrum ent
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided it Is
not done for illegal or fraudulent purpose (NIL, Sec 12).

31

' Sl-C Jf)

Incomplete
and
undelivered
instrument

SEC 16 \ 0

Complete
instrament but
undelivered.

Instrument
1. If instrument
not
in
will not be a is
valid contract possession of
who
in tiie hands party
of any holder, signed, a valid
if completed and intentional
1'delivery by him
and
negotiated

U n i v e r s i t y of S a n t o T omas
________ ; F aculty of Civil Law

MERCANTILE LAW
; ^authority ' to without
complete it by authority.
filing up blanks
therein.
i
2. When the
instrument
is
merely
a
signature.
on.
blank
paper
delivered
.b y
person making
the signature ift
order that the
paper may be
converted into a
NI, the person in

possession has
prima
fa d e
authority to fill up
as such for any
am ount

such instrument against the party whose signature was

placed before delivery (NIL, Sec. 15).

is prima fa d e
presumed.

NOTE: Non-delivery of an Incomplete instrument is a

real defense (ibid.)

2. If holder is
HIDC,
valid
delivery, by all
parties prior to
him so as to
make
them
liable to him is
conclusively .
presumed.

Enforcement of d ie Instrument against the party

whose signaturej was placed after delivery
The instrument, can be validly enforced against the party
whose signature! was placed after delivery like ah
indorser because the indorser warrants foe instrument to
be genuine and in all respect what it purports to be.
NOTE: An HIDC cannot hold liable a maker for
instruments which are Incomplete and undelivered even
supposing that foe note was stolen, fllled-up, and was
subsequently negotiated The law Is specific that the
instrument is not a valid contract in the hands of any
holder. The phrase "any holder" includes an HIDC
i

Q:
a)
PN makes a promissory note for PS,000.00, but
leaves the name o f the payee in blank because he
w anted to verity Its correct spelling first He
mindlessly left foe note on top of bis desk a t the end
of th e workday. When he returned die following
morning, the note was missing. It turned up later
when X presented It to PN for paym ent Before X, T
w ho turned put to have filched die note from PNs
office, b a d endorsed the note after inserting his own
nam e in the blank space as th e payee. PN dishonored
th e note, contending that he did not authorize its
completion and delivery. But X said he had no
participation in, o r knowledge about the pilferage
and alteration of foe note and therefore he enjoys the
rights of a holder in due course under the Negotiable
Instrum ents Law. Who is correct and why?

NOTE:
The
holder must only
act in accordance
with
th&
authority granted
him, otherwise it
may be used as a
defense against
him.
Q: Lorenzo signed several blank checks instructing
Nicky, h |s secretary, to fill them as paym ent for his .
obligations. Nicky filled one check with h e r hme as
payee, placed P30,000.00 thereon, endorsed and
delivered it to Evelyn as paym ent for goods the latter
delivered to th e former. When Lorenzo found out,
ab o u t the transaction, he directed th e drawee bank to
dishonor th e check. When Evelyn encashed the check,
it was dishonored. Is Lorenzo liable to Evelyn? (2006
Bar) '

b) . Can the payee inaproniissoiy note be a "holder

in due course" within the meaning of the Negotiable
Instrum ents Law (Act 2031)? Explain your answer
(2000 Bar)
A:
a) . Since the negotiable instrument is still incomplete
and has not yet been delivered, PN is correct in
dishonoring the said instrument Sec. IS of Act 2031
providesThat where an incomplete instrument has not
been delivered, it will not If completed and negotiated
without authority, be a valid contract in the hands of any
holder, as againjst any person whose signature was placed
thereon before idelivery. Thus, under this section, it is a
real defense that can even be interposed against a holder
in due course.

A: Yes. This covers the delivery of an incomplete

instrument, under Section 14 of the Negotiable
Instruments. Law, which .provides that there was prima
facie authority on the part of Nicky to fill-up any of the
material particulars thereof. Having done so, and when it
is first completed before it is negotiated to an HIDC like
Evelyn, it is valid for all purposes and she may enforce it
within a reasonable time, as if it had been filled up strictly
in accordance with the authority given.

b)
(2000 and 2006 Bar)
Rule When an
undelivered

instrum ent i s / incomplete and

Where an incomplete instrument has not been delivered,

the holder, whether HIDC or not, cannot validly enforce
Un iv er sity
JnigC m nR M

S a n to T omas
Nnypc _________

of

32

A payee may be an HIDC provided that he was

able to establish the conditions entitling him to
be a holder in due course [De Ocampo vs
Gatchalian, 6ft No. 1-15126, November 30,
1961)i

I IA tJL.t I N b iKUM LIN l b> L A W

C O M P L E T E B U T U N D E L I V E R E D iNLSTRUMENiTS
' ( \ U . , SKC: 16)
Vs V

Im m ediate p atties
Immediate parties are persons having knowledge of the
conditions or limitations placed upon the delivery of an
instrum ent Itm eans privity, and not proximity.
;

Effect if an instrum ent Is undelivered

It is incomplete and revocable until delivery of the
Instrument for the purpose of giving it effect (NIL, Sec 16).
Delivery is essential to the validity of any negotiable
instrum ent (Sundiang Sr. &Aquino, 2009).

Remote parties

Where a debtor who drew two checks payable to his

creditor never delivered the checks to his creditor and a
third party was able to coDectthe proceeds of the checks *
by forging the endorsement of the creditor as payee, the
creditor has no cause of action againstanyone on the basis
of the checks, since the payee acquires no interest in the
check until its delivery to him (Development Bank ofRizal

v. Stm Wei, G.R. No. 85419, March 9,1993).

"'
However, in another case, the Court held that the payee of
a check can sue a collecting bank to whom the check was
deposited with a forged endorsement even if the check
was never delivered to the payee, to avoid a circuity of
suits (Westmont Bank v. Ong, G.R 132560, January 30,
2002).

Validity of signature In a negotiable Instrum ent

A patty may use his full name, surname, Initials or even
any mark In signing a negotiable instrument to indicate
his intention to bind himself.

GR:. Only persons whose signatures appear on an

instrument are liable thereon (NIL, Sec 18)
XPNs: Notwithstanding the absence of their signatures in
their own names, the following persons are deemed
liable: (Trap FAP)
1. Person mho signs in Trade or assumed name (NIL Sec.
18) - Patty who signed m ust have intended to* be bounfc

The instrum ent is deemed issued upon the first delivery

ofthe instrum ent, complete in form, to a person who takes
ita s holder/N/Z* Sec. 191)

by his signature.

C onditional delivery o r deliver^ for a special purpose

2. principal who signs through a duty authorized agent

and such agent discloses the name of his principal and
adding words to show he is merely signing in' a
representative capacity (NIL* Sec. 19,20).

The delivery is made conditional pr for a special purpose

if it was made not for the purpose of transferring the
property (title) to the instrum ent In such case, if the
instrum ent lands in die hands of an H1DC (one who does
not know of the conditional delivery or of its spedal
purpose), the instrum ent is treated as if there is no
condition if such delivery was made to a holder not in due
course, prior parties are not bound by the instrument

3. Eorger (NIL, Sec 23)

4. Acceptor, who makes his acceptance of a bill on a
separate paper (NIL, Sec 134)

(NIL, Sec. 16).

5. Person, who ipakes a written promise to accept the bill

before it js drawn (NIL, Sec. 135)
NOTE: Where a . signature is so placed upon the
instrument that It Is not clear in what capacity the.person
signed, he is deemed to be anindorser (NIL, Sec 17(f)), not
a maker or drawer.

NOTE: The law contemplates that the condition is orally

or verbally conveyed to the holder upon delivery, because
of the rule that the negotiability is determined only upon
the face of the instrum ent
Presum ption as to delivery

Q: Juan borrowed P10,000.ti0 from Joe as evidenced

by a prom issory note. All o th er req u isites of
negotiabilityare present except th at Juan did no t affix
his usual signature thereon as he was ailing a t th at
tim e and was only able to p u t "X" in th e blank space
m eant for th e signature o f the m aker. Is th e req u isite
th a t the Instrum ent m ust be signed by th e m aker
complied with?

If the instrum ent is in the possession of an HIDC, valid

delivery is conclusively presumed.

j ft

-..SIGNATURK

Persons liable on an instrum ent

Issuance o f a n instrum ent

p i fe

>

NOTE: A signature may be made In any manner as long as

the person signing has the intention to be bound.

NOTE: The defense of want of delivery of a Complete .

Instrument is only a personal defensewhich means that it
is only available againsta holder NOT in due course.

* n

Persons without knowledge as to the conditions or

limitations placed upon the delivery of an instrument,
even if he is the next party physically.

If the instrum ent is in the possession of a party other than

an HIDC, possession of such party constitutes only prima
fade presumption of delivery.

A: Yes. The letter X" is sufficient to comply with the

requirem ent It appears from the problem that such letter

33

U n i v e r s i t y of S a n t o T o ma s
------- !------ Faculty of Civil. Law

?
6

Mercantile law
was adopted by )uan with the intent to authenticate the
instrum ent It is not necessary that the signature is the
. usual signature of the maker.
S I G N I N G IN T R A D E N A M E

As a general rule, only persons whose signatures appear

bn an instrum ent are liable thereon. But one who signs In
a trad e o r assumed name is liable as if he signed his own
nam e (NIL, Sec 18). It is necessary, however, th at th e
party who signed intended to be bound by his signature.
S I G N A T U R E OK A G E N T

R equisites for an ag en t to be exem pt from liab ility

(AWDf)
1. He is duly Authorized
2f. He adds W ords to his signature indicating-that he
signs'as an agent/representatiye and
3. He ESsdoses the name of his principal (NIL, Sec 20).
Legal effects o f a n agents signature
Provided that the above requisites are complied with, die
legal effects of an agents signature in a negotiable
instrum ent are:

trum tent by a m inor

T ransfer o f instrum
While a minor is not bound by his indorsement for lack of
capacity, he is however not incapacitated to transfer his
rights.
M inor can bebodnd by his representation th at he is of
legal age
j
"!
Where he committed actual fraud by specifically stating
that he is of legal] age, a minor can be bound by his
signature in an instrum ent (PNB v. CA, G.R. No. L-34404,

June25,1980).
. Q: A executed a prom issory n o te in favor o f M w hich
reads:

I promise talpqyP(16years old) or order P10,000.

_________ I Sgd.M____________________
P indorsed it to A
I.

1. May A collect from M notw ithstanding th at P, die

in d o rser is a m inor?
2. In case th a t A cannot collect from M, can he collect
from P7

P rocuration

A:
l.Ves.AcancoUe ct from M: Notwithstanding the fret that
A is a minor, the iiindorsement of P (them inor) passestitle'
to A (the holder), M cannot invoke the defense ofminority
because such defeinse would only be available to P.

It is die actby which a principal gives power to another to

ac t in his plate as he could himself (Fink v. Scott, 143 SB.

2. No. A cannot collect from P, as he has a real defense of

minority on his p a rt

1. His signature will bind his principal; and

2. He will be exempt from personal liability.

30S).

EORG ER Y

Effect o f a sig n atu re by procuration

(1990,1997,1999,2004,2006,2008 Bar)

It operates as notke o r a warning th at the agent has but a

lim ited authority to sign and the principal is'bound only
in case die agent in so signing acted within the actual
lim its of his authority (NR* Sec21).

It is the counterfeit making or fraudulent alteration ofany

writing. It happens w hena signature is affixed by onewho
does not daim to actas an agent and who has no authority
to bind the person whose signature he has forged [NIL,

I N D O R S E M E N T B Y M I N O R OR C O R P O R A T I O N ' .

E ffe c ts'o f in d o rsem en t m ade fay an in fan t o r a

corporation

1. Minor-A contract entered Into bya minor is voidable, a t

th e option of the minor, ft is a real defense that tan be
invoked by a minor. However, it Is not a defense which'
m ay be setup by parties other than a minor.
2. Incapacitated person - An incapacitated person may
also use as a real defense his incapacity to enter into a
contract Contract entered into by the incapacitated are
voidable. Incapacitated persons include: a) insane or
demented persons and b) deaf and blind who does not
know how to w rite.
3. Corporation- Issuance or indorsement ofan instrum ent
by a corporation acting beyond, its powers is a BEAL

defense.

Sec 23).
. B urden o f p roof in proving forgery
Forgery, as any other mechanism of fraud m ust be proven
dearly and convincingly; and the burden of proof lies on
the party alleging forgeiy (Chiang Yia Min v. CA, G.R. No.

137932, Mar.2Si2001)
Extent and effejets o f forgery
1. Only the signature forged or made without authority
Is th e one inoperative, the instrument itself and the
genuine signatures are valid.
2.- An instrum ent indorsed which on its free is payable to
bearer may be enforced by the holder to whose title
over the instrument the forged signature is not
necessary.

n eg o tia
b le instrum
ents La w
.
;_____ ^___ t__________________
3. The Instrument can be enforced against those who are
precluded from setting up forgery.

2.

Illustration

3.. A holder of a bearer instrument who subsequently

negotiates such .instrument with a prior forged
indorsement (forged indorsement is not necessary to his
title it being a bearer instrument).

Pay to P or order P10,000 30 days after sight

Those who by their acts, silence, or negligence, are

estopped from claiming forgery;

(Sgd)D, (forged by P)
ToX
P presented the instrument for acceptance. Xaccepted the
instrument without detecting the forgery. P then indorses
the bill to A, A to B, B to C, the present holder. In this case,
if after 30 days the holder presented the Instrument to X
for payment the latter Is liable despite the forgery,
because by preclusion, the acceptor admits the
genuineness of the drawer's signature (NIL, Sec 62)
A payee m ay sue die collecting ban k for th e am ount of
' th e checks it paid u n d er a forged indorsem ent even
w hen th e instrum ent h as n o t been delivered to him
The collecting bank is liable to die 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 die owner of
the dieck is immaterial since the payee merely used one
action to reach, by desirable shortcut; the person who
ought in any event to be ultimately liable as among the
innocent persons. The payee is.allowed to directly recover
from the collecting bank to simplify proceedings
(Westmont Bank v.Ong, supra).

Liabilities of th e parties to a negotiable instrum ent

w here an indorsem ent is forged
ORDER INSTRUMENTS

ORDER PROMISSORY
NOTE
Prior parlies are not
bound. Forged signature
is wholly inoperative
unless estoppel sets in
with regard prior parties
(cut-offrule).

ORDER B U I OF
EXCHANGE
Prior parties are not
bound. Forged signature
i s * wholly inoperative
unless estoppel sets- in
with regard prior parties
(cut-offrule).

Subsequent parties to die

forgery are bound

Subsequent parties to the

forgery are bound
NOTE:
A
drawer's
account
cannot
be
charged by the drawee.
The drawer is not liable to
the collecting bank, since
the duty of the latter is
only to the payee.
Collecting bank bears/the
loss.

Effects of forgery
The payee can recover
from either the drawer or.
collecting bank, but not
from die drawee unless he
accepts the bill.

GR: It does not avoid the instrument but only the forged
signature. The signature is wholly inoperative. In other
words, rights may still exist and be enforced by virtue of
such instrument as to those signatures thereto are found
to be genuine.
'
However, a forged indorsement prevents any subsequent
parties from acquiring any right against any party prior to
the forgery. Such forged indorsement cuts off the rights
against piior parties to the forger (C ut-offrule).

XPNs:
1. If the party against whom it is sought to enforce such
light is precluded from setting up forgery or want of
authority (NIL, Sec 23).
2. Where the forged signature is not necessary to the
holder's title, in which case, the forgery may be
disregarded (NIL, Sec 48).

'BEARER INSTRUMENTS

BELL
BEARER PROMISSORY BEARER
NOTE
EXCHANGE
Prior parties liable.
Prior parties liable
However, the forged
signatory is not liable to a
party who is not a holder
in due course.

However, the forged

signatory is not liable to a
party who is not a holder
in due course.__________

Illustration

P ersons precluded from setting u p th e defense of

forgery (2010 Bar)
1.

OF

Those who admit/warrant the genuineness of the

signature such as indorsers, persons negotiating by
delivery and acceptor; (NIL, Sec 56).

/
Maker

TTmvgpgTv

c m**** **-

Mercantile law
a. If. the instrum ent is payable to order and the
indorsem ent of one of the indorsers is forged, C can
enforce the note againstX and B but not against M, P or A,
because were it not for the foigeryofX the instrum ent will
n ot reach the possession of C

bank, since the duty of collecting bank is only to the

payee (Manila Lighter Transportation, Inc v. CA, G.R.

No. L-50373 February15,1990).

b. If the instrum ent is payable to bearer, the indorsem ent

of X is not necessary to vest title to Cbecause negotiation
on bearer instrum ent requires only deliveiy.

b. Drawee-bank can recover from the collecting bank

because even if the . indorsement on the chedc
deposited by the bank's client is forged, collecting bank
is bound by its warranties as an indorser and cannot
set up defense of foigeiy as against drawee bank

Legal consequences w hen a bank honors a forged

$becH

(Assodated Bank v. CA, supra, Great Eastern Ufe Ins. Co.

v. Hongkong &Shanghai Bank, G.R. No. 18657, Aug. 23,
1922).

1.
When drawer's signature isforged - Drawee-bank by
accepting die check cannot set up the defense of forgery,
because by accepting the instrument; the drawee bank
admits, the genuineness of signature of draw er (BPl

Q: Discuss th e legal consequences w hen a bank

honors a forged check. (2006 Bar)
A: When the draw er's signature isfoiged, the'draweebank by accepting the check cannot set up the defense of
forgery because1by accepting the instrument, the drawee
bank, admits the genuineness of the signature of the
drawer (BPl Family Bank vs. Buenaventura, supra).

Family Bank v. Buenaventura, G.R. No. 148196, September

30,2005; NIL, Sec 23):
Unless a forgery is attributable to die fault or negligence
of the draw er himself, die remedy of die drawee-bank is
against' d ie party responsible for the forgery. Otherwise,
th e drawee-bank bears the loss. A drawee-bank paying on
a forged check m ust be considered as paying out of its
funds and cannot charge die amount to the draw er

When the payee's signature is forged, the drawee-bank'

who pays die same must be considered as paying out of
its own funds since it is the primary duty of die bank to
verify the authenticity of the payee's signature. (Traders

(Samsung Construction Co. Phils, v. FarEastBank, GJL No.

129015, August13*2004). If die drawee-bank has charged

Royal Bank v. RPN, supra).

draw er's account; the latter can recover such am ount

from die drawee-bank (Associated Bank v. CA, 6.R. N0.

When die forged signature is that of an indorsement; the

drawer's account cannot be charged, and if charged, he
can recover from the drawee-bank because the liability to
pay still falls on the drawee bank for having guaranteed
the genuineness of all prior indorsements. However, a
collecting bank is not guilty of negligence over a forged
indorsement oh checks for it has no way of ascertaining
the authority] of die indorsement unless it further
indorses the forged check wherein he becomes liable
upon the sam eas a general indorser, (ibid.)

107382,'January 31, 1996; BPl v. Case Montessori

Internationale, G.R.N0. 149454, May28,2004).
However, die draw er m aybe precluded or estopped from
setting up the defense of forgery as against die draweebank, when it is shown th at the drawer himself.had been
guilty of gross negligence as to have facilitated the forgery

(Metropolitan Waterworks v. CA, G.R. No. L-62943, July 14,

1986).
2.

Q: X fraudulently obtained possession o f th e d ieck

and forged P 's signature and then indorsed and
deposited th e check w ith XYZ bank which honored
th e dieck and placed the am ount thereof to his c re d it
T hereafter, XYZ Bank indorsed th e check to th e
draw ee bank-ABC bank which paid It and charged th e
account o f th e draw er. Illustrate Hie liability of a
draw er and | a draw ee-bank in an 1) instrum ent
payable to o rd e r and in an 2) instrum ent payable to
b earer in case o f a foigeiy on payee's sig n atu re

Drawee bank versus collecting bank - When the

signature of the draw er is forged, as hetween the draweebank and collecting bank, die drawee-bank sustains the .
iosS. sihce th e collecting bank does not guarantee the
signature of the drawer. The payment of the check by the
drawee bank constitutes die proximate negligence since
it has the duty to know the signature of its client-drawer.

(Philippine National Bank v. CA, GJL No. L-26001, October

29,1968).
3. Forged payee's signature - When drawee-bank pays
the forged check, it m ust be considered as paying out of
its funds and cannot charge the amount so paid to the
account of the depositor. In such case, the bank becomes
liable since its prim ary duty is to verify the authenticity of
the payee's signature (Traders Royal Bank y. Radio

Pay to P or order P10,000.

(Sgd)D
To: ABC Bank

Philippines Network, G.R. No. 138510, October 10, 2002;

A:
1. If die instn iment is payable to order,

' Westmont Bank v. Ong, supra).

4. Forged indorsement - Drawer's account cannot be
charged, and if charged, he can recover from the draweebank (Associated Bank v. CA, supra).

a. The drawee bank is liable to the drawer for the amount

of the check jand his account cannot be charged because
the indorsement of the payee is a forgery. Hence, it is
wholly inoperative and therefore, ABC Bank has no right
to ask the drawer for its payment

a. The Drawer has no cause of action against collecting

Un i v e r s i t y

of

S anto T omas

M .

N egotiable instruments L aw
b. XYZ Bank Is however, liable to the drawee' bank .
because of his w arranty as an indorser) (NIL, Sec 66)
c. D, the drawer, Is not liable on the check because Its
eider is to payP o r his order and not to any other person.
i
2. If die instrum ent is payable to bearer.
1
a. ABC Bank, d ie drawee-bank; may charge the amount*
thereof to the account of the drawer because die forged
indorsement did not prevent the transfer of tide. The
remedy of the draw er is against the forger.
. b. Drawer has no cause of action against collecting bank,
since the duty of collecting bank is only to the payee

(Manila Lighter. Transportation,' Inc v.CA, G.R. No. L50373February15,1990) The drawee-bank can recover
from the collecting bankbeCause even if die indorsement
on the check deposited by the bank's client is forged,
collecting bank is bound fay its warranties as an indorser
and cannot se t up defense of forgery as against drawee
bank (Associated Bank v.CA, supra).
Q: P sold to M 1.0 gram s o f shabu w orth PhpfS,000.00.
As he had no m oney a t d ie tim e o fth e safe, M w rote a
prom issory n o te prom ising to pay P o r h is o rd e r
PhpSfOQO.00. P th e n Indorsed th e n o te to X (w ho did
no t know ab o u t d ie shabu), an d X to Y. Unable to
co D ectfro iiiP ,Y th en su ed X o n d ien o te.X seti]p d ie
defense o f illegality Of consideration. Is h e correct?
(2011 Bar)
A: No, since X, a general indorser, w arrants th at die note
is valid and subsisting.
Remedy o f th e draw ee bank in case o f a forged
indorsem ent
The drawee bank may not debit the account of the draWer
but may generally pass liability back through the
collection chain to thepartyw ho took from die forgerand,
of course, to th e forger himself, if available, if d ie forgexy
is that of the *payee's or holder's indorsement; the
. collecting bank Is held liable, without prejudice to the latter proceeding against the forger.
-
Since a forged indorsem ent is inoperative, the collecting
bank had no rig h t to be paid by the drawee bank. The
former m ust necessarily return th e money paid by die
latter because it was paid wrongfully (Associated Bank v.

CA, supra).
Liability o f th e draw ee bank and th e draw er for th e
am ount paid on checks w ith forged indorsem ents. If
d ie sam e w as d u e to th e negligence of both th e draw ee
bank and th e d raw er
The loss occasioned by such negligence should be divided
equally between the draw er/deposltor and the drawee.'
Q: X en tru sted h is check books; cred it cards;
passbooks, b an k statem ents and cancelled checks to
his secretary. He also Introduced the secretary to th e
bank for purposes o f reconciliation o f his accounts.
Subsequentiy, X 's secretary forged his signature on
.i

to e checks andw as able to w ithdraw h is m oney. Is die

draw ee bank Uable fo r to e am ounts w ithdraw n fayto e
secretary?
A: No, he is precluded from setting up the foigery due to '
his ownnegligence In entrusting to his secretary his credit
cards ami check book including die verification of his
statements of account (Tlusario v. CA, G.R. No. 139130,

November27,2002).
Q: The draw er's signature w as forged. T here Is,
however, a provision in to e m onthly b an k statem en t
to h tlfth e d raw er's signature w as forged, th e draw er
should rep o rt i t w ithin 10 days from receip t of to e
statem ent to to e draw ee. The draw er, how ever, felled
to do sd. W hat w ili b e its effect Insofar as th e draw er's
rig h t is concerned?
A: The failure of toe drawer to report the forgery within
ten days from.redeipt ofthe monthly bank statem ent from
die drawee bank, does not preclude die draw er from
questioning the mistake of the drawee bank despite the
provision (BPIv. CASA MnntessorilntemationaJe^ supra).
Q: If forgery w as com m itted by an em ployee o f to e
draw er whose signature w as forged, does th e
relationship am ount to estoppel such th a t to e draw er
is precluded in recovering from th e draw ee bank?
A: The bare feet th at toe foigeiy was committed by an
employee ofdie party whose signature wasforged cannot
necessarily imply that such party's negligence,was toe.
cause of the forgery in toe absence of san e circumstances'
ratting estoppel against the drawer (Samsung
Construction Ca v. FarEastBank arid Trust Comparer, G.R,

No. 129015, August13,2004).

CONSH) l *KATH) i \ !

(2000,2009 Bar)
It is an inducement to a contract that Is the cause, price or
Impelling influence, which induces a party to enter into a
contract
NOTE: Every negotiable instrum ent is deemed prima
fade to have been issued for a valuable consideration
(NIL, Sec 24)

A check constitutes an evidence of indebtedness and is a

veritable proof of an obligation. Thus; based on Sec 24 of
die Nil* checks complete and delivered to a person by
another are sufficient by themselves to prove the
existence of the loan obligation obtained by die latter
from the former. (Ting Ting Pua v. Spouses Hong and

Caroline Teng, G.R. No. 198660, October23,2013, in Divlna,

2014)
Q: Virginia, th e General M anager o f North Stpr, in
accom m odation an d upon to e instruction o f its client,
Engr, Cayanan, sen t to e am ount o f US$60,000 to View
Sea Ventures Ltd* in Nigeria from h e r personal
account In Citibank M akati. Virginia again sen t
US$40,000 to View Sea V entures by telegraphic
transfer, w ith US$15,000 coming from Engr. Cayanan.

M e r c a n t i l e La w
To cover paym ent o f th e foregoing obligations, Engr.
Cayanan Issu e d !!v e checks to North Star. W hen
' p resen ted for p ay m en t tw o o f th e checks w ere
dishonored for insufficiency o f funds w hile foe o th er
th re e checks w ere dishonored because o f a sto p
paym ent o rd e r from Engr. Cayanan. North S tar
dem anded paym ent, b u t Engr. Cayanan foiled to settle
h is obligations. Hence, N orth S tar Instituted a
crim inal case, charging Engr. Cayanan w ith violation
o f fo e Bounding Checks Law. Engr. Cayanan in sists
th a t fo e US$85,000 se n t to View Sea V entures w as n o t
se n t fair fo e account o f N orth S tar b u t fo r foe account
o f V irginia as h e r in v estm en t Engr. Cayanan claim s
th a t N orth S tar d id n o t give any valuable
consideration fo r foe checks since tim US$85,000 w as
tak en from fo e p erso n al d o llar account o f V irginia
an d n o t th e corporate funds o f Norfo Star. v

W ant o r absence of consideration v. Failure of

consideration (1996,2007 Bar)
W A N T OR A B S E N C E OK
CONSIDERATION

F AI L UR E OF
CONSIDERATION

Total lack of any valid

consideration for foe
contract

Failure or refusal of one

of . foe parties to db,
perform or comply with
foe consideration agreed
upon__________ ._____

Effect of w ant of consideration

It becomes a m atter of defense as against any person not
a holder in due course, thus, a PERSONAL defense (NIL,

Sec. 28).
Effect Ofp artial failure of consideration

A: Upcin issuance of a negotiable check, in foe absence of

evidence to foe contrary, it ispresum ed th at foe same was
Issued for valuable consideration w hidi may consist
either in some right; interest; profit or benefit accruing to
foe party who makes the contract or some forbearance,
detrim ent; loss or some responsibility, to act; or labor, o r
service given, suffered o r undertaken by the other side.
Under foe Negotiable Instrum ents Law, it ispresum ed
that eveiy party to ah instrum ent acquires foe same for a
consideration or for value. As Engr. Cayanan alleged th at
there was no consideration for foe issuance of the subject
checks, it devolved upon him . to present Convincing
evidence to overthrow foe presumption and prove th at
foe checks were in fact issued -without- valuable
consideration. Engr. Cayanan, however, has not presented
any credible evidence to rebut the presumption/as well as
N orth'Star's assertion, th a t the checks were issued as
payment for the. US$85,000 Engr. Cayanan criyed to the
corporation and not to foe manager who facilitate foe
ftrfid transfer. C a y a n a n v. North StaHnternational

Travel Inc, G.R. No. 172954, October 5,2011).

H older fo r value
A holder for value is one who has given a valuable
consideration for foe instrum ent A holder for value is
deemed as such not only as regards foe party to whom the
value has been given to by him b u talso in respect to all
those who became parties prior to foe time when value
was given.
NOTE: Where foe holder has a lien on the instrum ent
arising either from contract or by implication of law, he is
deemed a holder for value to foe extent of his lien. [NIL,

Partial failure of consideration is a defense pro Junto,

whether foe failure is an ascertained and liquidated
amount or otherwise (ibid.).
Inadeqnacy o f consideration
GKb Inadequacy of consideration does not invalidate the
instrum ent
XPN: There has been fraud, mistake or undue influence

(NCC, Art 1355).

NOTE: However, knowledge of inadequacy of
consideration would render foe holder not HIDC liable

(NIL, Sec S3).

Q: X borrow ed m oney from Y in
th e
am ount o f Php lMBIion- and as paym ent
issued a check. Y then indorsed foe check to h is sister
Z fo r no consideration. W hen Z deposited th e check to
h e r account foe d ieck w as dishonored for
insufficiency o f funds. Is Z a holder in due course?
Explain ybur answ er (2012 B ar) \
. A: No, Z is not an HIDC Under-Sec 52 (c), NIL it is
expressly provided that the instrum ent m ust be acquired
in good faith and for value to consider him a HIDC
ACCOMMODATION PARTY

Accommodation party

Value

An accommodation party is one who has signed the

instrum ent as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for foe purpose' of
lending his name to some other person (NIL, Sec 29).

It is any consideration sufficient to support a simple

contract

R equisites to be an accom m odation p a tty (1990,

1991,1993,1996,1998,2005,2008 Bar)

NOTE: An antecedent o r pre-existing debt constitutes

value and is deemed such whether foe instrum ent is
payable on demand or a t a future time (NlfcSec 25).

1. Accommodation party m ust sign asmaker, drawer,

acceptor or indorser

Sec 27).

'

. .

2. No value is received by the accommodation party from

foe accommo lated party; and
Un i v e r s i t y

of

Santo T omas

uncot
f ma

*:i $
f
I '
ir
s

S'
r
T

s
jj 1
i

b.
liable
d Pc<
\ ; h
ofine
Q
TJ !I;
. Dagul,
it. "e i
- p i'

N egotiable Instrum ents L aw

3. The purpose is to lend the name.

indorse the note to Facundo. Is Dagul- an

accommodation party? Explain. (2005 Bar)

NOTE: It does not mean, however, that one cannot be an

accommodation party merely because he has received
some consideration for die use of his name. The phrase
"without receiving value therefor" only means that no
value has been received "for the instrument" and not "for .
lending his name." .

A: No. An accommodation note is one to which the

accommodation party has put his name, without
consideration, for toe purpose of accommodating some
other partywho Is to use it and is expected to pay i t The
accommodation is not one to toe person who takes the
notethat is, the payee or fhdorsee, but one to the maker
or indorser of foe note. In this case, the indorser, Dagul, in
making foe indorsement to the lender, Facundo, was
merely acting as agent for the latter or, as a mere vehicle
for toe transference of the naked title from toe borrower
or maker of toe note and was not acting as an
accommodation party.
,

Q: Susan Kawqda borrow ed P500,000 from XYZ Bank

which re q u ired 'h er, together with Rose Reyes who
did n o t receive any am ount from the bank, to execute
a prom issory note payableto th e bank, or its order on
stated m aturities. The note was exeqrted as so
agreed. W hat kind o f liability was incurred by Rose,
th at of an accommodation party o r th a t o f a solidary
debtor? Explain. (2003 Bar)

Accommodation party v. Regular party

Ai Rose incurs the liability, of an accommodation party

since she executed the promissory without receiving
value therefor and for the purpose of lending his name to'
Susan Kawada, the accommodated party. Nonetheless,
as an accommodation maker. Rose is primarily and
unconditionally liable on the promissory note to a holder
for value, regardless ofwhether die stands as a surety or
solidaiy co-debtor since such distinction would be
entirely immaterial and inconsequential as far asa holder
for
/ value is concerned.
,
Q: JuanSy purchased from "A" Appliance Center one
generator s e t on.lnstalbnent with chattel mortgage In
favor of th e vendor. After getting hold o f the
generator set; Juan Sy immediately sold i t without
consent o f th e vendor. Juan Sy was criminally charged
with estafa. To settle the case extra judicially, Juan
Sy paid th e sum o f P20,000 and for the balance of
P5,Q00.00 h e executed a prom issory note for said
am ount w ith Ben Lopez as an accommodation party.
Juan Sy failed to pay th e balance.
a.
b.

A C C O M M O D A TION P A R T Y

W hat Is foe liability o f Ben Lopez as an

accommodation party? Explain. ; . .
W hat Is the liability QfJuanSy? (2003 Bar)

A:
a.
Section 29 of the Negotiable Instruments Law '
provides that an accommodation party is liable on the
instrument to a holder for value] notwithstanding that
such holder ht the time of taldngthe instrument knew him
to be only, an accommodation party.
As an
accommodation party, Ben Lopez is primarily and
unconditionally liable on toe promissory note to a holder
for value as if toe contract was not for accommodation.
b. Under Section 14 of the NIL, Juan Sy is primarily
liable to the extent of P5,000 in toe hands of a holder in
due course. However, if Ben Lopez paid the note, Juan Sy
has .toe obligation to reimburse the former to toe extent
of the amount paid.
Q: Dagul hah a business arrangem ent with Facundo.
The latter w ould lend money to another, through
Dagul, w hose nam e would appear In toe prom issory
note as th e lender. Dagul would then immediately

39

Signs
an
instrument
without receiving value,
therefor (NIL, Sec 29]
Purpose ofsigning Is to lend
Ills name to another person
WL> Sec 29)
May always show, by parol
evidence] that he is only
such
Cannot avail of toe defense
Df absence/failure
of
consideration against a
holder not in due course
May sue reimbursement
after
paying
toe
holder/subsequent party

R C O U U R PARTY

Signs the instrument for

value [NIL, Sec. 24)
Not for that purpose
Cannot disclaim personal
liability.by parol evidence
May avail of such defense "
/
May not sue

Q: PCIB granted a credit line to Gonzales through toe

execution of toe COHLA. Gonzales drew from said
credit line through the issuance of check. Gonzales
issued a check in favor of Rene Unson, drawn against
toe credit line. However, upon presentm ent for
paym ent by Unson o f said check; It was dishonored by
PCIB due to th e term ination by PCIB of toe credit.line
under COHLA for toe unpaid periodic interest dues
from toe loans of Gonzales, and the spouses Panlilio.
Gbnzales, through counsel, wrote PCIB insisting that
the check h e issued had been folly funded, and
demanded toe retu rn of toe proceeds of his FCD as
well as damages for the unjust dishonor of th e check.
Was it proper for PCIB to dishonor the check issued
by Gonzales against the credit line under toe COHLA?
A: No. While a maker who signed a promissory note for
the benefit of his co-maker (who received the.loan
proceeds) is considered as an accommodation party, he is,
nevertheless, entitled to a written notice on the default
and the outstanding obligation of the party
accommodated. There being no such written notice, the
Bank is grossly negligent in terminating the credit line of
the accommondation party for the unpaid interest dues
from the loans of foe party accommodated and in
dishonoring a checkdrawn against such credit line
(Eusebio Gonzales v. Philippine Commercial and

U niv . b r s i t y o f S a n t o T o m a s
F aculty of Civil Law

____________ Mercantile L aw

International Bank, Edna Ocampo, and Roberto Noceda,

G.RNo. 1802S7, February23,2011).
Extent of liab ility o f a n accom m odation party
1. Right to revoke accommodation - before the instrument
has been negotiated for value*
2. Right ^reim bursem entfrom the accommodated party the accommodated party is the real debtor. Hence, the
cause of action Is not on the instrument but bn an implied
contract of reimbursement
3. Right to contribution from other .solidary
accommodation maker (Sadqya v. Sevilla, G.R. No. 1-17845,
April27,1967).
Accom modation p a rty cannot ra ise th e defense of
absence o r w ant o f consideration
r An accommodation party who lends his name to enable
the accommodated party to obtain credit or raise money
is liable on the instrument to a holder for value even if he
receives no part of the consideration He. assumes the
obligation to the other party and binds himself to pay the
note on its due date. By signing the note, the
accommodation, party thus became liable for the debt
even if he had no direct personal interest in the obligation
or did not receive any benefit therefrom (Dela Rama v.
Admiral United Savings Bank, C.R. No. 154740, April 16,
2008).

S a n to T omas

or

ir

bus.,i
<rdta
f
1
<. it i
Suit 1

E iP
tie(
accon
pf Iso

s r

*] I ;
Q:No ;
if hk

3 I
Wh J
Itskn

.W"
b. Yes, Pedro may recover from X.
When the
accommodation party makes payment to the holder of the
note, he has the rightto sue the accommodated partyfor
reimbursement; since the relation between them is in
effect that of principal and surety, the accommodation
party being the surety. Thus, after paying the holder,.
Pedro . may seek reimbursement from X, the
accommodated party.
Q: On June 1, 1990, A obtained a loan of f 100,000
from B, payable n o t later than Decem ber20,1990. B .
required A to issue him a check for th a t am ount to be
dated Decem ber 20,1990. Since h e does no t have
any checking account. A, w ith th e knowledge o f B,
requested his friend, C, President of Saad Banking
C orporation (Saad) to accommodate him. C agreed,
h e signed a check for th e aforesaid am ount dated
Decem ber 20, 1990, draw n against Saad's account
w ith the ABC Commercial Banking Co. The By-laws of
Saad requires th a t checks Issued by it m ust be signed
by th e P resident and the T reasurer o r th e ViceP resid en t !Since the T reasurer was absent, C
requested the Vice-President to co-sign the check,
which th e jla tte r reluctantly did. The check was
delivered to B. The check was dishonoured upon presentm ent on due date for insufficiency of fends.

Q: To accom m odate Carm en, m aker o f a prom issory

note, Jorge signed as in d o rser tbereon, and th e
Instrum ent w as negotiated to Rafly, a holder for
value. At th e tim e Rafly took th e instrum ent, he
knew Jorge to be an accom m odation p arty only.
W hen the prom issory n ote was n o t paid, and Rafly
discovered th a t C arm en had no fends, h e sued Jorge.
Jorge pleads in defense th e feet th a t h e bad endorsed
th e Instrum ent w ith o u t receiving value therefor, and
th e fu rth er fact th a t Rafly knew th a t a t th e tim e he
to o k th e in stru m en t Jorge hadm ot received any value
o r consideration o f an y kind fo r his indorsem ent Is
Jorge liable? Discuss. (1990,1996 Bar)
of

a. May Yrecover from Pedro if th e la tte r Interposes

th e absence of consideration?
b. Supposing under the sam e facts, Pedro pays the
said Php20,000.00 may he recover th e sam e am ount
from X? (1998 Bar)
A:
a. Yes, Y may recover from Pedro* Section 29 of the NIL
provides that a person who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person is liable on the instrument to a holder
for value, notwithstandingihe feet that such holder at the
time of taking the instrument knew him to be only an
accommodation party. Pedro, being an accommodation
maker of a : note, may thus be held primarily and
unconditionally liable therefor.

H older for- value, m ay recover from an

accom m odation
p a rty
notw ithstanding
h is
know ledge o f such feet (1990, 1991, 1993 /1 9 9 6 ,
1998,2005,2008 B ar)
t
This is so because an accommodation party Is liable on the
instrument to a holder for value, notwithstanding that
such holder atth e time of taking the instrument knew him
to be only an accommodation party. The accommodation
party is liable to a holder for value as if the contract was
riot for accommodation. It is not a valid defense that the
accommodation party did not receive 'any valuable
consideration when he executed the instrument Nor is it
correct to say that the holder for value is not a holder in
due course, merely because at the time .he acquired the
instrument, he knew that the indorser was only an
accommodation party (Ang Tiong v. Ting, G.R No. L-26767,
February22,1968).

Un iv e r s i t y

A: Yes, Jorge is liable. By the dear mandate of section 29.

of the Negotiable Instruments Law, an accommodation
party is "liable bn the instrument to a holder for value,
notwithstanding that such holder at the time of taking the
instrument knew him to be only an accommodation
party." It is not a valid defense that die accommodation
party did not receive any valuable consideration when be
executed the instrument (Ang Tion'g vs Ting, supra).
1
Q: For th e purpose o f lending h is nam e w ithout
receiving value therefor, Pedro m akes a note for
P20,0d0 payable to the order of X, who In turn
negotiates it to Y, the la tte r knowing th a t Pedro is not
a party for value.

a. . Is Saad liable on the check as an accommodation

party?
|

40

w fwi
*

instithat si
hi ' r t

a i i 1
uncb.i

B?nk,

TH is
cc P
ac-v !
has t
ar im

cc P

(C.J I

Negoti
{X p f
he *
NOTE:
WJ A
19 | ;
I !

N egotiable Instrum ents Law

b. If it Is not; who then, under the above foots,
is/a re liable? (1991 Bar]

. Methods of transferring an Instrument

1. Issuance - first delivery of the instrument complete in
fo: n to a person who takes it as a holder.
2. Negotiation
3. Assignment - transfer of the tide to the instrument, with
the assignee generally taking only such title as his
assignor has; subject to all defenses available against
the assignor.

A:
a. No, Saad is not liable as an accommodation party.
This is because the issue or indorsement of negotiable
. paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who
has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a
corporation where i t is only an accommodation party.
While it may be legally possible for a corporation whose
business is to provide financial accommodations in the
ordinary course of business; such as one given by a
financing company, to be an accommodation party, this
situation, however, is not the case at bar. .

t
i!

D I S T I N G U I S H E D F R OM A S S I G N M E N T
,

Only
a
instrument
negotiated.

fa. Considering that both the President and the VicePresident were signatories to die accommodation, they
themselves can be subject to the liabilities of
accommodation parties to the instrument in their
personal capacity (Crisologo-Jase v. CA, G.R No. 80499,
September15,1989).
Q: Nora applied for a loan of Phpl00,Q00.00 with BUR
Bank. By way of accommodation, Nora's sister, Vilma,
executed a prom issory note In favor of BUR Bank.
When Nora defaulted, BUR bank sued Vilma, despite
its knowledge d ial Vflraa.recelved no p a rt of the loan.
May Vilma be held liable? Explain. (1996 Bar)
A: Yes, Vilma may be held liable. A person who has signed
the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person is liable on the.
Instrument to a holder for value, notwithstanding the fact
. that such holder at the time oftaking the instrument knew
him to be only an accommodation parly. Thus, as an
accommodation maker, Vilma is primarily and
unconditionally liable on the promissory note to BUR
Bank, a holder for value.

' ASSIGNMENT

. N E G O T I A T I O N

negotiable
may be

Noil-negotiable
Instrument may be
assigned absent any
prohibition
against
assignment written on its
fate.

The transferee, if he is a
HIDC may acquire better
rights
than
his
transferor.

The transferee can have

no better right than his
transferor; he merely
steps into the shoes of the
assignor .

The holder can hold the

drawer and the indorsers
liable if the party
primarily liable does not
pay.

The transferee has no

right of recourse for
payment
against
immediate parties.
r

M O D E S OF N E G O T I A T I O N

Modes of negotiation

1. i f payable to bearer it is negotiated by mere delivery

2. If payable to order- it is negotiated by the Indorsement
of tiie holder completed by delivery (Nil* Sec 30).
Q: Ligaray charged Wagas with estafa, alleging that
Wagas placed an order of ZOO bags of rice over the
telephone with a post-dated check payable to cad i as
paym ent The seller Ligaray delivered th e rice to
Canada, brother-in-law of Wagas. In turn Ligaray
received a post-dated check issued by Wagas, which
was later on dishonored due to insufficiency o f funds.
.
/
i
During trial, Wagas averred that he Issued the check
to Cafiada, and that it was the latter who had
transacted with Ligaray. While admitting th a t he
signed a letter acknowledging his debt to Ligaray,
Wagas Insisted that he signed the sam e |u s t to
accommodate the please of his sister and her husband
Caftada.

Accomodation m ade by a corporation

The issue or indorsement of a negotiable paper by a
corporation without consideration and for the
.accommodation of another is ultra vires. Hence, one who
has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a '
corporation where it is only an accommodation party
(Crisologo-Jose v. CA, G.R No. 80599, September 15,1989).
(1997,1998,2002 Bar)
Negotiation is the transfer of an instrument from one
person to another so as to constitute the transferee the
holder thereof (NIL, Sec. 30).

Is Wagas guilty of estafa?

NOTE: A holder is the payee or indorsee of a bill or note,

who is in possession of it, or the bearer thereof (NIL, Sec
191).

At No. In order to constitute estafa under Article 315,

paragraph 2(d) of the RPC, as amended, the act of
postdating or issuing a check in payment of an obligation
must be the efficient cause of the defraudation. This

A1

Un iv e r s ity

of

S anto T omas

Mercantile Law
means th at the offender m ust be able to obtain money or
property from the offended party by reason of the
issuance of-the check; w hether dated or postdated. In
other words, the Prosecution m ust show that the person
to whom the check was delivered would not have parted
with his money or property were it not for the issuance of
the check by the offender.
Under die NIL (Sec 9 and Sec 30), a check made payable
to cash is payable to the bearer and could be negotiated
by m eredeliveiy w ithout theneed ofindorsem ent
ThisW ndered it highly probable that Wagas had issued
the check not to. Ligaray, but to somebody else Uke
Canada, h is brother-in-law, who then negotiated it to
Ugaray. Relevantly, Ligaray confirmed that he did not
himself see or m eet Wagas a t the time of die transaction
and thereafter, and expressly stated that the person who
signed for and received th e stocks of rice was Cafiada.
It bears stressing th at the accused, to be guilty of estafa as
charged, m ust have used th e check in order to defraud the
com plainant W hat the law punishes is the fraud dr deceit,
not the m ere issuance of the worthless check. Wagas
could not be held guilty, of estafa simply because he had
issued the check used to defraud Ugaray. The proof of
guilt m ust still dearly show that it had been Wagas as the
drawer who had defrauded Ligaray by means of the check
(People v. GUbert Wagas, R No. 157943, September 4,

Later, C, w ithout indorsing die prom issory note,

tran sfers and (delivers d ie sam e to D. The note Is
subseqiiendy dishonored by A. May D proceed against
A fo r th e note? (1998 Bar)
A: Yes. D may jcollect from A. The note made by A is a
bearer instrum ent Where an instrum ent payable to
bearer, is indorsed, it may nevertheless be further
negotiated by delivery. Despite die special indorsement
made by B, the note remained a bearer instrument and
can be negotiated by mere delivery. When C delivered
and transferred die note to D, the latter became a holder
thereof. As such, D can proceed against A.
Q: X executed a prom issory note w ith a face value o f
PhpSO,000.00, payable to d ie order o f Y. Y indorsed
th e note to Z,jto whom Y owed Php30,000.00. If X lias
n o a t all against 01*bow ntucta rosy Z colioct
from X? (2011 Bar)
A: Php 50,000.00, but with the obligation to hold
Php20,000.0(| for Ys benefit
Effect of assignm ent of a negotiable instrum ent
The transferee does not become a holder and he merely
steps into the shoes of the transferor. Any defense
available against the transferor is available against the
transferee (SOlas v. CAG.R. No. 76788,January22,1990).

2013).
Delivery o f negotiable instrum ent
Delivery . . means transfer of possession, actual. or
constructive, from one person or another (NIL, Sec. 191).
\ :
NOTE: Where the instrum ent is no longer in the
possession of the party whose signature appears thereon,
there is a prima facie presumption of a valid and
intentional delivery by him. (ML Sec. 16).
Effect if a b e a re r in stru m en t is negotiated by
indorsem ent an d delivery

Effect of th e delivery of an order instrum ent w ithout

indorsem ent
The transfer operates as an ordinary assignment (NIL, Sec
49). The transfer vests in the transferee such tide as the
transferor hiad therein and the transferee acquires in
addition the right to have the. indorsement of the
transfereror.
NOTE: For ithe purpose of determining whether the
transferee is a HIDC, die negotiation takes effect at the
tim e when the indorsement is actually made.
' . kinds

A bearer instrum ent, even .when indorsed specially, may

nevertheless be further negotiated by delivery, but die
person indorsing specially shall be liable as indorser to
only such holders as make tide through Ids indorsement
(once a bearer instrum ent, always a bearer instrum ent)

of indorsements

Indorsemi.ejnt
It is he signing of die name of the indorser on the
instrument; with the intent to transfer tide to the same.

(NIL, Sec. 40].

W here th e indorsem ent should be placed
NOTE: This rule applies only to Instruments originally
payable to-bearer. It. does not apply to instrum ents
originally payable to order converted to bearer because
the on|y or last indorsem ent is in blank
Q: A m akes a prom issory note payable to b earer and
delivers tiie sam e to B. B, however, endorses it to C in
tills m anner:

1. On the instrument itself; or

2. On a separate piece of paper attached to die instrument
called "allonge" (NIL, Sec 31)
Rules on indorsem ent
GR: Indorsement must be of the entire instrument (NIL,

Sec 32). j
"Payable to C. Signed: B.n
XPN: When the instrum enthas been paid in part.

N egotiable Instrum ents

V* -V ,tf.
NOTE: Inddtsement to two or more indorsees severally
does NOT operate as a negotiation of the instrument

law

NOTE: Any of them can indorse to effect negotiation of the

instrument
Rights o f an indorsee in a restrictive indorsem ent

D ifferent kinds of indorsem ent

1. Special (NIL, Sec. 34) - Specifies the person to whom or
to whose order the instrument is to be payable, it is also.
known as specific indorsement or indorsement in full.

1. To receive payment of the instrument;

2. To bring any action thereon that the indorser could
bring; and
,

NOTE: An instrument payable to bearer indorsed

specially may nevertheless be negotiated by delivery
(once a beareralways a bearer) (NIL, Sec 40).

3. To transfer his rights as such indorsee, where the form

of the indorsement authorizes him to do so (NIL, Sec
37,).

2. Blank (NIL, Sec 34) -Specifies no indorsee.

a. Instrument is payable to bearer and may be
negotiated by deliveiy;
b. May be converted to special indorsement by
writing over the signature of the indorser in blank
any contract consistent with the character of
indorsement (NIL, Sec 35).

NOTE: All subsequent indorsees acquire only the tide of

. tiie 1st indorsee under the restrictive indorsement (NIL,
Sec37).
Effect of a qualified indorsement
A qualified indorsement does NOT destroy the
negotiability of the instrument It only means that the
qualified indorser is NOT liable when the maker is
insolvent A qualified indorser is liable only If the
instrument is dishonored by non-acceptance or non
payment due to:

3. Restrictive (NIL, Sec 3d)-When the instrument:

a. Prohibits further negotiation of the instrument (it
destroys the negotiability of die instrument);
b. Constitutes the indorsee die agent of die indorser;
c. Vests die tide in the indorsee in trust for or to the
use of some persons.

1. Forgery;
2. Lack of good title on the part of the indorser;
3. Lack of capacity to indorse on the part of the prior
parties; or
4. The fact that at the time of the indorsement the
instrument was valueless or not valid at the time of the
indorsement which fact was known to him.
/

NOTE: But mere absence of words implying power to

negotiate does not make an instrument restrictive.
4. Qualified (NIL, Sec 38) - Constitutes the indorser a
mere assignor of the tide to the instrument made by
adding to the indorser's signature words like, without
recourse, sans recourse or a t die indorsee's own risk (this
serves as an ordinary equitable assignment).

Instances when the Indorsem ent is considered only as

equitable assignm ent

5. Absolute-The indorser binds himself to pay:

a. Upon no other condition than failure of prior
parties to do so;
. b* Upon due noticeto him of such failure

1. Indorsement of only a part of the amount of the

instrument (NIL, Sec 32)
2. In cases of qualified indorsement (NIL, Sec 38)

J.

6. Conditional (NIL, Sec 39)-Right of the indorsee is made

to depend on the happening of a contingent event The
party required to pay may disregard the conditions.
i
NOTE: The condition refers to the indorsement not on
the instrument itself
i.

3. Transfer of an instrument payable to order by mere

delivery (ML, Sec 49).
Joint indorsem ent
CR: All must indorse in order for the transaction to
operate as a negotiation (NIL, Sec 41).

7. Joint (NIL, Sec 4 1 )- Indorsement made payable to 2 or

more persons who are notpartners. .

XPN: Only one of them may indorse in case the

1. Payees or indorsees are partners; and
2. Payee or indorsee indorsing has authority to indorse for
the others.

NOTE: All of them must indorse unless the one

indorsing has authority to indorse for the others.
8. Irregular (NIL, Sec 64) - A person who, not otherwise a
party to an instrument places thereon his signature in
blank before delivery,

Effect of Indorsing an instrum ent to a person as

cashier o r other officers of a corporation
The negotiable instrument is deemed prima facie payable
to the corporation of which said person is such an officer.
It may be negotiated further by either indorsement of the
corporation or indorsement of the officer (NIL, Sec 42).

9. Facultative -Indorser waives presentment and notice

of dishonor, enlarging his liability and his indorsement.
10. Successive - Indorsement to two persons or more in
succession.

43

Un i v e r s i t y of S anto T o m a s
P aomitv rtP fll/II I MI

Mercantile Law
RI GHT S OF T H L H O L D E R

D ate o f Indorsem ent

GR: Every negotiation Is deemed primafade to have been
effected before the instrum ent wasoverdue.
XPN: Except where an indorsem ent bears d a b after the
m aturity of the instrum ent (NIL, Sec 45).

* H older
The payee o r| indorsee of a bill or note who is in
possession of it or die bearer thereof (NIL, Sec 191).
Classes of holders

C ontinuation o f negotiable character

I

GR: An instrum ent negotiable in origin is always

negotiable until paid, which is still true even if the NI was
dishonored o r Is already overdue.

1. Holders in general (Simple Holders] (NIL, Sec SI).

2. Holders foi value (NIL, Sec 26).
3. Holders in due course (NIL, Secs. 52,57).
R ights o f a holder in general

XPNs:
1, When die instrum ent' has been restrictively
indorsed;
2. When discharged by payment or otherwise (NIL, Sec

47)

1. Right to su e
2. Right to receive payment (NIL, Sec SI).
NOTE: |f the payment Is in due course, the Instrument is
discharged.

Striking o u t o f an indorsem ent

H O L D T R IN DUG COURSK (IIHK.)

The holder may, a t any tim e, strike out any indorsem ent
which is n o t necessary to his title. Indorser whose
indorsem entis struck out; and all indorsers subsequent to
him are relieved fromlfability on the instrum ent (NIL, Sec

To be considered as a H1DQ the requisites under 5ec 52

o/tfteNUrau&becompifed with. AHIDCtakesaNI under
;th e followingcondidons (COFI) (1992-1996,2000 B ar);

48).
1. That is Complete and regular upon its face;
N egotiation by a p rio r p a rty
Where an instrum ent is negotiated back to a prior party,
such party may reissue and further negotiate die same.
But; he is no t entitled to enforce payment thereof against
any intervening party to whom he w as .personally liable
(NIL, Sec. SO). However, he may strike out the intervening
indorsem ents because they,are not necessary for his tide
and he is liable to diem because of his initial indorsem ent

NOTE: Absence of the required documentary stamp will

not make the instrument incomplete (it is not a requisite
of negotiability under Sec. 1, NIL and it is not a material
particular underSec 12S, NIL}.
2. Became the holder before it was Overdue, and without
notice that it has been previously dishonored, if such was
thefect;

(NIL, Sec 48).

e.g. "A" payee indorsed the instrum ent to B, then B
indorsed it to C, C to D, then D to B. B can further negotiate
the instrum ent He may also strike out the indorsement of
C and D (Simdlang Sr. &Aquino, 2014).
L im itations on re-negotiation
In the following cases, a prior party cannot further
negotiate the instrum ent:
1.

2.

W here It is payable to th e order of a third person, And

it has been paid by the drawer (NIL, Sec 121(a)).
W here it was made or accepted for accommodation
and has been paid by the party accommodated (NIL,

Sec 121(b)).

NOTE: Ifthe! instrument Is payable on demand, the date of

m aturity is determined by the date of presentment; which
m ust be made within areasonable time after its issue; If it
is a note, or after die last negotiation thereof, if it is a bill
of exchange (NIL, Secs. 71 and 143(a)%
3. Took It in good faith and for value;
!
"
.
4. At the tinte it was negotiated to him, he had no notice of
any Infirmity in the instrum ent or defect tn the tide of the
person negotiating i t (NIL, Sec 52)
Where the .transferee receives notice of any infirmity in
the instrum ent or defect in the tide of the person
negotiating die same before he had paid the foil amount
agreed to be paid, he wall be deemed a holder in due
course only to the extent of the amount paid by him (NIL,

Sec 54).
3.

In other cases, w here the instrum ent is discharged

when acquired by a prior-party (NIL, Sec 119(e)).

NOTE: Knowledge ,of the agent is constructive knowledge

of the principal
v
Q: R Issued a check for P1M which he used to payS for
killing h is political enemy.

fa*

Negotiable Instruments Law

a.

Cam th e check be considered a negotiable

instrum ent?
b. Does S have a caiise o f action against R in case of
dlsh o n o rb y th e draw ee bank?
c. If S negotiated thecheck to T, ^ 1 0 accepted it in
good faith and far value; m ay R be held
secondarily liable by T? (2007 Bar)

Baby could enforce the note against Larry the same way
as Dew could enforce i t
Q: X borrow ed m oney from Y in file am ount o f Php 1
Million and as paym ent; issued a check. Y then
indorsed th e check to bis sister Z for no consideration.
When Z deposited th e checkto h e r account th e check
was dishonored for insufficiency o f fiends. .Is Z a
holder in due course? Explain your answ er. (012
Bar)

A:
a. Yes. The check can be considered as a negotiable
instrum ent since it compiled with the requirements of
negotiability under Sec. 1 of die Negotiable Instruments
law. The unlawful consideration for the issuance of the
check is of no moment and will not affect the negotiability
of the check as itm erely constitutes a defect oftitle under
Sec. 55 of the NIL

A: No. A holder in due course is a holder who has taken

die instrument under the following conditions: (aJThatit
is complete and regular upon its face; (b) That he became
the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was file
fact; (c) That he tookitin good faith and for value; (d) That
a t file time it was negotiated to him he had no notice of
any infirmity in the instrument or defect in the tide of the
person negotiating i t All of the four conditions must
concur in order for a holder to qualify as a holder in due
course. In the case a t hand, Z did not acquire the
instrument for value. As such she cannot be considered as
a holder in due course.

b. No. S does not have a cause of action against R In case

of dishonor by die drawee-bank. S Is not a holder in due
course, thus, R can raise the defense that the dieck was
issued for an illegal consideration.
c. Yes. R m aybe held liable byT since T is a holder in due
course o f die instrum ent The unlawful consideration of
' the check is only a personal defense that cannot be
interposed to a holder in due course who receives die
check free from die defect of tide of S.

A holder is presum ed to be an IUDC (1993,2007 Bar)

GR: Every holder is deemed primafade to be an HIDC

Q: Larry issued a negotiable prom issory note to

Evdyn and authorized th e la tte r to fill up th e am ount
in blank w ith his loan account in th e sum o f P1,000.
However, Evelyn inserted P5,000 in violation o f the
Instruction. She negotiated d ie n o te to Julie who had
ho know ledge o f th e infinnity.Jnlie in turnnegotfated
said n o te to Devi for value and who hnd no-knowledge
o f th e infirm ity.
(.

XPN: When It is shown that file tide of any person who

has negotiated the instrum ent was defective. But this is
only as regards a party who' became such after die

acquisition o f the defective tide (NIL, Sec.5^).

Paym ent in due course

In order for payment to constitute payment in due course,
it must be made:
'

a. Can Devi enforce th e note against Larry and if she

can, for how m if d i? Explain.

1. At or after the maturity of the instrument

2. To* the holder thereof, in good faith and without notice
that his title is defective (NIL, Sec. 88). .

b. Supposing Devi endorses th e note to Baby for

value b u t w ho has knowledge o f th e infirm ity, can the
la tte r enforce th e n ote against Larry? (1993 Bar)

Availability o f rights to a party who derives his title

from a.hoider in due course

A:

a. Devi can enforce the note against Lany since she is

. a holder in due course. Since the document delivered to
Eyelyn. is in blank and she u n au th o riz ed to fill up the*
am ount in the promissoty note, Devi can enforce against
Larry the amount of P5,000.Gti as tilts case fells squarely
under Sec 14 of the Negotiable Instruments Law. As
against a. holder in due course, the instrument is always
valid and enforceable to the full extent The defense of
filing-up contrary to authorization is a mere personal or
equitable defense [Villanueva, 2009).

A holder who derives his tide through an HIDC, and who

is nothimselfa party to any fraud or illegality affecting the
instrument has all die rights of such former holder in .
respect to all parties prior to the latter (NIL, Sec. 58).
Specifically, a holder is entitled to the .following rights:
(1998,2007,2009 Bar)
1. Hold the instrument free from defenses available to
parties among themselves;
2. Hold the instrument free from any defect of title of
prior parties;
3. Receive payment;
(
4 . ' Enforce payment ofthe instrument for the full amount
thereof against all parties liable; and
5. Sue

b. Baby cannot enforce the note against Lany since she is

not a holder in due course because Lany could interpose
the real and personal defenses to defeat the claim of Baby.
However, because of die shelter principle in Negotiable
Instrum ents Law, Baby could be elevated to a status of a
holder in due course since a person not holder in due
course, steps in the shoes of the prior party. Therefore,

AS

Un i v e r s i t y

of

S anto T omas

Mercantile Law
S helter p rinciple

unlawful means, or for an

illegal consideration or
when he negotiates it in
breach of faith, or under
any other circumstances
as amount to a fraud.
(NIL.Sec55)_____

Under the "shelter principle," the HIDC, by negotiating the

instrum ent, to a party not an HIDC, transfers all his rights
as such holder to the latter and acquires the right to
enforce the instrum ent as if he was an HIDC The principle
applies to a "sheltered holder who is not a party to any
fraud or illegality Impairing the validity of the instrum ent
r'
T hat it Is com plete and reg u lar upon Its face

Instances w hen th e tid e o f a person (transferor) is

defective
1

An instrum ent is complete when it is not wanting in any

m aterial particular and regular when there is no
alteration apparent on the face of the instrum ent

1. In Its acquisition - When he obtained the instrument, or

any signature thereto, by:fraud, duress, or force and fear,
or other unlawful means, or for an illegal consideration

T hat he becam e th e h o ld er before i t w as overdue

2. In the negotiation - When henegotiates it in breach of

faith, or undeij such circumstances as amount to a fraud
(NIL, Sec 55).
.

_________________

An overdue Instrum ent is still negotiable, and although it

Is subject to defenses existing a t the tim e of transfer. A
negotiable instrum ent in circulation p astits m aturity date
carries strong indication th a t it has been, dishonored. An
overdue Instrum entputs all person on notice thatitm ight
.hot have been paid because of a valid defense to such
paym ent (De Leon, 2010],

Notice o f defect on th e transferee

I
The person to whom itis negotiated m ust have had actual
knowledge of jsudi facts o r knowledge of other facts that
his action In taking the instrum ent amounted to bad faith

(NIL, Sec 56).

W ithout n o tice' th a t it h as been
dishonored, if such w as th e feet

previously
Effect o f notice before th e full am ount is paid

An instrum ent m aybe dishonored either by:

Where the transferee receives notice ofany infirmity in

the instrum ent or defect In the tide of the person
negotiating the same before he has paid the full amount
agreed to be paid therefor, he will be deemed a holder In
due course oiily to the extent ofdie amounttherefore paid
by him (NIL, Sec 54).

1. Non-acceptance (refers to a bill of exchange) or

2. Non-payment
An overdue o r dishonored instrum ent may still be
negotiated either by indorsem ent or by delivery to the
same extent-as before maturity. However, in case of
negotiation of an overdue instrument; the holder cannot
be an HIDC while in case of negotiation of a dishonored
instrum ent; the holder without notice can be a holder in
due course (De Leon, 2010).

Q: A d raw er issued a check fo r th e paym ent of a car,

which checkw as.delivered to th e agent o f th e ow ner
o f th e ca r fo r safekeeping. The checkwas th en used by
th e agent to pay them ed k al bills o fh is w ife in ad in ic.
The projected purchase did n ot m aterialize! Is th e
clinic considered a holder In due course?

T h at he took it in good faith and fo r value

A: No, tiie rule that a possessor of the instrum ent is prima

fade a HIDC does not apply to the clinic because it cannot

Good faith is the holder's well founded or honest belief

th at the person from whom he reedved the instrum ent
was the owner thereof, with the rightto transfer it (Duran
v IAC, G.R. Na t-64159, September10,1985).

be said to have acquired the negotiable instrum ent in

good faith for there was a defect in the title of tiie holder
(agent), since the instrument was not payable "to the
agent or to bearer;" also the drawer had no account with
the clinic, the agent did not show or tell the payee why he
had the checkin his possession and why he was using it
fertile payment of Ids own account

Value may be some right; interest; profit or benefit to the

party who makes the contract or some forbearance,
detriment; loan, responsibility, etc. to the other (BP1 v.

Roxas, G.R. No. 157833, October15,2007).

As the holder's title was defective or suspicious, it cannot

be stated that the payee acquired the check without
knowledge of said defect in holder's title, the presumption
that the clinic Is a HIDC does not exist (De Ocampo &Co. v.

At th e tim e it w as negotiated to h in t h e had no notice

o f any infirm ity in th e instrum ent o r defect in th e title
of tiie person negotiating it
INFIRMITY:' '

Refers to those th at
vitiate the instrum ent
itself

University

Gatchalian, G.R. No. L-1S126, November30,1961).

Possession o f a negotiable
p resentm ent and dishonor

DFT-TCT

Refers to how he
obtained the instrum ent
or the signature thereto,
as by fraud, duress, or
force and fear, or other
of

S a n t o T om a s

instrum ent after

It does not make the possessor a holder for value within

the meaning of the law. It gives rise to no liability on tiie

46

INEGOT1ABLE INSTRUMENTS LAW

part of the maker or drawer or indorsers (STELCO
Marketing Corp. vs. CA, G.R Na 96160, June 17,1992).
Q: Is a corporation to which four crossed checks w ere
Indorsed by d ie payee corporation a holder In due
course an d hence entfded to recover d ie am ount of
d ie checks w hen die sam e had been dishonored for
die reason o f "paym ent stopped?
A: The checks were crossed checks and specifically
Indorsed for deposit to payees account only. Fijom the
beginning, the corporation was aware of the fact that the
checks were all for deposit only to payees account.
Clearly then, it could not be. considered an HIDC (Atrium
Management Corp. v. CA, G.R. No. 109491, February 28,
2001).

Rights of a holder who Is n o t a holder In dne course

-The lights of a holder not an HIDC are similar to an
assignee. The other rights are:
1.

He may receive payment and if the payment is in due

course, the instrument is discharged;

2.

He Is entitled to the instrument but holds it subject to

the same defenses as if it were non-negotiable;

3.
.

He may sue on the instrument in his' own name (NIL,

S ecS l). .
.

DEFENSES AGAINST Tilt HOLDEN

Defenses against th e holder

NOTE: Presence or absence of defect or infirmity must be
determined at the time the instrument was negotiated to
; the holder.
Payee as h o ld er In due course '
There can be no doubt that a proper Interpretation of NIL
as a whole leads to die conclusion that a payee may be a
holder in due course under the circumstances in which he
meets the' requirements of Sec 52 (De Ocampo v.
Gatchalian, supra).
D rawee as h o ld er in due course
A drawee does not become a HIDCby simply paying a bill
A holder refers to one who has taken the instrument as it
passes along in the course of negotiation; whereas a
drawee, upon acceptance and payment; strips the
instrument of negotiability and Reduces It to a mere
voucher or proof of payment
Instances w hen a person is deem ed n o t a holder in
due course
1. A holder who acquires the instrument after its date of
maturity.
2. Where an instrument payable on demand is negotiated
for an unreasonable length of time after its issue (NIL,
.. Sec S3).
NOTE: A note payable on demand is due when payment
' is demanded. Acheck becomes overdue when it is not
presented for payment within a reasonable time,
usually 6 months from date the thereof, afterwards, it
becomes a stale check.
3. Where the instrument contains an acceleration clause,
knowledge of the holder at the time of acquisition
thereof that one installment or interest, or both, is
unpaid is a notice that it is overdue.
NOTE: Where indorsement is not dated, it is deemed
prima facie to have been negotiated before the
instrument was overdue (NIL, Sec 45). An overdue
instrument is still negotiable but it is subject to the
defenses existing at the time of the transfer.

The defenses available against file holder are classified as

follows:
1. Real or Absolute Defenses - those that are attached to
the instrument itself and are available against all parties,
both immediate and remote, including holders in due
course.2. Personal or Equitable Defenses -defenses which are
only available against a holder not in due course. Those
which grow out of the agreement or conduct of a
particular person which renders it inequitable for him,though holding the legal titles to enforce it against file
party sought to be made liable.
.

'

Real defenses available against a holder y. Personal

defenses
REAI." DEFENSES

PERSONAL DEFENSES

(!M In IJ1in i.AH-nrI)

, PODIF)

(lnnoCi-nlS: ADI) FUn In

Fraud I

Incomplete
and
undelivered
instrument
Minority
(available
only to the minor)
Incapacity as for as
incapacitated persons
are concerned
W ira -vires acts of a
corporation
Want of Authority,
apparent and real
fraudulent alteration
Forgery
Duress amounting to
Forgery
Erescription
fither
infirmities
appearing on the face
of the Instrument
1. Discharge
in
insolvency
Illegal Contract

U niversity

of

Innocent alteration or
spoliation
Discharge of party
Secondarily liable fay
discharge pf prior
party.
Set-off
between
immediate parties
Filling up .of blanks not
in accordance with file
Authority given
Acquisition
of
instrument by Duress
or force and fear;
unlawful means or for
an illegal consideration
Discharge by payment
or renunciation or
release before maturity
Eailure or absence of
consideration.
Undelivered complete
instrument

S anto T omas

Mercantile Law
3. fra u d in Factum. o r .

Esse Contractus
NOTE: Awinf in factum
exists in those cases In
which a person, without
negligence, has signed an
instrum ent; but was
deceived* as to foe
character
of
foe
instrum ent and w ithout
knowledge of it, as where
. a note was signed by one
under the belief that he
w as signing as a witness
to a deed. This kind of
fraud is a real defense
because there is no
contract; since foe person
did notknow what he was
signing (iDeLeon, 2010).

Insertion of a wrong
date
0. Fraud in inducement
o r simple fraud
NOTE:
Fraud
in
fnducem entrelates to foe
quality, quantity, value or
character
of
foe
consideration of foe
instrum ent Here, deceit
Is not In foe character" of
foe instrum ent but in its
amount or terms. This
existswhen a person Is
induced to sigh a note for
foe p rice'o f'a worthless
stock
which
was
fraudulently represented
by the payee' as to its
value. Such type of fraud
is only a personal defense
because it does not
prevent a contract (t)e

A: No, since F in treat U as maker due to the minority of

T, flie drawee.
I
NOTE: Where the drawee does not have the capacity to
contract; die holder may treat foe bill as a PN (Nik Sec.
130).
1
,
I
Q: Eva issued! to Im elda a check in fo e am ount of
P50,000 post-dated S ept 30,1995, as security for a
diam ond rin g to be sold on commission. On S ept 15,.
1995, Im elda negotiated th e check to MT investm ent
w hich paid fo e am ount of P40,000 to her,
Eva foiled to sett the ring, so she retu rn ed It to Imelda
on S e p t 1 9 ,1995. Unable to retriev e hear check, Eva
w ithdrew her< funds from foe draw ee bank. Thus,
When MT Investm ent presented foe check for
p ay m en t th e draw ee bank dishonored i t Later on,
w hen MT Investm ent sued her, Eva raised foe defense
o f absence o f consideration, foe check having been
issued m erely as security for th e rin g th a t she could
n o t s e ll Does Eva havea valid defense? Ejqplain. (1996
B ar) . . .

BaW j^

Leon, 2010).'
Q; Brad w as in d esp erate need o f m oney to pay his
d e b t to Pete, a loan shark. Pete threatened to tak e
B rads life If h e failed to pay. B rad and P ete w ent to
se e S enorita Isobel, B rads rich cousin, an d asked h er
if sh e could sign a prom issory note to h is favor in th e
am ount o f P10,000.00 to pay Pete. Fearing th a t Pete
w ould k ill Brad, S efioiita Isobel acceded to th e
re q u e s t She affixed h e r signature on a piece o f p ap er
W ith th e assurance o f B rad th a t h e w ill Just fill it up
la te r. B rad th en filled o p th e blank pap er, m aking a
p ro m issory n ote for th e am ount o f P1OO,0O0.OO. Re
then, indorsed and delivered d ie sam e to Peite who
W hat defense o r defenses can S efiorita Isobel s e t up
ag a in st P ete? Explain. (2005 Bar)
A: Sefiorita Isobel can se tu p both real and personal
defenses against Petewho cannot claim to be a holder in
due course because he knew of the compulsion used upon
Sefiorita Isobel, thus:
a) . the real defenses available are incompleteness of the
instrum ent because Senorita Isobel only signed on a blank
piece of paper, duress amounting to forgeiy, alteration of
the holder by changing the amount to a higher figure; and
b) th e personal defenses of fraud in inducement
incompleteness when;the paper was delivered, and lack
of consideration.
Q: A b ill o f exchange h as T for its draw ee, If as draw er,
an d F a s holder. W hen F w ent to T fo r presentm ent; F
learn ed th a tT is only 15 years old; F w ants to recover
front U b u t th e la tte r in sists th at a n o tice o f dishonor
m u st firs t be m ade, th e instrum ent being a bill o f
exchange. Is h e correct? (2011 Bar)

ioesi have a valid defense. Ber defense that

A: No. Eva doesnot
there was no iconsideration is not availableto defeat foe
claim of MT Investment since It is a holder in due course
who holds th|e postdated check free from any defect of
title of prior parties and from defenses available to prior
parties among themselves. Eva can raise foe defense of
absence of consideration against MT Investment only if
foe latter was privy to foe purpose for which the checks
w ere issued, and therefore, not a holder in due course.
Q: X m akes a prom issory note for P10,000 payable to
A, a m inor, to help him buy school books. A endorses
fo e n o te to B fo r value; who in tu rn endorses fo en o te
to C C know s A isam to o r. IfC sues X on fo e note, can
X s e t up fo e ' defenses o f m inority and lack of
IDO! (1998B ar)
consideration?
A: X cannot! set-up die defense of m inority to defeat the
claim of C since only A foe minor could invoke minority
as a defense. X.cannot set up the defense against C Lade of
consideration .is a personal defense which is 6nly
available between immediate p a rti^ who are notholders
in due course. Cs knowledge that A is a minor does not
prevent C from being a holder of due course. C took the
prom issory from a holder for value B.

We^at_

-in

and

. LIABILITIES OF P A R T I E S

P arty Prim arily liable v. Party secondarily liable

P R I M A R I L Y LIABLE-

S E C O N D A R I L Y LIABLE

Unconditionally bound

Conditionally bound '

Undertakes to pay only
after the ff. conditions
have been fulfilled:
1. Due presentment for
payment or acceptance to
primaiy party (NIL, Sec.
143);

Absolutely required to
pay die instrument
upon m aturity

u
4 s
*f

N egotiable Instrum ents Law

2. Dishonor by such party
(NIL, Sec.70);
3. Taking of proceedings
required by law (NIL,
Sec.152)

fv. Instrument, at the time

of indorse- ment, was
valid and subsisting;
b. On due presentment, it
shall be accepted or paid, or
both according to its tenor

Parties prim arily liable.

' i.
2.
3.

c. If the instrument is
dishonored and the necessaiy proceedings on
dishonor be duly taken, he
will pay the holder. (NIL,
Sec66.)

Maker - of a promissory note;

Acceptor - of a bill of exchange; and
Certifier of a check

U Parties secondarily liable

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 tile
maker or drawer

,-N! should be presented for payment to the party primarily

liable (NIL, Sec 72(d)):
Promissory note -m aker
Bill o f exchange- drawee/acceptor

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

The draw ee is notliable for paym ent of a bin of

exchange
The mere issuance of a hill does not operate as an
v assignment of the binds in die hands of a drawee. The
drawee must accept the instrument (thus, becomes an
acceptor) in order that he may be primarily liable for the
payment of a BOE.

MAKER

Maker
The maker of a negotiable instrument, by making such
instrument:
1. Engages that he will pay it according to its tenor, and *,
2. Admits the existence, of the payee and his then capacity
to indorse (NIL, Sec 60; 1995,2001 Bar).

W arranties and liabilities o f parties who are

secondarily liable
A B S O L U T E LIABILI TY

L I M I T E D LI ABILI TY

Drawer o f dBOB

Q ddl(fiefiinddir^

Warrants:
a. The existence of payee
and his then capacity to
Indorse;
b. Thatthe instrument wiU
be accepted or paid upon
due presentment by the
party primarily liable
according to its tenor; and
c. That if dishonored, he
will pay the party entitled
to be paid. (NIL, Sec 61.)

Warrants thatthe:
a. Instrument is
genuine;
b. He has good title to it;
c. Capacity to contract
of all prior parties; and;
d. No knowledge of any
fact which would impair
the validity of the
instrument
(NIL,
Sec6S)
NOTE: He is liable to all
parties who derive their
titiethrough
his
indorsement
Person negotiating by
\ dedWety ] : , .;
Same warranties as a
qualified indorser. But
unlike a qualified indor
ser,' a person negotiating
by mere delivery is liable
only to his immediate

General indorser
a..Warrants that:
I. Instrument is genuine
ii. He had good title to it
Hi. All prior parties had
capacity to contract

NOTE: Person negotia

ting by mere deliveiy and
a qualified indorser's
secondaty liability is
limited, namely, to their
warranties

Irregular indorser

}1. Drawer of a bill; and

Z Iiidorserofanoteorabill
r
Person to whom the negotiable instrum ent should be
presented

1.
2.

transferee. (NIL, par. 2,

Sec. 65)

NOTE: The maker is liable the moment he makes the NI.

His liability is primary and unconditional.
Q: A issued a promissory note payable to B o r bearer.
A delivered the note to B. B indorsed the note to C C
placed die note in his drawer, which was stolen by the
janitor X. X indorsed the note to D by forging C's
signature. D Indorsed the note to E who In turn
delivered the note to F, a holder in due course,
without indorsement. Discuss the Individual
liabilities to F of A, B and C (2001,1997 Bar)
A: A is primarily and unconditionally liable to F as the
maker of the promissory note. Section 60 provides that,
by making the instrument, the maker obliges himself to
pay according to the tenor of the instrument He is liable
to both payee and subsequent holder in due course.
Despite the presence of the special indorsements oh the
note, these do not detract from the fact that a bearer
instrument, like the promissory note in question, is
always negotiable by mere delivery, until it is indorsed
restrtctively "For Deposit Only"

49

U n iv e rsity of S a n to Tomas
___________ EAULLXE n r Civil. I. a w

Mercantile Law
B as a general indorser Is secondarily liable to F. By
placing bis signature on the bearer instrument, he
w arrants th at die instrum ent is genuine and in all
respects w h atlt purports tobe; that he has good tide to it;
th a t all prior parties had capacity to Contract; th at he has
no knowledge of any fact which would impair the validity
of die Instrum ent orrenderltvalueless; that at the tim e of
indorsem ent; the instrum ent is valid and subsisting; and
th at on due presentment; it shall be accepted or paid, or
both, according to its tenor, and that if It be dishonored
and the necessary proceedings on dishonor be duly taken,
he will pay the am ount-thereof to the holder, or to any
subsequent Indorser who m aybe compelled to pay,

0 R.UVl-R
D raw er

The drawer, by drawing the instrument*.

* 1. Admits the existence pfthe payee and his then capacity
to indorse; ana

2i Engages that on due presentment the instrum ent will

be accepted or! dishonored; and
3. That if the necessary proceedings on dishonor beduly
taken, he will pay the amount thereof to the bolder, or to
any subsequent indorser who may be compelled to pay it
(Sec 61, NIL; 1991 Bar}

C, however, cannot be held liable because the signature

purporting to be his is a product of forgery. Ccan raise the
defense o f forgery since it his signature th at was forged,
Q: On th e rig h t bottom m argin o f a PN appeared th e
sig n atu re o f d ie corporation's p resid en t and
tre a su re r above th e ir prin ted nam es w ith th e p h rase
"and In h is personal capacity." The corporation failed
to p ay its obligation. A re th e officers liable?

Secondary liab ility of the draw er

1.
2.

The drawer is secondarily liable to the following:

The holder or
To any subsequent indorser who may be compelled to
pay it (ibid.).
I k e draw er m ayllm it bis liability to th e holder

A: Yes, persons who sign their names on the face of

prom issory notes are m akers and liable as such. The
officers are co-makers and as such, they cannot escape
liability arising therefrom (Republic Planters Bank v. CA,

G.R. No. 93073, December21,1992).

Q: R ichard C linton m akes a prom issory no te payable
to b e a re r an d d eliv ers d ie sam e to A urora Page.
A urora Page, how ever, endorses it to X In th is
m anner: "Payable to X. Signed: A urora Page."
Later, X, w ithout endorsing th e prom issory note,
tran sfers an d delivers th esam e to Napoleon. The n o te
Is subsequently dishonored by Richard Clinton. May
N apoleon proceed against Richard Clinton fo r th e
note? (1998 Bar)*
A: Yes, Richard Clinton is liable for the promissory note.
Under Section 60 of the NIL the maker of a negotiable
instrum ent, by making the same, engages that he will pay
according to Its tenor, and admits tire existence of the
payee and his then capacity to Indorse. The liability of the
maker is prim ary which means he is absolutely and
unconditionally required to pay. He engages to pay the
instrum ent according to its term s without any condition.
He is not only liable to the payee but also to the
subsequent holder in due course. Since the instrum ent is
a bearer instrum ent (which nature was not changed even
if it was specially indorsed by Aurora), Napoleon became
a legal holder thereof by mere delivery from X to him.
Thus, as a legal holder of the promissory note, he is
entitled to proceed against the maker thereof, Richard
Clinton.

The drawer inay Insert in the NI an express stipulation

negativing o r limiting his own liability to the holder (ibid.).
Q: A delivers a b earer instrum ent to B. B then
specially in dorses it to C and C later Indorses it in
b lan k to D. E steals th e instrum ent from D and, forging
th e instrum ent of D, succeeds in "negotiating" it to F
w ho acquires th e instrum ent In good faith and for
value.
'
a. If fo r any reason, the draw ee bank refuses to honor
th e check, can F enforce th e instrum ent against th e
draw er?
b. In case o f th e dishonor o f th e check by both th e
draw ee and th e draw er, can F hold any o f B, C and D
liable secondarily on th e Insjtnmieist? (1997 Bar)
A:
...|
a. Yes, F can proceed against the drawer. A, in case of
dishonor by tiie drawee bank. Section 61 of the NIL
provides that by drawing the instrument, the drawer
engages that the instrument will be accepted or paid o r .
both according to its tenor. Not only is the drawer obliged
' to pay tiie amount of the Instrument to the holder, but he
shall likewise be liable to'the subsequent indorser who
was compelled to pay I t The forged signature is
unnecessary to presume the juridical relation between or
among the! parties prior to die forgery and the parties
after the forgery. Moreover, the only party who can raise
the defense of forgeiyagainsta holder in due course is the
person whose signature is forged.
b. Only B and C can be held liable by F. According to
Section 67, when a person puts his signature on a bearer
instrum ent as a form of indorsement; he becomes subject
to all liabilities of an indorser. D cannot be held liable as
an indorser because his signature is forged by E-hence,
there was no consent from D. The forged signature is
deemed inoperative and no. right can arise out of it

nto

T om a s

N egotiable Instruments Law

However, tifeeffect of being inoperative affectsonly the
signature which is the product of forgery. It will not deem
to affect other signatures subscribed with knowledge and
voluntariness. Therefore, B and C are liable as indorsers.

acceptor. As acceptor, die bank became primarily and

directly liable to the payee/holder B.
The recourse of the bank should be against X and Its
bookkeeper who conspired to make X'S ledger show that
he has sufficient funds.

Q: D draw s a b ill o f exchangethat states: "One m onth

from date, p ay to B o r h is o rd er PhplOO,000.00.
Signed, D. T he draw ee nam ed in th e bill is E. B
negotiated th e b ill to M, M to N, N to 0 , and 0 to P. Due
to non-acceptance and afte r proceedings fo r dishonor
w ere m ade, P ask ed 0 to pay, w hich 0 did. From whom
m ay O recover? (2011 B ar)

INDORSER
Endorser
A person placing his signature upon an instrument
otherwise than .as maker or acceptor is deemed to'be an
Indorser, unless he dearly Indicates by appropriate words
his intention to be bound in some other capacity (NIL, Sec

A: D, being the drawer.

63).

.Acr;j-:p r o i i

NOTE: A person who plates his indorsement on a bearerinstrument incurs all liabilities of an indorser (NIL, Sec -

Acceptor

..

x "

..

67).

The acceptor, by accepting the instrument}

1. Engages that he will pay the Nl accordingto the tenor o f
his acceptance; and
2. Admits the existence of the drawer, the genuineness of his
'signature and his capacity and authority to draw die
instrument;
' 3. Admits the existence of the payee and his then capadty to
indorse (NIL, Sec 62,1992; 1998Bar).

General indorser v. Irreg u lar indorser (1005 Bar)

pMdiUHUllHfflfiMM

P arty who can accep t th e bill o f exchange

GR: Only the drawee may accept A stranger o r volunteer
is not bound by acceptance.

Always makes a blank

indorsement

Indorses the instrument

after its deliveiy to the
payee

Indorses before its

delivery to the payee

liable only to parties

subsequent to him .

liable to the payee and

subsequent parties ufnless
he signs for the
accommodation of the
payee in which case he Is
liable only to all parties
subsequent to the payee

XPN: In case of a bill winch is ^cep ted for honor supra

protest (NIL, Sec 161).

NOTE: Drawee does not become liable until he accepts the

Instrument in which case he becomes, an acceptor. An
acceptor engages to pay according to the tenor of his
acceptance, which may not be the sairne as the tenor of the
bill Itself because die acceptance may be qualified.

IRREGULAR INDORSE I

Makes either a blank or

spedal indorsement

[ is
i ;

(NIL, Secs. 64,66; De Leon, supra)

NOTE: The holder or subsequent indorse* who tries to
claim under die instrum ent which had been dishonored
for "irregular indorsement m ust no t'b e the irregular
indorser himself who gave cause for the dishonor.

Difference betw een th e liability o f an acceptor o r

draw ee-acceptor and a m aker

{Consoles v. RIzal Commercial Banking Corporation, GR

No. 156294, Novembber29,2006)

While both are prim arily liable, die acceptor engages to

pay the negotiable instrum ent according to the tenor of
his acceptance. On the other hand, the maker engages tov
pay the negotiable instrum ent according to the tenor of
the bill itself.

Qualified indorser A qualified indorser is a person who indorses without

recourse (NIL, Sec 65).

Q: X draw s a check against h is cu rren t account with

Bonifacio Bank in favor of B. Although X does nothave
-sufficient funds, th e bank honors the check when it is
presented fo r pay m en t Apparently, X has conspired
with th e bank's bookkeeper so th a t his ledger card
would show th at h e still has sufficient funds.The bank
files an action fo r recovery o f th e am ount paid to B
because th e check presen ted h as no sufficient funds.
Decide th e case (1998 Bar).

Drawer v. Indorser
w iim
Party only to a bill
Makes admission as to
the existence of the payee
and his capadty to
indorse
Makes no warranties, but
engages to pay after
certain conditions are
complied with

A: The bank cannot recover the am ount paid to B for the

check. When the bank honored the check; It became an

JL

' INDORSER .

Party either a bill or note

No such admission

Has warranties

U n i v e r s i t y m? S *MTn

i
Vi!

Mercantile L aw
W A R R A N T I E S '

Order of liability among d ie Indorsers

(1995,2001,2005 Bar)
f
The following are the warranties a person provides in
negotiating an instrument:

1. Among themselves - Liable prima fa d e In die order in

which they indorse (NIL, Sea 68)
. 2. To the holder- In any order .
NOTE: Every indorser is liable prim afade to all Indorsers
subsequent to him, but not those Indorsers prior to him
(NIL, Sea 68)

1. That the instrument is genuine and in all respects

what it purports to be;
2. That he has good title to it;
3. That all prior parties had capacity to contract;
4. That he has no knowledge of any fact which would
impair the validity of the instrument or render it
useless.
I ,
*
,
NOTE: Indorser's liability as warrantor is distinct from
his liability tp pay the instrument Even a qualified
indorser may! Incur liability for breadt of implied,
warranties. As warrantor, bis liability is unconditional

Liability o f an agent o r broker who negotiates an

instrum ent without indorsem ent
He Incurs all die liabilities, prescribed to . a general
indorser unless he discloses the name of his principal and
the fact that he is acting only as an agent (NIL, Sea 69)
NOTE: Parol evidence is NOT admissible to relieve an
agent or broker whose endorsement brings him within
the above liability.-

FK!-S KNTiW E N T TOR P A Y M E N T

Q: Can a collecting b an k .d eb it the account o f the

. depositor w hen the d ieck s indorsed to It |P>ank) w ere
forged?

Presentm ent for payment

It is the presentation of an instrument to the person
primarily liable for the purpose of demanding and
receiving payment

A: Yes, because die depositor of a check as indorser

warrants that it is genuine and in all re je c ts what it
purports to be. Thus, when the checks deposited had .
foiged indorsements and the collecting bank; as a
consequence of such forgery, was made to pay die drawee
bank, the collecting bank can debit the account of the
depositor for his breach of warranty (Jai-AIai Corporation
o f The Philippines v. BPI, G.R. No. L-29432, August6,1975).

Manner of presentment
GR: Instrument must be exhibited to the person from
whom payment is idemanded; when paid, it must be
delivered to the person paying it (NIL, Sec 74).
XPNs: When exhibition is excused:.
1. Debtor does not demand to see the instrument and
refuses payment on some other grounds; or
2. Instrumentislost or destroyed,
i

Q: Phebean, th e d raw er issued a check to James.

James, subsequently indorsed It to Trade. When
T rade is about to encash the check, th e drataee Unidn
Bank refused to encash it due to insufficiency of
funds. Trude sued James for paym ent of money. James
alleged th at th e su it should be dismissed because
Phebean is an indispensable party. Does James'
argum ent hold Water?

Liability of a bank paying a certificate of deposit

payable to b earer without requiring its surrender
The bank remains liable to the holder If it paid the
certificate of deposit payable to bearer without requiring
its surrender; (Far East Bank & Trust Company v. Querlmit,
G.R No. 148582,January 16,2002).

A: No, there is no privity between the drawer, and the

holder. The drawer is merely secondarily liable. As
indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid, or
both, according to their tenor, and that In case they were
dishonored, she would pay the corresponding amount
Alter an instrument is dishonored by non-payment,
indorsers cease to be merely secondarily liable; they
become principal debtors whose liability becomes
identical to that of the original obligor (Tuazon v. Heirs o f
Bartolome Ramos, G.R No. 156262, July 14,2005).

Payee cannot claim paym ent for a promissory note

which^was stolen and as such is not in his possession
To make presentment for payment, it is necessaiy to
exhibit the instrument, which he cannot do because he is
not in possession thereof.

Q;

Q: X is th e holder of an instrum ent payable to him (X)

or his order, with Y a s m aker. X then indorsed it as
follows: Subject to no recourse, pay to Z. Signed, X."
When Z w ent to collect from Y, it turned out th at Y's
signature was forged. Z now sues X for collection. Will
it prosper? (2011 Bar)
A: Yes, because X, as a qualified indorser. Warrants that
the note is genuine.
University

of

S a n t o T omas

J. ,

A. AB issued a promissory note for P I,000 payable to

CD or his order on September 15,2002. CD indorsed
th e note t a j blank and delivered the same to EF. GH
. stole tiie note from EF and on September 14, 2002
presented itto AB for paym ent When asked by AB, GH
said CD gave him the note In paym ent for two cavans
o f rice. AB therefore paid GH PI,000 on the same date.
On September 15,2002, EF discovered that the note
o f AB was hot in his possession and he went to AB. It
was then tiiat EF found out that AB had already made

52

N egotiable Instruments law

paym ent on th e note. Can EF still claim paym ent from
AB?WHy?

1. By the holder, or his agent authorized to receive

payment on his behalf;
2. At a reasonable hour on a business day;
3. At a proper place;*
4. To the person primarily liable, or if he is absent or
inaccessible, to any person found at the place where
the presentment is made (NIL, Sec 72).

B.As a sequel to d ie sam e facts n arrated above, EF, out

of p ity for AB w ho had already paid P1,000 to GH,
decided to forgive AB and Instead go afte r CD who
indorsed th e n o te in blank'to him . Is CD still liable to
EF by v irtu e o f th e indorsem ent lnblank? Why? (2002
Bar)

Time for presentm ent for paym ent

A:
*
A. Since the instrum ent became a bearer instrument, EF
could ho longer claim payment from AB. EF is not a
holder of the prom issoiy note. To make the presentment
for payment; it is necessary to exhibit die Instrument;
whidi EF cannot do because he is not in possession
thereof

TI ME KOR P R E S E N T M E N T

INSTRUMENT

GR: On the day it foils due (NIL, Sec

B5)
Payable a t a
fbcedor
determinable
future time

B. No, because CD negotiated the instrum ent by delivery.

n e c e s s i t y .o k p r e s e n t m e n t f o r p a y m e n t

KPN: If the due. date foils on a

Saturday, presentment must be
made on thenext Monday.
NOTE: Ifpresentment for payment is
made before maturity, it will not
result to a discharge of . the
Instrument (NIL, Sec SOI______'

Instance when presen tm en t fo r paym ent Is necessary

Promissory note
Within a reasonable time after its
ayableon

Presentment for payment is only necessary to charge

persons secondarily liabledrawer and indorsers (NIL,

issue.

Within a reasonable time after the

iast negotiation thereof (NIL, Sec 71).

Sec 70).
NOTE: Presentm ent for payment is not necessaty in order
to charge the person prim arily liable on the instrum ent

NOTE: "Last negotiation" means die

last transfer for value Subsequent
BUIdfexchange transfers between banks for
purposes of collection. are not
payable on
negotiations within Sec 71.
t.

Instance w hen presentm ent fo r paym ent is not

necessary to charge persons secondarily liable

demand

1. As to drawer, w here he has ho right to expect or require

that the drawee or acceptor will pay the instrument.
: (Sec 79, NIL).

Reasonable time" means not more

than 6 months from the date of issue.
Beyond said period, the check
becomes stale and valueless and
thus, should not he paid.__________

2. As to indorser .where the instrum ent was made or

accepted for h is accommodation and he has no reason
to expect th at th e instrum ent will be paid if presented

NOTE: Every N! is payable a t tire time fixed therein

without grace

(NIL, Sec 80).

3. When dispensed with under Sec 82, NIL such as:
a. Where, after tire exercise of reasonable diligence,
presentm ent cannot be made;
b.* W here the drawee is a fictitious person;
' c. By waiver of presentm ent express or implied

Rules on presentm ent fo r paym ent when m aturity

d ate is fixed
T I M E OF M A T U R I T Y OF , W H E N T O P R E S E N T E R '
P A Y M T N T A : /:
INSTRUMENT .

On a Sunday or holiday

Rule if th e in stru m en t is, by its term s, payable a t a

special place

On a Saturday

Ifthe instrum ent is, by its terms, payable at a special place,

and the person prim arily liable is able and willing to pay
it there a t maturity, such ability and willingness are
equivalent to a tender of payment upon his part (Sec 70,

If instrument which falls

due on a Saturday is
payable on demand

NIL).

On 'th e nod succeeding

business day
On the next succeeding
business day
Before 12:00 noon on
Saturday, or on Monday, at
the option of the holder

Instances when delay in m aking presentm ent is

excused

R equisites fo r a sufficient presentm ent fo r paym ent

(1994,2002 B ar)

1. When caused by circumstances beyond the control of

the holder; and
2. Not imputable to his default, misconduct, or negligence

Presentm ent for payment; to be sufficient, m ust be made:

(NIL, Sec 81).

53

U n i v e r s i t y o f S a n t o T o ma s
. F aculty of Civil Law

!v

MERCANTILE LAW
NOTE: Only th e delay in presentm ent is excused and not
die presentm ent itself. Hence, a s soon as the. cause of
delay ceases to operate* presentm ent m ust be made with
reasonable diligence (ibid.).

presentment m ust be made to the drawee although he

Is not automatically liable on the bill.
XPNs: Where the person/s prim arily liable is/are:

Q: Is th e b an k liab le to th e payee fo r depositing and

encashing th e cro ssed checks to an unauthorized
person?

1.
Dead - payment m ust be made to his personal
representative {JWL&c 76).

A: Yes, the effects of crossing a check relate to the mode

of its presentm ent for paym ent Under Sec. 72 of die NIL
presentment, for paym ent to be sufficient m ust be made
by the bolder o r by some person authorized to receive on
. his behalf. H ie checks here had been crossed and issued
"for payee's account only." This only signifies that the
draw er had intended the same for deposit only by the
person indicated (Associated Bonk v. CA, G.R, No. 89802,

- payment may be made to any of them though there has

. been dissolution of the firm (NIL, Sec. 77).

May 7,1992).

Liable as partners and no place o f payment specified

3. Several persons, not partners, and no place of

ptgment Is specified - payment must be made to all of
them (NIL, Sec 78).
4. If tbe person primarily liable is absent or
inaccessible, teen presentment m ust be made to any

an

person of sufficient discretion at the proper place of

presentm ent (NIL Sec 72(d)).

O rder o f p referen ce w ith regard to th e place o f

p resen tm en t
1. Specified place in the instrum ent
2 . ' Address of the person to make the payment if gjven
in the instrum ent
3. U sualplaceofbusinessorrestdenceofthepersonto
malm die paym ent
4. W herever he can be found; or
5. At his Last known place of business or residence

(NIL, Sec 73).

Tim e o f p resen tm en t w h ere th e instrum ent is payable
a t a bank
Presentm ent m ust be m ade during banking hours, unless
the person to make paym ent has no funds there to m eet it
at any time during die day, In which case presentm ent at
any hour before the bank is closed on that day is sufficient

DISPENSATION WITH PRESENTMENT 0I; PAYMENT

Effect when presentm ent is n o t m ade

GR: Drawer and the indorsers are discharged from their
secondary liability.
XPNs:
1. Presentment for payment is not required to charge
draw er and indorser when:
a. Drawer- when he has no right to expect o r require
teat the drawee o r .acceptor will pay die instrument
his accommodation and he has no reason to expect
that the instrum ent will be paid If presented (NIL,

y Sec 80).'
2. When presentment for payment is dispensed with

R equisites o f paym ent in d u e course

under Sec 82, NIL

Payment ism ade in due course when (MMG)'

3. When tee BOE has been dishonored by non-acceptance,

since no PP for is necessary (NIL, Sec 151).

1. It i$ made a t or after die date offijaturity;

2. T othe H older .thereof;
3. In ood faith and w ithout notice that holders title is
defective (NIL, Sec 88).

Instances w hen presentm ent for paym ent m aybe

dispensed w jth

NOTE: The term "in good faith" refers to the maker or

acceptor and not to the holder.

1. Where, after die exercise of reasonable diligence,

presentment cannot be made;
2. Where the drawee is a fictitious person; .or
3.
By waivjer of presentment; express or implied (NIL

W HGM Pu e s e n tm e n t FOR PAYMENt ,

's h o u l d BE MADK '

of1**

(N ILSecfa).
b. Indorser - When the NI was made or accepted for

{NIL, Sec. 75).

.p a ; r t j ES

IP12

Sec 82).

Tim

P arties to w hom p resen tm en t fo r paym entsbould be

m ade
GR: Presentm ent for paym ent m ust be made to the
prim ary party; to the:
N<
1. The m aker in case of a promissory note, or
2. The acceptor in case of an accepted bill. If the bill of
exchange or check is payable on demand, the
University

of

S a n t o T o m As

Negotiable Instruments Law

D I S H O N O R OV -NO : \- P A Y M E N T

Instances.w hen an Instrum ent Is dishonored by non

paym ent
NON-PAYMENT UPON
niJK P R E S E N T A T I O N

N O N - P A Y M E N T V V/ OU T
PRESENTATION

The instrum ent is duly

presented for payment to
party prim arily liable and
it is either refused or
cannot be obtained

Presentment is excused
and the instrum ent Is
overdue and unpaid

(Nil, Sec 83).

Effect of dishonor by non-paym ent .
Subject to the provisions of the law, when the Instrument
is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues
to the holder (NIL, Sec 84),. .
N O T I C E OF D I S H O N O R

Notice o f dishonor
It Is a notice given by die holder to the parties secondarily
. liable, draw er and each indorser, that die instrum ent was
dishonored by non-payment o r non-acceptance by the
drawee/maker.
v
'
, ; .
NOTE: Persons primarily liable need not be given notice
of dishonor because they are the ones who dishonored die
Instrum ent
*. * *
*
Purposes fo r requiring notice o f dishonor-

I;

*1

1.

To Inform parties secondarily liable that the maker

or acceptor has failed to meet his engagement; and

2.

To advise them th at they are required to make

paym ent

Q; Notice o f dishonor is n o t required to b4 m ade In all

cases. One instance w here such notice Is not
necessary Isw hen th e in d o rser is th e one tow hom th e
instru m en t is supposed to be presented fo r paym ent
The ratio n ale h e re Is th a t th e in d o rser (2011 Bar)
A: Already knows of the dishonor and it makes no sense
to notify him o f i t
'T im e and place of giving d ie notice of dishonor
1. GR: As soon as instrum ent was dishonored (NIL, Sec
10.J-Party is allowed one entire day for the purpose of
giving notice.

a. Place ofbusiness - Before dose of business hours on

the day following
*
/

b. Residence - Before the usual hours of rest on the day

following
c. By mall - Deposited in the post, office in time to reach
him in the usual course on the day following (NIL, Sec

103)
3. Parties reside in differentplaces
a. Bymail - Deposited in the post office in time to go by'
mail (actual departure in the course of mall from the
post office in which the notice was deposited) the day
followingthe day of dishonor.

*.

b. If no mall - At a convenient hour (qf the sender) on

that day, by the next mail thereafter
/
c. Other than by post office (e.g. personal messenger)
Within the time that notice would have been received
in due course of mail, if it has been deposited in the
post office within the time spedfied in (a) (NIL, Sec

104) .
4. Time of notice to antecedent parties - Same time for
giving notice that the holder has after the dishonor
(NIL,Secl07)I
NOTE: Actual receipt of the party' within the time
specified bylaw is sufficient though not sent in the places
* spedfied above (NIL, Sec 108).
/^
Instances w hen a negotiable instrum ent is considered
dishonored
A. For BOE,
1. If not accepted.when presented for acceptance; or
2. If presentment for acceptance is excused and the bill
is not accepted (NIL, Sec 149).
B.ForPN,
.
.1.
Not paid (that is, payment is refused or not
obtained) when pretonted for paym entat maturity; or
.
2. Where presentment-is excused or waived and the
instrument is overdue and unpaid (NIL, Sec 83). '
Liability of a person secondarily liable w hen th e
instrum ent is dishonored
After the necessary proceedings for dishonor had been
duly-taken, an immediate right of recourse to all parties
secondarily liable thereon accrues to the holder (NIL, Sec

84).
V

P A R T IE S TO RE NOTITIED'

P arties to whom notice m ust be given

Notice of dishonor should be given to:
1. The drawer; or
2. Indorser; or
3. His agent (NIL, Sec 97)

Mercantile Law
4.
5.
6.
7.

NOTE: Holder is not required to notify all indorsers, he

may select to hold bnfy one or more Indorsers. Indorsers
who are discharged from liability by reason that no notice
of dishonor was given to them is still liable for breach of
w arranties as to me NI.

W here party Is d e a d -to a personal representative or

sent to the last residence o r last place of business of
the deceased (NIL, Sec 98)
When the parties to b e notified are paitnerc notice ,
to any one partner though there has been a
dissolution (NIL, Sec. 99)
Notice to joint parties who are not partners must be
given to each of them (Nil* Sec 100)
W here a party has been adjudged a bankrupt - to th e
party himsetf or to his tru stee o r assignee (NB, Sec

2. To his principal - The principal m ust give notice to

l.O ral; or
2. In writing;
.3. It may be giver by personal delivery, or by mail (NIL,
Sec96)
|
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for payment or
for acceptance and that it has been dishonored (If

protest is necessary, notice must also contain a

statement that it has been protested); and ;
' c. Statem ent that the party giving the notice intends to
look for die party addressed for payment

parties secondarily liable as if his agent were an

independent holder (NIL, Sec 94).

NOTE: A written notice need not be signed, and an

insufficient notice may. be supplemented or validated by
verbal communication. A misdescription of the
instrum ent does W y itiate the notice unless the party to
whom die notice is given is in fact misled thereby (NIL,

NOTE: A party who receives notice of dishonor is entitled

to give notice of such dishonor to prior parties within the
sam e period oftim e that the holder hasafter the dishonor,
as if he were the said holder (NIL, Sec 107)

Sec 95).
or

1.
2.
3pW

Form an d contents o f a notice o f dishonor

1. To the parties secondarily liable-W ithin the time fixed '

by Secs. 102-104, and 107, otherwise, they are
discharged.

p a r t ie s w h o m a y tiyt: no tice

&

FORM OF NOTIOF

101)

P arties to whom d ie n o tice o f dishonor should b e

given in case th e in stru m en t w as dishonored in d ie
han d s o f th e agent

i i n
dishoi

d i .s' i i o n o i

4f , D

I f > n<
IL ,
ma

Hi
ct :
3 f 1 D;
if.
4. a

WAIVER

s / J*

1. Holder;
2. Another in behalf of the holder;
3. Any party to the instrum ent, who may be compelled to
pay and who, upon taking it up, would have a right to
reim bursem ent from the party to whom notice is given
(NIL, Sec 90). .

W aiver o f notice

It is die willingness on the part of die drawer or indorser

to be bound as such even without due ndtice of dishonor.
Tim e w hen a w aiver o f notice m aybe given

EFFECT OF NOTICE

1. Before die time of giving notice has arrived; or

2. After the omlssion to give due notice (NIL, Sec

Effect o f notice o f dish o n o r if given by o r on behalf o f

th e h older

W ays to give a w aiver of notice

It can either be:
1. Express; or
2. . Implied [eg. Payment by an indorser after he learns
of the derault o f the maker; admission of liability after
dishonor) (NIL, Sec 109).

All parties prior to the holder but subsequent to the

party to whom notice has been given and against
whom they may have a right of recourse (NIL, Sec 92)

e>

101

an

PhpU
iiy^m
iri

b iH

necboj
r

P arties affected by th e w aiver o f notice

Effect o f notice o f d ishonor if given by p arty entitled

th ereto

1.

All parties (if embodied on the face of the

instrum ent); or
2. . Particular indorser (if written above the signature of
such indorser) (NIL, Sec 110).

Notice of dishonor inures to the benefit oh

1. The holder; and
2. Ail parties subsequent to the party to whom notice is
given [NIL, Sec. 93).

Any drawer or indorser to whom such notice is not given

is discharged [NIL, Sec 89)

Q:Jfcoi
fo lie
to p
dishoc
gi h

W aiver of p ro test

I f }

It is the waiver .ofthe formal instrum ent executed usually

by a notary public certifying that the legal steps necessary
to fix the liability of the drawee and the indorsers have
been taken. Th is, it is deemed to be a waiver not only of a

A: No,
ch ks,
dfc n

Effect o f failure to give notice o f dishonor

. iWB.l U n i v e r s i t y o f S a n t o T o m a s :

b(

cani ;

109).

Notice of dishonor inures to the benefit oh

1. All holders subsequent to the holder who has given
notice;and
2.

Nf

56
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N egotiable Instruments Law

formal protest but also of presentm ent and notice of
dishonor (Nil* Sec 111).

Instances when It is not necessary to give a notice of

dishonor to d ie indorser

DISPENSATION WITH NOTICE-V- v.

1.

. Instances w hen notice o f dishonor is n o t necessary

2.
Waiver of notice (NIL, Sec 109)
Waiver of protest (NIL, Sec I l l )
When notice is dispensed with when after exercise of
reasonable diligence, notice cannot be given or does
not reach the parties sought to be charged (NIL, Sec
112)
4. Drawer in cases under Sec 114, NIL
5. Indorser in cases under Sec 115, NIL; and
-Where due nodce of dishonor by non-acceptance has
, been given (notice of dishonor by non-payment not
1.
2.
3.

3.

Drawee is fictitious or has no capacity, to contract,

and indorser was aware of these focts at the time he
indorsed the instrument;
Indorser is person to whom the instrum ent Is
presented for payment; or
Instrument was made or accepted for his
accommodation (Nit, Sec 115)
ITT LOT OF FAILURE TO GIVI- NOTICF .

Effect o f the omission o f a previous holder to give

notice o f dishonor by non-acceptance
It does not prejudice the rights of a holder in due course
subsequent to the omission to preiseiit the instrum ent to
the drawee for acceptance and notify the draw er and
indorsers if acceptance is refused (NIL, Sec 117).

necessary).(NII+Sec 116.)
Instances w hen a notice o f dishonor to d ie draw er
m ay be dispensed w ith

. Effect of failure to give notice o f dishonor

1.
2.

When draw er and drawee is the same person

Drawee is fictitious or, does not have die capacity to
contract
3. Drawer is th e person to whom die instrum ent is
presented for payment (he is the one who dishonored
J theinstrument)
4. Drawer has no right to expect or require that the
drawee or acceptor will honor die instrum ent
5. Drawer has countermanded the paym ent (e.g. stop
paym entorder) (NIL, Sec 114)

GR: Any person to whom such notice is not given is

discharged, but he will still be liable for breach of
warranties pertaining to the instrum ent
XPNs:
T . Waiver (NIL, Sec 109)
2. Notice is dispensed with (NIL, Sec 112)
' 3. Notice not necessaiy to drawer (NILfSec 114)
4. Notice not necessaiy to indorser (Nil, Sec 115)

' NOTE: The holder of two checks -which were dishonored

because the drawer withdrew h er funds from the bank
can hold the draw er liable even if no notice of dishonor
was given to the drawer, since die drawer had no right to
. expect that the drawee bank would honor the .checks.
(State Investment House;, Inc vs. Court o f Appeals, G.R. No.

i
:v

w hich Is payable In Installm ents

1. No acceleration clause - Failure to give notice of
dishonor on a previous installment does not discharge
drawers and indorsers as to succeeding installments.

101163,January11,1993)
Q: P authorized A to sign a negotiable instru m en t in
' h is (P's) nam e. It reads: 'P a y to B o r o rd e r th e sum o f
P h p l m illion. Signed, A (for and in beh alf of F).* H ie
instrum ent show s th a t I t w as draw n on P. B then
; Indorsed to C, C toD , and D to E E then treated Ita s a
bill o f exchange. Is presentm ent fo r acceptance
; necessary in th is case? (2011 Bar)

i.

2. With acceleration clause - It depends upon w hether the

clause is automatic or optional.
a. Automatic - failure to give notice of'dishonor as to a
previous installment will ' discharge the persons
secondarily liable as to the succeeding installm ents;.
b. Optional - If hot exercised, the rule would be the same
as if there is no acceleration clause. If exercised, the rule
would be the same as if the installment contains an
automatic acceleration clause (Town Savings Bank v. CA,

. a n No. 106011,June 17,1993)

A: No, since the drawer and drawee are the same person.
Q: Juben issued to Y two post-dated checks as security
. for pieces of jew eliy to be sold. Y negotiated th e check
to S. When Juben failed to sell th e jew eliy, he
w ithdrew all his funds from th e draw ee bank. After
dishonor, Iiiben contends th a t the h o ld er failed to
give him a notice o f dishonor. Is notice o f dishonor
necessaiy?
,

,. < I

DISCHARGElOF NKG0T1ABLb INSTRU MEN T

It is the release of all parties, whether prim ary or

secondary, from the obligations arising thereunder. It
renders the instrument without force and effect^ and
consequently, it can no longer be negotiated
M ethods for discharge o f Instrum ent

A: No, Juben was responsible for the dishonor of his

checks, hence, there was no need to serve him notice of
dishonor (State Investment House, Inc v. CA, supra).

1. Payment by principal debtor:

a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof

2 .

University

of

S anto T omas

Mercantile Law
unequivocal !term s as novation is never presumed.
Secondly, the old and tire new obligations must, be
incompatiblejon every point

d. In good faith and w ithout notice that the holder's

title is defective
2. Payment by accommodated party

In this case, J.Y. Bros/sacceptance ofthe Solid Bank check,

w hidi replaced the dishonored Prudential Bank check,
did not result to novation as there was no express
agreement to establish. that Salazar was already
discharged from his liability. Neither was there any
incompatibility, since both cheeks were given to
term inate a single obligation arising from, the same
transaction (Anamer Salazar v. J.Y. Brothers, Marketing

3. Intentional cancellation ofinstrum ent by the holder (by

expressly stating it in the Instrum ent or when the
instrum ent is torn up, burned or destroyed]
4. Any act which discharges a simple contract for the
payment of money under A rt 1231 of the NCC
specifically remission, novation, and merger.
NOTE: Loss of thie negotiable instrum ent wih not
extinguish liability; compensation is no t available so long
as an obligation is evidenced by a negotiable instrum ent
(Villanueva, 2009). .

Corporation, C.B. Na 171998, October20,2010, In DMna

2014).

5.. Reacquisition by principal debtor in

Reacquisition m ust be:
a. By the principal debtor.
b. in his own right
c. At or after date of m aturity
discharged; if made before,
renegotiated) (NIL, Sec 119).

M ethods o f discharge o f secondary parties(ACS TReE)

discharge

his own right.

^

s e c o n d a r i l y lia ble

Q: The ru le is th a t th e Intentional cancellation o f a

person secondarily liable resu lts in th e discharge o f
th e latter. W ith, respect to an indorser, th e b id d er's
rig h t to cancel h is signature is: (2011 Bar)
A: Limited to the case where the indorsement is not
necessary to his title.
Effects o f paym ent by persons secondarily liable
1. Instrum ent is not discharged
2. It only cancels his own liability and that of the parties
subsequent to him
t*
j
3. GR; Instrum ent may be renegotiated
XPNs:
a. Where it Is payable to the order of a third person, and
has been pajd by the drawer; and
b. Where it is paid by the accommodated party

A: No. While Section 119 of the NIL in relation to Article

1231 of tiie Civil Code provides th at one of the modes of
discharging a negotiable instrum ent is by any other act
which will discharge a simple contract for the payment of
money, such as novation, the acceptance by the holder of
another check w hidi replaced the dishonored bank check
.did not result to novation.

NOTE: (a) and (b) has the same effect as payment by the
party primarily liable.
.4. Person paying is remitted to his former rights (as
regards prior parties) and he may strike out his own and
all subsequent indorsements (NIL, Sec 121).

There are only two ways which Indicate the presence of

novation and thereby, produce the effect of extinguishing
an obligation by another which substitutes the same.
First, novation m ust be explicitly stated and declared in
S ant o T omas

ns

(instrum ent is
it may be

Salazar contends th a t th e issuance o f th e Solid Bank

check and tiie acceptance th ereo f by J.Y. Bros, in
replacem ent o f th e dishonored P rudential Bank
check, am ounted to n ovation th a t discharged th e .
la tte r check; th a t resp o n d en t's acceptance o f th e Solid
B ank check, notw ithrtandlng its eventual dishonor by
th e draw ee hank; had th e effect o f erasing w hatever
crim inal responsibility, un d er A rticle 315 o f th e RPC,
th e draw er o r in d o rser o f th e Pim dential Bank check
w ould have in cu rred in th e issuance th e re o f and th a t
a check is a co n tract w hich is susceptible to a novation
fu st like an y o th er c o n tra c t Is Salazar correct?

of

parti

1. Any Act'which discharges the instrument;

2. Intentional Cancellation of his signature by the
holder
3. Discharge of prior party whidi may be made when
signature is Stricken out
4. Valid Tender of payment by a prior party;
5. Release of the prindpa! debtor, unless holder
expressly reserves his right of recourse against tire said
subsequent parties
6. Extension rtf'time of payment^ unless:
a. Extension isconsented to by such party
b. Holder expressly reserves his right of recourse
against such party (NIL, Sec 120)

Q: Salazar w ith Calleja an d Kallos procured from |. Y.

B ros. 300 cavans o f rice. As paym ent; Salazar
negotiated an d in d o rsed to J.Y. Bros. P rudential Bank
Check issu ed by T lm arto w ith th e assurance th a t th e
Check is good as cash. On th a t assurance, J.Y, Bros,
p arte d w ith 300 cavans o f rice to Salazar. However,
upon presentm ent; th e check w as dishonored due to
"dosed account" Calleja, Kallos and S alazar delivered
to j.Y. B ros, a replacem ent cross Solid Bank Check
again issued w hich bounced due to insufficient funds.
D espite dem ands, S alazar felled to se ttle th e am ount
due. J.Y. Bros., charged Salazar and Tim arfo w ith th e
. esftifa.

University

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N egotiable Instruments law

R Hi UTS OF A PAKTY WHO DISCHAHOFD THF
t:\STRlJM l\NT-'
'

3.
4.
5.

Gfl: The party.so discharging the instrum ent is rem itted

to his former rights as regards all prior parties, and he
may strike out his own and all subsequent indorsements,
and again negotiate die instrum ent

6.
7.

The time or place of payment

Number or the relations of the parties
Currency in which payment is to be made
Adds a place of payment where no place is specified
Any other change or addition which alters the effect of
the.instrument (NIL, Sec 125.)

%
_ DTE: The change in the date of indorsement is not
material where the date is not necessary to fix the
maturity of the instrum ent

XPNs:
1. Where it is payable to the order of a third person,
and has been paid by the drawee; and
2. It was made o r accepted for accommodation, and
has been paid by the party accommodated.

Spoliation
It refers to material alteration of an instrument done by a
stranger. It has the same effect as alteration.

Rl:.NUi\(MATiOi\ BY IIOl.OKK

Renunciation

KFFHCT OF M AT HM AI. AI.TKRATiON

It is the act of surrendering a claim or right with or

without recompense (a PERSONAL defense).

Effect of m aterial alteration o f a negotiable

fostrum entw ithont th e assent o f all p arties liable
thereon

M anner o f m aking renunciation by d ie h older

1. Avoids the instrument except againsb
a. A party who has made the alteration;
b. A party who authorized o r assented to the alteration;
or
'
c. The indorsers who indorsed subsequent to th e
alteration (because of their warranties).

1. Must be w ritten
2'. If oral, the instrum ent m ust be surrendered to the
person primarily liable (NIL, Sec 122).
Effects of renunciation
\

1. Made in favor o f principal debtor made at or after rite

2. tf negotiated to an HIDG,'pe may enforce the payment

thereof according to its original tenor against the person
notaparty to the alteration. He may also enforce payment
thereofagainst the party responsible for the alteration for
die altered am ount
/
f
.3. If negotiated to a holder not an HIDQ he cannot enforce
payment /against the person not a party , prior to the
alteration. He may, however enforce payment according
to the altered tenor from the person who caused the
alteration and from the indorsers (NIL, Sec 12).

maturity (made absolutely and unconditionally) o f the

instrument - discharges the.instrum ent (NIL, Sec 122).
2. Made infavor o f a secondary party may be made by tire
holder before, at or after maturity - discharges only the
secondary parties and all subsequent to him (NIL, Sec
122). 3
3. Renunciation does not affect the rights of a holder in
due course w ithout notice (NIL, Sec 120).
Rule regarding d ie cancellation o f an Instrum ent

Q: Can a draw ee who accepts a m aterially altered

ch ed t recover from th e holder and th e d raw ert (2011
Bar)

It is presumed intentional. It .Is inoperative if

unintentional, o r under a mistake or without the authority
of the holder. But where an instrum ent or any signature
appears to have been cancelled, the burden of proof lies
on the party alleging th at the cancellation was made
unintentionally, o r under a mistake or without authority

A: No, he cannot Recover from either of them.

(NIL, Sec 123).

MATHRIAL ALTERAT10 N
.

CONCEPT

I *

T here Is no m aterial alteratio n when th e serial

num ber o f a check had been altered
An alteration is said to be material if it alters the effect of
the instrum ent It means an unauthorized change in an
instrument that purports, to modify in any respect the
obligation of a party or an unauthorized addition ofwords
or numbers or other change to an incomplete instrum ent
relating to the obligation of a party.*The alteration of the
serial number of a check did not change the relations
between the parties nor the effect of the instrument.
Hence, the alteration on the serial number of a check is
not a material alteration (International Corporate Bank v.

'

M aterial alteratio n
It is any change in the instrum ent which affects or changes
the liability of the parties in any way.
Instances th a t constitute m aterial alteratio n

CA, G.R. No. 141968, February12,2001)

Any alteration which changes:
Date
Sum payable, either for principal or interest

59

Un i v e r s i t y of S anto T om as
__________ F aculty of Civil Law

K E M E D IA L L A W

The defendant may move for the reconsideration of the

order and If die denial is tainted with grave abuse of
discretion, he may file a petition for certiorari (Riano,
2014).

4.
5.

When non-appearance o f a party in a pre-trial

conference excused
1.
2.

If a valid cause is shown therefore; or

If a representative shall appear in his behalf fully
authorized in writing to:
a. enter, into an amicable settlement; '
b. submit to alternative modes of dispute
resolution; and
c. enter Into stipulations or admissions of facts
. and of documents (Sec. 4, Rule 18).

NOTE: The phraseology of the provision suggests that it is

not sufficient for the written authority to give to the
representative the power to enter into one of the matters
mentioned in Sec. 4 of Rule 18, as when the only authority
granted is to enter into amicable settlement The
authority must also confer upon the representative the
power to enter into alternative modes of dispute
resolution and stipulations and admissions of fact An
incomplete authority does not satisfy the requirements of
the Rules and should be deemed the equivalent of having
no authori ty at all Further, the mere presentation of such
w ritten . authority is not sufficient but must be
complemented by a showing of valid cause for the nonappearance of the party himself (Ibid.).
The authority to submit to ADR, which includes
arbitration, is not complied with by a mere special power
to compromise since a special power to compromise does
not authorize submission to arbitration (A rt 1880, NCC).
Moreover, the written authority must be in the form of
special power of attorney. Entering into an amicable
settlement fora client who is the principal in the attorneyclient relationship involves entering Into a compromise.
Substantive law is explicit: Special power of attorney is
necessary to compromise, and to submit questions to
arbitration. Procedural rules likewise prohibit an
attorney to compromise his client's litigation without a
special authority" (Ibid.).
;.v " ;v:PRE-TRIAL BRIEF: . .
!EFFECT OF FAILURE TO FILE

The documents o j exhibits to,hq presented, stating

the purpose thereof;
A manifestation of their having availed or their
intention to avail themselves of discovery
procedures or rieferral to commissioners; and
The number and names of the witnesses, and the
substance of their respective testimonies and the
approximate number of hours that will be required
by the parties for the presentation of their respective
witnesses (Sec. 6, Rule 18).

Note: The parties are bound by the representations and

statements in theirrespective pre-trial briefs (AM. 03-109-SC, July' 13, 2004). Hfence, such representations and
statements are in the nature of judicial admissions .in ,
relation to Sec. 4, Rule 129.
Effect of Failure to file a Pre-trial Brief
It shall have the same effect as failure to appear at the pre
trial (AM. No. 03-1-09-SC, July 13,2004). Hence, if it is the
plaintiff who foils to file a pre-trial brief, such failure shall
be a cause for dismissal of the action. If it is the defendant
who foils to do so, such failure shall be a cause to allow the
plaintiff to present his evidence ex parte.
NOTE: The dismissal of the complaint for failure to file
pre-trial brief is discretionaiy on the part of the trial court
(Ramos v. Spouses Lavendia, G.R. No. 176706, October 8,
2008).
I
Pre-trial Order
An order issued by the court upon termination of the pFetrial. Under AM. ho. 03-1-09-SC, the pre-trial order shall
be issued within 10 days after termination of the pre-trial.
Contents of a Pre-trial Order
The order recites in detail the following:
1.
2.
3.
4.

The matters taken up in the-conferenCe;

The actions taken thereon;
The amendments allowed to the pleadings;
The agreements or admissions made by the parties
ds to any matters considered.

NOTE: These admissions embodied in the pre-trial order

are binding upon the parties and conclusive upon them. '

When filed
The parties shall file their respective pre-trial briefs in
such a manner as shall ensure their receipt thereof at least
3 days before the date of the pre-trial (Sec. 6, Rule 18).
Contents of a pre-trial brief
1.
2.
3.

A statement of their willingness to enter into

amicable settlement o r alternative modes of dispute
resolution, indicating the desired terms thereof;
A summary of admitted facts and proposed
stipulation of facts;
The issues to be tried or resolved;

fmfc\

Q. Upon term ination bf the pre-trial, the judge

dictated the pre-trial order in the presence of the
parties and th eir counsel, reciting w h a t. had
transpired and defining three (3) issues to be tried.
a. If, Immediately upon receipt of his copy of the
' pre-trial order, plaintiff's counsel should move
for its amendment to include a fourth (4th)
triable issue which he allegedly inadvertently
foiled to mention when the judge dictated the
order. Should the motion to amend be granted? b. Suppose trial had already commenced and after
the plaintiffs second witness had testified, the
defendant's counsel moves for the amendment of
the pre-trial order to include a fifth (5th) triable

GRf"Vh
<*ra |H
bill I

NO/
acc( JH
accept
accentaj
m

t wqer

hof
2.SuL<
3 -1 '!]*
to tilJ I
anotLJ
NO! m
quaJ ,i
express
h rn ra s
Acu.t !
Acc ita
.by! H
oven (
accepta
Effi

Certific;
suf jei
bee i
appli. 1
Where
dra
Sec ! t

417L}t

U n iv e rs ity o f S a n to Tomas
---301 C o rc

NEGOTIABLE INSTRUMENTS LAW

' c Any person who, upon faith thereof, receives the bill for
value (NIL, Sec 135).

P RE S EN TM EN T FOR AC CE P TA NCE

Presentm ent for acceptance

T I M E F O R A C C E P T A N C E

It Is the production or exhibition of a bill of exchange to

the drawee for his acceptance pr payment (also includes
presentment for payment).

The draw er has 24 hours after presentment to decide

whether or not he will accept the bill The acceptance, if
given, dates as of die day of presentation (NIL, Sec 136).

Necessity o f presentm ent for acceptance

NOTE: Drawee bank is not entitled to 24 hours to decide
I';.' w hether or not to jiay a check since a check is presented'
for payment, not acceptance.

GR: Itis notnecessaiy to render any party to the bill liable

?'

XPNs:

(NIL, Sec 143, par. 2).

EUI.E.S G O V E R N I N G A C C E P T A N C E

1. Where bill is payable after sight; or when it is necessaiy

in order to fix the maturity of tee instrument;

Effect of accepting an instrum ent w ith a qualified

h) acceptance

2. When bill expressly stipulates teat itshallbe presented

for acceptance; or

GR: When the holder takes a qualified acceptance the

draw er and indorsers are discharged from liability on the
bill.

3. Where the bill is drawn payable elsewhere than at the

residence or place of business of tee drawee (NIL, Sec 143,

NOTE: The holder may refuse .to take a qualified

.acceptance and if he does not obtain an unqualified
acceptance, he may treat the bill as dishonored by nonalcceptance (Sundlang Sir. &Aquino, 2014).

par.l).
NOTE: The holder must either presentit foracceptance or
negotiate it within a reasonable time, otherwise, the
drawer and all indorsers are discharged (NIL, Sec 144).

,-XPNsj
1. When they have expressly or impliedly authorized the
holder to .take a qualified acceptance; or

TIiME/PLACE/ M A N N E R OER RI CS KN TM EN T

P roper presentm ent for acceptance

2. Subsequently assent thereto;
It m ust be made:
%. By or on behalf of tee holder
1
2. At a reasonable hour on a business day '
3. Before the bill is averduie; and
4. To tee drawee or some person authorized to accept or
refuse to accept on his {rehalf (NIL Sec 145).

3. Implied assent (when they did not express their dissent

to the holder w ithin a reasonable time when they received
v ' a notice of qualified acceptance) (NIL, Sec 142).

\ NOTE: When the draw er o r indorser receives notice o f a.

'/qualified acceptance, he.must; within a reasonable time,
^ express his dissent to the holder o r he will be deemed to
have assented thereto (Sundiang Sr. &Aquino, 2014).

BUtaddnssed to 2
or more drawees
who are not
partners

Acceptance o f an Incom plete bill

Acceptance may be made before the bill has been signed
. by the draw er o r while otherwise incomplete, or after itis
overdue, or even after It has been dishonored by non*
acceptance or non-payment (NIL, Sec 138).

All of teem unless one has

authority to acceptor refuse
acceptance for all, in whidt
case presentment may be
made to him only (NIL, Sec

14S,[aJ).
Drawee is dead

Effect o f the certification by th e draw ee bank

Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have
been set apart for its satisfaction and that they shall be so
applied whenever the check is presented for paym ent
Where a check is certified by the bank on which it is
drawn, the certification Is equivalent to acceptance (NIL,
Seps. 187,189; New Pacific Timber v. Seneris, G.R No. L*

Drawees personal represen

tative (NIL, Sec 145, [b]).
NOTE: Presentment is merely

permissive since it is excused

by (NIL, Seel48 [a]).
Drawee is
adjudged a
bankrupt or
insolvent or has
made an
assignmentfo r the
benefitofcreditors

41764, December. 19,1980).

61

Un i v e r s i t y
----... -

To drawee or his trustee/

assignee (NIL, Sec 14S, [c]).

of

S anto T omas
**. I .lit

Mercantile L aw
EFFECT 01- FAILURE TO MAKE PRESENTMENT

4. In case of non-payment, holder must' give the

corresponding notice of dishonor; otherwise, secondary
parties are discharged

Effect o f failure to m ake presentm ent for paym ent of

a check within a reasonable tim e
Failure.to make such presentment will discharge die
drawer from liability or to the extent of the loss caused by
the delay (NIL, Sec 186; Republic o f the Philippines vs: PNB,
CR. No. L-16106, December30,1961).

Rigjhts of a holder when bill Is not accepted

When a bill is dishonored by non-acceptance; an
immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment for
payment is necessary (NIL, Sec 151).

Instance when delay in presentm ent may be excused

Acceptance for honor

Where die holder of a bill drawn payable elsewhere than

a t the place of business or die residence of the drawee has
no time with the exercise of reasonable diligence, to
present the bill for acceptance before presenting it; for
payment on die day that it foils due (NIL, Sec 147).

It is an undertaking by a stranger to a bill after protest for

the benefit pf any party liable thereon or for the honor of
the person for whose account the bill is drawn which
acceptance inures to the benefit of all parties subsequent
to the person for whose honor it is accepted, and
conditioned to pay the bill when it becoipe? due if the
original drawee does notpay ft (NIL, Sec 161).

Instances when presentm ent is excused .

1. Where the drawee is dead, or has absconded, or is a
fictitious person nothaving capacity to contract by bill;

Requisites ofacceptance for honor (WIS)

2. Where, after exercise of reasonable diligence,.
presentment cannot be made; o r .

1. Must be in Writing
2. Must Indicate that it is an acceptance for honor;
3. Must be Signed by the acceptor for honor (NIL, Sec 162)

3. Where,: although presentment has been irregular,

acceptance has been refused on some other ground (NIL,
Sec 148).

m atte

PROMISSORY NOTES

Prom issory note

- DISHONOR RYNON-ACCEPTENCE

An unconditional promise in writing made by one person

to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum
certain in money to order or to bearer (NIL, Sec 184).

Instances w hen a bill is dishonored by nonacceptance

1. When it is duiy presented for acceptance and such an
acceptance is refused or cannot be obtained; or

Special types of promissory notes

2. When presentment for acceptance is excused, and the
bill is not accepted (NIL, Sec 149).

1. Certificate o f deposit - a written acknowledgment by a

bank of the receipt of money on deposit on which the bank
promises to pay to the depositor or to him or his order or
to some other person or to him or his order, or to a
specified person or bearer, on demand or on a fixed date,
often with interest

NOTE: It is' not Sufficient that presentment for acceptance

;is excused, it is also necessary that the bill remains not
accepted.
Duty of th e h o ld er w here bill is not accepted

2. Bonds - a n evidence of indebtedness issued by a public

or private corporation which constitutes a promise, under
seal, topay money. It runs for a longer period of time than
aPN.
3. Registered! Bond - one payable only to the person whose
name appears on the face of the certificate.

If within 24 hours after due presentment, the bill is not

accepted, the person presenting it must treat die bill as
dishonored by non-acceptance otherwise he will lose the
right of recourse against the drawer and indorsers (NIL,
Sec ISO).

4. Coupon Bond - one to which are attached coupons

which entitle the holder to interest when due.

Rules when a bill is dishonored by non-acceptance

1. Right of recourse against all secondary party accrues to
the holder.

5. Bank Note ~ instrument issued by a bank for circulation

as money payable to bearer on demand

2. No presentment for payment is necessary since dishonor

of the instrument by non-payment is to be expected.3

6. Due Bill - PN which shows on its face that one person

acknowledges his indebtedness to another. The word
"due" is commonly
used.
jmr

3. If the instrument is accepted offer it has beeii dishonored

by non-acceptance, presentment for payment is
necessary upon maturity.
U n i v e r s i t y of S a n t o T omas
A A < e r . Pii MiTgg

62

a deposit
subf 1 1
Com f t
2011, i I

N egotiable Instruments law

7. Mortgage Note - an Instrument secured by either a real
(REM) o r personal property (Chattel).
fr. Title-Retaining Note - an Instrument used to secure the
purchase price of goods. It ordinarily provides th attitie to
- the goods shall remain in payee's name until the note is
paidfnfrill.

Instances when a b ill of exchange may be treated as a

prom lssoiynote
1. The drawer and the drawee are the same person;
2. The drawee is a fictitious person;
3. The drawee has no capacity to contract;
4. The instrument is so ambiguous that there is dottbt
whether it is a bill o ra note (Stmdiang Sr. A Aquino, 2014,

citing NIL, Secs. 17[e] and 130).

9. Collateral Note - it is used when the maker pledges

securities to die payee to secure the payment of the
amount of the note.

'CHECKS

10. Judgment Note - this is a note to which a power of

attorney is added enabling die payee to take judgment
against the m aker without the formality of a trial if the
note is not paid oh its due date [De Leon, supra).

DEFINITION

(1991,1994-1996,2002,2004,2005Bar)
It is a bill of exchange drawn on a .bank and payable on
demand (NIL, Sec. 185).

Q: P rudential .Bank received from th e (HR a Final

A ssessm ent Notice and a Demand L etter lo r
deficiency D ocum entary Stamp Tax for th e taxable
y ear 1995 o n its R epurchase Agreem ent w ith d ie BSP,
P u rch ase o f T reasu ry n ils from th e BSP, and o n its
SAP p ro d u c t P rudential Bank p ro tested d ie
assessm ent on th eg ro u n d th a tth e docum ents subject
m atter o f th e assessm ent are n o t subject to DST. It
contends th a t its SAP is n o t subject to DST because i t
is n o t included In th e list o f docum ents un d er Section
180 o f th e o ld NIRC, as am ended. P rudential Bank
in sists th a t unlike a tim e deposit, its SAP is evidenced
by a passbook and h o t by a deposit certificate. In
addition, its SAP is payable on dem and and n o t on a
fixed determ inable future.. To support its position,
p etitio n er re lie s on th e legislative in ten t o f th e law
p rio r to R epublic A ct (RA) No. 9243 and th e historical
. background Qf d ie taxability o f certificates o f deposit.

NOTE: A check m ust be presented for payment within a

reasonable time after lbs issue' or the drawer will be
discharged from liability thereon to the extent of the loss
caused by the delay.
Essentia] characteristics o f checks
There are 2 essentia! distinct characteristics of checks:
1. They are drawn on a bank; and
2. Payable instantly on demand.
PCIB, now EPCIB, w ith a balance, o f P35,147.59. He
issued a post-dated PCIB check in favor o f SU In th e
am ount ofP34,58872. After clearing, th e am ount of
tite check was im m ediately debited fry EPCIB fiom i
T an's account thereby leaving him w ith a balance'of
only P558.67. He th ereafter issued three (3) checks
payable toASELCO, ANECO, and th e o th er payable In
cash. When th e la tte r w ere presented fo r paym ent;
th e th ree (3) checks w ere dishonored fo r being draw n
against insnffldent funds. As a result; tite electric
pow er supply fo r th e two mini-sawmills owned and
operated fay Tan, w as cu t off and i t was resto red only
after som etime. A fter trial, th e RTC ruled In favor .of
EPCIB and dism issed tite com plaint/On appeal th e CA
reversed the decision o f th e RTC Is EPCIB liable due to Its prem ature debiting o f th e p o std ated check,
thereby affecting T an's business operations?

P rudential B ank fu rth er contends th a t even assum ing

th a t Its SAP is subject to DST, Ihe CTA En Banc
nonetheless e rre d in denying Prudential B ank's
w ithdraw al o f its petitio n considering th a t It h as paid
un d er th e IVAP, which ft dafm s Is 100% o f th e basic
tax o f th e original assessm ent BIR. P rudential Bank
in sists th a t th e paym eut.it m ade should be deem ed
substantial com pliance considering th e refusal q f th e
CIR to issue th e le tte r o f term ination and au th o rity to
cancel assessm en t Is Prudential Bank's contention
tenable?
A: No. A certificate of deposit is defined as a w ritten
acknowledgment by a bank or banker of the receipt of a
sum of money on deposit which the bank or banker
promises to pay to the depositor, to the order of the
depositor, or to some other person or his order, whereby
the relation of debtor and creditor between the bank and
the depositor is created A document to be considered a
certificate of deposit need not be in a specific form. Thus,
a passbook issued by a bank qualifies as a certificate of
.deposit drawing interest because it is considered a
Written acknowledgement by a bank that it has accepted
a deposit of a sum of money from a depositor. Thus, it is
subject to documentaiy stamp tax (Prudential Bank v.

A: Yes. The premature debiting of die postdated chedc by

the bank which resulted to insufficiency of funds that
brought about the dishonor of two checks causing the
electric supply to be cut-off and affected business
operations indicates the negligence of tite bank. For its
failure to exercise extra-ordinary diligence, it should be
made liable in the case (Equitable PCI Bark v. Arcelito B.

Tan, G.R. No. 165339, August23,2010, in Divina, 2014).

Commissioner o f Internal Revenue, G.R. No. 180390, July 27,

2011, in Divina; 2014).

63

Un i v e r s i t y

of

S a n t o T omas

Mercantile Law
Check v. BUI o f exchange
- - BASIS

Drawee

Payability
..t

CHECKS . , v
Always drawn on a
bank or banker
against a previous
deposit of funds *
Always payable on
demand

BOB ;
AA.
May or may not be
drawn on a bank
aihd need not be
drawn against a
deposit
Either payable on
demand dr a t a fixed
or determinable
future time (NIL,

Sec4)
Function
Presentmentfirr
Payment

Ordinarily intended
for immediate
payment
Must be presented
for payment within
a reasonable time

Intended for
circulation as
instrum ent of credit
Must be presented
for payment within
a reasonable time

after its issue(NIL,

Secl86)

after Its last

negotiation
(NlL,Secl71)

Discharge , When a check is

accepted o r
of
Liability
certified, the drawer
& indorsers are

They remain liable

despite acceptance

(NIL, Sec 84)

discharged from
liability thereon

(NIL, Sec 188)

Effect o f
Die Death
o f the
Drawer

Presentm entfbr
Accep
tance .

Death of the drawer

of a check with the
knowledge of the
bank revokes the
authority of the*
bank to pay.
Need not be
presented for
acceptance (NIL,

Must be.presented
for acceptance in
certain cases (NIL,

Sec.185)

Sec 143)

Death of the draw er

of an ordinary bill
does notrevokethe
authority of the
drawee, to pay*

Q: A check w as dishonored due to m aterial alteratio n .

T he cred ito r th en filed a n action against draw ee b ank
fo r th e am ount. Wfli th e action prosper?
A: No. If a bank refuses to pay a checkfnotwithstanding
th e sufficiency of funds), the payee-holder cannot; as
provided under Sections 185 and 189 of the NIL, sue the
bank. The payee should instead sue die drawer who might
in turn sue the bank. This is so because no privity of
contract exists between the drawee-bank and the payee

( Villanueva v. Nite, G.R No. 146211, July25,2006).

NOTE: A check of itself does not operate as an assignment
of any p art of the funds to die credit of the drawer with
the bank, and the bank is not liable to the holder, unless
and until it accepts o r certifies the check (NIL, Sec 169).
Stopping paym ent
The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule that

the issuance of a check by itself is not an assignment of

funds by the drawee. If a bank pays a check after it has
been notified to stop payment, it pay's in its own
responsibility and will not be permitted to charge the
account The drawer may countermand payment if he has
a valid defense against the holder of the check. Thus,
countermanding of a check is proper where the payee
failed to deliver the goods that he was supposed to deliver
(Sundian Sr. A Aquino, 2014, citing Bataan Cigar and

Cigarette Factory v. CA, GR. No. 93046, March 3,1994).

KINDS
Sp ecial types o f checks

..

1. Cashiers Check - a BOE drawn by the bank upon itself

and is accepted at its Issuance. It is usually signed by the
cashier of the ^ank. .

2..Manager's Check - a BOE drawn by the bank upon itself

and is accepted at its issuance and signed bya manager on
hehalfofabank.
3. Certified Check - Drawn by a.depositor upon fends to
his credit in a bank which an officer of a bank certifies will
be paid on presentation.
4. Crossed Check-D one by writing 2 parallel lines on the
left top portion of the check. The marking signifies that
the bank should pay only with the intervention of the
company only. .
I
5. Memorandum Check - A check with Memorandum"
w ritten on its face. The writing signifies that the drawer
engages to pay the bona fide holder absolutely, without
any condition concerning its presentm ent
6. Traveler's Checks - Instruments purchased from banks
o r express companies which can be used like cash upon
th e second sijgnature by the purchaser (De Leon, supra).
Q: W hat is a crossed check? W hat a re th e effects of
crossing a check? Explain. (1991,199.4-1996, 2002,
2004,2005|B ar)
A: A crossed check is a check with two (2) parallel lines,
written diagonally on the upper right corner thereof. It is
a warding td the drawee bank thatpaym ent m ustbe made
to the right party; otherwise the bank has no authority to
use the drawer's fends deposited with the bank
To be assured that it will avoid any mistake in paying to
the wrong party, banks adopted the policy that crossed
checks must be deposited In the payee's account When
withdrawal is made, the banks can be sure that they are
paying to the right party. The crossing becomes a warning
also to whojever deals with the said instrument to inquire
as to the purpose of its issuance. Otherwise, if something
wrong happens to the payment thereof, that person
cannot claim to be a holder in dile course. Hence, he is
subject to the personal defense on the part of the drawer
th at there is breach oftrust committed by the payee in not
complying with the drawer's instruction.

fc
al

N egotiable Instruments Law

Hence, the effects of crossing a check are:
' 1. That the check may not be encashed but only deposited
in the bank;
2. That die 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 th at the check has been issued for definite
purpose so th at he m ust inquire if he has received the
check pursuant to the purpose. Otherwise, he Is n o t an
H1DC (State Investment House v. IAC, G.R. No. 72764, July
. 13,1989).
Q: Po P ress issued in favor o fJo sea postdated crossed
check, In paym ent o f new sprint w hich Jose prom ised
to deliver. Jose sold and negotiated th e check to Excel
Inc. a ta d isco u n t Excel did n o t aide Jose th e purpose
Of crossing d ie check. Since Jose tolled to deliver th e
n ew sp rin t Po ordered th e draw ee bank to stop
paym ent o n th e check. Efforts o f Excel to collect from
Po tolled. Excel w ants to know from you as counsel:
a. W hat a re th e effects o f crossing a check?
b. W hether as second in d o rser and holder of th e
crossed check, Is i t a holder In due course?
c. W hether Po's defense o f lack o f consideration as
against Jose Is also available as ag ain st Excel? (1994,
1995,2005 Bar)
A:
a. The effects of crossing a check are:
1. H ie check may not be encashed but only deposited
inthebank;

.
;
2. The check may be negotiated only once to one who

has an account w ith a bank; and

I*
3. The act of crossing the check serves as a warning to
the holder that die check has been issued for a definite
purpeise so that he must inquire if he has received th e '
check pursuant to th at purpose, otherwise he is n o t a
holder in due course.
b. Excel Inc. is not a holder in due course. The act of
crossing the check imposes upon the holder thereof the
duty to ascertain the indorser's, tide to the check o r the *
nature of his possession or die purpose for which it Was
issued. Excel is guilty of gross negligence amounting to
legal absence of good faith for its failure to inquire from
)ose the purpose for which the three checks were crossed
despite the warning of the crossing, hence, it is not
deemed a holder in due course.
c. Yes, the defense of lack of consideration as against lose
is also available as against Excel. For not being a holder
; In due course, Excel is subject to personal defenses as if
the check w ere non-negotiable, such as lack of
consideration between Po Press and Jose. In tids case;
Jose's failure to deliver die newsprint resulted in the
absence of consideration for the issuance of the check.

Consequendy, Po Press cannot be made liable to pay the

face value of die check.
Purpose o f crossing a check
The purpose is to insure payment to the payee. It can only
be deposited but may not be converted into cash by the
drawer. Crossing a check does not destroy its
negotiability but toe check may be negotiated only once r
to one who has an account with toe bank (De Ocampo v.

GatchaHan, supra).
Q: PCIB Hied an action against Balmaceda, it alleging
that betw een 1991 and 1993, by taking advantage of
his position as branch manager, he fraudulently
obtained and encadied 31 Managers checks In toe
P10,782,150.00. PCIB moved to be allow ed to file an
am ended com plaint to Im plead Rolando Ramos as
one of th e recipients o f a portion o f to e proceeds from
Balmacedas alleged fraudd Since Balm aceda did not
file an A nsw er,.he w as declared in d e fa u lt On toe
o th er hand, Ramos filed an Answer denying any
knowledge of Balmacedas schem e The RTC Issued a
decision in favor o f PCIB. On appeal, to e CA dism issed .
to e com plaint agalnstRamos.AccordJng to to e CA, the
m ere fact th at Balmaceda m ade R am os'the payee in
som e of to e M anagers checks does nbtsufficeto prove
th a t Ramos was com plidt In Balmacedas fraudulent
schem e Is PCIB Itself a t fault as em ployer?
.,
A: Yes. While its manager forged toe signature of the
authorized sifgnatortes of clients in the application for
managers checks and forged toe signatures of the payees
thereof, the drawee bank also failed to exercise 'toe
highest degree of diligence required of banks In the case
at bar. It allowed its manager to encash .toe Manager's
checks that were plainly crossed checks A crossed check
is one where two parallel lines are drawn across jts face
or across its corner. Based on jurisprudence, toe crossing
of a check has the following effects: (a) the check may not
be encashed but only deposited in the bank; (b) the check
may be, negotiated only once to toe one who has an
account with the bank; and (c) toe act of crossing the
check serves as a warning to toe holder toatthe check has
been issued for a definite purpose and he m ust inquire if'
he received the check pursuant to this purpose;
otherwise, he is not a holder in due course. In other words,
tire crossing of a dreck is a warning that the check should
be deposited only in toe account of toe payee. When a
check is crossed, it is the duty of the collecting, bank to
ascertain that toe check is only deposited to the payee's
account In complete dis-regard of tills duty, PCIB's
systems allowed Balmaceda to encash 26 Manager's
checks which were all crossed checks, or checks payable
to toe "payee's account only." (PCIB v. Balmaceda and

Ramos, G.R. No. 158143 September 21, 2011, in Dlvina,

2014).
Rule on crossed check w ith notataion "Account Payee
Only"
A crossed check with the notation account payee only can
only be deposited in the named payees account. It is gross
negligence for a bank to ignore this rule solely on the basis
Un i v e r s i t y

of

S anto T omas

f ir i

Jem

Mercantile Law
o f a third partys* oral representations of having a good
title thereto.
The fact th at a person, other than the named payee of the
crossed check, w as presenting it for deposit should have
p u t the bank on guard. lt should have verified if the payee
authorized tiie holder to present the same In its behalf or .
indorsed it to'him . The bank's reliance on the holder's
. assurance th at he had good title to th e.th ree checks
constitutes gross negligence even though the holder was
related to the majority stockholder ofthe payee. While the
check was not delivered to the payee, the siiite* may still
propser because the payee did not assert a right based on
the Uhdelivered check b ut on quasi-delict (Equitable
Banking Corporation v. Special Steel Products, C.R No.

175350,June 13,2012, in Divina, 2014). .

Q: D istinguish d e a rly crossed checks from cancelled .
checks (2004 B ar)
-
A: A crossed check is one with two parallel lines drawn
diagonally on th e left portion, of the chedc. On the other, 1
hand, a cancelled chedc is one marked or stamped "paid"
and/or "cancelled" by or on behalf of a drawee bank to
indicate paym ent thereof.
Q: On Oct 1 2 ,1 9 9 3 , C helsea Straights; a corporation
" engaged in th e m anufacture o f cigarettes, o rd ered
from M olses2,000 b ales o f tobacco. Chelsea issued to
M ofses tw o crossed checks postdated 15 M ar 9 4 and
15 A pr 9 4 in full paym ent therefor. On 19 fan 94
M olses sold to Dragon Investm ent House a t a discount
d ie tw o checks draw n by Chelsea in h is favor.
' M olses failed to deliver th e bales o f tobacco as agreed
desp ite C helsea's dem and. Consequently, on 1 M ar 94
Chelsea issu ed a"sto p p ay m en t"o rd ero n th e2 checks
issu ed to M olses. Dragon, claim ing to be a h o ld er in
due course, filed a com plaint for collection ag ain st '
Chelsea fo r th e value o f th e checks. Rule on th e
com plalnfofD ragon. Give your legal basis, (1995 Bar).
A: The cdmplaintshould be dismissed. The act of crossing
the check imposes upon the holder thereof the duty to .
ascertain the indorser's, in tills case M oisei title to the
check o r the nature of his possession. Failing in this
respect; Dragon cannot b e deemed a holder in due course
and as Such, Moises is subject to personal defenses as if
the check w ere non-negotiable, such as lack of
consideration between Chelsea and Moises for Moises1
failure to deliver the bales of tobacco. There being no
consideration for the Issuance of the check, Chelsea
cannot thus be made liable to pay the face value of the
check and this constitutes a defense not only against
Moises but even against Dragon who is not a holder in due
course.

If Fund House files a com plaint against Pentium and

CD Bytes fo r th e paym ent o f th e dishonored check,
w ill th e com plaint prosper? Explain (1996 Bar)
A: The case will prosper as against the CD Bytes, the
immediate indorser but not as against Pentium Company.
The effect of crossing a chedc relates to the mode of its
presentm ent fcfr payment which must be made by the
holder, or by some person authorized to receive payment
on his behalf. Thus, in the absence of due presentment; as
in this case where the check was not presented by the
payee (CD Bytes) or the proper party authorized to make
presentm ent of the checks, the drawer (Pentium
Company) cannot be held liable. However,'Fund House
may recover from the immediate indorser, if the latter has
no valid excuse for refusing payment
Stale check
i

A chedc which has not been presented for paymentwithin
a reasonable time after its issue. It is valueless and thus,
should not be paid. A chedc becomes stale 6 months from
datedfiam e.~"''*
When.drawey of check discharged from liability
1.
2.
3.

The check is not presented within a reasonable time

after its issue;
The drawer suffers loss; and
The loss suffered by the drawer is attributable to the
delay (De Leon, 2010).

M em orandujn check
A memorandum check is an evidence of debt against the
drawer and although may not be intended to be
presented, has the same effect as an ordinary chedc and if
passed on to a third person, will be valid In his hands like
any other chejdc (People v. Nitafan, G.R. No. 75954, October
22,1992). !
V * P R E S E N T M E N T FOR P A Y M E N T

TIME
A check must be presented for payment within a

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

'Rea. j f i
Q: T ^en
req;
to U ej j
. before*,
w er'-j ri
covi eA
PuzL ij i
SMC, tWi
D urfrg c
Offii
176b/^ r
27903 vs 1
w ltirS PI *
le ftt i f
w ith ih
re tu rn oi
hemHSIV
inve!
o f th e
agreed ft
th e O jc

A:Ye& 1
paym ent'
th e!/ Vu
ched ;C1check v(
give effect
was i t
The evil
given in p;
proyi
am or Jj i
the doc.. J

EFFECTS OF DELAY

Effects o f d d ay
1. The drawer will be discharged from liability thereon to
th e extent of the loss caused by the' delay, (ibid)
2. The indorser shall be discharged from liability (PNB vs.

Seem, G.R. No. L-4388, August 13,1952).

Q: On M arch 1 ,1 9 9 6 , Pentium Company o rd ered a
com puter from CD B ytes, and Issued a crossed check
in th e am o u n t o f P30,00Q post-dated M ar 3 1 ,1 9 9 6 .
Upon re ceip t o f th e check, CD Bytes discounted th e
check w ith Fund House. On A pril 1,19 9 6 , Pentium
stopped paym ent o f th e chedc for failure o f CD Bytes
to d eliv er th e com puter. Thus; w hen Fund House
- deposited th e check, th e draw ee bank dishonored i t

mac it
o r injur
effected,
as c 'id^

NOTE: PP is not dispensed with by Sec, 186 of the NIL

Hence; if there is no PP, the drawer cannot be held
irrespective of the loss or Injury suffered by the payee (Pio

Barretto Realty Corp. v.CA,C.R No. 132362,June28,2001).

Furti W
"Asp :
to be cC.<
deviated |
check m
issuat :
the terina

Corpo^tic
Septet P*r

Insurance Law
, Q: W hen w ill th e dellveiy o f a check produce th e effect
of paym ent even if th e sam e had n o t been encashed?

INSURANCE LAW

A: If the debtor was prejudiced by the creditors

unreasonable' delay in presentm ent Acceptance of a
| check implies an undertaking of due diligence in
presenting ft for paym ent If no such presentm ent was
made; the draw er cannotbe held liable irrespective of loss
or injury sustained by die payee. Payment will be deemed
effected and die obligation for which the check was given
as conditional payment will be discharged (Pio Barretto

Laws governing contracts of insurance In th e

Philippines
1. R A 10607
2. New Civil Code
3. 'Special Laws

C O N C E P T OF I NS U R A N C E

' Realty Corp.v.CA, supra).

C ontractofinsurance

Q: To en su re paym ent and as a business practice, SMC

required Puzon to Issue postdated checks equivalent
* to d ie v alue o f d ie products purchased on cred it
before th e sam e w ere released to him . Said checks
w ere re tu rn ed to Puzon when th e transactions
covered by th ese checks w ere paid o r settied in fon.
Puzon purchased products on credit and issued to
SMC, tw o (2) BPI checks to cover the said transaction.
During on o f h is visits to th e SMC Paranaque Sales
Office, h e allegedly requested to see BPI Check No.
17657. Howevier, w hen h e got hold o f BPI Check No.
27903 w hich w as attached to a bond p ap er together
with BPI Check No. 17657, he allegedly im m ediately
left d ie office w ith his accountant; bringing th e checks
j With them . SMC se n t a le tte r to Puzon* dem anding d ie
retu rn o f th e said checks! Puzon Ignored th e dem and
hence SMC filed a com plaint against him fo r th e ft The
iuvestfgadng prosecutor recom m ended th e dism issal
o f th e case fo r lack of evidence. On appeal, th e CA
agreed w ith d ie prosecutor. W ere th e prosecutor and
;the DOJ co rrect in finding no probable cause for theft?

It is an agreement, whereby one undertakes for a

consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event (IQ Sec 2(a)).

.i

NOTE: A contract of insurance, to be binding from the

date of application, must have been a completed contract
(Perez vs.CA, GR No.112329, January 28,2000). Thus, it
m ust have all the essential elements of a valid contract as
enumerated in A rt 1318 of the New Civil Code:

d.

1. Subject m atter in which the insured has aif insurable

interest;
2. Consideration, which1is the premium paid by the
insured, for the insurer's promise to indemnify the former
upon the happening of die event or peril insured against;

3. Meeting of minds ofthe parties.

j
*

*
/
"Doing an insurance business o r "transacting an
insurance business

A . Yes. If the subject check was given by Puzon to SMC in

I payment of the obligation, die purpose of giving effect to

:the instrum ent is evident thus title to or ownership of the
;check was transferred upon deliveiy. However, if the
check was n ot given as paym ent,there being no intent to
; give effect to the instrument; then ownership of the check
was not transferred to SMC
The evidence o f SMC foiled to establish that the check was
given in paym ent of the obligation of Puzon. There was no
provisional receipt o r official receipt issued for the
Amount of the check.-What was issued was a receipt for
-the docum ent a POSTDATED CHECKSLIP.
Furthermore, SMC's demand letter sent to Puzon states:
"As per company policies on receivables, all issuances are
to be covered b y post-dated checks. However, you have
deviated from this policy by forcibly taking away the
check you have issued to us to cover the December
issuance. Notably, the term payment was not used instead
the term s covered and cover were used" (San Miguel

The term 'doing an insurance business or "transacting an

insurance business* means:. (ISRA)
1. Makingorproposingto make, as Insurer,anyinsurance
c o n tra ct.
2. Making or proposing to make, as Surety, any contract of
suretyship as a vocationand hot as merely incidental to
any other legitimate business or activity of the surety;
3. Doing any kind of business, including a reinsurance
business, specifically Recognized as constituting the
doing of an insurance business.
4. Doing or proposing to do any business in substance,
equivalent to Any of the foregoing in am anner designed *
to evade the provisions of the Insurance Code (Sec 2(b),

ibid).
NOTE: In the application of the provisions of the
Insurance Code, the fact that no profit is derived from the
making of the insurance contracts, agreements or
transactions or that no separate or direct consideration is
received therefor, shall NOT be deem ed conclusive to
show that the making thereof does not constitute the
doing or transacting of an insurance business (Ibid).

Corporation v. Bartolome Puzon, Jr., G.R No. 167567,

September22,2010).

Since the subject C8A provision is an insurance contract,

the rights and obligations of the parties m ust be
determined in accordance with the general principles of
insurance law. (Mitsubishi Motors Philippines Salaried

Un i v e r s i t y

of

S a nto T omas

JB

M ercantile Law
P arties to th e contract ofinsurance

Employees Union vs. Mitsubishi Motors Corporation, GJL

No. 175773, June 17,2013, in Divina2014).

1. Insurer - party who assumes or accepts the risk of loss

and undertakes for a consideration to indemnity the
insured on the! happening of a specified contingency or
event

Insurance a s an UbenimaeFides contract (1993 Bar)

The contract of insurance is one of perfect good faith
(uberrimaefidei) not for th e insured alone, but equally so
fo rth e insurer;Jn fact, it is more so for the latter, since its
dominant bargaining position carries with it stricter
responsibility (Qua Chee Can vs. Law Union and Rode
Insurance, Co. Ltd* GR No. L-4611, December 17,195S).lt
requires the parties to th e contract to communicate th at
which a party knows and ought to communicate, th at is;
the duty to disclose in good faith all facts material to the
contract This doctrine is essential on am ount of the fact
that the fell circumstances of the subject m atter of
' insurance are, asa rule, known to the insured only and fee
insurer, in deciding whether or not to accept a risk, m ust
rely primarily upon die information supplied to him by
the applicant (Sundiang Sr. &Aquino, 2014).

2. Insured - person in whose favor the contract is

operative and is indemnified.
NOTE: The insured is not always the person to whom die
proceeds are paid.
3. Assured/Beoeflciary- a person designated by the term s
of the policy to receive the proceeds of die insurance. He
may be the injured or a third party in the contract for
whose benefit the polity is issued and to whom the loss Is
payable,
|*
'
In su rer
*

Insurance a s contracts o f adhesion (F in eP rin t Rule)

*1
i f!
i

Anyc

1. "Professional reinsurer" as any person, partnership,

association or corporation that transacts solety and
exclusively reinsurance business in the Philippines.

does

2. "Mutual Insurance Companies" are also induded The

law also provides for die procedure for mutualization of
domestic stock life insurance companies. A new provision
on RA 10607 is on demutualization or conversion of
mutual insurance companies into stock corporations (IC,

i.;
in&<
Ip

as amended try R A t0607, Sec. 280). .

3. Cooperatives are now expressly induded in the term
"Insurer" or "insurance company." However, the
cooperative m ust

No. 198174, September 2,2013, in Divlna 2014).

R ides i n d ie construction o r in terp retatio n o f
insurance co n tracts

tC
L

a. Have a sufficient capital and asset required under

the Insurance Code and the pertinent regulations
issued by p ie Commission (IQ as amended, Sec 192).

By reason of the exclusive control of the insurance

company over the term s and phraseology of the contract,
th e ambiguity m ust be held strictly against the insurer
and liberally in favor of th e insured (Qua Chee Gan v Law
Union and Rode insurance, supra). However, if the terms,
which the parties themselves have used, are d ear and
unambiguous, they m ust be taken and understood in their
plain, ordinary and popular sense (Sun Life Ofpce, Ltd. ys.'

polic
j!MtlC

(IC, eisamended. Sec 193, Sundiang Sr. &Aquino, 2014).

Q: Philippine Health Care Providers, Inc. is engaged in
operating a prepaid group practice health care
delivery sysitent o ra health m aintenance organization
(HMO) to tak e care o f th e sick and disabled persons
enrolled in th e health care plan. Individuals enrolled
In its health care program s pay an annual
m em bership fee and are endtied to. various medical
services provided by its duly licensed physicians,
specialists and other professional technical staff
participating In th e group practice health delivery
system a t a hospital or dim e operated o r accredited

The phraseology used in medical or hospital service

contracts, such as "standard charges, m ust be liberally
construed in favor of die subscriber, and if doubtful or
reasonably' susceptible of two interpretations, the
construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful im port should be strictiy
construed against the provider (Fortune Medicare Inc. vs.

Amorin, G.R. No. 195872, March 12,2014, in Divina 2014).

R

Li

e^fin

b. Have a certificate of authority to operate.issued by

die Commission which should be renewed every year

CA, G.R. No. 92383, July 17,1992).

S anto T omas

Sepb

NOTE: The term "insurer no longer includes

individuals" under RA 10607, Hence,.an individual
natural person is no longer allowed to be an insurer.
However, itiridudes die fallowing:

A contract of insurance is a contract of adhesion. So when

the term s of the insurance contract contain limitations on>
liability, courts should construe them in such a way as t o .
preclude, die insurer from non-compliance with his
obligation (Alpha Insurance and Surety Co. vs. Castor, GR

of

RA10607, Sec. 6).

{Ibid].

University

Every corporation, partnership, or association duly

authorized (by the Insurance Commission) to transact
insurance business may be an Insurer (IQ as amended by

While generally, stipulations in a contract come about

after deliberate drafting by the parties thereto, there are
certain contracts alm ost all the provisions of which have
been drafted only by one party, usually a corporation.
Such contracts are calledawrtracfs o f adhesion, because
the onjy participation of d ie other party is th e signing of
his.' signature o r his 'adhesion* thereto. Insurance
contracts fall into this categoiy (SweetLines, Inc vs. Teves,
GR No. L-377S0, May 19, 1978). An illustration of a
contract of adhesion is w hen die insurer used "fine print"
letters in conditions stated in a contract of insurance

the^
. .?nsi
i
1*0:
prov

tr J p :
Decei

ft

t-

/ 1
Subj<

depri
p !*f
I :

Insurance Law
by itls Philippine Health Care Providers, Inc. a health
m aintenance organization o r an insurance company?

Event o r peril insured against

it i? any contingent or unknown event, whether past or
future, which may damnify a person having an insurable
interest, or create &liability against him subject to the
provisions of Chapter I of the Insurance Code (IC, Sec 3)..

A; HMOs are not insurance .business. One test th at they

have applied is whether the .assumption of risk and
indemnification of loss (which are elements of an
insurance business) are the principal object and purpose
of the organization or whether they are merely incidental
to its business. If these are the principal objective* the
business is that of insurance, but if they are merely
incidental and sendee is the principal purpose, then the
business is not insurance

Consent o f spouse n o t necessary

The consent of the spouse is not necessary for the validity
of an insurance policy taken out by a married person on
his or her life or that of his or her children (IQ Sec 3).

Philippine Health Care' Providers appears to provide

insurance-type benefits to its members (with respect to
its curative medical sendees), but these are incidental to
the principal activity of providing them medical care. The
"insurance-like" aspect of Philippine Health Care
Providers' business is miniscule compared to its
noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance
.services, it cannot be considered as being in the insurance
business (Philippine Health Care Providers, Inc, v.

NOTE: Prior to the efiectivity of the Insurance Code of

2013, the term used was "husband" instead of "spouse"
(IC,Sec3).
,
Effect of death o f polity's original ow ner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health of the
person insured shall automatically vest in the latter upon
the death of the original owner, unless otherwise
provided for In the polity (IC, Sec 3).

Commissioner o f Internal Revenue, G.R No. 167330,

September18,2009).

NOTE: Prior to the efiectivity of the Insurance Code of

2013, the term used was "minor" instead of "the person
insured * A minor cannot enter into any contract of
insurance with any insurance company.

Persons w ho m ay be insured (2000 B ar) .

Anyone except a public enemy m aybe insured (IC, Sec 7).
NOTE: A public enemy is a nation at war with the
Philippines and eveiy citizen or subject of such nation It
does not indude mobs, thieves or robbers (Boulder's Law

Gam es o f chances cannot be insured

Dictionary).
L/V, NOTE: If majority of the stockholders of the respondent
corporation w ere German subjects who became an enemy
corporation upon the outbreak of the w ar between the
United States and Germany, it stands to reason th at an
insurance policy ceases to be afiowable as soon as an
insured becomes a public enemy. The respondent having
/ become an enemy corporation on December 10,1941, the
insurance policy issued in its favor on October 1,1941, by
a Philippine corporation had ceased to be valid and
enforceable, and since the insured goods were bunted
.after December 10, 1941, and during die war, the
respondent w as not entitled to any indemnity under said
policy from th e petitioner. However, elementary rules of.
justice (in the absence of specific provision in the
Insurance Law) require that the premium paid by the
respondent for the period covered by its policy from
December 11,1941, should be returned by the petitioner
(Filipinos Compana de Seguros v. Christem, Huenfeld and
Ca, Inc, aR No. L-2294 May25,1951).
Subject m atter o f a contract of insurance
Anything having an appreciable pecuniaiy value, which is
subject to loss or deterioration or of which one ihay be
deprived so th at his pecuniary interest is or may be
prejudiced.

An insurance for or against the drawing of any lottery, hr

for or against any chance or ticket in a lottery drawing a
prize is not authorized (IQ Sec 4).
ELEMENTS OF-CONTRACT,OF INSURANCE

(SPEAR)
. 1. Scheme to distribute losses - Such assumption of risk is
p art of a general scheme to distribute actual losses
among a large group or substantial number of persons
bearing a similar risk

2. Eqymentofpremium - As consideration for the insurers

promise, the insured makes a ratable contribution
called "premium," to a general insurance fond. .
3. Existence o f insurable Interest - The insured possesses
an interest of'som e kind susceptible of pecuniary
estimation, known as "insurable interest"
NOTE; In general (except in life insurance policies), a
person is deemed to have an insurable interest in the
subject m atter insured where he has a relation or
connection with or concern in it that he will derive
pecuniaiy benefit or advantage from its preservation
and will suffer pecuniaiy loss from its destruction or
injury by the happening of the event insured against '
A life insurance policy may be taken by the creditor on the
life of the debtor to the extent of the debt owed by the
debtor.

U n i v e r s i t y o r S a n t o T o ma s

* .g i

Mercantile law
On the other hand, no contract o f policy of insurance on
p roperty shall be enforceable except for die benefit of
some person-having an insurable interest in the property
insured (1994,1997,2000,2001 Bar)I The lessor cannot
be validly a beneficiary o f an insurance policy taken by a
. lessee over his merchandise, and the provision in the
lease contract for such autom atic assignment is void for
being contrary to law an d /o r public policy - the insurer
cannot be compelled to pay the proceeds of the policy to
a person who has. no insurable interest in the property
insured (Cha v. Court o f Appeals, GR. ffo. 124S20, August

18,1997).
4. Assumption o f Risk - The insurer assumes that risk of
loss for a consideration.
5. Risk o f loss - The insured is subject to a risk of loss
through the destruction or impairment ofthat interest
by the happening of designated periL.
NOTE: The inherent uncertainty of events is normally
described in term s of risk. A contract possessing only the
last threeeleraents enum erated above is a risk-shifting
device, but NOT.a contract of insurancewW ch is a riskdistributing device [De Leon, 2006).
Consequently, however, the existence of insurance could
have the perverse effect of increasing the probability o f
loss. This is when die insured, having in mind the
indemnification for loss o r damage 'caused by t&e
happening of die event insured against; would have
reduced incentive to take steps to protect himself or his
property, subject of insurance. This phenomenon is called
m oral hazard (ibid).
C H A R A C T E R I S T I C S A N D N A T U R E OR AN I N S U R A N C E :
'
CONTRACT '

NOTE: An aleatory contract is a contract where one or

both of the parties reciprocally bind themselves to give
or do something upon the happening of an event which
Is uncertain} or which is to occur at an indeterminate
tim e (NCC, A rt 2010).

i i
C.i

SJ i

4. Unilateral - It imposes legal duties only on tire Insurer

who promises to indemnify in case of loss.
NOTE: Itis executed as to the insured afterthe payment
of the premium, and executory on the p art ofthe insurer
in the sense that it is not executed until payment for a
loss.
5. Conditional - It is subject to conditions, the principal
one of which is the happening of. the event insured
against
i

?r

6. Contracto f indemnity - Recovery is commensurate with

the am ount of the loss suffered.

. r tov

GR: The insurer promises to make good only the loss of

the insured. |

(SL.
n

m
^

Jr.

XPN: The principle is not applicable, to life and accident

insurance where the result is death' because life is not
capable o f pecuniary estimation. Hie only situation Where
(he principleof indemnity is applicable to life insurance is
when tiie interest ofa person insured is capable of exact
pecuniary m easurement An example would be in a case
where a cre ditor Insures the life of Ms debtor to the
extent of tiie latter's debt to the former.

Itltn
Hew
. if**
Id*

dtipc
n

' 6. Personal - Each parly having in view the character,

credit and cqnduct oftiie other.The law presumes that tiie
insurer considered tiie personal qualifications of the
insured in approving the insurance application (Sundiang

kD

ris

Sr. &Aquino, 2014).

a ?ei

C haracteristics o f an insurance contract

1. Consensual-It is perfected by the masting o f the Minds

of .the parties as to the object; cause and consideration of
the insurance contract There should be acceptance of the
application for Insurance.
2. Voluntary - The parties may incorporate such teim s
and conditions as they may deem convenient: Provided
they do not contravene any provision of law and are not
opposed to public policy, law, morals, good customs, or
public order.
GR: The taking out of an insurance contract is not
compulsory.
XPN: Liability insurance may be requiredhy law in certain
instances {Eg. compulsory m otor vehicle liability
insurance, o r employees under Labor Code, or as a
condition to granting a license to conduct a business or
calling affecting the public safety or welfare).3
3. Aleatory - The liability of the insurer depends upon
some contingent event

7. Property - Since insurance is a contract, it is property in

t H

legal contemplation

ins i
0t o

9. Risk-distributing device - Insurance serves to distribute

the risk of economic loss among as many as possible, of
those Who are subject to the same kind of loss.By paying
a pre-determined amount into a general fund out of which
payment will be made for an economic loss of a defined
type, each member contributes to a small degree toward
compensation for losses suffered by any member of tiie
group. Thisjbroad sharing of economic risk is the principle
of risk-distribution (Sundiang Sr. &Aquino, 2014).

ir uiy

3.
w *?th
4.' f j r
traiiWp
ti: r
si rji-

10. Onerous - There is a valuable consideration called the

premium.
CLASSES-OF INSURANCE

1. Life insurance
a. Individual life
b. Group Ipfe
c Industrial life
2. Non-Life insurance
a. Marine

: //
fa itii

H
b .l

it

loir

N< E:
In: P ai
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Insurance Law
b. Fire'
c. Casualty
3. Contracts o f suretyship or bonding [DeLeon, supra).
4. Compulsory Motor Vehicle Liability Insurance
5. Microinsurance
.

therewith such as insurance of aircraft; goods while being

packed or assembled, injury to passengers, predous
stones, jewels, jewelry whether in die course of
transportation or n o t (Perez, 2010).
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-tite ship owner or not (Roque v. 1AQ GRNo.

'

NOTE; For purposes of determining the liability of a

health care provider to its members, a health care
agreement is in the nature of non-life insurance, which is
primarily a contract of indemnity (Fortune Medicare Inc.

L-66935, Nov. 11,1985).

vs. Amorin, C.R. No. 195872, March 12,2014).

As a general rule, the marine insurance policy needs to be
presented in.evidence before the trial court or even'
belatedly before the appellate court However, as in
general rule,-there are admitted exceptions. The policy
can still be considered in court as long as it has been
properly identified by testimony duly recorded arid has
been incorporated in, the records of the case (Asian

M A R I N E I N S U R A N C E

Traditionally, marine insurance includes policies that

cover risk connected with navigation to which a ship,
cargo, freightage, profits or other insurable interest in
movable property may be exposed during a certain.
. voyage or a fixed period of time. However, under the
present laws, it also covers inland marine insurance
(Sundiang'Sr. &Aquino, 2014). Marine insurance includes:

Terminal vs. CIR, G.R. No. 171406, April 4,2011, in Dtvina

2014).
M arine protection and indem nity insurance

a:!nsurance against loss o r damage to:

1. Vessels, craft; aircraft, vehicles, goods, freights, cargoes,
merchandise, effects, disbursements, profits, moneys,
securities, choses in action, instrum ents of debts, valuable
papers, bottomry, and respondentia interests and all other
kinds of property and interests therein, in respect to,
appertaining to or in connection with any and all risks or
perils of navigation, transit or .transportation, or while
being assembled, packed, crated, baled, compressed or
similarly prepared for shipment or while awaiting '
shipm ent o r during any delays, storage, transshipment;
or reshipment inddent thereto, induding w ar risks,
marine builder's risks, and all personal property floater
risks;
/

It is an insurance against; or against legal liability of the

insured for loss, damage, or .expense inddent to
ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or
instrumentality in use of ocean or'inland waterways,
induding liability of tire insured for personal injury,
illness or death or for loss of or damage to the property of
another person (IC, Sec. 101, [b]).
M ajor divisions o f m arine insurance

1. Ocean marine insurance -coverspri raarily sea perils of

shipsand cargoes. Scope: (GELS)
a. goods or cargoes
b. jgarnings such as freight passage money
, c. Liability incurred by reason of maritime perils
d. Ships or hulls

2. Person or property in connection with or appertaining

to a marine, inland marine, transit Or transportation
insurance, including liabUity fbr loss of o r damage arising
out of or in connection w ith die construction, repair,
operation, maintenance or use of the subject m atter of
such insurance (but not induding life insurance or surety
' bonds nor insurance against loss by reason of bodily
injury to any person arising out of ownership,
maintenance, or use of automobiles);
3. Predous stones, jewels, jewelry, prerious metals,
w hether in course of transportation or otherwise; and

NOTE: The insurer is liable only for such losses or

damages proximately caused by the perils Insured against

(DeLeon, supra).
*-*

4. Bridges, tunnels and other instrumentalities of

transportation and communication (excluding buildings,
their furniture and furnishings, fixed contents arid
supplies held in storage); piers, wharves, docks and slips,
and other aids to navigation and transportation, including
dry docks and marine railways, dams and appurtenant
facilities for the control of waterways.
b. Marine protection and indemnity insurance (1C, Sec

101).
NOTE: From the foregoing enumeration, marine
Insurance now includes, not only risks connected with
marine navigation, but which are otherwise connected

71

2. Iniandmarine insurance - Covers primarily the land or

over the land transportation perils of property shipped by
railroads, motor trucks, airplanes; and .other means of
transportation. It also covers risks of lake, river, or the
other inland -waterway transportation and other
waterborne perils outside of those risks that fall definitely
within the ocean marine category. Classes: (Pit-BaFF)
a. property In Zranslt - Provides protection to the
property frequently exposed to loss while it is being
transported from one location to another.
b. Bailee liability - Provides protection to persons who
have temporary custody of tire goods or personal
property of others, such as carriers, laundtymen,
warehousemen, and garagekeepers.
c. Eixed transportation property - Covers bridges, tunnels
and other instrumentalities of transportation and
communication, although as a m atter of fact they are

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Mercantile law
wind, water, and salt conditions. Moreover, it isa cardinal
rule in the interpretation of contracts that any ambiguity
therein
should
be . construed
against the
m aker/issuer/drafter thereof, namely, the insurer.
Besides the precise purpose of insuring caigo during a
voyage would be rendered fruitless (CathayInsurance Co.,

fixed property. They are so Insured because they are held

to be an essential pact of transportation system. *
d. Boater- Provides insurance to follow-the insured
property wherever it m ay be located subject always to
th e territorial limits of die contract (De Leon, 2010).
R ish insured against in m arin e insurance

v. CA, e t aU G.R No. L-7614S,June30,1987).

GR: bi the usual form of a m arine policy, the risks insured

' against are only "perils o f the sea"..

Q: A m arine insurance policy on a cargo states th at

"the fn su rersh all be liable for losses in d d eh t to perils
o f d ie sea." D uring die voyage; seaw ater entered the.
com partm ent w here th e cargo was stored due to the
defective drainpipe of th e shlp-The insurpdfiled.an
action on d ie policy fo r recovery o f th e damages
caused to d ie cargo. May th e insured recover
dam ages? (1998 Bar)

NOTE: The insured is bound to prove th at the cause of the

loss is a peril of the sea.
XPN: When the insurance is an "all risk policy" and thus
covers even "perils o f the ship".

tOur

A: No. The proximate cause of the damage to the cargo

insured was the defective drainpipe of the ship. This is
peril of tiie shjp, apd not peril of toe sea. The defect in toe
drainpipe was toe result of toe ordinaiy.use of the ship.
To recover under a marine insurance policy, the
proximate cause of the loss or damage must be peril of toe
sea.
|

XPN to XPN: When die risks are expressly excepted by

the "all risk policy".
NOTE: The burden rests on the insurer to prove th at the
loss is caused by a risk th at is excluded (Sundiang Sr. &

Aquino,' 2014i citing Go Tiaco Y Hermanos vs. Union

Insurance Society o f Canton, G.R. Na .13983, Sept 1,1919;
Filipino Merchants Ins. Co.vs.CA, GJL No. 85141, November
28,1989; and Choa 7'iekSengvs.CA, GR. No. 85407, March
15,1990

*T

.!+

tek

-All riste " m arine tasorancepolky

GR: It is that which insures against allcauses of
conceivable loss or damage.

' P erils o f d ie sea o r p erils o f navigation' (1998 Bar)

It includes only those casualties due to the (WIN):
1. Unusual violence or extraordinary action of Wind and
wave, or
2. Other extraordinary causes connected with
Navigation (De Leon, 2010).

XPNs:
!
1. As otherwise exduded in toe policy; or

P erils o f the ship"

NOTE: Ah "all risks" policy grants greater protection than

th at afforded by the "perils clause" (De Leon, supra).The
insured under an "ail risks insurance policy" has toe initial
burden of proving that the caigo was in good condition
when toe policy attacked and that the cargo was damaged
when unloaded from the vessel; thereafter, the burden
then shifts to toe -insurer to show toe exception to the
coverage (Filipino Merchants Insurance Co. vs. CA, supra).

parq

2. Due to fraud or intentional misconduct on the part of

the insured (Choa TiekSeng v. CA, supra).

It is a loss which, in the ordinary course of events, results

from die (NON):
:'
1. Natural and inevitable action of die sea;
2. Ordinarywear and tear of the ship;
3. Negligent failure o f the ship's owner to provide the
vessel with proper equipm ent to convey the cargo
under ordinary am ditions.

paf !
onto

Extent o f d ie insurable in terest

Q: Remington In d u strial Sales C orporation
(Remington) shipped o n board a vessel, seam less
steel pipes from Japan to th e Philippines and insured
th e shipm ent w ith Cathay Insurance Go. (Cathay).
Upon receipt o f said shipm ent, losses and dam ages
w ere discovered. Upon dem and u n d er th e Insurance
contract; it w as denied by Cathay. Remington
contends th at d ie ru s t on d ie seam less still pipes is
n o t an inherent vice o f th e shipm ent, thus d ie sam e is
considered as a p eril o f th e sea. Cathay, oil th e o th er
hand claim s th a t th e loss w as occasioned by an
inherent defect o r vice In d ie insured artid e . Is th e
"rusting- of d ie seam less steel p ipes considered as a
peril of th e sea"?

1. Ship-owner
a. Over toe value of toe vessel, even when it has been
chartered by one who covenants to pay him Its value in
case of loss. In such a case, the insurer shall be liable for
only th at jpart of the toss which toe insured cannot
recover from toe charterer (IC, Sec 102).
b. If hypothecated by a bottomry loan, the insurable
interest is only the excess of toe value of the vessel over
the amount secured by bottomry (1C, Sec 103).
c. He also has an insurable interest on expected
freightage (IQ Sec 104).

2. Cargo owner - over the cargo and expected profits (1C,

Sec 107).

A: Yes. The rusting of steel pipes in the course of a voyage

is a "peri) of the sea in view of the toll onthe cargo of

3. Charterer
i.#

*-yro.

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INSURANCE L aw
a. Over the vessel, to the extent of-the amount he is liable
to the shipowner, if the ship is lost or dameged during the
voyage (IC, Sec 108).
b. Over hfs expected profits or freightage if he accepts
cargoes'from other persons for a fee (Sundiang Sr. &

Insurable in terest in expected profits

Insurable interest in expected profits exists:
1. When file interest in the thing involved is based on a
legal right
2. When the interest in filing involved is based on valuable
consideration.

Aquino, 2014).
c. Over his own caigo.or his clients cargo (Sundiang Sr. &

Aquino, 2014).
Special m arine insurance contracts and clauses

4. Creditor/lender - over the amount of the loan.

1. All-risks policy
Loan on bottomry or respondentia

2. Barratry clause -a clause which provides that there can

be .no recovery on the policy in case of any willful
misconduct on the part of the m aster or crew in
pursuance of some unlawful or fraudulent purpose
without the consent of the owner and to file prejudice of
owners interest It requires an intentional and willful act
in its commission. No honest error or judgment or mere
negligence, unless criminally/ gross, can be barratry
(Roquev. IAC, Gft No. L- 6935, Nw. 1 1 198S).

A loan In which under any condition whatever, the

repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival.in port of the
goods on wliich it is made or of the price they may receive
in case of accident (Code o f Commerce, Art 719).
Loan on bottomry if.Loan on respondentia

3. Inchmaree clause - -a clause which makes the insurer

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

'th e y are basically the same. The only distinction is, a loan
on bottomry involves a vessel as a security, while a
respondentia has cargo as its security (Perez 2010).

a. Negligence of the captain, engtneers,etc.

Freightage

b. Explosion, breakage of shafts; and

It signifies all the benefits derived by the owner, either
-from the chartering of the ship or its employment for the
carriage of his own goods o r those of others (IC, Sec 104).

c. Latent defect ofmachinery or hull (Thames and Mersey

Marine Insurance Co v. Hamilton Fraser and Co (1887) 12
AC484).

InsUrable In terest in expected freightage in a ch arter

4. "Sue and labor" clause - a clause which makes th^

insurer liable for
. /

party

a. all the expenses attendant upon a loss which forces the

ship into port to be repaired; and

Insurable interest in expected freightage in a charter

'party, exists from the time fire vessel has broken ground
bn the.chartered voyage (IC, Sec.106). .

b . expenses incurred, where it i$ stipulated in the policy

that file insured shall labor for the recovery of the
property (7C Sec 165).

Insurable in te re st in expected freightage if th ere is no

charter party

NOTE: Insurer is liable for such expense, in either case,

being in addition to a total loss, if that afterwards occurs
(ibid).
.

. If a price is to be paid for the carriage of goods, insurable

interest in expected freightage exists when they are
actually on board, or there is some contract for putting
them on board, and both ship and goods are ready for the
specified voyage (ibid).

Concealment in m arine insurance

It is the failure to disdose any material fret or

circumstance which in fact or law is within, o r which
ought to be within the knowledge of one party and of
which the other has no actual or presumptive knowledge

Instances w hen th ere is no Insurable in tere st in

freight
1. When there is ho contract and no p art of the goods
expected to be carried are on board, although there
are goods ready for shipm ent or the m aster is provided with funds for the purpose of purchasing a
cargo. .
2. Where the vessel is a mere "seeking ship", the owner
has no insurable interest in freight to be earned on
goods not loaded.

(DeLeon, 2010).
NOTE: Information of the belief or expectation of a third
person, in reference to a material fact, is material (IC, Sec
110).
Presum ption o f knowledge o f p rio r loss in m arine
insurance

NOTEtA seeking ship is a vessel looking for cargo to be

ansported (De Leon, 2010).

A
in9Jred by a contract of marine Insurance is
presumed to have knowledge, at the time of insuring, of a
prior loss, if the information might possibly have reached
him in the usual mode of transmission and at the usual

73

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rate of communication (IQ Sec 111).The presumption,
however, is rebuttable.
Concealm ent in re sp ect to any o f th e following
m atters does n o t v itiate th e en tire contract but
m erely exonerates th e In su re r from a loss resulting
from the risk concealed
1. National character of die insured;
2. The liability of the tiling insured to capture and
detention;
3. The liability to seizure from breach of foreign laws of
trade; '
4. The want of necessary documents; and
5. The use of false and simulated papers (IQ Sec 112).
NOTE: Ordinarily the matters concealed need not be the
cause, of the loss. In marine insurance, the abovementioned matters, although concealed, will not vitiate
the contract except when they caused the loss.
Concealm ent in m arine insurance y. Concealment In
o th e r p roperty Insurance
MARINE INSURANCE

.. O T H E R P R O P E R T Y
INSURANCE

The information or the

belief o r expectation of 3rd
persons in reference to a
material fact is material
and must be
communicated.

The information or belief

of a 3"* party is not
material and need not be.
communicated, unless it
proceeds from an agent of
the insured whose duty is
to give information.

The concealment of any

fact in relation to any of ;
the matters stated in Sec.
112 does not vitiate the
entire contract but merely
exonerates1the insurer
from a risk resulting from
the fret concealed.

Concealment of any
material fact will vitiate
the entire contract;
whether o r not the loss
results from the risk
concealed.'

la w

3. Warranty of Neutrality - The ship will cany the

requisite documents too show the nationality or
neutrality of tlje ship or its cargo and will not carry any
documents that 'ast reasonable suspicion on it if the
nationality or{ neutrality of the ship or its cargo is
expressly warranted (1C, Sec 122);
4. Non-deviation from the Agreed voyage (IQ Secs. 125,
126,127);
5. Presence of Insurable interest
Seaworthiness

Scope of th e seaw orthiness o f a vessel

i
'
A warranty of seaworthiness extends not only to the
condition of the structure of the ship itself, but requires
that it be properly laden, and provided with a competent
master, a sufficient number of competent officers and
seamen, and the requisite appurtenances and equipment;
' such as ballasts, cables and anchors, cordage and sails,
food, water, fuel and lights, and other necessary or proper
stores and implements for the voyage (IQ Sec 118).
Compliance w ith the w arranty of seaw orthiness
GR: It is complied with if the ship is seaworthy at the time
of the commencement of the risk (IQ Sec 117).
XPNs:
1.in die case o f time policy- the ship must be seaworthy at
the commencement of every voyage it undertakes
during that time (IQ Sec 117, [a]).
2. In die case o f cargo policy- each vessel upon which cargo
is shipped or transshipped must be seaworthy at the
commencement of each particular vbyage (IQ Sec 117,

Effect o f falsity o f a rep resen tatio n by th e insured

1. Promissory Representation - if a representation by the
insured is intentionally false in any material respect or in
respect of any fact on which the character and nature of
the risk depends, the insurer may rescind the entire
contract (IQ Sec 113).

A ship is seaworthy when reasonably fit to perform the

service and to encounter the ordinary perils of the voyage
contemplated by the parties to the policy (IQ Sec 116).

3. In the case o f voyage policy contemplating a voyage in

different stages- the ship must.be seaworthy at the
commencement of each portion of the voyage (IQ Sec
119). I
.
Admission of seaw orthiness by th e in su rer

-I

2. Representation o f Expectation -The eventual falsity of a

representation as to expectation does noti in the absence
o f fraud, avoid a contract of marine insurance (IQ Sec
114).

Seaworthiness is admitted by the insurer when:

1. The warranty of seaworthiness is to be taken as
fulfilled; or
2. The risk of unseaworthiness is assumed by the
insurer (ibid).

Im plied w arranties in m arine insurance (SINAI)

(2000 Bar)

Effect of the admission of seaworthiness by the

in su reri

1. Seaworthiness (IQ Sec 115 to 121);

2. Non-engagement from Illegal venture;

If the policy provides that the seaworthiness of the vessel

' as between insured and insurer is admitted, the issue of
seaworthiness cannot be raised by the insurer without
showing concealment or misrepresentation by the

IIMOUrtMINV^e. IMW
insured (PM American General Insurance Co. v. CA, G.R.
No. 116940, June I t 1997}

delay in pursuing the voyage or the commencement of an

entirely different voyage (IQ Sec 125}

Effect if unseaw orthiness is unknow n to th e ow ner of

th e cargo

Instances when deviation is proper (2000,2005 Bar)

1.

It is immaterial in ordinary marine insurance and may not

be used by him as a defense in order to recover on'the
m arine insurance policy. It becomes the obligation of a
cargo owner to look for a reliable common carrier, which
keeps its vessels in seaworthy conditions. The shipper
may have no control over the vessel but he has control in
the choice of the common carrier th at will transport his
goods (Roque v. 1AC, G.H No. L- 66935, Nov. 11,1985}

2.
3.
4.

When caused by circumstances over which neither

the m aster nor the owner of the ship has any control;
When necessary to comply with a warranty, or to
avoid a peril, whether or not peril is insured against;
When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
When made in good faith, for the purpose of saving
human life or relieving another vessel in distress (IC,

Sec 126}
Im proper deviation

Effect o f paym ent-m ade by th e in su rer to th e Insured

fo r th e la tte r's lo st cargo in case th e ship Is
unseaw prtfay.

Every deviation not specified under Sec 126 is improper

(IC, Sec 127).

Payment made by the insurer to die insured for- the'
latter's lost cargo operates as waiver of the insurer's right
to enforce the implied, w arranty of seaworthiness. .
However, th is waiver extends only in favor of the insured.
There is no waiver in favor of the carrier that transported
the cargo. The insurer can still claim payment against the
carrier for breach of contract based on the insurer's right
of subrogation (Sundiang Sr. &Aquino, 2014 citing Delsan
Transport Lines, Inc v. CA, G.R. No. 127897, Nov. 15,2001}

/
NOTE: In improper deviation, an insurer is not liable for .
any loss happening to the tiling insured subsequent to an
improper deviation (IC, Sec 128,2005 Bar}
Kinds o f losses
1. Total, which may be (1992 Bar):
a. Actual total loss
b. Constructive total loss
2. Partial

' Effect w hen th e ship becom es unseaw orthy during

thevoyage

Actual v. Constructive loss

An unreasonable delay in repairing the defect exonerates
the insurer on ship or shipowner's interest from liability
from any loss arising therefrom (IC, Sec 120).

AcfijAi;-;roT.Ai.

E xpress w arran ty as to natiohalityand neutrality

1.
2.

As to nationality - im ports that die vessel belongs to

the subject of a particular country.

As to neutrality- imports thatthe property insured Is
neutral in fact; that is it belongs to neutrals and th at
no act of insured or his agent shall be done which can
legally compromise its neutrality.

CO: \. STKUf, TiVL T O T A L

LOSS

loss

It is one which the loss,

although not actually total,
is of such a character that
the Insured is entitled, if he
thinks fit; to treat it as total
by abandonment (7G5ec .

It exists when the subject

blatter of the insurance is
wholly destroyed or lost
or when it is so damaged
as no longer to exist in its
original character.

1331
' Abandonment by the
insured is necessary in
order to recover for a total
loss f/C, Sec 141) in the
absence of any provision to
the contrarv in the policy.

The insured has the right

to claim tiie whole
insurance without notice
of abandonment (IQ Sec

Rule regarding voyage in m arine insurance

137}

.W hen the voyage contemplated by a marine insurance

policy is described by die places of beginning and ending,
the voyage insured is one which conforms to the course of
sailing fixed by mercantile usage between those places

Actual total loss (1996 Bar)

(IC, Sec 123}

NOTE: If the course of sailing is not'fixed by mercantile
usage, the voyage insured is that way between die places
specified, which to a m aster of ordinary skill and
discretion, would mean the most natural, direct and
advantageous (1C, Sec 124).
I
D eviation

The following constitutes actual total loss:

1. A total destruction of the thing insured;
2. The irretrievable loss of the thing by sinking, or by
being broken up;
3. Any damage to the thing which renders it valueless
to the owner for the purpose for which he held it; or
4. Any other event which effectively deprives the
owner of the possession, at the port of destination,
of the thing insured (IC, Sec 132}

It is a departure from the course of the voyage insured,

mentioned in Sec' 123 and Sec 124, or an unreasonable

NOTE: Complete physical destruction is not essential to

constitute actual total loss.

75

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Mercantile L aw
there Is no constructive total loss to speak of.
An insurance confined in terms to an actual loss does not
cover a constructive total loss, but covers any loss,-which
necessarily results in depriving the insured of the
possession, at the port of destination, of the entire thing
insuredflC, Sec 139).
, .
Constructive to tal lo ss
There is constructive total loss when: .
1. More than V* thereof in value is actually lost; or
would have to be.expended to recover it from the.
. peril;
2. . The thing insured is injured to such extent as to
reduce its value more than 44;
3. The thing insured is a ship, and die contemplated
voyage cannot be lawfully performed without
incurring either an expense to the insured of more
than % the value of the thing abandoned or a risk
which a prudent man would not take under the
circumstances; or
4. The thing insured, being cargo or freightage, and the
voyage cannot be performed, nor another ship
procured by the master, within a reasonable time
and with reasonable diligence, to forward the cargo,
without incurring the like expense or risk mentioned
in no. (3). But freightage cannot in any case be
abandoned (and thus declared constructively lost)
unless the ship is also abandoiied (1C Sec 141).
Q: M/V P early Shells, passenger and cargo vessel, w as
insured for P40,000,000.00 against constructive
to tal loss. Due to a typhoon* it sank n ear Palawan.
Luckily, th e re w as no casualties, only injured
passengers. The shipow ner-: sen t a notice o f
abandonm ent o f h is in te re st o ver th e vessel to the
insurance com pany which th en hired professionals to
afloat d ie vessel fo r P900,000.00. W hen re-floated,
th e
vessel
needed
re p a irs
estim ated
at
P2,000,000.00. The. insurance com pany refused to
pay d ie d a l m o f th e shipow ner, stating th a t th ere w as
no constructive to tal loss.
a. W as th e re constructive to tal loss to en titie th e
shipow ner to recover from d ie insurance company?
Explain.
b. W as it p ro p er for th e shipow ner to send a notice
o f abandonm ent to the insurance company? Explain
c.

W hen does double in su ran ce exist?

d. W hat is th e n atu re o f liability of th e several

in su rers in double insurance? (2005 Bar)
A:
a.
No. A constructive total loss is one which gives the
insured the right to abandon. (Sec 131,1CP) Abandonment
of the thing insured may be availed of if the loss is more
than three-fourths of its value or die expense to recover it
from peril (Sec 139,1CP). In this case, the constructive loss
claimed by the shipowner pertains to die vessel. The
expenses for refloating and estimated repairs did not
amount to three-fourths of the value of the vessel, hence,

___ _ L p
Kinds o f

b. No. The case did not qualify as one for total

constructive loss. Deduced from the facts of the case, the
loss incurred during die peril did not amount to threefourths of its value.
As provided in Sec 139,
abandonment may be availed of if the loss is more than
three-fourths ofits value or the expense to recover it from
peril.

I
c.
Sec.93 of the Insurance Code provides that double
insurance exists where the same person is insured by
several insurers separately, in respect to the same subject
and interest
i
d. In double insurance, the insurers are considered as
co-insurers. Each one isbound to contribute ratably to the
loss in proportion to the amount for which he is liable
under his contract This is known as the principle of
contribution or contribution clause." (IC, Sec.94 [e]}
Presumption of actual loss
Actual loss may be; presumed from the continued absence
of a ship without being heard of. The length of time which
is sufficient to raise his presumption depends on the
circumstances of the case (1C, Sec 134).
' i
_
Liability oftfae insurer as regards the Cargo in case of
reshipm ent
When a ship is prevented, at an intermediate port; from
completing the voyage, by the perils insured against; the
liability of a marine insurer on the cargo continues after
they are thus reshipped. The insurer may, however,
require additional premium if the hazard be increased by
his extension of liability (1C, Sec 135).

Si

1. Grt fqfat

are u e j^
uponhL
. o r f lth
f<* r f ,
NOTE:
ail f ]thi ,
201

2. Simple
an<f xpi
hav apt,
thepeij |

ofComi...
f%

*i< 9k,
alone ,
' case L .
f1
Requi ft*
contruw
a.

Thefhm

b. Part of 1
c The s a c .
benpjto
d. It moil |
J
ie. It mf i b
I yes; fit;
' \ 1
f. It must, i

The marine insurer is bound for.

1. Damages; 1
2. Expenses of discharging;
3. Storage;
4. Reshipment; .
5. Extra freightage; and
6. Ail other | expenses incurred in saving cargo
reshipped, up to the amount insured (1C, Sec. 136).

Liabili m l
* > ]
GR:The.-J
andpa'"cu
' i
XPN: \A i
Clause ii. :!
genera* we:
. m
NOTE: . j
Clause) : A
insurai sit
liable f

NOTE: Nothing in Sec 136 and Sec. 135 shall render a

marine insurer liable for any amount in excess of the
insured value of, if there be none, of the insurable value.

XPN L
effe of t
porf ^Sic

Additional liabilities of the insurer of goods referred

to In tiie reshipm ent of cargo

Average
it is any extraordinary or accidental expense incurred
during the voyage for the preservation of the vessel,
cargo, or both and all damages to the vessel and cargo
from the time it is loaded and the voyage commenced
until it ends and the cargo unloaded (Code o f Commerce,
A rt 806).

(1C, j( [j
Aband im
if . It is the ., t
total loss ..e
his inte st

I nsurance L aw
W hdsofaverage.

E f^ofavaM a& ajndbnm ent

1; Grossorgeneral averages damages or expenseswhich

. are deliberately caused tiy the master oftfte vessel or
upon his authority, In orderto save the vesselhercargo
orbothatthe-sam etim efrom a re a l andknow n risk

ltiseqaivalent toatransferbjy the insured of his interest,

to die insurer, with all' die chances of recoveiy and
indemnity (5fec 148, ibid).

(CodeofCommerce, Art 811f

Requisites of valid abandonm ent

NOTE: This ldnd of average m ust be borne equally by

aU of the interests concerned In the venture (De Leon

1. There must be an actual relinquishment by the

person insured of his interest in the thing insured

2010).

(Sec 140, ibid)

XSimpJeorparticularaverages-theyinclude all damages

2. There must be a constructive, total loss (Sec 141,

and expenses caused to the vessel o r to her cargo which

have notInured to the common benefit and profit oFall
die persons Interested in die vessel and her cargo (Code

ibid).
3. The abandonment must neither be Tpartial nor
conditional (Sec 142, ibid).

o f Commerce; Art 809).

NOTE: This ldnd of average Is suffered by and borne
alone by the owner of the cargo or of die vessel as the
case may be (De Leon, 2010).

4.

{uisites to th e rig h t to dafan general average

ntribution

5.

It must be made within a reasonable time after

teceipt of reliable information of the- loss (Sec 143,

ibid).
It m ust be factual (Sec 144, ibid).

6. It must be made fay giving notice thereof to the

"There m ust be a common danger to the vessel o r cargo;

insurer which may be done orally or in writing;

Provided, that if the notice be done orally, a written
notice of such abandonment shall be submitted
within 7 days from such oral notice (Sec 145, ibid).

/ Part of the vessel or caigo was sacrificed deliberately;

th e sacrifice must be for the common safety or for the
benefit of all;
7.

It must be made by the master or upon his authority;

The notice of abandonment must be explicit and

must specify the particular cause of abandonment

(Sec 146, ibid)

must be successful, i.e. Resulted in the saving of the

Vessel or cargo; and
must be necessary (Sundiang Sr. &Aquino, 2014).

NOTE: Such notice must state only enough to show that

there is probable cause for abandonment, but need not be
accompanied with proof of interest or of loss.

lillty o f th e in su rer as to averages

Person who may make notice of abandonm ent

1The marine insurer is liable both for general average

particular average loss.

The abandonment need not necessarily be made by the

insured but may be made by an authorized agent; and an
agent having an authority to insure has prfma facie an
.authority to abandon (De Leon, 2010).

*: When there Is T ree From Particular Average"

se in the policy making die insurer liable only for
;ral average.

Person to whom notice of abandonm ent may be made

OTE: Free From Particular Average Clause (FFPA

use) - A clause agreed upon In a policy of marine
ce in which it is stated that the insurer shall not be
!e for a particular average.

To the insurer or Ids authorized agent or the broker who

is the agent for both parties (ibid).

.. XPN to XPN: When particular average loss has the

effect of depriving the insured of the possession at the
.port of destination of the whole of the tiling insured

X. Express
2. Implied from the conduct of the insurer

Forms o f acceptance of abandonm ent

(IC, Sec 138).

NOTE: Mere silence of the insurer for unreasonable

length of time after notice shall be construed as an
acceptance (IQ Sec 152).

Abandonment
the act of th e insured by which, after a constructive
!loss he declared the relinquishment to the insurer of
interest in the thing insured (Sec 140, ibid).

Effects of acceptance ofabandonm ent

1.

The insurer becomes at once liable for the whole

amount of the insurance and also becomes entitled to

_________ ________________________

77

U n i v e r s i t y of S anto T omas
Faculty of Civil Law

Mercantile L aw
all rights which insured possessed in the thing
insured (Sec 148, ibid)I
2.

GR: It fixes die rights of the parties; whether express

or implied, it is conclusive upon them, (Sec. 1S3, ibid.)
and irrevocable (Sec 154, ibid).
XPN: Where the ground upon which it was made
proves to be unfounded (Sec 154, lbid)Mnder Sec.
147, abandonment can be sustained only upon the
ground specified in die notice thereof.

3.

It stops the insurer to rely on any Insufficiency in the

form, time, or right, of abandonmentfSec. 145,143,
141, Ibid).Whether the insured has a right to abandon
is immaterial where the abandonment -is accepted
and there is no fraud (New Orleans ins. Co. vs. Piaggio,

16 Wall [US]378).
4.

On accepted abandonment of a ship, freightage

earned previous to the loss belongs to die insurer of
said freightage; but freightage subsequently earned
belongs to the insurer of the ship (Sec 155, ibid]

Effect o f th e in su rer's refusal to accept a valid

abandonm ent
If the Insurer refuses to accept a valid abandonment; he is
liable as upon an actual total loss, deducting from the
amount any proceeds ofdie thing insured which may have
come to die hands of the insured (Sec 1S6, ibid).

but without reference to any loss incurred in raising

money for its {purchase, or to any drawback on its
exportation, or to the fluctuation of the market at the port
of destination, or to expenses incurred on the way or on
arrival.
c. Value of freightage - gross freightage exclusive of
primage, which is a small compensation paid by a shipper
to die master of the vessel for his care and trouble
bestowed on the shipper's goods and which die master is
entitled to retain in die absence of an agreement to the
contrary with the owners of the vessels.
d. Cost ofinsurance - the cost ofinsurance is.aiways added
in calculating the value of the ship, cargo, or freightage or
other subject m atter in an open policy (De Leon, 2010]
Drawback
It is an allowance made by the government upon the
duties due on imported merchandise when the importer,
instead of selling there, re-exports it; or the^refunding of
such duties if Already paid (Perez, 2006).Prim age
It is a small allowance or compensation payable to the
master or owner of the vessel for the use of his cables and
ropes to discharge the goods, and to die mariners for
lading and unlading in any port (Perez, 2006}.
NOTE: Drawback and primage are not included in
determining the loss in a marine open policy.
Co-Insurance

NOTE: However, if the abandonment was improper, the

insured may nevertheless recover to the extent of die
damage proved (De Leon, 2010).
Effect o f Insured's failure to m ake abandonm ent
The insured has an election to abandon or not, and cannot
be compelled to abandon although abandonment is
proper. If die insured foils to abandon, he may
nevertheless recover his actual loss QC Sec 157).

Co-insurance jis a form of insurance In which the person

who insures his property for less than die entire value is
understood to be his own insurer for the difference which
exists between the true value of the properly and die
amount of insurance.
In such a case, a marine insurer is liable upon a partial loss
only for such|proportian of the amount insured by him as
the loss bears to the value of the whole interest of the
insured in the property insured (IC, Sec 159).

M easure o f indem nity 1. Valued polity - the parties are bound by-die valuation.
If the insured had some interest at risk and there is no
fraud (Sec. 158, ibid).
NOTE: Overvaluation of property by the insured may
take place either at the time of making the contractor
at the time of submission of the proof of loss. In either
event, such overvaluation, if fraudulent, entirely avoids
the insurance. However, such fraudulent intent must be
alleged and clearly proven by the insurer (Perez, 2006).

2. Open policy - the following rules shall apply in

estimating a loss:
a. Value o f the ship - value at die beginning of the risk.
b. Value o f the cargo - actual cost to the Insured, when
laden on board, or where that cost cannot be ascertained,
its m arket value at the time and place of lading, adding die
charges incurred in purchasing and placing it on board,

Un i v e r s i t y

of

S anto T omas

Requisites for co-insurance

I
There is co-insurance when the following requisites
concur:
<
1. The toss is partial; and
2. The amount of insurance is less than the value of the
property insured (Sundiang Sr. &Aquino, 2014).
Co-Insurance in marine insurance v. Co-insurance in
fire insurance
C0 - 1N SUR ANC-E.1N FIRE ,
-CO-INSURANCE IN
in su r a n c e

uRa n g e 1
There is (co-insurance by There has to he an express
virtue of Section 159 of stipulation to that effect
the Insurance Code, as
long as the aboveenumerated requisites
are present.

: MAr in e i

INSURANCE Law
Co-Insurance v. Reinsurance (1994 Bar)
I

The insured is considered a co-insurer as to the uninsured

portion of P200,000. (1M - 800,000).

. CO - I N S U R A N C E
; ' :/v'R E I N S U R A N C E ,
A plan of indemnity
It is a contract through
insurance under which
which the insurer
the reinsurer assumes
procures a thirdperson
the obligation on the
to isnure him against loss
amount reinsured, in the or liability by reason of
same fashion as the
such original insurance.
insurer is obligated to
In eveiy reinsurance, the
the.insured (excluding
original contract of
. policy loans). For this
insurance and the
risk, the insurer the
contract of reinsurance
insurer usually pays to
are separate and distict
the reinsurer the gross
from each other and
premium (less
covered by separate *
commissions and
. policies..
expense, aDowances) it
has collected from the
insured on the amount
Insured (it should be
noted that the insurer
has no relationship with
the insured or
beneficiary!.

NOTE: If the loss is total, the insurer is liable for the full
amount of P800,000. On the other hand, if the property is
insured to its full value, the insured is entitled to recover
the full amount of the partial loss of P400,000.
Amount the insured is entitled to recover in case of
loss if profits to be realized are separately insured
Where profits are separately insured in a contract of
marine insurance, the insured is entitled to recover, in
case of loss, a proportion of such profits equivalent to the
propprtion which the value of the property lost bears to
the value of the whole (JC, Sec 160).
Conclusive presumption of loss of profits
1 When profits are valued and Insured by a contract of
marine insurance, a loss of them is conclusively presumed
from a.loss of the property out.of which they were
expected to arise, and the valuation fixes their amount (IC,

Sec 162).
T o rt of refuge expenses

(Diaz e t al 2014)
: . CO-INSURANCE ; 1
The insurer remains as
the insurer of the original
insured
The subject of insurance'
is the property
An insurance of the same
interest
The'insured party is the
party in interest in all
contracts

The insured has to give

consent

These, are the additional expenses incurred in repairing

the damages suffered by a vessel because of the perils
insured against as well as those incurred for saving the
vessel from such perils, such as the expense of launching
or raisingthe vessel or of towing or navigating it into port
for her safety. These are items to be borne by the insurer,
in additioitto a total loss if that afterwards takes place (ICj

. REINSURANCE
|
The insurer becomes the
insured, insofar as the
reinsurer is concerned
The subject is the original
insurer's risk
Insurance of a different
Interest
The original insured has
no interestin die contract
of reinsurance which is
independent
of the
original: contract of
insrurance
Consent of the original
insured (who is hardly
even aware of the
reinsurance transaction)
is hot necessary.

Secl6S).
FIRE I NSURANCE

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

consideration, agrees to indemnify the insured against
loss ofor damage by fire, lightning, windstorm, tornado or
earthquake and other allied risks, when sudh risks are
covered by extension to fire insurance policies or under
separate poIIcies(7C, Sec 169).
NOTE; The liability of an insurer.is to pay for direct loss
only. The insurer may be liable to pay for consequential
or indirect losses if covered ,by extension to such fire
policies or insured under separate policy (De Leon, 2010).

(DeLeon, 2014).
Formula to determ ine th e am ount recoverable in coinsurance
'

Indirect losses

Illustration
If a vessel valued at P1M is insured for only P800,000 and
Is damaged to the extent of P400,000, the insurer will be
required to pay only 80% of the loss suffered, or
P320.000; the other 20% or P80.000 being home by the
insured himself.

The following are indirect losses:

(Partial) Loss
Insurance

X Amount of Amount of recovery

(Insurer's Liability)
Value of thing Insured

P400.000 or 2 /5 XP800.000 P320.000

P1M

1.
2.

79

Physical damage caused to other property.

Loss of earnings due to the interruption of business
by damage to the insured's property.

U n iv e r s ity o f S a n t o Tomas
F a c u l t y of Civil Law

fa

M ercantile L aw
3.

Additional expenses Incurred by idle insurer ,

following the damage to the property or contents by
an insured peril (De Leon, 2010).

Friendly fire v. H ostile fire

FRIENDLY EIRE

HOSTILE EIRE

Fire that burns in a place

where it is supposed to
burn.
E.g. Gas stove, fire place -

Fire that escapes and

burns in a place where It
is ,not supposed to be. It
may also refer to fire that
started out as a friendly
fire but escapes from Its
original place or it
becomes too strong as it
becomes out of control

-tin

i i
fit
Fjf
I P
equi (

Requisites in o rd er th at the Insurer may rescind a fire

insurance policy on die ground of alteration m ade in
1.

The use or condition of the thing Is specially limited

or stipulated l | the policy;

2.

Such use or condition is altered;

3.

The alteration is made without the consent of die

insurer;

4.

The alteration is made by means within the control

of the Insured; and

5.

The.alteradoij increases the risk (1C, Sec 170).

sn t
2J1
fo jr.st
cc hoi
u p
A:Y(
wctelc
tn sfe
Ft; j H
of la'
therisl
dh
of
stipd \
remove
sui ;r i

( Sundiang Sr. & Aquino,

2014).

6.

There must be a violation of a. material policy

provision (Sundiang Sr. A Aquino, 2014).
./
NOTE: A contract joffire insurance is not affected by any
act of die insured subsequent to the execution of die
policy, which does not violate its provirions even though
it increases the rildc and is die cause of the loss (IC, Sec
172).
r

Ocean M arine Insurance v. Fire Insurance

1

OCEAN marine:

EIRE

A policy of insurance on a
vessel
engaged
in
navigationis a contract of
marine
insurance
although
it
insures
against fire risks only.

Where the hazard is fire

aloneand the subject is an
unfinished vessel, never
afloat for a voyage, the
contract to insure is a Are
risk especially in the
absence of an express
agreement that it shall
have the Incidents of
marine policy, or where it
insures materials in a
shipyard for use In
constructing vessels.

Marine v. Fire insurance

Marine Insurance

Eire !ii5ui ;i!u:t:

Not in a fire insurance :

In case of partial loss of a

thing insured for less than
its actual value, the
insured in a m arine policy
is a co-insurer of the
uninsured portion (1C,

The insured may only

become a co-insurer if
expressly agreed upon by
the patties (1C, Sec. 174)

Sec 1591
(DeLeon, 2010).

hi
has it i

15 o f th e policy which states th at if the claim be in any

respect fraudulent, o r if any false declaration be m ade
o r used In support th ereo f all the benefits under, the
policy shall be forfelted-CBlC contends th at because
arson and fraud attended th e claim, UMC Is not
entitled to recover under Condition No. 15 o f the
insurance policy. Is UMCis entitled to claim from CBIC
th e full coverage of its fire insurance policy?

(De Leon, 2010).

Rules on constructive
total loss O'C, Secs. 133,
141): and abandonment
( 1C, Sec. 140) apply

Efi 'tft
of H

Q: United M erchants Corporation (UMC)'s General

M anager Alfredo Tan Insured UMCs stocks in trad e of
Christinas lights against fire with Country Bankers
Insurance Corporation (CBIC). Unfortunately, a fire
gutted the w arehouse rented by UMG When UMC
dem anded for paym ent under the insurance policy.

Also where a policy

insures against fire, a
vessel while moored and
in use as a hospital.

lo iP

XP" B
2. In^ >
acts dr
affi tsl
_an pE
Me air
fin P a

A: No. The lnsujrance Code provides that a policy may

declare that a violation of specified provisions thereof
shall avoid i t Thus, in fire insurance policies, which
contain provisions such as Condition No. 15 of
theinsurance policy, a fraudulent discrepancy between
the actual loss and that claimed in the proof of loss voids
the insurance policy. Mere filing of such a claim will
exonerate the insurer ( United Merchants Corporation v.

11

tfr
fire I

Country Bankers insurance Corporation, G.R. No. 198588,

July 11,2012).

at ..it

Q: Oh May 13, 2014, Freedom Insurance Company

(Freedom) issued Fire Insurance Policy to BCP
Corporation for the latter's m achineries and
equipm ent located a t Tower 1 Building located in
Concepcion, Tarlac which was used as a factory for
autom otive pairts. The insurance, which was for 10
m illion and effective for a period of one year, was
procured by BCP Corporation for Rizal Commercial
Banking Corporation (RCBC), the m ortgagee of the
insured m achineries and equipm ent On October 12,
2014, the Insured m achineries w ere totally lost by

1r f
i I a
wU
JMer.
t.

l. in
LthLo

(Sur^iat
fnsi m
m l

INSURANCE Law
lire. BCP Corporation filed a fire insurance claim with
Freedom which denied th e d aira upon the ground
th at at the tim e o f loss, d ie insured m achineries and
equipment w ere transferred by BCP Corporation to a
.location different from th a t indicated In the policy.
The insured m achineries w ere transferred from the
Tower 1 Bidding to theTow er 2 Building also found in
Concepcion* Tarlac which was used as a w arehouse
for storing old and unused m achineries of the
corporation. W as the refrisal of Freedom fustified?

Co-insurance clause in fire policies

The co-insurance clause is a clause requiring the insured
to maintain insurance to an amount equal to the value or
specified percentage of the value of the insured property
under penalty of becoming co-insurer to the extent of
such deficiency. This is to prevent the property owners
from taking out such small amount of Insurance, and
thereby reducing the premium payments and thereby
increasing die rates of premium for all (De Leon, 2010).

A: Yes. The policy stipulated that the insured properties

were located a t the Towerl Building but BCP Corporation
transferred the machineries without the consent of
Freedom. The alteration ofthe location Increased the risk
of loss. The transfer affected Freedoms ability to control
die risk by guarding against the risk brought about by the
change in condition, specifically the change in the location
of the risk. Tower 2 Building was not the location
stipulated in the policy. There being an unconsented
removal, the transfer was a t BCPs own risk and it must
suffer die consequences of the'fire (Malayan Insurance

NOTE: A co-insurance cannot exist In fire insurance if

there is no Stipulation to that effect
Option to rebuild dause
It gives die insurer the option to rebuild the destroyed
property instead of paying the amount of the loss or
damage, notwithstanding a flxedyaluation in the policy
(IC, Sec 174). This dause serves to protect die insurer
against unfairness in the appraisal and award rendered
by a packed board of arbitrators, or in die proof of loss.

Company, Inc v. PAP Co, Ltd G.R. Na 200784, Avgust 7.

2013).

NOTE: The insurer must exercise his option to rebuild

within the time stipulated in die polity, or in die absence
ofstipulation, within a reasonable time. The choice by the
insurer shall produce no effect except from the time it has
been communicated to die insured (Article 1201, NCC).

Effect when th e insured has no control or knowledge

of the alteration
GR: th e insurer is not relieved from liability if the acts or
Vdrcumstances by which die risk is diseased are
occasioned by accident, o ra cause over which the insured
has no control.
'

Unless the policy has limited die cost of rebuilding to the

amount of die insurance, the Insurer, after electing to
rebuild, can be compelled to perform his undertaking,
even though the cost may exceed die original amount of
insurance (De Leon, 2010).

XPNs:
1. Actually known to the insured or
2. Insured is presumed to know of the alteration when the
acts or circumstances, permanently and substantially
effects the conditions of (he property so as to constitute
an increase in risk (De Leon, supra, 2010).

Insured can pledge, hypothecate dr- transfer a fire

insurance policy o r rights thereunder
He may do so after a loss has occurred and even without
the consent of, or notice to, the insurer. In such a case, it is
not die personal contract which is being assigned, blit a
claim under or a right of action on the policy against the
insurer (De Leon, 2010).

, ?Measure o f indem nity in open and valued policies in

'fire insurance
:OPEN POLICIES

Limitation to the right of die insured in pledging,

hypothecating o r transferring hfe right under a fire
insurance policy

VALUED POLICIES

th e expense it would be to Hie parties are bound by

die insured a t the time of die valuation, in die
the commencement of die absence of fraud.
fire to replace the thing
Idst or injured in die
condition in which it was
at the time of the injuiy.

Section 175 of the Insurance Code prohibits the exercise

ofthis right in die case where the pledging; hypothecating,
or transferring is made to any person, firm or company
who acts as agent for or otherwise represents the insurer.
NOTE: Any such pledge, etc shall be void and of no effect
insofar as it may affect other creditors of the insured

In an open polity, the

actual loss, as determined,
will represent the total
indemnity due the insured
except only that-the total
indemnity shall not exceed
the total value ofthe policy

(ibid).
GASUALTVINSURANCE ' -'-.V-

It is an insurance covering loss or liability arising from

accident or mishap, excluding certain types of loss which
by law or custom are considered as falling exclusively

(Sundiang Sr. & Aquino 2014, citing Development

insurance Corporation v. IAC, G.R. No. 713610, July 19,
1986).

81

U n i v e r s i t y o f S a n t o Tomas
Faculty of Civil Law

M e r c a n t il e
within the scope of other types of insurance such as fire
or marine (IC, Sec 176).
Coverage of casualty insurance
1. Employer's liability and workmen's insurance - the
risk insured against is the liability of the assured to
make compensation or pay damages for an accident,
injuiy, or death, occurring to a servant or other
employee, in die course of his employment under
statutes imposing such liability on employers.
2. Public utility insurance - indemnifies against liability
on account of injuries to the person or property of
another. It may extend to automobiles, elevators, fly
wheels, libel, theaters, and vessels.
3. Motor vehicle liability insurance - is a contract of
insurance against passenger and third-party liability
for death or bodily Injuries and damage to property
arising from, motor vehicle accidents.
4. Plateglass insurance - an insurance against loss from
accidental breaking of plate-glass windows, doors,
showcases, etc.
' .
5. Burglaiy and tiieft insurance - an insurance against
loss of property by the depredations of burglars and
thieves.
6. Personal accident insurance - a form of insurance
which undertakes to indemnity the assured against
the expense, loss oftime, and suffering resulting from
accidents causing him physical Injury, usually by
payment at a fixed rate per weak while the
consequent disability lasts, and sometimes including
the payment of a fixed sum to his heirs in case of his
death byaccident within the term of the polity.
7. Health insurance - an indemnity to persons for
expense and loss of time occasioned by disease.
8. Other substantially sim ilar kinds of insurance (Perez,

2006).
Two divisions of casualty insurance

1. Accident or health Insurance - Insurance against

specified perils which may affect the person and/or
property of the insured. (Eg. personal accident,

robbery/theft insurance)
2. Thirdparty liability insurance (.TPL) - Insurance against
specified perils whicti may give rise to liability on the
part of the insured of claims for injuries or damage to
property of others (De Leon, 2010).
"Accidental .Intentional" as used in insurance
..ACCIDENTAL-;-'^

The terms "accident"

and "accidental" have
been taken to mean that
which happens by
chance or fortuitously,
without intention' or
design,
which
is
unexpected, unusual or
unforeseen. The term
does
not,
without
qualification,
exclude
Un i v e r s i t y
2 0 1 S G olden

; intentional v

Intentional as used in an
accident
policy
excepting
intentional
injuries inflicted by the
insured or any other
person, implies the
exercise of the reasoning
faculties, consciousness,
and volition. Where a
provision of the policy
excludes
intentional
of

S a nto T omas

N otes

law

injury, It is the intei

of the person infii
the injury that is
controlling.
If
the
injuries suffered by the
Aquino, 2014 citing Pan insured clearly resulted
Malqyan insurance Corp. from tire intentional act
V. CA, G.R No. 81026, of a third person, the
insurer is relieved from
April3,1990).
|
liability as stipulated
events resulting | In
damage or loss due to
fault, recklessness or
negligence of third
parties (Sundiang Sr. &

(Sundiang Sr. & Aquino,

2014 citing Biagtan v.
The
Insular
Life
Assurance Co. Ltd, G.R
No. L-2SS79, March 29,
1972).
Rules on Third paijty liability insurance
1. Insurable interestis based on the interest of thelnsured
in the safety of the persons, and their property, who may
maintain an action against him in case of their injury or
destruction respectively (De Leon, 2010).
2. In a TPL insurance contract^ the insurer assumes the
obligation by paying the injured third party to whom the
insured Is liable. Prior payment by the insured to the
injured third person is not necessaiy in order that the
obligation of the Insurer may arise. The moment the
insured becomes liable to third persons, the insured
acquires an interest in the insurance contract which may
be garnished like any other credit (Perla Compania de

Segums, Inc vs. Ramolete, G.R No. L-60887, November 13,

1991).
3. In burglary, jrobbeiy and theft insurance, the
opportunity to defraud the insurer (moral hazard) is so
great that insurer! have found it necessaiy to fill up the
policies with many restrictions designed to reduce the
hazard. The purpose of the exception is to guard against
liability should theft be committed by one having
unrestricted access to the property (Fortune Insurance &

Surety Co. vs. CA,G.RNa 115278, May 23,1995)

4. The right of the; person injured to sue the insurer of the*
party at fault (insured), depends on whether the contract
of insurance is intended to benefit third persons also or
only the insured (Eulogio vs. Del Monte, GR No. L-22042,
August17,1967). If the contract provides for:
a. Indemnity against third party liability - The third
persons to Iwhom the insured ,is liable, can sue
directly the insurer upon the occurrence of the injury
or event upon which the liability depends.The
purpose, is to protect the injured person against the
insolvency of the insured who causes such injury and
to give him a certain beneficial interest in the
proceeds ofl the policy. It is as if the injured person
were especially named in the policy (Shafer vs. RTC
judge, G.R No.7i
No. 78848, November14,1988,1996 Bar).
b. Indemnity against actual loss or payment r-The third
persons cannot proceed against the insurer, the
contract being solely to reimburse the insured for

(H frsl
20, ik

Insurance Law
liability actually discharged by him through payment
to third persons, said third person's recourse being
thus limited to the insured alone (Guingon us. Del
Monte, G.R. No. L-22042, August 17, 1967) Prior
payment by the insured Is necessary to give rise to
the obligation of the insurer.

accrues immediately upon the occurrence of the injury or

event upon which the liability depends (Shafer vs RTC

Judge, supra).
Liability of insurer if the insured was'committing a
felony

Source o f liability of third party liability insurance

(1996,2000 Bar)

liabilities arising out of acts., of negligence, which are

also criminal, are also insurable on the ground that such
acts are accidental. Thus, a motor insurance policy
covering the insured's liability for accidental injury
caused by his negligence, even though gross and attended
by criminal consequences such as homicide through
reckless imprudence, wall not be void as agains^ public
policy. But liability consequences of deliberate crim inal
acts are not insurable (Sundiang Sr. &Aquino, 2014).

The direct liability of the insurer under indemnity

contract against third party liability does not mean that
the insurer can be held solidarity liable with the insured.
The .insurer's liability is based on contract; that of the
insured is based on.tort (Figuration vda. De Maglana, e t
al v. Hon.Francisco Consolation, G.R. No. 60506, August 6,

1992).

"No action" dause

Q: Lawrence; a boxer, is a hdlder o f a n accident
insurance policy. In a boxing match, he died after
being knocked ou t by th e opponent Can his father
who is a beneficiary under said insurance policy
. successfully claim indem nity from the insurance
company? (1990 Bar)

It is a requirement in a policy.oHiability insurance which

provides that suit and final judgment be first obtained
against the insured, that only thereafter can the person
injured recover on the policy. It expressly disallows suing
the insurer as co-defendant (Guingon v. DeiMonte, supra).

A: Yes. Clearly, the proximate cause of death was the

boxing contest Death sustained in a boxing contest is an
accident (De la Cruz v. Capital Insurance &Surety Co., G.R.

NOTE: A "no action" dause mustyield to the provisions of

the Rules of Court regarding multiplicity ofsuits (Shaferv.

RTCJudge, supra.).

No. L-21574, June 30,1966).

Liability of th e insurer v. Liability of th e insured
i. .

I NS UR E!

The liability Is direct-but

the insurer cannot be
held solidarity liable with
the insured and other
parties at fault
Liability is based . on
contract
The third-party liability
is only up to the extent of
the insurance policy and
that required by law

. . .

. I N S U R E D * .

Rules in aeddent insurance

1.

Liability is direct and can

be held liable with all the
parties at fault

For death or injury to be covered-by the polity, suich

should not be the natural or probable result of the t
insured's voluntary act; or if something unforeseen
occurs in the doing of the act which produces the
injury, which may result to death (Dela Cruz vs.

Capitol insurance &Surety Co., supra).

Liability is based on tort.

2.

Suicide and willful exposure to needless peril are in'

pari matere because they both signify a disregard for

The liability extends to

the amount of actual and
other damages.

one's life. Voluntary exposure to a known danger is

generally held to negate the acddental character of
whatever followed from the known danger (De Leon,
2010).

(Heirs Poe v. Malayan Insurance, G.R. No. 156302, April 7,

2009)

3.

Q: While driving his car along EDSA, Cesar sideswiped

Roberto, causing injuries to the latter, Roberto sued
Cesar and th e th ird party liability insurer for damages
an d /o r insurance proceeds. The insurance company
moved to dism iss th e complaint, contending th at the
liability of Cesar has not y et been determ ined w ith'
finality. Is th e contention of the insurer correct?
(1996 Bar)

The insured's beneficiary has the burden of proof in

demonstrating that the cause of death is due to the
covered peril. Once that fact is established, the
burden shifts to the insurer to show any excepted
peril that may have been stipulated by the parties

(Vda. De Gabriel vs. CA, G.R. No. 103883, Novembber

14,1996).
;>-:j

Contract of suretyship

A: No, the contention of the insurer is not correct There

is no need to wait for the decision of the court determining
Cesar's liability with finality before the third party
' liability insurer could be sued. The occurrence of the
injury to Roberto immediately gave rise to the liability of
the insurer under its policy. Where an insurance policy
insures directly against liability, the insurer's liability

It is an agreement whereby a party called the "surety"

guarantees the performance by another party called the
"principal or obligor" of an obligation or undertaking in
favor of a third party called the "obligee". It includes
offidal recognizances, stipulations bonds or undertakings
issued by any company by virtue and under the

83

U n i v e r s i t y of S anto T omas
_________ Faculty of Civil Law

T.

M ercantile Law
I

provisions ofAct No. 536, as amended by Act No. 2206 (JC,

The premtjun becomes a debt as soon as the contract.

of suretyship or bond is perfected and delivered to
the obligor (1C, Sec 77);

Sec 177).
The extent of surety's liability is determined by the
language of die suretyship contract or bond itself. It
cannot he extended y Implications beyond the term s of
the contract Having accepted the bond, the creditor is
bound by the redta) in the surety bond that the terms and
conditions of distributorship contract be reduced in
writing or at the very least communicated in writing to
the surety. Such non-compliance by die creditor impacts
not on the validity or legality ofdie surety-contract but on
the creditor's right to demand performance. (First

2.

Limited orfixed -Lim ited to the amount of the bond

(It cannot be extended by implication).

3.

3. /udttr
rpoi
- im

3.

Where the obligee has accepted the bond. It shall be

valid and enforceable notwithstanding that, the
premium i has not been paid (Philippine Pryce
Assurance Carp. v. CA, G.RNo.107062, February 21,

LoUr

If the contract of suretyship or bond is not accepted

by, or filedwith die obligee, die surety shall collect
only a reasonable amount;
If the non-accfeptance of the bond be due to the fault
or negligence of the surety, no service fee, stamps, or
taxes imposed shall be collected by the surety; and
!
In die case of continuing bond (for aterm longer than
one yearjor with no fixed expiration date), die obligor
shall pay the subsequent annual premium as it foils
due until the contract is canceled (1C, Sec 179) (De

The liability of the surety or sureties shall be:

1. Solidary -Joint and several with the obligor and

Cbnlractoaf-Itisdetem tinedstrictlyby the terms of

the contract of suretyship in relation to the principal
contract between the obligor and the obligee (1C, Sec

Leon, 2010).

178).
Suretyship v. P roperty Insurance
SURETYSHIP

PROPERTY INSURANCE

It is an accessory contract

The principal contract

itself.*
There are only two parties:
insurer and insured

There are three parties:

the surety, obligor/debtor,
and the obligee/creditor.
More
of ' a
credit Generally a contract of
accommodation with die indemnity
surety assuming primary
liability
. Surety .is i entitled to No right of recoveiy for the
reimbursement from th e ' .loss the insurer may
principal
and
his sustain except when the
guarantor for the loss it insurer . is entitled to
may suffer under the subrogation.
contract
be
canceled
Abond maybe canceled by May
or with the consent o f die unilaterally either by the
obligee
or by
the insured or by die insurer on
commissioner or by the grounds provided by law.
court
Requires acceptance of the ! Does not need acceptance
obligee before it becomes of any third party.
valid and enforceable.
A risk-shifting device, the A risk-distributing device,
premium paid being in the the premium paid being
considered
a
ratable
nature of a service fee.
contribution to a common
fund.

f J F j i l Un i v e r s i t y o f S a n t o T o m a s
2 0 1 5 Golden N otes

Tire

f an
I 3T
M 1
acco;
. i Te-

tu (
Fuml
?S sl

r
delft
r% *

d ifl

Insurance Corporation vs. Logman, G.R No. 16S487,Julyl3,

2011, in Divina, 2014).

2. Fidelity bonds -They pay an employer for loss growing

out of a dishonest act of his employee. For the purposes
of underwriting, they are classified as:
a. Industrial bond ~ One required by private
employers to cover loss through dishonesty of
employees; and

|-

<*p
I-id
bone

1. Contract bonds-These are connected with construction

and supply contracts. They are for the protection of die
owner against a possible default by the contractor or
his possible failure to pay materials, men, laborers and
sub-contractors.The position of surety, therefore. Is to
answer for a failure of the principal to perform in
accordance with the terms and specifications of the
contractJThere may be two bonds:
a. Performance bond - One covering the faithful
performance of the contract; and
b. Payment bond - One covering the payment of
laborers and material men.

Rules o f paym ent o f prem ium s In suretyship

NOTE: By law and by die specific contract involved in this

case, die effeictivity ofthe bond required for the obtention
of a licensed) engage indie business of receiving rice for
storage Is determined not alone by the payment of
premiums but principally by die Administrator of the
NFA* A continuing bond, as in this case where, there is no
fixed expiration date, maty be cancellied only by the
obligee, which is the NFA, by the Insurance
Commissioner, and by die court (Country Bankers

Types of sujrety bonds

(DeLeon, 2,010).

!in

The contmct of suretyship or bonding shall not be

valid and binding unless and until die premium
therefor has been paid;

4.

Nature of liability of surety

2.

1994);

Leparito-Taisho Insurance Corporation vs. Chevron

Philippines,;G.R. No. 177839,January 18,2012).

Tatsf

AM
th ep
t' -ba
ai>*
know
s' ert

Uj

comr

defl j

Chevi

his sv
* ft

Nii
annu

: n

84
t
n
i

Insurance Law
b. Publicofficialbond - One required of public officers
for the faithful performances of their duties and as a
condition.of entering upon die duties of their offices,

program shall be considered a life insurance contract for

purposes of the Insurance Code (1C, Sec 181).

Every contract or pledge for the payment of endowments

or annuities shall also be considered a life insurance
contract under the Insurance Code (IC, Sec 182).

3. Judicial bonds - Tfiey are those which are required in

connection with judicial proceedings (ibid).
Q: Fumitechniks Corporation, represented by Ma.
Lourdes Apostol, had a l l i e d for and was issued a
surety bond by First Lepanto-Taisho Insurance
Corporation (First Lepanto-Taisho) for the amount of
P15,700,000.00. As stated in Cite attached rider, the
bond was in compliance with die requirement for the
grant of a credit line with the Chevron Philippines;
Inc. (Chevron) to guarantee payment of the cost of fuel
; products withdrawn within the stipulated time in
accordance prftth die term s and conditions of
agreem ent between Chevron and Famitedmiks.
i When Fumitechniks defaulted on its obligation.
Chevron
notified
First
Lepanto-Taisho
of
Fumitechniks' unpaid purchases. First Lepanto,' Taisho. thereafter demanded to Fumitechniks die
. subm issionofacopyoftheagreem entsecuredbythe
bond, together with copies o f documents such as
. delivery receipts, Fumitechniks, however, denied that
it executed such an agreement with Chevron, thus no
copy of such agreement could b e submitted. Because
o f this, Chevron Philippines, Inc. sued First LepantoTaisho for the payment of unpaid of] and petroleum
purchases made by Famitedmiks. Is the surety liable
to the creditor in absence of a written contract with
the principal?

Who may exercise any right under the policy

In the absence of a Judicial guardian; the father, or in the
latter's absence or incapacity, the mother, of any minor,
who is an insured or a beneficiary under a contract of life,
health, or accident insurance, may exercise, in behalf of
said minor, any right under the policy, without necessity
of court authority or the giving of a bond, where the
interest of the minor In the particular act involved does
not exceed Five hundred thousand pesos
(P5OO,OO0.OO) or in such reasonable amount as may
be determined by die Commissioner. Such right may
include, but shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of the
Policy, and giving the minor's consent to any transaction
on the minor's consent to any transaction on the policy.
In the absence o r in case of the incapacity of (he father
o r mother, die grandparent, die eldest brother or
sister at least eighteen (18) years of age, o r any
relative who has actual custody of die minor Insured
o r beneficiary, shall act as a guardian without need of
a court order or Judicial appointment as such
guardian, as long as such person is not otherwise
disqualified or incapacitated. Paymentmade by the
insurer pursuant to this section shall relieve such /
Insurer ofanyliabillty under the contract f/C Sec 182).

A: No. Section 176 of the Insurance Code is dear that a

surety contract should be read and interpreted together
with die contract entered into between the creditor and
the principal^ surety contract is merely a collateral one,
. its basis is the principal contract or undertaking which it
secures. Necessarily, die stipulations in such prindpal
agreement must at least be communicated or made
known to the surety. Having accepted the bond. Chevron
1 ascreditormustbeheldboundbytheredtalinthesurety
bond that the terms and conditions of its distributorship.
' contract be reduced In writing or at the very.least
communicated in writing to. the surety. Such non' compliance by the Chevron impacts not on the validity or
>legality ofthe surety contract but on the creditor's right to
demand performance (First Lepanto-Taisho Insurance v.

Life'insurance is also a contract of indemnity

This is because of the following reasons:
1. The liability in life insurance is absolutely certain
2. Amount of life insurance generally is without limit
3. The policy is a valued policy
4. There is no direct pecuniaiy loss required (De Leon,

2010) .

Kinds ofllfe insurance policies

1. Ordinarylife,general life orold linepolicy - Insured pays
a premium eveiy year until he dies. Cash surrender
value after 3 years.

Chevron Philippines, Inc, G.R. No. 177839, January 18,

2012).
. LIFE INSURANCE,"

2. Limited payment - Insured pays premium for a limited

period If lie dies within the period, his beneficiary is
paid; if he outlives the period, he does not get anything.

Jt is insurance on human lives and insurance appertaining

thereto or connected therewith (Sec 181, Insurance
CodeJ.it is made payable on the death of die person, or on
his surviving a spedfied period, or otherwise contingentiy
on the continuance or cessation of life (1C, Sec. 182J.

3. Endowment - insured pays premium for spedfied

period. If he outlives the period, the face value of the
policy is paid to him; if not; his ben.efitiaries receive the
benefit

NOTE: Every contract or undertaking for the payment of

annuities including contracts for the payment of lump
sums under a retirement program where a life insurance
company manages or acts as a trustee for such retirement

4. Term insurance - insured pays premium only once, and

he is insured for a specified period. If he dies within the
period, his beneficiaries benefit If he outlives the
period, no person benefits from the insurance.

>*

85

U n i v e r s i t y o f S a n t o Tomas
Faculty of Civil Law

>

M ercan tile L aw
5. Industrial life - entitles the insured to pay premiums
weekly, or where premiums are payable monthly or
oftener (Sundiang Sr. &Aquino, 2014).
C ontract o f life annuity
It is a contract to pay the insured, o r a named person or
persons, a sum o r sums periodically during life or certain
period (Perez, 2006).
M easure o f indem nity u n d e r a policy o f Insurance
u p o n life o r health
GR: The measure of indemnity under a policy of insurance
upon life or health is the sum fixed in the policy.

since the death was an accident (Sun Insurance v CA, G.R.

Nos. 79937-38, February 13,1989).

Q: X, in January 30, 2009, o r two (2) years before
reaching th e age of 65, insured his life for
Php20Milllon. Fojr reason unknown to his family, he
to o k h is own life two (2) days after his 65di birthday.
The policy contains no excepted risk. Which
statem en t Is m ost accurate? (2012 Bar)
A: A.The Insurer! will be liable under Sec. 183 of the:
insurance Code. The suicide is committed after die policy
has been in force for a period of 2 years from the date of.
its issue.
Life insurance v. Fire/Marine insurance

XPN: The interest of a person insured ls susceptible of

. exact pecuniary measurement (IQ Sec. 186).
Liability o f th e in su re r in case o f suicide
The insurer shall be liable in case of suidde by the insured
if:
1. The suicide is committed after the policy has beenin
force fo ra period of 2 years from die date of its issue
o r of its last reinstatement.
2. The suicide is committed within a shorter period as
provided in the policy.'
3. The suidde Is committed in the state of insanity
regardless of the date of commission (IC,.Sec. 183)
Q: Sun Insurance Co. issued to T an a life policy having
th is provision: "the com pany shall not b e liable in
re sp e c t ofliodU y Injury* consequent upon th e insured
p erso n who willfully exposes him self to needless
p e ril except in a n a tte m p t to save hum an life". Tan
designated his wife, Beverly a s beneftdary.
One evening, Tan, w hile playing w ith h is hand gun,
su d d en ly sto o d in fro n t o f h is sec retary an d pointed
th e gun a t h er. S tarded, sh e p u sh ed d ie gun aside and
said th a t it maty b e loaded. Thus, Tan, to assu re h er
th a t it was n o t loaded, p o in ted i t a t ids tem ple. The
n e x t m om ent, th ere w a s an explosion and Tan
slum ped to th e floor lifeless.
Beverly, th e n claim ed d ie proceeds from Sun
Insurance, b u t th e la tte r rejected h e r claim on die
g round t h a t d ie death o f T an w as n o t accidental.
Beverly su ed th e insurer. W ill Beverly's claim
prosp er? (199 3 ,1 994 Bar)
A: Beverly can recover die proceeds of the policy from the
insurer. The death of the insured was not due to suicide
or willful exposure to needless peril which are excepted
risks. The insured's act was purely an act of negligence
which is covered by th e policy and for which the insured
got die. insurance for his protection. In fact, he removed
the magazine from the gun and when he pointed the gun
to his temple he did so because he thought that it was safe
for him to do so. He did so to assure his sister that the gun
' was harmless. There is none in the policy that would
relieve the insurer of liability for the death of the insured

a U n iv e rs ity of S a n to Tomas
20 15 GOLDEN N o t e s

- LIFE INSURANCE

It is a contract of
investment not contract of
indemnity.
Always regarded as valued
doHcv.
May be transferred or
assigned to any person
even if he has no insurable
interest
!
The consent cif the insurer
is not esseijitial to the
.validity of th e assignment
of a life p(olicy unless
expressly req uired.
Insurable ini Merest in the
life.or health of the person
insured nee d not exist
after the insnuance takes
effect or when loss occurs.
Insurable interest need
not have any legal basis.
Contingency
that
is
contemplated is a certain
event; the only uncertainty
being the time when itwid
take place. >
The liability Of the Insurer
to make payment is
certain, the only uncertain
element being when such
payment must be made.
May be terminated by the
insured but cannot be
cancelled by the insurer
and is usuajily a long term
contract. I
The
"loss"
to
the
beneficiary caused by the
death of the insured can
seldom be . measured
accurately in terms of cash
value.

. riRi;/MARlNE
INSURANCE

p ;iir>

It is a contract of
indemnity.
May be open or valued.

iiip r =
injur i [

The
transferee
or
assignee must have an
insurable interest in the
thinE insured.
Consent, in the absence
of waiver by the insurer,
is essential in the
assignment of the policy.
Insurable interest in the
property insured must
exist not only when the
insurance takes effect but
also when the loss
occurs. '
Insurable interest must
have a legal basis.

Sr

p .
I*

Ni
tlie :
liab le
jut mi
V.!
* i !
D^nt

1)
Aniv.ve
po er

f:i
The contingency insured
against may or may not
occur.
Liability is uncertain
because the happening of
the peril insured against
is uncertain.
May be cancelled by
either party and is
usually for a term of one
year
The reverse is generally
true of the loss of
property, i.e., it is capable
of pecuniary estimation.

ro[ r%
moij ir
and cn
rui or.
tra j^n
agri" II

NQ E:
pn p il

mo^ ft

withnc
2.!!"%

j
i

In s u r a n c e L a w
The beneficiary is under
no obligation to prove
actual financial loss as a
result of the death of the
insured in order to collect
the insurance.

The insured is required

to submit proof of his
actual pecuniary loss as a
condition precedent to
collecting the insurance.

Any fare-paying person being transported and conveyed

in and by a motor vehicle for transportation of passengers
for compensation, including persons expressly
authorized by law or by the vehicle's operator or his
agents to ride without fore (IC/Sec 386, ft]).
3. Third-party

C O M P U L S O R Y M O TO R VlilI1CLL LIABILITY
'
INSURANCE"

Any person other than a passenger as defined in this

section (ibid) and shall also exdude a member of toe
household, or a member of the family within toe second
degree of consanguinity or affinity, of a motor vehicle
owner or land transportation operator, as likewise
defined herein, or his employee in respect of death, bodily
injuiy, or damage to property arising out of and in the
course of employment (Sec 386, [c], ibid%

Motor vehicle liability insurance

It is a protection coverage that will answer for legal
liability for losses and damages for bodily injuries or
property, damage that may be sustained by another
arising from the use and operation of a motor vehicle by
its owner (Compulsory Motor Vehicle Liabilitylnsurance,

prepared and distributed by the Insurance Commission).

4. Owner or Motor vehicle ownerJ MVO)

The Insurance Code makes it unlawful for any land

transportation operator or owner of a motor vehicle to
operate the same in public, hi^iways ,unless there is an
insurance or guaranty to indemnify the death or bodily
injury of a third party or passenger arising from the use
thereof (1C Sec 387). Registration of any vehicle will not
be made or renewed without complying with the
requirement (7C Sec. 389).

Actual legal owner of a motor vehlde, whose name such

vehide is duly registered with the Land Transportation
Office (Sec 386, [d], ibid).

5. Land transportation operator (LTO)

,
*
<
The owner or owners of motor vehicles for transportation
of passengers for compensation, induding school buses

(Sec 386,[e], ibid).

Purpose of m otor vehicle liability Insurance
Persons required to maintain a compulsory motor
vehide liability insurance (CMVLQ policy to operate
m otor vehide/s in public highways

To give immediate financial assistance to victims of motor

.vehicle accidents and/or their dependents, especially if
they are poor regardless of financial capability of motor
vehicle owners or operators responsible for toe accident
sustained (First Integrated Bonding Insurance Co., Inc v.

1. Motor vehide owner (MVO)

2. Land transportation operator (LTO) (Sec 387, ibid).

i
i

Hernando, G.R No. L-51221,July31,1991).

Scope of coverage required for compulsory motor
vehide liabflity insurance

NOTE: The insurer's liability accrues immediately upon

the occurrence of toe injuiy dr event upon which toe
liability depends, and does not depend on toe recovety of
judgment by the injured party against the insured (Shafer

1. For MVOs, toe coverage must be comprehensive

against third party. liability Tor death' or bodily
injuries. If toe private motor vehide Is being used to
transpoitpassengersforcompensati<m,thecoverage
shall fndude passenger liability.
2. For LTOs, coverage must be comprehensive against
both passenger and third-party liabilities for death or
bodily injuries (Ins. Memo. Cir. No. 3-81).

v.Judge, RTC, supra).

Definitions
1. Motor vehicle
Any vehicle propelled by any power other than muscular
power using the public highways, but excepting road
rollers, trolleys cars, street sweepers, sprinklers, lawn
mowers, bulldozers, graders, forklifts, amphibian trucks,
and cranes if not used in public highways, vehicles which
run only on rails or tracks, and tractors, trailers and
traction engines of all kinds used exclusively for
agricultural purposes (Sec 3[aJ ofRA 4136).

Substitutes for. a compulsory motor vehicle liability

insurance policy
Instead of a CMVLl policy, MVOs or LTOs may either:
;
1. Post a surety bond with toe Insurance Commissioner
who shall be made the obligee or creditor in toe bond
in such amount or amounts required as limits of
indemnity to answer for the same losses sought to be
covered by a CMLVI policy; or -
2. Make a cash deposit with the Insurance Commission in
such amount or amounts required as limits of
indemnity for the same purpose (Sec. 390, ibid).

NOTE: Trailers having any number of wheels, when

propelled or intended to be propelled by attachment to a
motor vehicle shall be classified as separate motor vehicle
with no power rating (ibid).

'vij

2. Passenger

87
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U n i v e r s i t y of S a n to T o mas
F aculty of Civil Law

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::JI L

_Pr

Mercantile L aw
Rules under tiuj "no fault Indemnity clause"

NOTE: After the cash deposit or surety bond has been

proceeded against by the Insurance Commissioner, such
cash deposit shall be replenished or such surety bond
9hall be restored by the MVOor LTOin the right amount/s
required as limit of liability within 60 days after
impairment or expiry, otherwise, he shall secure a CMLVI
required (ibid).

1. The total indemnity in respect of any one person shall

not exceed P15,000 for all motor vehicles (Ins. Memo.

Cin. No. 4-2006).

2. Proof of loss:
a. Police report of accident
b. Death certifica^ and evidence sufficient to
establish (proper payee
c. Medical report and evidence of medical or hospital
disbursement (IQ Sec 391 [3]).

Duties of m otor veblde owner o r land transportation

operator in contemplation of die cancellation of the
'policy
Contemplating die cancellation of the policy, the MVO or
LTO shall:
1. Give to the insurance qr surety company concerned a
written notice of his intention to cancel;
2. Secure, before the insurance policy or surety bond
- ceases to be effective, another similar polity or bond to
replace that one canceled;

3. Without making any replacement make a cash deposit

in sufficient amount with the Insurance Commissioner
and secure a certification from the Insurance
Commissioner regarding the deposit made for
presentation to and filing with the Land Transportation
Office (CMVLl supra) (IQ Sec 393-394).

391 [c], ibid).

4. In case injury ofan occupant of a vehicle, the claim shall
. He against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from

(ibid).

vehide

1. An evidence or proof of a new and valid CMVLl cover

which, may be either an insurance policy or guaranty in
cash or surety bond;
2. A signed duplicate of an endorsement or addendum
Issued by the insurance company concerned showing
revival or continuance ofthe. CMVU cover; or

| -v 3. A certification issued by the Insurance Commissioner to

^ tiie effect that a cash deposit in the amount required as
\lhhitof indemnity has been made with him by the MVO or
m (CMVU, supra, IQ Sec 393).
-

This no-fault daim does NOTapply to property damage. If

the total indemnity daim exceeds P15, 000 and there is
controversy inrespect thereto, the finding of fault may be
availed of by tne insurer only as to the excess. The first
P15,000 shall be paid without regard to the fault (CMVU;

Itl
against
wf au
tal R
auttL.

A: Against the insurer of the passenger jeepney driven by

Ybecause X was his passenger. The Insurance Code states
that in the case of an occupant of a vehide, the daim shall
lie against the insurer ofthe vehide in which the occupant
is riding, mounting or dismounting from.

nfere the insurer is required to pay a third

*Wjled in an accident witiiout the necessity
f,:br negligence on the part of die insured,
yated maximum amount to be recovered.
S a n t o T omas
N otes

policy.

Q: X Is a passenger of a jeepney for hire being driven

by Y. The jeejpney collided with another passenger
feepney being drfven byZ who was driving recklessly.
As a result o f the collision, X suffered injuries. Both
passenger jeepneys are covered by Comprehensive
Motor Vehicular Insurance Coverage. If X wants to
claim under tne "no fault indemnity dause1, his claim
will lie (2012 Bar)

.qninity clause (1994 Bar)

cannot
ai
*_ j ;
AfoLi

NOTE: The dajmant is not free to choose from which

insurer he will claim the "no fault indemnity," as the law,
by using the word "shall", malms it mandatory that the
claim be made against the insurer of the vehicle in which
the occupant Is riding, mounting or dismounting from.
That said vehicle might not be the one that caused'the
accident is of no moment since the law itself provides that
the party paying may recover against the owner of the
vehide responsible for the accident (Perla Compania de
Seguros, Inc v. Ancheta, G.R. No. L-49599, August8,1988). 0

supra).

idamage" coverage
p r- v- "

jsimply meant that die insurer had assumed to

|burse the costs for repairing the damage to the
||ed vehicle, as opposed to damage to third party
^/property. The phrase M
own damage" does not
iatnage to the insured car caused by the assured
of third parties ( Pan Malayan Insurance
Pft/on V. Court o f Appeals, supra)

of

NOfEt

5. In any other case (not an occupant), claim shall Jie

against the insurer of the directly offending vehicle
(ibid).
|
6. In all cases, the right of the party paying the daim to
recover against the owner ofthe vehicle responsible for
the accident shall be maintained (ibid).

XPNs: No confiscation will be ordered if said Office

receives any of the following:

olden

(Sundi

permit

GR: Upon receipt of the notice of such cancellation, the

Land Transportation Office shall order the immediate
confiscation of the plates of the motor vehide concerned.

||y $ .s ,T y

nTK

liL j \

3. Claim may be made against one motor vehicle only (Sec

Effects o f the cancellation of tile policy

M l
Audio

an^J

Compa
A h
insu.i
several
th? p i
ev I 'f
there !
unlawf
tai p
pe t s

(ParJi
173771
p
Tt

There
wi P i
th- I!

88

Insurance Law
Authorized driver clause

1. The vehicle is returned;

2. The vehicle was stolen by the driver of die insured
{Alpha Insurance and Surety Company v. Castor, G.R

It indemnifies die insured owner against loss or damage

to the car but limits the use of the insured vehicle to:
1. The insured himself; or

198174, September2,2013);
3. The vehicle was taken to die owner ofa repair shop for
the purpose of repair and in order to attach
accessories (Paramount Insurance v. Spouses

NOTE: The insured need not prove that he has a driver's

license at the time of the accident if he was the driver

Remondeulaz, G.R No. 173773, November 28, 2012)

(Sundiang Sr. &Aquino, 2014).

y. (Sundiang Sr. &Aquino, 2014)..

' 2. Any person who drives on his order or with his

permission; provided, that the person driving is
permitted to drive the motor vehicle in accordance with
} , the law, and is not disqualified (Villacorta v. Insurance
;; Commissioner, G.R No. 54171, October28,1980).

Limitations with respect to compulsory motor vehicle

liability insurance over solicitation
. 1. No government office or agency having.the duty of
implementing die provisions of the Insurance Code on
CMVU shall act as agent in procuring die insurance
polity or surety bond required;

: NOTE: The main purpose of this clause is to require a

, person other than the insured, who drives the car on the
j- insureds order or with his permission, to be duly licensed
drivers and have no disqualification to drive a motor
' vehicle {Villacorta v. Insurance Commission, G.R No. L-

2". No official or employee of such office or agency shall

similarly act as such agent; and

54171, October28,1980).

3. The commission of an agent procuring the

corresponding insurance polity or surety bond shall in
no case exceed 10% of the amount of premiums
therefore (1C, Sec 400).
,

' An. Irish citizen whose 90-day tourist visa had expired,
, cannot recover on his car insurance policy, not being
authorized to drive a motor vehicle without a Philippine
drivers license {Stokes v. Malayan Insurance Co., Inc. GR

Q: When a passenger Jeepney, insured ,but with an

authorized drivers clause and was driven by a driver
who only holds a Traffic Violation Report (TVR)
because his license was confiscated, met an accident,
may the owner of die Jeepney claim fro m 'th e
insurance company? (2003 Bar)

No. 1-34768, February24,1984).

A driver with an expired Traffic Violation Receipt or
expired Temporary Operators permit is not considered
s an authorized driver within the meaning of the insurance
policy. The Traffic Violation Receiptis coterminous with a
confiscated license under die Motor Vehicle Law
. {Gutierrez v. Capital Insurance &Surety Co., Inc, G.R No. L: 26287, June29,1984)

A: Yes. The fact that the driver was merely holding a TVR /
does not violate die condition that the driver should have I
a valid and existing drivers license. Besides, such a
condition should be disregardedbecause what is involved
is a passenger Jeepney, and what is involved here is not
own damage insurance but third party liability where the
injured party is a third party not privy to the contract of
insurance.

. Theft clause
It is that which includes theft as among the risks.insured
against Where* a car is unlawfully and wrongfully taken
without the knowledge and consent of the owner, such
taking constitutes "theft and it is the theft clause, not the
authorized driver clause which should apply (Perla
: CompaniadeSeguras,Incv.CA,supra).

-MICROINSURANCE

It is a financial product or service that meets the risk

protection needs of the poor where:

The "Theft Clause of a comprehensive motor vehicle

. insurance policy has been interpreted by the Court in
several cases to cover situations like (1) when one takes
; the motor vehicle of another without die latter's consent
. even if the motor vehicle is later returned, there is theftthere being intent to gain as the use of the thing
unlawfully taken constitutes gain or (2) when there is
taking of a vehicle by another person without die
permission or authority from the owner thereof.
(Paramount Insurance v& Spouses Remondeulaz, G.R No.

a. The amount of contributions, premiums, fees or

charges, Computed on a daily basis, does not exceed seven
and a half percent (7.5%) of the current daily minimum
wage rate for nonagricultural workers in Metro Manila;
and
b. The maximum sum of guaranteed benefits is not more
than one thousand (1000) times of current daily minimum
wage rate for nonagricultural workers in Metro Manila

173773, November28,2012).

(JC, Sec 187).

Theft

NOTE: No insurance company or mutual benefit

association shall engage in the business of microinsurance
unless it possesses all the requirements as may be
prescribed by the Commissioner. The Commissioner shall
issue such rules and regulations governing
microinsurance (1C, Sec 188).

There is theft if the vehicle is taken with intent to gain

without the consent of the insured-owner. Thus, there is
theft even if:

89

U n i v e r s i t y of S anto T omas
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Mercantile Law
|

f
----- - - - -s.
. . . *-

The benefiriaty The

beneficiary
need not have must
have
insurable interest insurable interest
overthelifeofthe over the thing
insured if the insured.
insured himself
A sto th e
secured
the
policy. However, if
beneficial
s interest k i tiie life insurance
was obtained by
the beneficiary,
...... *.... *
the latter must

j"-.V have
insurable
"v
interest over the
.........
... life of tiie insured.
(De Leon, 20i0; Sundiang Sr. &Aquino, 2014).

. I N S U R A B L E IN T E R E S T

An insurable interest is that interest which a person is

deemed to'have in the subject matter insured, where he
has a relation or connection with or concern in it, such
that the person will derive pecuniaiy benefit or advantage
from the preservation of the subject matter insured and
will suffer pecuniary loss or damage from its destruction,
termination, or injury by the happening of the event
insured against(Violeta R Lalican vs. The Insular Life
Assurance Company Limited, G.R No. 183526, August 25,
2009).
NOTE: The existence of insurable interest is a matter of
public policy and is not susceptible to the principle of
estoppel. The existence of an insurable interest gives a
person the legal right to insure the subject matter of the
policy of insurance (ibid).

Existence of insurable Interest In life and property

insurance
.
/
For both life and property insurance, the insurable
interest is required to exist at the time of perfection of the
policy. For property insurance, the ipsurable interest
must also exist at the time of loss, however, in case of life
insurance, the insurable interest need to exist only at the
time of perfection aiid not thereafter (IC, Sec 19}
Q: X owned a house and lo t X insured the house. The
house got burned. Then he sold the partially burnt
house and the lot to Y. Which statement Is most
accurate? (2012 Bar)

When does a person has Insurable Interest?

GR: A person is deemed to have an insurable interest in
the subject matter insured where he has a relation or
connection with or concern in it that he will derive
pecuniaiy benefit or advantage from its preservation and
will suffer pecuniaiy loss from its destruction or injury by
the happening of the event insured against
XPN: To have an insurable interest in the life of a person,
the expectation of benefit from the continued life of that
person need not necessarily be of pecuniaiy nature (De
Leon,2010).
Insurable interest in life insurance v. Insurable
interest in property insurance (2002 Bar)
1

As.to extent

When m ust
insurable
interest
-exist.

LIFE

PROPERTY

GR: Every person

has an unlimited
insurable interest
in his own life

limited to the
actual value of the
property

XPN: Where life

insurance is taken
nut*
UUv Hv
ujr aCLrrpriitnr
14CUUvl
on the life of the
debtor, insurable
interest is limited
to the amount of
debt
Must exist at the
time the policy
takes effect and
need not exist
thereafter (IC, Sec
19).

a X Is not anymore entitled to the proceeds of the

insurance policy because he already sold the partially
burnt bouse and lot
i
b. X is still entitled to the proceeds of the insurance.
policy because what is material is that at the time of
the. loss, X Is the owner of the house and lo t
c. No one is entitled to the proceeds because
ownership over the house and lot was already
transferred.
d. Y will be the one entitled to the proceeds because
he now owns the partially burnt house and lo t

GR: Must exist both

at the time the
policy takes effect
and the time ofloss,
but need not exist
in the period in
between (Sec 19,
ibid).
XPN: Secs. 21-24;
25. ibid.

A: b. X is $till entitled to the proceeds of the insurance

policy because what is material is that at the time of the
loss, X is the owner of the house and lot After the loss
occurs, tiie right of the insured under the policy becomes
fixed and a subsequent conveyance by the insured cannot
affect the insurers liability (Perez, supra, pg. 43, citing
Florea vs. Iowa State Ins. Co., 32 SW 2d 11,225Mo. App. 49).
' Mere hope or expectancy is not insurable
.1
*
A mere contingent or expectant interest in any tiling, not
founded on an actual right to the thing, nor upon any valid
contract for it, is not insurablef/CC, Sec. 16).
Right of the insured to change the beneficiary he
designated
GR: The insured shall have the right to change the
beneficiary he designated in the policy

| U n i v e r s i t y ojf S a n t o T o m a s
p i 5 G olden N otes

Insurance Law
XPN; If the insured expressly waived this right In the said
policy.

The question of insurable interest Is immaterial where the

policy is procured by the person whose life is insured. A
person who insures his own life can designate any person
as his beneficiary, whether or not the benefidaiy has an
Insurable interest In the life of the insured subject to the
limits under Artides 739 and 2012 of the New Civil Code

NOTE: Under Sec. 64 of die Family Code, the innocent

spouse is allowed to revoke the designation of the other
spouse as irrevocable benefidaiy after legal separation.

(DeLeon, 2010).
Effect o f the irrevocable designation of the
beneficiary to the assignment o f the policy

2. Insurance upon life of another - are those taken out by

the insured upon the life of another. Where a person
names himself beneficiary in a policyhe takes on the life ,
of another, he must have insQrable interest in the life of
the latter (De Leon, 2010). This class includes the
following (1997,2000,2002 Bar):
a. His spouse and of his children .
b. Any person on whom he depends wholly or in part for
education or support; or in whom he has a pecuniary
interest
c. Of any person under a leg^l obligation to him for the
payment of money, or respecting property or services,
of which death or illness might delay or prevent the
performance.
d. Of any person upon whose life any estate or interest
vested in him depends (1C, Sec. 10).

The insured cannot assign the policy if the designation of

the beneficiary is iifevocable. The Irrevocable benefidaiy
has a vested right (Sundfang Sr. &Aquino,2014,2005Bar).
When designation
irrevocable

of benefidaiy

is

deemed

The insured'shall have the right to change the benefidaiy

he designated in the polity, unless he has expressly
waived this right in said policy. Notwithstanding the
foregoing, in the event the insured does not change the
benefidaiy during his lifetime, the designation shall be
deemed irrevocable (IQ Sec. 11).
NOTE: The foregoing provision is an amendment
incorporated in the Insurance Code of 2013.

NOTE: In paragraph (a) of Section 10 of the Insurance

Code, mere relationship is siiffident while the rest (pars,
b, c, and d) requires pecuniaiy interest Thus, the interest
of the creditor oyer the fife of the debtor ceases upon fall

Void stipulations In an insurance contract

Every stipulation in an insurance contract:
1. For the payment of loss whether the person insured
has or does not have any insurable interest in the
subject-matter of insurance, or .

payment (Ssndiang Sr. &Aquino, 2009).

2.

That the. policy shall he received as proof of such '

interest, and

3.

Eveiy policy executed by way of gaming or wagering

is VOID (ICC, Sec. 25).

Under the Article 739 of the New Civil Code, the following
are prohibited designation of beneficiaries:
1.
Those made between persons who were guilty
(finding of guilt in a civil case is sufficient) of
. adultery or concubinage at the time of donation
f
2.' Those made between persons found guilty of the
same criminal offense, in consideration thereof

Persons prohibited from being designated as

benefidarles (1998 Bar)

NOTE: The Insurance Code provides that a policy may

declare that a violation of specified provisions thereof
shall avoid it. Thus, in fire insurance policies, which
contain provisions that if the claim be in any respect
fraudulent or if any false declaration be made or used in
support thereof, all the benefits under the policy shall be..
forfeited, a fraudulent discrepancy between the actual
loss and that claimed in the proof of loss voids the
insurance policy. Mere filing of such a claim will exonerate
; the Insurer. (United Merchants Corporation vs. Country

3.

Those made to a public officer or his wife,

descendants or ascendants by reason of his office.

NOTE: The designation of the above-enumerated persons

is void but the policy is binding. The estate will get the
proceeds (Sundiang Sr. &Aquino, 2009).

Bankers Insurance Corporation, G.R. No. 198588, July 11,

Q: Can a common-law wife named as beneficiary In

the life insurance policy of a legally married man
claim the proceeds thereof in case of death of the
latter?

2012) .

A: No. Under Article 2012 of the New Civil Code, any

person who is forbidden from receiving any donation
under Article 739 cannot be named benefidaiy of a life
insurance policy by the person who cannot make a
donation to him. Common-law spouses are, definitely,
barred from receiving donations from each other. In
essence, a life insurance policy is no different from a dvil
donation insofar as the beneficiary is concerned. Both are
founded upon the same consideration: liberality. A

Two general classes of life policies

1. Insurance upon one's life - are those taken out by the
Insured upon his own life (IC, Section 10[a]) for the benefit
of himself, or of his estate, in case it matures only at his
death, for the benefit of third person who may be
designated as beneficiary (1997,2000,2002 Bar).

91

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Mercantile Law
beneficiary is like a donee, because from the premiums of
the policy which the insured pays out of liberality, the
beneficiary will receive the proceeds or profits of said
insurance (The Insular Life Assurance Company; Ltd., v.
Carponia T. Ebrado and Pascuala Vda. De Ebrado, G.R.
No.L-44059, October28,1977).
Because no legal proscription exists in naming as
beneficiaries children of illicit relationships by the
insured, the shares of the common-law spouse in the
insurance proceeds, whether forfeited by the Court in
view of the prohibition on donation under Article 739 of
the Civil Code or by the insurers themselves for reasons
based on the insurance contracts, must be awarded to the
said illegitimate children, the designated beneficiaries, to
the exclusion of the legitimate heirs (Heirs o f Loreto
Maramag vs. Maramag, G.R. No. 181132, June 5,2009).
Extent of the creditor's recovery from the insurance
h e procured upon the life of die debtor, if the latter
dies
It is limited only to the extent of the amount of the debt at
the time of debtor's death and the cost of carrying the
insurance on the debtor's life.
Consent o f d ie person insured Is not essential to the
validity of th e policy

So long as it could be proved that the insured has an

insurable interest at the inception of die policy, the
insurance is valid even without such consent (1C, Sec. 10).
Effect if the beneficiary wfllftilly brought about the
death of the insured (2008 Bar)
GR: The interest of a beneficiary in a life insurance policy
shall be forfeited when the benefitiary is die principal,
accomplice, or accessory in willfully bringing about the
death of the insured. In such a case, the share forfeited
shall pass on to the other beneficiaries, unless otherwise
disqualified. In the absence of other beneficiaries, the
proceeds shall be paid in accordance with the policy
contract If the policy contract is silent; the proceeds shall
be paid to the estate of the insured (Sec. 12, Ibid).
NOTE: th e rule provided was an amendment stated in the
insurance Code of 2013.

A: a] X as sole beneficiary under the life insurance policy

on the life of Y will be entitled to tire proceeds of the life
insurance.
j
Common-law spouses are definitely barred from
receiving donations from each other. In essence, a life
insurance policy is no different from a civil donation
insofar as die beneficiary is concerned. Both are founded
upon the same consideration: liberality. A beneficiary is
like a donee, because from the premiums of the policy
which the insured pays out of liberality, the beneficiary
will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the New
Civil Code should equally operate in life Insurance
contracts. The mandate of Article 2012 cannot be laid
aside: any person who cannot receive a donation cannot
be named as beneficiary in the life insurance policy of the
person who cannot make the donation (Insular Life
Assurance, Co. vs. Ebrado* GR No. L-44059, supra)..
/
Q: Juan de la Cruz was Issued Policy No. 8888 of the
Midland Life Insurance Co. on a whole life plan for
P20,000 on August 19, 1989. Juan Is m arried to
Cynthia with whom he has three legitimate children.
He, however, designated Purita, his common-law
wife, as the revocable beneficiary. Juan referred to
Purita in his application and policy as the legal wife.
Three (3) years later, Juan died. Purita filed her claim
for the proceeds o f the policy as the designated
beneficiary therein. The widow, Cynthia, also filed a
claim as the legal wife. To whom should the proceeds
of the insurance policy be awarded? (1998 Bar)
A: The estate is entitled to claim for the proceeds of the
insurance polity. As a general rule,. the insured may
designate anyone he wishes to be his/her benefidaiy.
However, Art 2012 of the Civil Code, which applies
suppletorily to the insurance Code) provides that any
person who is forbidden from receiving any donation
under Art 739 icannot be named benefidary ofia life
insurance policy by the person who cannot make any
donation to him, according to said article. Art 739
specifically bars the donations as between persons, who
were guilty of adultery or concubinage. Since Purita is a
common-law wife of )uan, she falls squarely in to this*
category therefore she is disqualified to receive insurance
proceeds and when this happens, the estate of the
deceased is the one entitled to the proceeds [Insular Life
Assurance Company, Ltd. vs. Capronia Ebrado, supra).

X P N s:

The beneficiary acted in self-defense;

The insured's death was not intentionally caused
[e.g., thru accident];
Insanity of the beneficiary at the time he lalied the
insured.
X is the common law wife of Y. Y loves X so much
he took out a life Insurance on his own life and
.her die sole beneficiary. Y did this to ensure
CwiU be financially comfortable when he is gone.
Uke death ofY, -(2012 Bar)

(2000 Bar)
Every interest in property, whether real or personal, or
any relation thereto, or liability in respect thereof, of such
nature that contemplated peril mightdirectly damnify the
insured, is insurable interest (IC, Sec. 13).
Insurable interest In property may consist of the
following (1991 Bar):

N on

j.

\
,c

4, ** *

1. An existingj interest - The existing interest in the

property may be legal or equitable title.

durin
c m
a j f
boLJi
over
r f-p
t

>

J i .U N iv E Rs i T Y of S a n t o T o m a s
j ^ ^ , . 0 1 S.Golden N otes
______

> m
e ;

Insurance Law
Examples of insurable interest arising from legal tide:
a. Trustee, as in the case of the seller of property not yet
delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased (De Leon, supra).

and received by the carrier for transportation until the

same r.re delivered, actually or constructively, by the
carrier ro the consignee, or to the person who has a right
to receive them (Eastern Shipping Lines vs. BPI/MS
Insurance Corp. and Mitsui Sum Tomo, G.R. No. 193986,
January IS, 2014).

Examplesof insurable interest arising from equitable title:

a. Purchaser of property before delivery or before he has
performed the conditions of the sale
b. Mortgagee of property mortgaged;
'
c. Mortgagor, after foreclosure but before the expiration
of the period within which redemption is allowed (De
Leon, 2010).

Effect of change of interest in any part of a thing

Insured unaccompanied by a corresponding change
of interest in the insurance
GR: A change of interest in any part of a tiling insured
unaccompanied by a corresponding change in interest in
the insurance suspends the insurance to an equivalent
extent, until the interest in the thing and the interest in
the insurance are vested in the same person (Sec 20;
Sec.S8, ibid).

2. An inchoate interest founded on an existing interest or

Example: A stockholder has an inchoate, interest in the
property of the corporation ofwhich he is a stockholder,
which is founded on an existing interest arising from his
ownership of shares in the corporation (De Leon, 2014).

NOTE: Change of interest" contemplated by law is an

absolute transfer of the insured's entire interest in the
property insured to one not previously interested or
insured (Perez, 2006).

3. An expectancy coupled with an existing interest in that

out of which the expectancy arises.
NOTE: Existence of insurable interestis a matter of public
policy. Hence, the prindple of estoppel cannot be invoked .
(Sundiang Sr. &Aquino, 2014).

When there is an express prohibition against alienation in

the policy, in case of alienation, the contract of insurance
is not merely suspended but avoided (Sundiang Sr. &
Aquino, 2014, citing NCC, Article 1306).
XPNs:
1. When there is a prohibition against alienation or
change of interest without the consent of the insurer in
which case the policy is not merely suspended but avoided
(ibidy citing Curtis vs Girard Fire and Marine Ins., U SE 3,
190 Ga. 9S4).
t

Measure of insurable interest in property (2000 Bar) '

The extent to which the insured might be damnified by
loss or injury thereof (IC, Sec 17). Insurable interest In
property does not necessarily imply a property interest
in, or lien upon, or possession of, the subject matter of die
insurance, and neither tide nor a beneficial interest is
requisite to the existence thereof. It is sufficient that the
insured Is so situated with reference to the property that
he would be liable to loss should it be injured or destroyed
by the peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit from
its existence or would suffer loss from its destruction
(Gaisano Cagayan, Inc v. Insurance Company of North
America, G.R. No. 147839,June 8,2006).

2.

In life, accident, and health insurance (IC, Sec 20).

3. A change of interest in a thing insured, after the

occurrence of an injury which results in a loss does NOT
affect the right of the insured to indemnity for loss (IC, Sec
21).
4. A change of interest in one or more distinct things,
separately insured by one policy does NOT avoid the
insurance as to the others (IC, Sec 22).

Extent of Insurable Interest of a common carrier or

depository in a thing held by him

5. A change of interest by will or succession, on the

death of the insured, does NOT avoid an insurance; and
his interest in the insurance passes to the person taking
his interest in the thing insured (IC, Sec 23).

To the extent of his liability but not to exceed the value

thereof (IC, Sec IS) because the loss of the thing by the
carrier or depositoiy may cause liability against him to
the extent of its value.

6. A transfer of interest by one of several partners,

joint owners, or owners in common, who are jointly
insured, to the others does NOT avoid an insurance even
though it has been agreed that the insurance shall cease
upon an alienation of the thing insured (IC, Sec. 24).

NOTE: When the goods were damaged even before thejy

were turned over to the stevedore and such damage was
even compounded by the negligent acts of the common
carrier and stevedore when both mishandled the goods
during the discharging operation, the common carrier
cannot deny its liability. From the nature of their business
and for reasons of public policy, common carriers are
bound to observe extraordinary diligence in the vigilance
over the goods transported by them. The extraordinaty
responsibility of the common carrier lasts from the time
the goods are unconditionally placed in the possession of,

8. When the policy is so framed that it will inure to the

benefit of whomsoever, during the continuance of the
risk, may become the owner of the interest insured f/C,
Sec 57).

93

U n iv ersity of S a n to Tomas
,______ F aculty of Ci vi l Law

Mercantile L aw
D O U B L E I N S U R A N C E A N D OVER IN SURANCE.

_____________

beyond the value of his

insurable interest_______

;
Rules when die insured in a policy other than life is
over Insured by double insurance

Double insurance (1999,2005 Bar)

Double Insurance exists where the same person is insured
by several insurers separately, in respect to the same
subject and interest (Sec 9S, ibid).

1. Subject matter is the same

2. Iw o or more insurers insuring separately
3. Risk or peril insured against is the same
4. Interest insured is the same
5. Eerson insured is the same

2. Where the policy under which the insured claims is a 4

valued policy, any sum received by him under any
other policy shall be deducted from die value of the
policy without regard to die actual value of the subject
matter insured;

There is no double insurance even though two policies

were both issued over the same subject matter and both
covered die same peril insured against if the two policies
were issured to two different enddtes (Malayan Insurance

3. Where the p olicy under which the insured claims is an

unvalued policy, any sum received by him under any
policy shall be deducted against die futf insurable
value, for any sum received by him under any policy;

Co. vs. Philippine First Insurance Co., G.R. No. 184300, July
11, 2012.)
.Double insurance is not prohibited by law
It is not contrary to law and hence, in case of double
insurance, the insurers,may still be made liable up to the
extent of the value of the thing insured but not to exceed
the amount of the policies issued (Perez, 2006).
NOTE: A provision in the policy that prohibits double
insurance is valid. However, in the absence of such
prohibition, double insurance is allowed (ibid).

V '

the Insu j
dec
shafi
pro*

. There is overinsurance whenever the insured obtains a

^policy in an amount exceeding the value of his insurable
/ interest (Perez, 2006).

'

'

l i ^ A p b u b l o Insurance v. Over Insurance

i i i s ^ D O UB L E I N S U R A N C E ' :
-$|tere maybe no over
ce as when the
tftotal of the amounts
ie-ptilicles issued.
Jes not exceed die
i^leinterest of the
insurers.

"

OVER INSU R A N C E :';

When the amount of die

insurance is beyond the
value of the insured's
insurable interest

There maybe only one

insurer, with whom the
insured takes insurance

wiVERsiTV o f S a n to T o ma s
^ olobn N otes

94

An iiisti
pro' lire

5. Each insurer and the other insurers, to' contribute

ratably to the loss in proportion to the amount for
which he is liable under his contract [Sec. 96, ibid).

Q: Wyeth Philippines, Inc (Wyeth) procured amarine

policy from ! Philippines First Insurance Co* In c
(Philippines First) to secure its interest over its own'
products while die same were being transported or
shipped in the Philippines. Thereafter, Wyeth
executed its. annual contract of carriage with'
Reputable Forwarder Services, In c (Reputable).
Under the contract. Reputable undertook to answer
for all r&ks with respect to the goods and shall be
liable to Wyeth, for the loss, destruction, o r damage of
die goods/products due to any and all causes
whatsoever,! including theft, robbeiy, flood, storm,
earthquakes, lightning, and other force majeure
while the goods/products are in transit and until
actual delivery to the customers, salesmen, and
dealers. The contract also required Reputable to
secure an insurance policy on Wyeths goods.Tlius,
Reputable signed a Special Risk Insurance Policy (SR
Policy) with Malayan Insurance Co., Inc, (Malayan)
.for the amount of P1,000,000.00. Is there is double
insurance (as prohibited in Section 5 of the SR policy
between Malayan and Reputable) so as to preclude
Philippine .First from claiming indemnity from
Malayan?

jOverinsurance

[Malaya
Co/ -ic
184 r ?

i
:
TheSjj i
wiUprol j
theflwu
and H

A clause in the policy that provides that the policy shall be

void if the insured procuresadditional Insurance without
the consent of the insurer (Pioneer Insurance and Surety
Carp vs. Yap, G.R. No. 1-36232, December19,1974).

In double insurance, the insurers are considered as co

insurers. Each one is bound to contribute ratably to the
loss in proportion to the amount for'which he is liable
under his contract Hits is known as the "principle of
contribution" or "contribution clause* (IC, Sec 96 (ej).

insure
cover'd:
sin(* Vthi
hay p
instity 1

4. Where the insured receives any sum in excess of the

valuation in the case of valued policies, or of die
. insurable value in the case of unvalued policies, he
niusthold such sum in trustforthe insurers,according
to their right of contribution among themselves.

Additional o r other insurance clause (2008 Bar)

Nature of the liability o f the several insurers in double

insurance (2005 Bar)

disi f p
Philip] I
equitaoi

1.. The insured unless the policy otherwise provides,

may claim payment from die insurers in such order as
he may select up to die amount which the insurers are
severally, liable under their respective contracts;

Requisites .of double insurance (STRIP)

maflr

(ibiajj

Afar ]tc<
con
When"
noti '*si
otiu P
abseij ;
to give'i
sanf
dec!
know )
the sain
desf red
Can H?
insfo i
S ec' 4 c

disc Pr
totaii *
insured,
pro iec
oco Pc
Q: The
insi e l
sun p
with] 1
months
insf Thi
sub p i
issiii^ c

INSURANCE Law
A: No.The interest of Wyeth over the property subject
matter of both insurance contracts is different and
'distinct from that of Reputables. The policy issued by
Philippines First was in consideration of the legal and/or
equitable interest of Wyeth over its own goods. On the
other hand, what was issued by Malayan to Reputable was
over the latter's insurable interest over the safety of the
goods, which may become the basis of the latters liability
in case of lossor damage to the property and falls within
the contemplation of Section 15 of the Insurance
Code.Therefore, even though the two concerned
insurance policies were issued over the same goods and
-cover the same risk, there arises no double insurance
since they were issued to two different persons/entities
^having distinct insurable interests. Necessarily, over
insurance by double insurance cannot likewise exist
(Malayan Insurance Co., Inc, v. Philippine First Insurance
Co, Inc and Reputable Forwarder Services, Inc, G.R No.

Francis filed with the insurance company a claim for

its value. However, the company denied his claim on
the ground th at-h e failed to pay die premium
resulting in the cancellation of the polity. Can Francis
recover from die Peninsula Insurance Company?
(2006 Bar)
A: Yes. As a general rule, no policy is binding unless the
premiums thereof have been paid. However, one of the
exceptions is when there is an agreement allowing the
insured to pay the premium in installments and partial
payment has been made at the time of lois. In the case at
hand Flrands already paid two installments at the time of
the loss and as such may recover on the polity (Makati
TuscanyCondominium Corp. v. CA G.R No. 9SS46, Nov. 6,
1992). Furthermore, die contention of the insurertiiat the
failure to pay premium resulted in the cancellation of the
policy since no polity of insurance shall be cancelled
except upon notice thereof to the insured (IQ Sec 64).

184300, July 11,2012).

LAn in su rer may provide that the insured may not
^procure additional insurance

Waiver of violation

When die insurer, with the knowledge of the existence of

other insurances, which the insurer deemed a violation of
the contract; preferred to continue the polity, its action
amounted to a waiver of annulment of the contract(Perez,
2006 citing Gonzales Lao v. Yek Tong Lin Fire &Marine Ins.

7The insurer may insert an *other Insurance clause" which

will prohibitdouble insurance. The rationale is to prevent
vtJie danger that the insured will over insure his property
and thus avert the possibility of perpetration of fraud
(ibid). It is lawful and specifically allowed under Sec. 75 of
the Insurance Code which provides that "a policy may.
declare that a violation or a specified provision thereof
shall avoid it, otherwise thebreach of an immaterial
provision does not avoid it"

Co., G.R No. L-33131, December13,1930).

M u l t ip l e

o r se v e r a im n t e r e st s on sa m e

PROPERTY

Instances where more than one insurable interest

may exist in die same property

'Absence of notice of existence of other insurance

fcbnstitutes fraud

1. In trust, both trustor and trustee have insurable interest

over the property in trust
2. In a corporation, both the corporation and its
stockholders have insurable interest over the assets.
3. In partnership both the firm and partners have insurable
interest over its assets.
4: In assignment both the assignor and assignee have
insurable interest over the property assigned.
5. In lease, the lessor, lessee and sublessees have insurable
interest over the property in lease.
6. In mortgage, both the mortgagor and mortgagee have
insurable interestover the property mortgaged.

'When the insurance policy specifically requires that

notice should be given by the insured of the existence of
.other insurance policies upon the same property, the total
>absence of such notice nullifies the policy. Such failure .
ip give notice of the existence of other insurance on the
.same properly when required to do so constitutes
'deception and it could be inferred that had the insurer '
known that there were many other insurance policies on
the same property, it could have hesitated or plainly
desisted from entering into such contract (Perez, 2006).
Cancellation of polity of insurance by reason of over .
'Insurance

Insurable interest of mortgagor and mortgagee in

case of a mortgaged property are NOT the sam e
(1999,2010 Bar)

Sec. 64 of the Insurance Code of 2013 provides that upon

'discovery of other insurance coverage that makes tire
total insurance in excess of the value of the property
insured, the insurer may cancel such policy of insurance;
provided there is prior notice and such circumstance
occurred after the effective date of the policy.

Each has an insurable interest in the property mortgaged

and this interest is separate and distinct from the other.
Therefore, insurance taken by one in his name only and in
his favor alone does not inure to the benefit of the other.
The same is not open to objection that there is double
insurance (RCBCvs. CA 289 G.R Nos. 128833-34,128866,

Q: The Peninsula Insurance Company offered to

insure Francis' brand new car against all risks in the
sum of P I Million for 1 year. The policy was issued
'With the. premium fixed a t P60,000.00 payable in 6
months. Francis only paid die first two months
Installments. Despite demands, he failed to pay the
subsequent installments. Five months after the
issuance of the policy, the vehicle was carnapped..

April20,1998;IC, Sec 8).

95

U n i v e r s i t y o f S a n t o Tomas
Faculty of Civil Law

If

Mercantile L aw
Extent of insurable interest of mortgagor and
mortgagee (1999 Bar)

does not constitute payment until the proceeds are

realized or collected {Perez, 2006).

1. Mortgagor - The mortgagor of property, as owner, has

an insurable interest to the extent of its yalue even
though the mortgage debt equals such value.
2. Mortgagee -The mortgagee as such has an insurable
Interestin the mortgaged property to the extent of the
debt secured; such interest continues until the
mortgage debt Is extinguished (Sundiang Sr. &Aquino,

Effects of "mortgage redemption insurance procured

by tiie mortgagor

AM
mocrtgage redemption insurance" is simply a kind of life
Insurance procured by the mortgagor with the mortgagee
as benefidaryj up to the extent of the mortgage
indebtedness. Its rationale Is to give protection to both the
mortgagee and the mortgagor. In case the mortgagor'
insured dies, toe proceeds of such insurance will be
applied to the payment of the mortgage debt to the
; mortgagee, thereby relieving the heirs of the mortgagor of
the burden of baying the debt (Perez,-2006 citing Great
Pacific Assur. Carp. v. Court of Appeals, et al, G.R No.

2014).
NOTE: In case of an insurance taken by the mortgagee
alone and for his benefit; the mortgagee, after recovery
from the insurer, is not allowed to retain his claim against
tiie mortgagor but it passes by subrogation to the insurer
to the extent ofthe insurance money paid (De Leon, 2010).

113899, October13,1999).
i

The mortgagee a s a beneficial payee

Standard or union mortgage danse

The mortgagee may be made a beneficial payee through

any of the following:
1. He may become the assignee of the policy with the
consent of the insurer
2. He may be the mere pledgee without such consent
3. A rider malting the policy payable to the mortgagee "as
his interest may appear" may be attached
4. A "standard mortgage clause" containing a collateral
independent contract between,the mortgagee and the
insurer may be attached
5. The policyj tiiough, by its terms payable absolutely to
the mortgagor; may have been procured by a
mortgagor under a contract duty to insure for the
mortgagee's benefit in which the mortgagee acquired
an equitable Hen upon the proceeds (ibid.).

Itisad au se that states that the acts of tlie'ihortgagor do

not affect the mortgagee. The purpose of the clause is to
make a separate and distinct contract.of insurance on the
interest of the mortgagee (De Leon, 2010).
Open or loss|payab1e mortgage clause
It is a dause which provides for the payment of loss, if any,
to the mortgagee as his interestmay appear and under it,
the acts of the mortgagor affect the mortgagee (ibid).
In a policy obtained by the mortgagor with loss payable
dause in fabor of the mortgagee as his interest may
appear, file mortgagee is only a beneficiary under the
contract and recognized as such by the Insurer but not
made a party to the contract itself. This kind of policy
covers only such interest as the mortgagee has at the
issuance of] the polity (,Sundiang Sr. & Aquino,' 2014,
Geagonia v. CA supra).

Insurance procured by mortgagor for benefit of

mortgagee, o r policy assigned to mortgagee
1.

The contract is deemed to be upon the interest of the

mortgagor; hence he does not cease to be party to the
contract;
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of the
mortgagee;
3. Any act which under the contract of insurance is to
be performed by the mortgagor may be performed by
the mortgagee with the same effect
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time of loss
and
5. Upon recovery by the mortgagee to the extent of his
credit, the debt is extinguished (ibid., citing JC, Sec 8).

TERFF-CTtONlOF THE INSURANCE CONTRACT

Policy of insurance
It Is the written instrument in which the contract of
. insurance jis set forth (IC, Sec 49.). It is.the written
document embodying the terms and stipulations of the
contract of Insurance between the insured and Insurer.
NOTE: The policy isnot necessary for the perfection of the
contract (Sundiang Sr. &Aquino, 2014).
Form of an insurance contract
1. The | policy shall be in printed form which may
contain blank spaces to be filled in;
2. Any rider, clause, warranty or endorsement
purporting to be part of the contract of insurance and
which is pasted or attached to said polity is not binding
on the insured, unless the descriptive title or name of the
rider, clause, warranty or endorsement is also mentioned'
and written on the blank spaces provided in the policy.

NOTE: The rule on subrogation by the insurer to the right

of the mortgagee does not apply in this case.
Assignment of policy to mortgagee Is not a payment
-The assignment is merely to afford the mortgagee a
greater security for the settlement of the mortgagors
obligati on and should not be construed as payment in just
the same way that delivery of negotiable instruments

Un i v e r s i t y

of

S anto T omas

201S G olden Notes

96

Insurance Law
3. Unless applied for by the insured or owner, any
rider, clause, .warranty or endorsement issued after the
original policy shall be countersigned by the insured or
owner.

1. The cover note shall be issued or renewed only upon

prior approval of the Insurance Commission;
2. The cover note shall be vaiid'and binding for not more
than sixty (60) days from the date of Its issuance;

NOTE: Notwithstanding the foregoing, the policy may be

in electronic form subject to the pertinent provisions of
Republic Act No. 8792, otherwise known as the
'Electronic Commerce Act* and to such rules and
regulations as may be prescribed by the Commissioner
(IC, Sec 50).

3. No separate premium (separate from the policy or

main contract) is required for die cover note;.
4. The cover note may be canceled by either party upon
prior notice to the other of at least seven (7) days;
5. The policy should be issued within sixty (60) days
after the issuance of the cover note;

Types of policy of insurance

1. Open - one in which the value of the thing insured is
not agreed upon, and the amount of die insurance merely
represents the insurer's maximum liability. The value of
such thing insured shall be ascertained at the time of the
loss (IC, Sec. 60).'
2. 'Valued - is one which expresses on its face an
agreement that the thing insured shall be valued at a
specific sum QC, Sec 61).
3. Running ~ one which contemplates, successive
insurances, and which provides that the object of the
policy may be from time to time defined, especially as to
the subjects of insurance, by additional statements or
indorsements (IC, Sec 62).

6. The' sixty (60)-day period may be extended upon

written approval of the Insurance Commission; and
7. The written approval of the Insurance Commission is
dispensed with upon the certification of the president,
vice-president or general manager of the insurer that th e'
risk involved, the values of such risks and.premium
therefor, have not as yet been determined or established
and the extension or renewal is not contrary to or is not
for the purpose ofviolating the Insurance Code or any rule
(Sundtang Sr. &Aquino, 2014).
OFFEH AND ACCEPTANCE/CO N.SENSU/U.

Basic contents of a policy

Perfection of an insurance contract

1. Parties;
2. Amount of insurance, except in open or running
policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the property if he is not the
absolute.owner;
6. Risk insured against; and
7. th e period during which the insurance is to continue
(IC,SecSl).

The contract of insurance is .perfected when the assent or

consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to
constitute the contract Mere offer or .proposal is n o t,
contemplated (De him v. Sun Life Assurance Co., C.R. No. L15774, Novebmer29,1920).
NOTE: Mere submission of the application without the
corresponding approval of the policy does not result in
the perfection of the contract of insurance.

Rider

Insurance contracts through correspondence follow the

"cognition theory" wherein an acceptance made by letter
shall notbind the person making the offer except from the
time it came to his knowledge (Enriquez v* Sun Life
Assurance Co. ofCanada, CR No. L-15774, Nov. 29,1920).

An attachment to an insurance policy that modifies the

conditions of the polity by expanding or restricting its
benefits or excluding certain conditions from the
coverage (Black's Law Dictionary).

Q: On June 1, 2011, X mailed to Y Insurance Co. his

application for life insurance. On July 21, 2011, the
insurance company accepted tire application and
mailed, on the same day, its acceptance plus the cover
note. It reached X's residence on August 11. On August
4,2011, X figured in a car accident. He died a day later.
May X's heirs recover on the insurance policy? (2011
Bar)

Riders are not binding on the insured unless the

descriptive title or name thereof is mentioned and written
oh the blank spaces provided in die policy. It should be
countersigned by the insured or owner unless he was the
one who applied Tor the same (IC, Sec 50).
Cover notes
Persons who wish to be insured may get protection before
the perfection of the insurance contract by securing a
cover note. The cover note issued by the insurer shall be
deemed an insurance contract as contemplated under
Section 1(1} of the Insurance Code subject to the
following rules:

A: No, since X had no knowledge of the insurers

acceptance of his application before he died. What is being
followed in insurance contracts is what is known as the
"cognition theoiy".
NOTE: Where the applicant died before he received notice
of the acceptance of his application for the insurance, .

97

U niversity of S anto T omas

Faculty of Civil Law

$*'*'*>
" - - r f f

M e r c a n tile La w
b. By agent -If delivered to the agent of the insurer,
whose duty is ministerial, or delivered to the agent of
toe insured, toe policy is considered constructively
delivered (DeLeon, 2010).

there is no perfected contract (Perez v. Court o f Appeals,

G.R. No. 112329, January28,2000).

Offer in p ro p e rty a n d liability Insurance
It is the insured who m akes an offer to the Insurer, who
accepts the offer, rejects it, or makes a counter-offer. The
offer is usually accepted tty an insurance agent on behalf
of the Insurer (De Leon, 2010).

Im portance of delivery
1. It becomes the evidence of the making of a contract
and of its terms;

Offer in life a n d h e a lth insurance

2. It Is considered as communication of (he insurers

acceptance of the Insured's offer;

It depends upon w hether the insured pays die premium

a t the time he applies for insurance.
1. If he does not pay the premium, his application is
considered an Invitation to (he insurer to make an offer,
which he m ust then accept before the contract goes into
effect
2. If he pays -the premium with his application, his
application will be considered an offer (De Leon, 2010).

3. It becomes toe determination of policy period;

4. It marks the end of insurer's opportunity to decline
coverage (De Leon, 2010).
PREMIUM.PAYMENT-

D L L A V 'IN A C C EPT A N C E

Premium!
Kind o f acceptance t h a t m u st b e given
jre< price for assuming and canying the risk , It isan agreed
that is, the consideration paid an insurer for undertaking
to indemnify toe insured against a specified peril (De
Leon, 2010). o

The acceptance of an insurance polity m ust be

unconditional, but it need not be by a.formal act (De Leon,

2010i
Effect o f d elay

Prem ium v. Assessment

Unreasonable delay in returning the premium raises die

presumption of acceptance of the insurance application

PREMIUM

(Gloria v. Philippine American Life Ins. Co., CA 73 O.G.

(No.37) 8660).

Premium is not a debt

Assessment
when
properly levied, unless
otherwise
expressly
agreed, is a debt

i:\(

Instances when paym ent of premium becomes a debt

o r obligation

D E L I V E R Y 0 1' P O L IC Y

ho

1. In fire, casualty and marine insurance, toe premium

payable becomes a debt as soon as the risk attaches.
2. In lift insurance, toe premium becomes a debt only
when, id the case of toe first premium,toe contract has
become1 binding, and in the case of subsequent
premiums,when toe insurer has continued the insurance
after maturity of the premium, in consideration of the
insureds express or implied promise to pay (De Leon,
2010).

D elivery is n o t n e c e ssa ry in th e form ation o f th e

.c o n tr a c t o f in su ra n c e
v Since the contract of insurance is consensual, deliveiy of
the polity is not necessary for its perfection (Sundiang Sr.

&Aquino, 2014).
The m ere delivery o f an insurance polity to someone does
not give rise to the formation of a contract in the absence
",' of proof to at he had agreed to be insured.

Paym ents in addition to regular premium

I
An insurer may contract and accept payments, in addition
to regular premium, for the purpose of paying future
premiums on the policy or to increase the benefits thereof

jfTwo ty p es o f delivery
g|j_Actual - delivery to toe person of toe insured.

Constructive
. 'By mail -If policy was mailed already and premium

(1C, Sec. 84).

'Was paid and nothingis left to be done by the Insured,

the policy is considered constructively delivered if
in su red died before receiving the policy.

p U
1 n iv er sity
. I- f.2 . 0 . 1 5 G o l d e n

of

Santo T omas

N otes

ASSESSMENT

Collected' to meet actual

losses

Mere delay inacceptance of the insurance application will

notresulf in a binding contract Court cannotimpose upon
the parties a contract if they did not consent However, in
proper cases, toe insurer may be liable for to rt (Sundiang

Sr. &Aquino, 2014).

Levied and paid to meet

anticipated losses

NOTE: This is a new provision under the insurance Code

of2013.

98

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Insurance Law
Non-payment of balance of premiums does not cancel
the policy

1. The insurer has become insolvent and has suspended

business, or has refused without justification a valid
tender of premiums (Gonzales v. Asia Life ins. Co., G.R
No. L-S188 Oct 29,1952).

A contrary rule would place exclusively in the hands of the

Insured the right to decide whether the contract should
stand or not (Philippine Phoenix Surety & Insurance, Co.,
Inc., v. Woodworks, Inc, G.R. No. L-22684, August31,1967).

2. Failure to pay was due to the wrongful conduct of the

insurer.
3. The insurer has waived his right to demand payment
(De Leon, 2010).

Effects of non-payment of premiums

NOTE: But the insurer will not be deemed to have waived

his privilege of forfeiture by mere inaction or silence if the
ground be default in the payment of premiums, going as it
does to the whole consideration inducing the insurer to
enter into the contract (De Leon, 2010).

Non-payment of the first premium unless waived,

prevents the contract from becoming binding
notwithstanding the acceptance of the application or the
issuance of the policy. But nonpayment of the balance of
the premium due does not produce the cancellation of die
contract
Non-payment of the subsequent premiums does not affect
the validity of the contracts unless, by express stipulation,
it is provided that the policy, shall in that event be
suspended or shall lapse (De Leon, 2010).

While the insured has the privilege of continuing the

policy in force by making premium payments, the insurer
cannot ordinarily force the insured to make these
payments (De Leon, 2010).
Effect of acceptance of premium

NOTE: In case of individual life or endowment insurance

and group life insurance, the policyholder is entitled to a
grace period of either 30 days or 1 month within which
the payment of any premium after the first may be made
(1C, Secs. 233[a], 234[a]).

Acceptance of premium within the stipulated period for

payment thereof, including, the agreed grace period, o
merely assures continued effectivity of the insurance
policy in accordance with its terms (Stoke v. Malayan
Insurance Co., Inc, G.R No. L-34768, February28,1984).

In case of industrial life insurance, the grace period Is 4

weeks, where premiums are payable monthly, either 30
days or 1 month (1C, Sec 236 [a]).

Payment of the premium to agent of the insurance

company is binding on it (Malayan.Insurance v. Amaldo
G.R No.L-67835,.Octoberl2,1987and Areola v. CA G.R No.
95641, September 22, 1994). If an insurance company
delivers a policy to an insurance broker, it is deemejl to
have authorized him to receive the payment of the
premium (Sec. 306, South Sea v. CA G.R. No. 102253, June 2,
1995; American Home Assurance v. Chua, G.R No. 130421,
June28,1999).

Q: If the applicant faffed to pay premium and instead

executed a promissory note in favor of the insurer
payable within 30 days which was accepted by the
latter, is die insurer liable in case of loss?
A: Yes, tile insurer is liable because there has been a
perfected insurance contract The insurer accepted the
promise of the applicant to pay the insurance premium
within thirty 30 days from the effective date of policy. By
so doing, it has implicitly agreed to modify the tenor of the
insurance policy and in effect, waived any provision
therein that it would only pay for the loss or damage in
case the same occurs after the payment of the premium.

An acknowledgment in a policy of the receipt of the

premium is conclusive evidence of its payment for the
purpose of making the policy binding despite a stipulation
that it will not be binding until the premium is actually
paid (\C,Sec. 78;American Home v. Chua, supra).
Effect of payment of premium by post-dated check

Considering that the insurance polity is silent as to the

mode of payment, insurer is deemed to have accepted the
promissory note in payment of the premium. This
rendered the policy immediately operative on the date it
was delivered (Capital Insurance &Surety Co. Inc v. Plastic
Era Co., Inc G.R. No. L-2237S, July 18,1975).

Deliveiy of a promissory note or a check will not be

sufficient to make the policy binding until the said note or
check has been converted into cash. This is consistent
with Article 1249 of the New Civil Code.
NOTE: Payment by means of a check or note, accepted by
the insurer, bearing a date prior to the loss, assuming
availability of the funds thereof, would be sufficient even
if it remains imencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor
(2007 Bar).

Rule on non-payment of premiums by reason of

fortuitous event
GR: Non-payment of premiums does not merely suspend
but put an end to an insurance contract since the time of
the payment is peculiarly of the essence of the contract
(De Leon, 2010).

Non-payment of the premium will not entitle the

Insurer to recover the premium from the insured

XPN:

99

Un i v e r s i t y of S anto T o ma s
F aculty of C ivil Law

<1

i
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Mercantile Law
The continuance of the insurer's obligation is conditioned
upon the payment ofthe premium, so that no recovery can
be had upon a lapsed policy, the contractual relation
between the parties having ceased. If the peril insured
against had occurred, die insurer would have had a valid
defense against recovery undo* the policy.
Q: Is the insurance company liable when a car, bought
on installm ent basis, m et an accident but the car is not
y et fully paid? (2006 Bar)
A: Yes, when insured and insurer have agreed to the
payment of premium by installments and pardal payment
has been made* at the time of loss, then the insurer
becomes liable. When the car loss happened on the 5th
. month, the six months agreed period of payment had not
yet elapsed. Hie owner may recover from Peninsula
Insurance Company, but the latter has the light to deduct
the amount of unpaid premium from the insurance
proceeds.
"Cash and c a n y rule (2003 Bar)
GRt No policy or contract of Insurance issued by an
insurance company is valid and binding unless and until
the premium thereof has been paid. Any agreement to the
Contraiy is void.
XPN: Apolicy is valid and binding even when there is non
payment of premium:
1. In case of life or industrial life policy whenever die
grace period provision applies, or whenever under die
broker and agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extendon is
given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from date
of issuance of the policy (IC, Sec 77).
2. When there is acknowledgment in a policy of a receipt
of premium, which the law declares to be conclusive
evidence of payment, even if there is stipulation therein
thatit shall not be binding until the premium is actually
paid. This is witiiout prejudice however to right of
insurer to collect corresponding premium (Sec 77,

ibid).
3. When there is an agreementallowingthe insured to pay
die premium in installments and partial payment has
beeii made at die time of loss (Makati Tuscany

Condominium Corp. v. CA, G.R No. 9S546, Nov. 6,1992,

2006,2007Bar).
4. When there is an agreement to grant the insured credit
extension for the payment of the premium. (Art 1306,
NCC), and loss occurs before die expiration of the credit
term (UCPB General insurance v. Masagana Teiemart,

G.R. No. 137172, Apr. 4,20012006,2007Bar).

5. When estoppel bars the insurer to invoke non-recovery
on the policy.
6. When the public interest so requires; as determined by
the Insurance Commissioner

: rf"*
Ini i

E.g. In compulsory motor vehicle insurance, if die policy

was. issued without payment of premium by the vehicle
owner, the insurer will still be held liable. To rule
otherwise woujtd prejudice the 3rdparty victim.

io.
'p<y

NOTE: Under Section 77 as amended by RA 10607, a

ninety (90)-day credit extension may be given whenever
credit extension is given under the broker and agency
agreements With' duly licensed intermediaries. The
requisites are as follows:

Hon

1. The credit extension must be provided for under the

broker and agency agreements;
2. The credit extension to a duly licensed intermedlaiy
should not exceed ninety (90) days from date of
issuance jofthe policy (Sundiang Sr. &Aquino, 2014).

Oh
off I

Jr

Employees ofthe Republic of the Philippines, including its

political subdivisions and instrumentalities, and
government-owned or-controlled corporations, may pay
their insurance premiums and loan obligations through
salary deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
government employee is authorized, notwithstanding the
provisions ofany existing law, rules and regulations to the
contraiy, to inake deductions from the salaiy, wage or
income of the latter pursuant to the agreement between
the insurer and the government employee and to remit
such deductions to the Insurer concerned, and collect
such reasonable fee for its services. (1C, Sec 78,). This is a
new provision.

A: S t Peter Manufacturing Company is entitled to recover

for the loss from Stable Insurance Company. Stable
Insurance Company granted a credit term to pay the
premiums. This is not against the law, because the
standing j business practice of allowing St Peter
Manufacturing Company to pay the premiums after 60 or
90 days, was relied upon in good faith by SPMC. Stable
Insurance Company is in estoppels (UCPB General

Asl
ie;
S if!

a:

?^|de

R ev j
\ p*i

tV
1th

Q: Stable Insurance Co. (SIC) and S t Peter Manufacturing Co. (SPMC) have had a long-standing
insurance relationship with each other; SPMC secures
the comprehensive fire insurance on Its plant and '
facilities from SIC The standing business practice
between them has been to allow SPMC a credit period
of 90 days from the renewal ofthe policy within Which
to pay the premium.
Soon after the new policy was issued and before
premium payments could be made, a fire gutted the
covered plant and facilities to the ground. The day
after the fire, SPMC issued a manager's check to SIC
for the fire Insurance premium, for which It was
issued a receipt; a week later SPMC issued Its notice
of loss. SIC responded by issuing its own manager's
check for die amount of the premiums SPMChad paid,
and denied SPMC's daim on the ground that under the
"cash and cany principle governing fire insurance,
no coverage existed a t the time die fire occurred
because the insurance premium had not been paid.Is
'SPMC endded to recover for die loss from SIC? (2003,
2013 Bar)

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Insurance Law
Insurance Company, Inc v. Masagano Telemart, Inc, G.R.
No. 137172, April4,20011
. Effect of acknowledgment of receipt of premium In
polity .

payment of premium, unless the cash surrender value

has been paid, or the extension period expired, upon
production of evidence of insurability satisfactory to
the company and the payment of all overdue premiums
and any indebtedness to the company upon said policy
(IC, Sec 233 ))]).

Conclusive evidence of its payment, in so far as to make

the polity binding, notwithstanding any stipulation
therein that it shall not be binding until the premium is
. actually paid (1C, Sec 79).

R E IN S T A T E M E N T OK A. LAPS ED POLK'.V OF LIFE

INSURANCE

When the policy contains such written acknowledgment,

it is presumed that.the insurer has waived the condition
of prepayment It hereby creates a legal fiction of
payment The presumption is however, extended only to
the question of the binding effect of the policy.

Purpose of the reinstatement provision

The purpose of the provision is to ( clarify the
requirements for restoring a policy to premium-paying
status after it has been permitted to lapse.
Period within which the holder of the policy is
entitled to reinstatement of the contract

As far as the payment of the premium itself is concerned,

the acknowledgment is only a primafacie evidence of the
fact of such payment The insurer may still dispute its
' acknowledgment but only for the purpose of recovering
the premium due and unpaid. Whether payment was
indeed made is a question of feet

The law requires that the policy owner be permitted to

reinstate die policy, subject to the violations specified,
any time within three (3) years from the date of default
of premium payment A longer period, being more
favorable to the insured, may be used.

N O N -D E F A U L T O P T IO N S IN LIFE IN SU R A N C E /

. Devices used to prevent the forfeiture of a life

insurance after the payment of the first premium

Reinstatement of a lapsed policy Is not an absolute

right of the insured

1. Grace period - After the payment of the first premium,

the insured is entitled to a grace period of 30 days
within which to pay die succeeding premiums (Sec. 233
[a], ibid).

Reinstatement is not an absolute right of the Insured, but

discretionary on die part of the insurer, which has the
right to deny reinstatement if it were not satisfied as to
the insurability of the insured, and if the latter did not
pay all overdue premiums and other indebtedness to the
insurer (McGuire vs. Manufacturer's Life Iris. Co., G.R. No.
L-3581, September21,1950).

2. Cash surrender value - The amount the insurer agrees

to pay to the holder of the policy if he surrenders it and
releases his claim upon it (Cydopedia Law Dictionary,
3rded.).

Evidence of insurability

3. Extended insurance - It is where the insured is given a

right, upon default, after payment of at least three full
annual premiums (1C, Sec 233 [f]) to have the policy
. continued in force from die date of default for a time
either stated or equal to the amount as the net value of
the policy taken as a single premium, will purchase [De
Leon, 2010).

Evidence of Insurability is broader phrase than

Evidence of Good Health" and includes such other
factors as the Insured's occupation, habits, financial
condition, and other risk selection factors.
Q: A life insurance policy lapsed. The Insured applied
for reinstatement of the policy and paid only a p art
of the overdue premiums. Subsequently, die Insured
died. Was the insurer liable?

4. Paid up Insurance - The insured is given a right, upon

default, after die payment of at least three annual
premiums to have the polity continued in force from
the date of default for the whole period of the insurance
without further payment of premiums [ibid). It results
to a reduction of die original amount of insurance, but
for the same period originally stipulated (6 Couch 2d.,
35S; 37 C.J.S 364).

A. The insurer is not liable as the policy was, not

reinstated. The failure to pay the balance of the overdue
premiums prevented reinstatement and recovery of the
face value of the policy (Andres vs. Crown Life Ins. Co., 55
O.GL3483).

5. Automatic Loan Clause - A stipulation in the policy

providing that upon default in payment of premium, the
same shall be paid from the loan value of the policy until
. that value is consumed. In such a case, the policy is
continued in force as fully and effectively as though the
premiums had been paid by the insured from funds
derived from other sources (6 Couch 2d, 383).

Q: Eulogio took out a life insurance policy which

contained a provision which allows for
reinstatement any time within tiiree years after it
lapsed. Eulogio paid the premiums due on the first
two months. However, he failed to pay subsequent
premiums. One month after the policy lapsed, he
filed an application for the reinstatement of his
policy. He deposited the overdue premiums and
signed a reinstatement policy stating that the

6. Reinstatement - Provision that the holder of the policy

shall be entitled to reinstatement of the contract at
anytime within 3 years from the date of default in the

101

U n i v e r s i t y of S an t o T omas
F aculty of Civi l Law

C*"**
*

<

Mercantile La w
2. Pro rata:
|
a. When the insurance is for a definite period and the
insured surrenders his policy before die termination
thereof, (IC, Sec. 80 [b]); except:
i. Policy not made for a definite period of time;
ii. Short periodrate is agreed upon;
iii. Life insurance policy.
b. When there is over-insurance. The premiums to be
returned shall be proportioned to the amount by which
the aggregate sum insured in all the policies exceeds the
insurable value of the filing at risk (IC, Sec 83).
i. In case of over-insurance by double insurance, the
insurer is not liable for the total amount of the
insurance taken, his liability being limited to the
property insured. Hence, the insurer is not entitled
to thatportipri of the premium corresponding to the
excess of the insurance over the insurable interest
of the insured (1990 Bar).
ii. In case of over-insurance by several insurers, the
insured i s )entitled to a ratable retyrp of the
premium, proportioned to the amount by which the
aggregate slim insured in all the policies exceedsthe
insurable value of the thing insured (IC, Sec. 83).

payment deposit only and shall not bind the

Company until this application is finally approved.
Hours later* Eulogio died of electrocution. The
insurance company denied the claim of his
beneficiaries stating th a t the 'polity was never
approved. Is the contention o f the Insurance
company valid?
' A: Y ^ lh b '^ p u la tf on in a life insurance policy giving ,
the'insured file privilege to reinstate it upon written
application does not give the insured absolute right to
such reinstatement by the mere filing of an application.
The insurer has file right to deny the reinstatement if it
is not satisfied as to the insurability of die insured and if.
the latter does not pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured, the insurance Company cannot be compelled to
entertain an application for reinstatement of the policy
because the conditions precedent to reinstatement can
no longer be determined and satisfied.
Eulogio's death, just hours after filing'his Application for
Reinstatement and depositing his payment for overdue
premiums and interests does not constitute a special
circumstance that can persuade to consider file policy
reinstated. Said circumstance cannot override the clear
and express provisions of the Policy Contract and
Application, for Reinstatement; and operate to remove
the prerogative of Insular Life thereunder to approve or
disapprove the Application for Reinstatement (Violeta R
Lalican w. The Insular Life Assurance Company Limited,

illustration

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nr

2.Mtsi

3pre;

: '

Where there is a total over insurance of P500,000.00 in an

aggregate P2,000,000.00 policy (PI,500,000.00 is only
file insurable value), 25% (proportion of P500k to P2M)
of the premiums paid to the several insurers should be
returned.
!

supra).
Instances whenj the insured is not entttiedto return of
premiums paid I

. REFUND OF PREMIUMS

Instances when the insured entitled to recover

premiums already paid o r a portion thereof (2000
Bar)

1. If file peril insured against has existed, and the insurer

has been liable for any period, the peril being entire and
indivisible (IQ Sec 81);
2. In life insurance polities (IQ Sec 80(b));
3. If the policy is annulled, rescinded or if a claim is
denied by reajson of fraud (IC, Sec. 82);
4 . " If cpntract is illegal and the parties are in pari delicto.

1. Whole:.
a. When iio part of the thing Insured has been exposed to
any of the perils insured against (IC, Set 80).
b. When the contract is voidable because of the fraud or
misrepresentations of the insurer of his agent (IC, Sec

Q: Teodoro Cortez, appli.ed.for a 20-year endowment

policy fwith Great Pacific Insurance Corporation
(Great Pacific). His application, with the requisite
medical examination, was accepted and approved by
the Great Pacific and in due course, an endowment
policy was issued in bis name. Thereafter, Great
Pacific advised Cortez that the policy was not in force.
To make it enforceable and operative, Cortez was
asked to remit the balance to complete his initial
annual premium and to see Dr. Felipe V. Remolio for
another full medical examination at his own expense.
Because of th is, Cortez informed that it that he was
cancelling the policy and he demanded the return of
his premium plus damages. Great Pacific Ignored his
demand. Is ortez is entitled to a refund of his
premium?

82).
c. When the insurance is voidable because of the
existence of facts of which the insured was ignorant
without his fault (IC,Sec 82).
d. When the insurer never incurred any liability under
the policy because of file default offiieinsured other than
actual fraud (IC, Sec 82).
e. When rescission is granted due to insurer's breach of
contract (IC, Sec. 74).
NOTE: When the contract is voidable, a person insured is
entitled to a return of the premium when such contract is
subsequently annulled under the provisions of the New
Civil Code.
A person insured is not entitied to a return of premium if
the policy is annulled, rescinded or if a claim is denied by
reason of fraud (IC, Sec 82).

U n i v e r s i t y of S a n t o T o m a s
2 0 1 S G olden N otes

N? TE:
to*"
eflfecth
efl a h
al

ft

A: Yes. Great pacific should have informed Cortez of the

deadline for paying the first premium before or at least
upon deliveiy| of the policy to him, so he could have

102

insurance
complied with what was needful and would not have been
misled into believing that his life and his family were
protected by the polity, when actually they were not And,
if die premium paid by Cortez was unacceptable for being
late, it was die company's duty to return i t Since his policy
was in feet inoperative or ineffectual from the beginning,
the company was never at risk, hence, it is not entided to
keep the premium (Great Pacific Life Insurance
Corporation v. CA, etai, CR. No. L-S7308, April23,1990).

Law

Under Section 27 of the Insurance Code, "a concealment

entities the injured party to rescind a contract of
insurance." Moreover, under Section 168 of the Insurance
Code, the insurer is entitled to rescind the insurance
contract in case of an alteration in the use or condition of
the thing insured (Malayan Insurance Companyvs. PAPCo.

(Phil Brandi), G.R. No. 200784, August 7,2013, in Divina

2014).
Requisites

RESCISSION OF INSU R A N C E C O N TR A C TS

1.
A party knows a fact which he neglects to
communicate or disclose to the other party
.2. Such party concealing is duty bound to disclose such
feet to the other
3. Such party concealing makes no warranty as to the
feet concealed
4. The other party has no means of ascertaining the
fact concealed
5. The feet must be material

Instances wherein a contract o f insurance may be

rescinded (1991,1994,1996 -1998 Bar)
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
Instances wherein a contract of insurance may be
canceled by the insurer

Test of materiality (2000 Bar)

1. Nonpayment of premium;
2. Conviction of a crime arising out of acts increasing the
hazard insured against;
3. Discovery of fraud or material misrepresentation;
4. Discovery of willful or reckless acts or omissions
increasing the hazard insured against;
5. Physical changes in the property insured which result
in the property becoming uninsurable;
6. Discovery of other insurance coverage that makes the
total insurance in excess of the Value of the property
insured; or
7. A determination by the Commissioner that the
continuation of the policy would violate or would place
the insurer in violation of the Insurance Code (1C, Sea 64).

It is determined not by die event, but solely by the

probable and reasonable influence of tite facts upon the
party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract; or
in making his inquiries (1C, Sea 31)..
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entities the
injured party to rescind (7C, Sec27).
Concealment in marine insurance

NOTE: No policy of insurance other than life shall be

canceled by die insurer except upon prior notice thereof
to the insured, and no notice of cancellation shall be
effective unless It is based on the occurrence, after the
effective date of tite policy, of one or more of the
abovementioned instances (Sec 64, ibidy.
Notice of cancellation of the contract
All notices of cancellation shall be in writing, mailed or
delivered to die named insured'at the address shown in
the policy, or to his broker provided the broker i s .
authorized in writing by the policy, owner to receive die
notice of cancellation on his behalf, and shall state:
1. Which of the grounds set forth in Section 64 is relied
upon; and
2. That, upon written request of the named insured, the 4
insurer will furnish the facts on which the cancellation is
based (Sea 65, ibid).
-T' , F

T- C 0 NCE A LMEN T- :

Rules on concealment are stricter since the insurer would

have to depend almost entirely on the matters
communicated by the insured. Thus, in addition to
material facts, each party must disclose ail the
information he possesses whidi are material or the
Information of the belief or expectation of a third person,
in reference to a material feet But concealment in a
marine Insurance in any of the following matters
enumerated under Section 112 Insurance Code does not
vitiate tiie entire contract, but merely exonerates the
insurer from a loss resulting from the risk concealed.
Test in asceitafning the existence of concealment
If the applicant is aware of*the existence of some
circumstances which he knows would probably influence
the insurer in acting upon his application, good faith
requires him to disclose that circumstance, though
unasked.
Matters that need not be disclosed
GR: The parties are not bound to communicate
information of the following matters:
1. Those which the other knows
2. Those which, in the exercise of ordinary care, the other
ought to know and of which, the former has no reason to
suppose him ignorant

. Concealment
Concealment is a neglect to communicate that which a
party knows and ought to communicate (IC, Sec. 26).

103

U n i v e r s i t y of S anto T omas
Faculty of Civil Law

Mercantile Law
was a typical mongoloid child upon filling out the
application form. It is evident that he withheld a fact
material to the risk to be assumed by the insurance
company had the plan be approved.

3. Those of which the other waives communication

4. Those which prove or tend to prove die existence of a
risk excluded by a warranty, and which are not otherwise
material
5. Those which relate to a risk excepted from the policy
and which are not otherwise material;
6. The nature or amount of the interest of one insured
(except if he is not the owner of the property insured) (1C,
Sec 34).

The contract of insurance is one of perfect good faith,

uberrima fides, absolute and perfect candor; the absence
of any concealment or demotion. Concealment is a neglect
to communicate that which needs to.be communicated
whether intentional or unintentional. In case of
concealment; the insurer is entitied to rescind th'e
contract of insurance. In the case at bar, the respondent is
guilty of such concealment Ultimately, there was no
perfected contract of insurance since the conditions In the
binding receipt were not complied with by the applicant
(Great Pacific Life Assurance Company v. CA, G.R. No. L31845, April30,1975).

XPN: In answer to inquiries of the other (1C, Sec. 30).

NOTE; Neither party is bound to communicate, even upon
inquiry, information of his own judgment; because such
would add nothing to the appraisal of the application (1C,
Sec 35).
The parties are bound to know ail the general causes
which are open to his inquiry, equally with the other, and
all general usages of trade (1C, Sec 32).

Q: Benny applied for life insurance for Php 1.5 Million;

The insurance company approved his application and
issued an insurance polity effective Nov. 6, 2008.
Benny named his children as his beneficiaries. On
April 6, 2010, Benny died of hepatoma, a liver
ailm ent

Matters th at must be disclosed even in the absence of

inquiry
1. Those material to die contract '
2. Those which the other has no means of ascertaining
3.
Those as to which the party with the duty to
communicate makes no warranty

The insurance company denied the childrens claim

for the proceeds of die Insurance policy on the ground
that Benny M e d to disclose in his application two
previous consultations with his doctors for diabetes
and hypertension, and that he had been diagnosed to
be suffering from hepatoma. The Insurance company
also rescinded the policy and refunded the premiums
paid.

NOTE: Matters relating to the health of the insured are

material and relevant to the approval 'of the issuance of
the life insurance policy as these definitely affect the
insurer's action to die application. It is well-settied that
the insured need not die of the disease he had failed to
disclose to the insurer, as it is sufficient that his non
disclosure misled the insurer in forming his estimates of
the risks of the proposed insurance policy or in making
inquiries (Sunlife Assurance Company o f Canada v. CA, G.R
No. 105135, June 22,1995).

Was the insurance company correct? (2013 Bar)

A: The insurance company correctly rescinded the policy
because of concealment (Section 27 o f Insurance Code).
Benny did not disclose that he was suffering from
diabetes, hypertension, and hepatoma. The concealment
is materia), because these are serious ailments (Florendo
v. Philam Plans, Inc, G.R No. 186983, February22,2012).
Benny died less than two years from the date of the
issuance of (he polity (IQ Sec 48).

Information as to the nature of interest need not be

disclosed except in property insurance, if the insured is
not the owner. If somebody is insuring properties of
which he is not the owner, he mustdisdose why he has
insurable interest that would entide him to ensure it; and
the extent thereof (1C, Secs. 34 & 51 (ej).

Right to Information of material facts may be waived

Right to information of material facts may be waived:
1. By the (terms of the contract
2. By the failure to make an inquiry as to such facts,
where they are distinctly implied in other facts from
which information is communicated (IC, Sec 33).

Q: Ngo Hing filed an application with the Great Pacific

Life Assurance Company (Pacific Life) for a twentyyear endownmcnt policy on the life of his one-year
old daughter Helen Go. Ngo Hing supplied the
essential data and filed the application to Mondragon,
the branch manager.After sometime, Helen Go died of
influenza with complication of bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in his
effort, he filed the action for the recovery of the same.
Did Ngo Hing concealed the state of health and
physical condition o f Helen Go, which rendered void
thehinding receipt?

Rules on concealment
1. If there is concealment under Section 27, the remedy
of the insurer is rescission since concealment vitiates the
contract of insurance (1996 Bar).

2. The party claiming the existence of concealment

must prove that there was knowledge of tire fact
concealed on the part of the party charged with
concealment
%I

A: Ngo Hing intentionally concealed the state of health of

his daughter Helen Go. He was fully aware that his child

U n i v e r s i t y of S a n t o T o m a s
2 0 1 S G o l en N otes

104

INSURANCE Law
i 3. Good faith is not a defense in concealment
I' Concealment, whether intentional or unintentional
I entities the injured party to rescind the contract of
insurance (!C, Sec. 27).
r; 4.

NOTE: Failure on the part of the insured to disclose such

facts known to his agent or wholly due to the fault of the
agent; will avoid the policy, despite the good faith of the
insured.

The matter concealed need not be the cause of loss

f; (1C, Sec 31).

Representation
.'5. To be guilty of concealment; a party must have
| knowledge of the fact concealed at the time of the
effectivity of the policy.

An. oral or written statement of a feet or condition

affecting the risk made by the insured to the insurance
company, tending to induce the insurer to assume the
risk.

1 In order for concealment to produce die effect of

|/ avoiding th e policy, It should take place a t the time
| the contract is entered into

NOTE: Representation should be made; altered or

withdrawn at the time of or before the issuance of the
polity. (Sec 37, Insurance Code). It may be altered or
withdrawn before the insurance .is effected, but not .
afterwards (Sec41, ibid).
/
Kinds of representation

1; Concealment should take place at the time the contract is

entered Into and not afterwards in order; that the policy
may be avoided. Hie duty of disclosure ends with the
|completion of the contract Waiver of medical
^ ^examination in a non-medical insurance contract renders
I'even more material the information required of the
^ applicant concerning previous condition of health and
diseases suffered, for sudi information necessarily
^constitutes an important factor which die insurer takes
^ into consideration In deciding whether to issue the policy
or not Failure to communicate information acquired after
| the effectivity of die policy will not be a ground to rescind
| 'the contract
*

1. Oral or written (Sec. 36, ibid);

2. Affirmative (Sec 42, ibid); or
3. Promissory (Sec. 39, ibid).
Affirmative representation

*
Any allegation as to the existence or non-existence of a
feet when the contract begins {eg. the statement of the
insured that the house .to be insured is used only for
residential purposes is an affirmative representation).

t NOTE: The reason for this is that if concealment should

^.take place, after the. contract is entered into, the
information concealed is no longer material as it will no
tj longer influence the other party to enter into such
^contract

Promissoiy representation

|A : No. The concealed feet is material to. the approval and

(['issuance of the insurance policy. lt is well settled that the
^insured need not die of the disease she felled to disclose
tto the Insurer. It is suffitientthat his nondisclosure misted1
1tiie insurer in forming his estimate of the risks of the
proposed insurance policy or in making inquiries (Sun

Misrepresentation
Misrepresentation is an affinnative defense. To avoid
liability; , the insurer has the duty to establish such a
defense by satisfactory and convincing evidence (Ng Can
Zee y Asian Crusader Life 'Assn. Corp*. GJL No. L- 30665,
May 30,1983). [See also Sec 44 (when the facts fail to. .
correspond to the assertions or stipulations), Insurance

Code].
: NOTE: In the absence of evidence that the insured has
sufficient medical knowledge to enable him to distinguish
between 'peptic ulcer* and "tumor", the statement of
deceased that said tumor was associated with ulcer of
the stomach should be considered an expression in good
faith. Fraudulent Intent of insured must be established to '
entitle insurer to rescind the insurance contract
Misrepresentation, as a defense of insurer, is an
affinnative defense which must be proved (Ng Can Zee v.
Asian Crusader Life Assn. Corp., G.R. Ate L- 30685, May 30,

Mfev. CA supra).
4

instances whereby concealment made by an agent

procuring th e insurance binds the principal
. 1. Where it was the duty of the agent to acquire and
^communicate information of the facts in question;
!. 2. Where it was possible for the agent; in the exercise of
^reasonable diligence to have made.such communication
r before the making of the insurance contract
t..
t
,

Any promise to be fulfilled after the contract has come

into existence or any statement concerning what is to
happen during the existence of the insurance.

|'Q: Joanna applied for a non-medical life insurance.

|;Joanna did not Inform die insurer th at one w eekprior
f -to h er application for insurance, d ie was examined
la n d confined a t S t Lukes Hospital where she was
pliagnosed for long cancer. The insured soon
I thereafter died in a plane crash. Is th e insurer liable
[; considering th at the feet concealed had no bearing
vWlth d ie cause o f death of the insured? Why? (2001
pilar)

1983).

1053r

h L _____________ ____________ _________________

U n iv e rs ity o f S a n to Tomas
F a c u l t y of Ci vi l Law

I
\
1.
ij
|
s
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M ercan tile L aw
R equisites o f m isrepresentation
1.
2.

The insured stated a fact which is untrue;

Such fact was stated with knowledge that it is untrue .
and with intent to deceive or which he states positively
a s tru e Virtthoutknowing it to be true and which has a
tendency to mislead; *
3.
Such fact in either case is material to die risk.-

2.
Oral or written
3.
Made at the time of, or before issuing the polity and
notafter
;
4. Altered or |withdrawn before the insurance is
effected but not afterwards
5. Must be presumed to refer to .the date the contract
goes into effect (IC, Sec 42).
Similarities o f concealment and representation'

NOTE: A representation cannot qualify an express

provision in a contract o f insurance but it may qualify an
implied w arranty (IQ Sec 40).

1.
Both refer to the same subject matter and both take
place before the contracts entered.
2. Concealment or representation prior to loss or
death gives rise to the same remedy; teat is rescission or
cancellation

R epresentation a s to a future undertaking

A representation a s to th e future is to be deemed a
prom ise unless It appears that it was merely a statement
. of belief or an expectation th a tis susceptible to present,
actual knowledge (IQ Sec 39).

3.

The test of materiality is the same (IQ Secs. 31,46).

4.

The rules ofconcealmentand representation are the

same with life and non-life insurance.
,y
i
7
5.
Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on ground of
concealment or false representation.

An erroneous opinion or b elief w ill n ot avoid th e

Insurance p olicy
The statem ent of an erroneous opinion, belief or
information, o r o f a n unfulfilled intention, perse, will not
avoid the contract of insurance, unless fraudulent

6. Since the contract of insurance is said to be one of

utmost good faith on the part of both parties to the
agreement; the rules on concealment and representation
apply likewise to the insurer.

T est o f m ateriality 0
It is to be determ ined not by the event but solely by t h e '
probable and reasonable influence of die facts upon the
p arty to whom th e representation is made, in forming his
estim ates of die disadvantages of the proposed contract
o r in making his inquiries (similar with concealment) (IQ

Sec 46).
Effects o f m isrepresentation
1. It renders the Insurance contract voidable a t the option
o f die insurer, although die policy Is not thereby rendered
void ab Initio.The injured partyentitled to resdnd from
th e time w hen the representation becomes false;

Concealment v. Misrepresentation
-

Oinceahnent '

The insured Withholds the

information ;of material
facts from the insurer
i

Misrepresentation

The insured makes

erroneous statements of
fccts with the intent of
Inducing the insurer to
enter into the insurancecontract

.Application o f concealment and misrepresentation in

case o f loss o j death

2. When th e in su rer accepted the payment of premium

w ith the knowledge of d ie ground for rescission, there is
waiver pf such right;

GR: If the concealment or misrepresentation is-,

discovered before loss or death, the insurer can cancel the
policy. If the discovery is after loss or death, the insurer
can refuse to pay.

3. There is no waiver o f the right of rescission if the

insurer had no knowledge o f die ground therefor a t the
tim e of acceptance of premium payment

XPN: Hie incontestability clause under paragraph 2 of

Section 4Q. |

Effect o f collu sion betw een d ie insurer's agent and the

insured

XPN to XPN: (/.&, when the contract may be rescinded

t even beyond the incontestability period)
F''er

It vitiates the policy even though the agent is acting within

the apparent scope of his authority. The agent ceases to
represent his principal He, thus, represents himself; so
th e insurer is not estopped from avoiding the policy.

1. Non-payment of premiums.
2.
Violation of condition (IQ Secs. 233 [b], 234 (bj).
3. No insurable interest
4.
Cause oildeath was excepted or not covered
5.
Fraud ojfa vicious type
6.
Proof of death was not given (IQ Sec 248)
7. That the conditions of the polity relating to military
or naval service (IQ Secs. 233 [b], 234 [b]).

C haracteristics o f representation
1.
Not a p art of the contract but merely a collateral
inducem ent to it

Un iv e r s it y

2015GOLDEN

S an t o T
Notes

of

omas

*M :
comn
r~r^n

; I

106

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INSURANCE LAW
Omission

8. That the.action was hot brought within the time

specified pC/Sec 63)

The failure to communicate information on matters

proving or tending to prove the falsity ofwarranty. In case
of omission, the aggrieved party may rescind the contract
of insurance.

Incontestability clause (1991,1994,1996 -1998 Bar)

After die policy of .life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured fora period of two (2) years from
the date of its issue.or its last reinstatement; the insurer
cannot prove that die policy is void ab initio or is
resdndible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent (Sundiang

BREACH 01'WARRANTIES

Warranties (1993 Bar)

Sr. & Aquino, 2014, citing IQ Sec. '40; Florendo v. Philam

Plans, G.R. No. 186983, February22,2012).
The "Incontestability Clause" under Section 48 of the
Insurance Code regulates both the actions of the insurers
and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained
by fraud, concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely uncoveredthus deterring them from venturing into such nefarious
enterprise (Manila Bankers life Insurance'Corporation vs.

Statements or promises by the insured set forth in the

policy itself or incorporated in it by proper reference, die
untruth or non-fulfillment of which In any respect; and
without reference to whether the insurer was in feet
prejudiced by such untruth or non-fulfillment render die
policy voidable by die insurer.
Purpose of warranties
>To eliminate potentially increasing moral or physical
hazards which may either be due to theacts of the insured
or to the change ofthe condition of the property. .

Cresencla-Aban, G.R No.175666,July29,2013).

Basis o f warranties

Defenses th at are not barred by Incontestability

clause

The insurer took into consideration die condition ofthe

property at die time of effectivity of the policy

The following defenses are not barred by the

incontestability clause:
1. That the person taking the insurance lacked insurable
interest as required by law;
. 2. That the cause of the death of the insured is an excepted
risk;
3. That tne premiums have not been paid (1C, Secs. 77,

Kinds of warranties

1. Affirmative warranty - one which relates to matters

which exist at or before the issuance of the policy.
2. Promissory warranty - one in which the insured
undertakes that something shall be done or omitted
after the policy takes effect and during its continuance.

233(b), 236(b));
4. That die conditions of the policy relating to militaiyor
naval service have been viplated 0C, Secs. 233(b), 234(b));
5. That the fraud is of a particularly vidous type;
6. That the benefidaiy foiled to furnish proof of death or
to comply with any condition imposed by'the polity after
die loss has happened; or .
7. That the action was not brought within the time
spedfied (Sundiang Sr. &Aquino, 2014).
Remedy of the
misrepresentation

injured

party

in

case

3. Express warranty - a statement in a policy, of a matter

relating to the person or tiling insured, or to the risk, as
a fact
4. implied warranty - an agreement or stipulation not
expressed in the policy but the existence of which is
admitted or presumed from the fact that the contract of
insurance has been executed.

of

Peculiar only to marine insurance, and therefore is

deemed included in the contract although not
expressly mentioned:
a. That the ship will not deviate from the agreed voyage
unless deviation is proper
b. Tha t the ship will not engage in illegal venture
c. Warranty of neutrality, that the ship will carry the
requisite documents of nationality or neutrality where
such nationality or neutrality is warranted
d. Presence of insurable interest
e. That the ship is seaworthy at the time of the
commencement of the insurance contract

If there is misrepresentation, the injured party is entitled

to restind from the time when the representation
becomes false.
Exercise of the right to resrind the contract
The right to rescind must be exercised previous to the
commencement of an action on the contract (the action
referred to is that to collect a claim on the contract) {1C,
Sec.48, par.l).

107

U n iv e rsity of S a n to Tomas
F aculty of Civi l Law

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Mercantile La w
/ : v - C l.A iM S .S E T T I,H M E N T A N D .S U H K ()G A T IO N

W arranty v. Representation
\

'. W A R R A N T Y

Considered parts of the

contract
Always written on die
face of the policy,
actually or by reference.
Must be strictly
complied with.
Its falsity or non
fulfillment operates as a
breach of contract
Presumed material

r e pr e se n t a t io n

Collateral inducement to the .

contract
Maybe written in a totally
disconnected paper or may be
oral
Only substantia) proof is
reauired.
Its falsity renders the policy
void on die ground of fraud
Insurer must show its
materiality in order to defeat
an action on die policy.

' T v . ' : - - v N O T IC E AND' P R O O F OF L O S S ' 'V

Loss In insurance
The injury, damage or liability sustained by the insured in
consequence of the happening of one or more of die perils
against which me insurer, in consideration of the
premium, has undertaken to indemnity the insured. It
maybe total, partial, or constructive in marine insurance.
Conditions before die insured may recover on the
policy after the loss

Effects of breach of warranty

1. The insured ir some person entitled to the benefit of

the insurance, without unnecessary delay, must give
written notice to the insurer (IQ Sec 90);

1. Material

2. When required by the policy, insured mu^t present a

GR: Violation of material warranty or of material

provision of a policy will entitle the other party to rescind
the contract
XPN:(with regard to "promissory warranties)
1. Loss occurs before die time of performance of the
warranty;
2. The performance becomes unlawful at the place of the
contract and
3. Performance becomes impossible (IQ Sec 73).

2,'Immaterial
GR: It will not avoid the policy.

preliminary proof loss which is the best evidence he has

in his power at the time (IQ Sec 91).
NOTE: For other non-life Insurance, the Commissioner
may specify did period for the submission of the notice of
loss (1C, Sec 90).

I
Notice of loss
It is the more or less formal notice given die insurer by the
insured or claimant underapolicy of the occurrence of the
loss insured against
Purposes of notice of loss (JR )

XPN: When the policy expressly provides or declares that

a violation thereof will avoid it.
For instance, an "Other Insurance Clause" which is a
condition in the policy requiring the insured to Inform the
insurer of any other insurance coverage of the property.
A violation of die clause by the insured will not constitute
a breach unless there is an additional provision stating
thatthe violation thereof will avoid the policy (IQ Sec 75).
Effect of a breach o f warranty without fraud
The policy is avoided only from the time of breach (IQ Sec.
76) and the insured is entitled:
1. To the return of die premium paid at a pro rata from
the time of breach or if it occurs after the inception of
the contract; or '
2. To all premiums if it is broken during the inception
of the contract

1. To give insurer Information by which he may determine

the extent of his liability;
2. To afford die insurer a means of detecting any fraud
that may have been practiced upon him; and
3. To operatejas a fiheck upon extravagant claims.
Effect of failure to give notice of loss
: FIRE-INSURANCE .

, Q TH ER TYPES ()E I N S U R A N C E ..

Failure to give notice

defeats the: right of
the insured
I to
recover.

Failure to give notice will not

. exonerate the insurer,.unless
there is a stipulation in the
policy requiring the insured to
__ do so._________

Instances when the defects in the notice o r proof of

loss are considered waived (Ma]oR-DeW)
Vtfhen the insurer:
1. Writes to the insured that he considers the policy null
and void, as the furnishing of notice or proof of loss
would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. loins in the proceedings for determining the amount of
die loss by arbitration, making no objections on account
of notice and preliminary proof; or

mmmj j
Clair Set
Clairii P :
the frLi
reins >ec
third

Rules ..i *
1. N i^ i
Pi/ p
pa^ oi
b; ts
u e tr

Insurance L aw
5. Makes Objection on any ground other than the formal
defect inthe preliminary proof.
Instances when delay in the presentation of notice or
proof of loss deemed waived
If caused by:
L Any act of die insurer, and
2; By failure to take objection promptly and specifically
upon that ground (IC, Sec 93).

2. Evidence as to numbers and types of valid and

justifiable complaints to the Commissioner against an
insurance company, and the Commissioner's
complaint experience with otherinsurance companies
writing similar lines of Insurance shall be admissible
in evidence in an administrative or judicial proceeding
brought under tills section (IC, Sec 247(b]).
Claims settiement In life Insurance
1 The proceeds shall be paid immediately upon the
maturity of the policy if there is such a maturity date.

Proof of loss

2. If the policymatures by the death ofthe insured, within

It is the more or less formal evidence given, the company

by the insured or claimant under a policy of the
^occurrence of the loss, the particulars thereofand the data
necessary to enable die company to determine its liability
and the amount thereof.

sixty (60) days after presentation ofthe claim and filing

ofthe proof ofthe death ofthe insured (Smdiang Sr. &

Aquino, 2014; IC, Section 248)

Claims settlement in property insurance

LIFE POLICIES

1.

Proceeds shall be paid within thirty (30) days alter

proof of loss Is received by the insurer and
rascertainment of the loss or damage is made either
by agreement or by arbitration.

2.

If no ascertainment is made within sixty (60) days

after receipt of proof of loss, it shall be .paid within
ninety (90) days after such receipt (Sundiang Sr. &

NON-LIFE POLICIES

L Maturing upon the The proceeds shall be

expiration o f the term- paid Within 30 days after

the receipt by the insurer

of proof of lossand'
ascertainment of the loss
or damage by agreement
of the parties or by
arbitration but not later
than 90 days from such
receipt of proof ofloss,
2. Maturing at the death whether or not '
of die insured, occurring ascertainment is had or
priot to the expiration of made (IQ Sec249).
the term stipulated - die
proceeds are payable to
the beneficiaries within
60 days
after
presentation of claim and
filing of proof of death
the
proceeds
are
immediately payable to
the insured, except, if
proceeds are payable in
installments or annuities
which shall be paid as
they become due.

Aquino, 2014; IC, Sec 249).

UNFA IN CLAIMS SETTLEMENT: SANCTIONS

Unfair settlement practices (MAI-GL)

Hie following constitutes unfair settiement practices:
1. Knowingly misrepresenting to claimants pertinent
. facts or policy provisions relating to coverage at
issue;
. 2.'

Failing to acknowledge with reasonable promptness

pertinent communications with respect to claims
arising under its policies;

3.

Failing to adopt and implement reasonable

standards for the prompt investigation of claims
arising under its policies;

4.

Not attempting in good faith to effectuate prompt;

fair and equitable settlement of claims submitted in
which liability has become reasonably dear; or

5.

Compelling policyholders to institute suitsto recover

amounts due under its policies by offering without
justifiable reason substantially less than the amounts
ultimately recovered in suits brought by them.

(IC, Sec 248).

GUIDELINES .ON CLAIMS SETTLEMENT

dalm Settlement
the insured. The claimant may be the insured or
reinsured, the insurer who is entitled to subrogation, or a
third party who has a claim against the insured.
Purpose of the rule
To eliminate unfair claim settiement practices.

Sanction for the insurance companies which engaged

to unfair settlement practices

Rules in claim settiem ent

1. - No insurance company doing business in the
Philippines shall refuse, without justifiable cause, to
pay or settle claims arising under coverages provided
by Its policies, nor shall any such company engage in
unfair claim settiement practices.

The suspension or revocation of an insurance companys

certificate of authority (1C, Sec247).

109

Un i v e r s i t y of S anto T omas
F aculty of Ci vi l Law

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Mercantile Law
under COGSA, the suit will not be dismissed if the delay
was not diiejto the claimant's fault The insurer therefore
should bearihe loss with interest on accountofsuch delay
(New World lntemational Development Phils. Inc vs. NYK-

Effectof refusal o r failure to pay die daim within the

time prescribed
The insurer shall be liable to pay interest twice the ceiling
prescribed by the Monetary Board on the proceeds of the
insurance from the date following the time prescribed
under the Insurance Code, until the claim is fully satisfied

F1LJAPANSnipping Corpv G.R No. 171468, August24,2011,

in Divina, 2014).

(Prudential Guarantee and Assurance, Inc v. Trans-Asia

Shipping Lines, Inc G. R No. 151890,June20,2006).

Q, From what time shall the period of prescription be

computed ! in case the insured asked for
reconsideration of the denial of claim? (1996 Bar)

NOTE: Refusal or failure to pay the loss or damage will

entitle the assured to collect interest UNLESSsuch refusal
or failure to pay is based on the ground that the claim is
fraudulent

A: In case the claim was denied by the insurer but the

insured' file a petition for reconsideration, the
prescriptive period should be counted from thedate the
daim was denied at the first instance and not from the
denial of the reconsideration. To rule otherwise would
give the insured a scheme or devise to waste time until
any evidence which may be considered against him is
destroyed (Sun life Office, Ltd. vs. CA, supra],

>/
Prescriptive period in motor vehide insurance

Where the mortgagor and the mortgagee were both

claiming the proceeds of a fire insurance policy and the
creditors of the mortgagor also attached the proceeds, the
insurance company cannot be held liable for damages for
withholding payment since the delay was not malevolent

[Rizal Commercial Bank Corporation v. Court o f Appeals,

supra).

It is one year from denial of the daim and not from the
date of the Ucddent

P R E S C R IP T IO N OF A C T IO N S

SUBROGATION

Rules on d ie prescriptive period for filing an

insurance claim

Prindple of Subrogation
1. The parties to a contract of Insurance may validly agree
that an action on the policy should be brought within a
limited period of time, provided such period is not less
than 1 year from the time the cause of action accrues. If
the period agreed upon is less than 1 year from the time
the cause of action accrues, such agreement is void (1C,
Sec 63,1996Bar).
.
a. The stipulated prescriptive period shall begin to run
from the date of the insurers rejection of die daim filed
by the insured or benefidaiy and not from .the time of
loss.
b. In case the claim was denied by the insurer but the
insured filed a petition for reconsideration, the
prescriptive period should be counted from the date the
daim was denied at the first instance and not from the
denial of the reconsideration (Sun Life Office, Ltd. vs. CA,

If the plaintiffs property has been insured, and he has

received indemnity from the insurance company for the
injuiy or loss arising out of wrong or breach of contract
complained of, the insurance company shall be
subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract

(NCC, Art 2207).

The insurer, upon happening of the risk insured against
and after payment to the insured is subrogated to the
rightsand cause of action of the latter. As such, the insurer
has the right to seek reimbursement for all the expenses
paid (Eastern Shipping Lines vs. Prudential Guarantee and

Assurance, Inc, G.R No. 174116, September1,2009).

supra).

NOTE: The prindple of subrogation inures to the insurer

without any formal assignment or any express stipulation
to that effect in the policy. Said right is notdependent
upon nor does it .grow out of any private contract
' Payment to the insured makes the insurer a subrogee in
equity (Malayan Insurance Co., Inc v. CA, G.R. No. L-36413,

2. If there is no stipulation or the stipulation is void, the

insured may bring the action within 10 years in case the
contract is written.
3. In a comprehensive motor vehide liability insurance
(CMVLI), the written notice of claim must be filed within
6 months from the date of the acrfdent; otherwise, the
claim is deemed waived even if the same is brought within
1 year from its rejection (Vda. De Gabriel vs. CA, GR No.

Sept 26,1988).
Incapacity of the insured will not affect the capacity of the
4 subrogee because capacity is personal to the holder

(Lorenzo Shipping v. Chub and Sons, Inc., G.R No. 147724,

June 8,2004).

103883, Nov 14,1996).

4. The suit for damages, either with the proper court or
with the Insurance Commissioner, should be filed within
1 year from the date of the denial of the claim by the
insurer; .otherwise, claimants right of action shall
prescribe (IC, Sec 397).

Purposes of subrogation
1.
2.

NOTE: Notwithstanding the fact that the case was filed

beyond, the one-year prescriptive period provided for
./i

U n i v e r s i t y of S a n t o T omas
201S^Goi, dbn N otes

110

To make the person who caused the loss legally

responsible for it
To jprevent the insured from receiving double
recovery from the wrongdoer and the insurer.

INSURANCE L a w
3.

To prevent the tortfeasors from being free from

liability and is thus founded on consideration of
public policy.

6.

NOTE: Since the insurer can be subrogated to only such

rights as the insured may have, should the insured, after
receiving payment from the insurer, release the
wrongdoer who caused the loss, the Insurer loses his
rights against the latter. But in such a case, the insurer will
be entitled to recover from the Insured whatever it has
paid to the latter, unless the release was made with the
consent of the insurer (Manila Mahogany Manufacturing
Corporation v. Court o f Appeals, G.R. No. L-52756, October
12,1937).

Rules on subrogation
1.

2.

For recoveiy of loss in excess of insurance coverage

Applicable only to property insurance - the value of

human life is regarded as unlimited and therefore, no
recoveiy from a third party can be deemed adequate
to compensate the insureds beneficiary.
The right of insurer against a third party is limited to
the amount recoverable from latter by the insured.

Rules on Indemnity
Q: Malayan Insurance Company Issued a car
insurance polity in favor of First Malayan Leasing and
Finance Corporation (First Malayan), insuring a
Mitsubishi Galant against third party liability, own
damage and theft, among others. Unfortunately, the
Galant encountered a vehicular accident at the comer
of EDSA and Ayala Avenue, Makati. The accident
involves a Nissan Bus operated by Aladdin Transit, an
Isuzu Tanker, and a Fuzo Cargo Truck. Because of this,
Malayan Insurance was constrained to pay First
Malayan of the damages sustained by i t Maintaining
that it has been subrogated to the rights and interests
of the assured, Malayan Insurance' sent several
demand letters to Rodelio Alberto (Alberto) and
Enrico Alberto Reyes (Reyes), the registered owner
and the driver, respectively, of the Fuzo Cargo Truck;
requiring them to pay the amount It had paid to the
assured. No settlement of liability was made, thus,
Malayan Insurance filed a complaint for damages for
gross negligence against Alberto, et aL Is Malayan
Insurance entitled to the right of subrogation?

1. Applies only to property insurance except when the

creditor Insures die life of his debtor.
2. Insurance contracts are notwagering contracts or
gambling contracts.
NOTE; Under the collateral source rule, if an injured
person receives compensation for his injuries from a
source wholly independent of the tortfeasor, the payment
should not be deducted from the damages which he would
otherwise collect from the tortfeasor. It finds no
application to cases involving no-fault insurances under
which the insured is indemnified for losses by insurance
companies, regardless of who was at fault in the incident
generating the losses. Here, it is clear that MMPC is a no
fault insurer. Hence, it cannot be obliged to pay
hospitalization expenses of the dependents of its
employees which had already been paid by separate
health insurance providers of said dependents.
(Mitsubishi Motors Philippines Salaried Employees Union
vs. Mitsubishi Motors Corporation G.R. No. 175773,June 17,
2013, in Divina, 2014).

A; A: Yes. The payment by the insurer to the insured

operates as an equitable assignment to the insurer of all
the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss.
The right of subrogation is not dependent upon, nor does
it grow out of, any privity of contract It accrues simply
upon payment by the insurance company of the insurance.
claim. When itis not disputed that the insurance company
indeed paid, then there is valid subrogation hr its favor.
[Malayan Insurance Co., Inc, vs. Rodelio Alberto, eta l, G.R.
No. 194320, February 1,2012).

When am ount paid by the insurance company does

not fully cover die injury o r loss
The aggrieved party shall be entitled to recover the
deficiency from die person causing the loss or injury (NCC,
Art 2207).
Instances w here the right of subrogation does not
apply
1.

Where the insured by his own act releases the

wrongdoer or third party liable for loss or damage
from liability

2.

The insurer loses his rights against the wrongdoer

since the insurer can only be subrogated to only sucji
rights as the insured may have

3.

Where the insurer pays the insured the value of the

loss without notifying the carrier who has in good
faith settled the insured claim for loss

4.

Where the insurer pays the insured for a loss or risk

not covered by the policy

5.

Life insurance

Ill

Un i v e r s i t y of S ant o T omas
F aculty of C ivi l Law

Mercantile L aw
Zarates' claim against the Pereiias was upon breach of
the contract of carriage for the safe transport of
Aaron; butthatjagainstPNR was based on quasi-delict
under Article 2176, Civil Code.

TRANSPORTATION LAW
Laws that govern contracts of transportation

In their defence, the Pereiias adduced evidence to

show that they had exercised the diligence of a good
father of the family in the selection and supervision of
Alfaro, by making sure that Alfaro had been Issued a
driver's license and bad not been Involved in any
vehicular accident prior to the collision.
[.'.

a) Is the defense of Perenas tenable?

b) Is the operation of a bus service considered as a
private carrier?

Contracts of transportation, whether by land, sea or-air, if

within the Philippines or If the transportation of goods be
from a foreign country to the Philippines shall be
governed by the following laws, arranged by order of
application:
1. Provisions of the New Civil Code on "Common
Carriers";
,
2. Code of Commerce; and
3. Special laws such as Carriage of .Goods by the Sea
(COGSA); Salvage Law; Public Service Act; Land
Transportation and Traffic Code; Tariff and Customs
Code; and Civil Aeronautics Act (NCC, A rt 1735 and
1766; American President Lines, Ltd. vs. Klepper, GR
No. L-15671, November29,1960).

A :'
p

a. No. Such defense as inappropriate in an action for

breach of contract of carriage. k
b. No. There jis no question that the . Pereiias as the
operators of a school bus service were: (a) engaged in
transporting passengers generally as a business, not just
as a casual j occupation; (b) undertaking to carry
passengers oyer established roads by the method by
which the business was conducted; and (c) transporting
students for a1fee. Despite catering to a limited clientele,
the Perenas operated as a common carrier because they
held themselves out as a ready transportation
indiscriminately to the students of a particular school
living within or near where they operated the service and
for a fee.
p

NOTE: In the case of international carriage in Air

Transportation, Warsaw Convention (RA. 9497) applies
If the goods are to be transported from Philippines to
foreign country, the law of the latter country shall govern
the transportation contract (CQ A rt 1753, National
Development Co. v. CA, G.R. No. L-49407, August 19,1988).
C O M M O N CARRIERS .

Requisites for an entity to be classified as a common

carrier (1996,1997,2000,2002 Bar) (PBL-FP)

The true test feu' a common carrier is not the quantity or

extent of the business actually transacted, or the number
and character of the conveyances used in the activity, but
whether the undertaking is a part of the activity engaged
in by die carrier that he has held out to the general public
as his business or occupation. If the undertaking is a single
transaction, not a part of the general business or
occupation engaged in, as advertised and held out to the
general public, the individual or the entity rendering such'
service is a private, not a common, carrier. The question
must be determined by the character of the business
actually carried on by the carrier, not by any secret
intention or mental reservation it may entertain or assert
when charged with the duties and obligations that the law
imposes (Sppuses Teodoro and Nanette Perena v. Spouses
Teresita Philippine Nicolas and L Zarate, G.R. No. 157917,
August 29,2f)12).

1. Must be a person, corporation, firm or association

2. Must be. engaged in the fiusinpss of canying or
transporting passengers or goods or both
3. The carriage or transport must either be by Land, water
or air
4. The service is for a pee
5. The service is offered to the Public {NCC, Art 1732).
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes/ pipelines is a
common carrier. The law does not distinguish as to the
means by which transportation is carried out; as long as it
is by land, water or air. Neither does the law require that
transportation be through a motor vehicle (First Phil
Industrial Carp. v. CA, G.R 125948, December29,1998).
Q: The Pereiias w ere engaged In the business of
transporting students from their respective
residences in Paraiiaque City to Don Bosco in Pasong
Tamo, Makati City, and bade They employed
Clemente Alfaro (Alfaro) as driver of the van. In lune
1996, the Zarates contracted the Pereiias to transport
their son, Aaron, to and from Don Bosco. However, the
train hit the rear end of the van driven by Alfaro, and
the impact threw nine of the 12 students in the rear,
including Aaron, out of the van. Aaron landed in the
path of the train, which dragged his body and severed
his head, instantaneously killing him.

Test for determining whether or not one is a common

carrier (1996 Bar)
.i

Whether thp person or entity, for some business purpose

and with general or limited clientele, offers the service of
canying orjtransporting passengers or goods or both for
compensation.

The Zarates commenced this action for damages

against Alfaro, the Pereiias, PNR and Aiano. The
Un i v e r s i t y

of

S anto T omas

2 0 1 5 G o Cden N otes

112

T ransportation Laws
It Is not required that the carrier's principal activity
is carriage of persons or goods in order to be a
common carrier

2.
No. AM Trucking may not set up the hijacking as
a defense to defeat Reynaldos claim as the facts given do
not indicate that the same was attended by the use of
grave or irresistible threat, violence, or force. It would
appear that the truck was left unattended by its driver
and was taken while he was visiting his girlfriend (Pedro
de Guzman v. CA, 1-47822 Dec27,1988).

Article 1732 makes no distinction between one

whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying
only as an ancillary activity fin local idiom, as "a
sideline"). Article 1732 also carefully avoids making any
distinction between a person or enterprise offering
transportation service on a regular or scheduled
basis and one offering such services on a an occasional,
episodic or unscheduled basis. Neither does Article 1732
distinguish between a carrier offering its services to the
"general public;" i.e., the general community or
population, and one who offers services or solicits
business only from a narrow segment of the general
population. Article 1733 deliberately refrained from
maki ng such distinctions (Perez,2009, citing Caltex [Phils.]
vs. CA, GR No. 131166, September30,1999).

Q: Alejandro Camaling of Alegrla, Cebu, is engaged in

buying copra, charcoal, firewood, and used bottles
and in reselling them in Cebu City. He uses 2 big Isuzu
trucks for the purpose; however, he has no certificate
of public convenience or franchise to do business as a
common carrier. Oil the return trips to Alegrla, he
loads his trucks with various merchandise of other
merchants in Alegrla, and the neighboring
municipalities of Badian and Ginatilan. He charges
them freight rates much lower than the regular rates.
In one of the return trips, whlfh left Cebu City at 8:30
pan. 1 cargo truck was loaded with several boxes of
sardines, valued a t PlOQth, belonging to one of his
customers, Pedro Rabor. While passing the zigzag
road between Carcar and Barili, Cebu, which is
midway between Cebu City and Alegrla, the truck was
hijacked by 3 armed men who took all the boxes of
sardines and kidnapped the driver and his helper,
releasing them In Cebu City only 2 days later.

Q: AM Trucking, a small company, operates to trucks

for hire on selective basis. It caters only to. a few
customers, and its trucks do not m ake regular or
scheduled trips. It does not even have a certificate of
public convenience.
On one occasion, Reynaldo contracted AM to
transport for a fee, 100 sacks of rice from Manila to
Tarlac. However, AM felled to deliver the cargo,
because Its truck was hijacked when the driver
stopped in Bulacan to visit his girlfriend.

Pedro Rabor sought to recover from Alejandro the

value Of the sardines. The latter contends that he is
not liable therefore because he is not a common
carrier under the Civil Code. If you were the judge,
would you sustain the contention of Alejandro? (1991
Bar)

1. May Reynaldo hold AM liable as a common

carrier? '
2. May AM set up the hijacking as a defense to
defeat Reynaldo's claim? (1996 Bar)

A: If I were the Judge, I would hold Alejandro as having

engaged as. a common carrier. A person who offers his
services to carry passengers or goods for a fee.is a
common carrier regardless of whether he has a certificate
of public convenience or not, whether it is his main
business or incidental to such business, whether it is
scheduled or unscheduled service, and whether he offers
his services to the general public or to a limited few (De
Guzman v. CA, G.R. 47822, December27,1988).

A:
1. Yes. Reynaldo may hold AM Trucking liable as a
common carrier. The feet that AM Trucking operates
only two trucks for hire on a selective basis, caters only
to a few customers, does not make regular or scheduled
trips, and does not have a certificate of public
convenience are of no moment as:

Q: Discuss whether or not the following stipulations

in a contract of carriage of a common carrier are
valid:

a. the law does not distinguish between

one
whose principal business activity is the
canying of persons or goods or both and
anyone who does such carrying only as an
ancillary activity,

1. A stipulation limiting the sum that may be

recovered by the shipper or owner to 90% of the
value of the goods in case of loss due to theft.

b. the law avoids making any distinction

between
a person or enterprise offering *
transportation service on a regular or scheduled
basis and one offering such service on an occasional,
episodic or unscheduled basis, and

2. A stipulation that in the event of loss,

destruction or deterioration of goods on account of
the defective condition of the vehicle used in the
contract of carriage, the carriers liability is limited to
the value of the goods appearing in the bill of lading
unless the shipper or owner declares a higher value
(2002 Bar)

c. the law refrains from making a distinction between a

carrier offering its services to the general public and
one
who
offers
services
or
solicits
business
only from a narrow segment of the
general population (Pedro de Guzman v. CA, L-47822
Dec 27,1988)

A:
1. Invalid. Article 1745 provides that the following
or similar stipulations shall be considered unreasonable.

113

U n i v e r s i t y of S anto T omas
F aculty of Civi l L aw

Mercantile law
unjust and contrary to public policy, among which is the
common carriers liability for acts committed by thieves or
robbers who do not act with grave and irresistible force,
threat or violence is dispensed with or diminished.

of or injuries' to
passengers (NCC,
... -

' -

A carrier which does not qualify under the requisites of a

common carrier is deemed a private carrier (National

Steel Corporation v CA, G.R No. 112287, December 12,

19971

S iK S S
f.v

,*** *r

COMMON
CARRIER
Undertakes
to
carry passengers
or goods for the
public

(First Philippine
Industrial Pipeline
vs. CA, supra).

PRIVATE
CARRIER
Carriage
is
generally
undertaken
by
special .agreement
and it does not hold
itself out .to carry
goods for ' toe
general public

(Loadmasters
Customs Services,
Inc vs. Glodel
Brokerage GR No.
179446, January 10,
20111

-JT

Civil Provisions on
i i t e l S p p l j Common Carriers,
Public Service Act;
and other special
laws relating to
transportation

Civil
Code
provisions
on
ordinary contracts

(ibid).

(Spouses Perena vs.

Spouses
Zarate
supra].
V e g r e e o f^ Extraordinary
Diligence; . diligence (NCC, Art
1733).

I fiB S I

lost, destroyed or
deteriorated.
2. In case of death

-to

(Sundiang Sr. &

Aquino, 2014).

Public utility ,
A business or service engaged in supplying the public with
some commodity or service of public consequence, or
essential to the general public (Perez, 2006, citing Albano

vs. Reyes, G.R 83551, July 1,1989; KMU Labor Center vs.
Garda, G.R 115381, December23,1994).
! .
Public service
Every person that may own, operate, manage, control in
the Philippines, for hire/compensation, with
general/limited clientele whether permanent, occasional
or accidental, and done for general business purposes,
any common carrier, with or without fixed route and
whatever may be its classification, engaged in the
transportation of passengers or freight or both, canal,
irrigation system, gas, electric light; heat and power,
water supply power, petroleum, sewerage system, wire or
wireless communication systems, wire or wireless
broadcasting stations and stetions and other similar,
public services (PublicServiceAct, Sec 13 (b)).
A casual or incidental service devoid of public character
and interest !$ not brought within the category. The
question depenjds on such factors as the extent of services,
whether such person or company has held himself or
itself out as ready to serve the public or a portion of the
public generally (Luzon Stevedoring v. PSC, G.R. 1-5458,

September161953).
Ordinaiy diligence
or diligence of a
good father of the
family
(Spouses

Perena v. Spouses
Zarate, supra].
tfreM m ptife 1. If the goods are

NOT subject
regulation by a
regulatory agency

A common carrier A private carrier

'cannot stipulate may validly enter
that ft is exempt into
such
from liability for stipulation
negligence of its
agents
or (Sundiang Sr. &
employees. Such Aquin^, 2014).
stipulation is void
as if is against
public
. policy

Private carrier

Common carrier v. Private carrier (2002 Bar)

101503, Sept IS,

1993).

Arts. 1735 and

17561
Subject
to
regulation by a
regulatory agency

2. Valid. The stipulation limiting the carriers liability

to the value of the goods appearing in the bill of lading
unless the shipper or owner declares a higher value, is
expressly recognized in Article 1749 of the New Civil
Code.

A private carrier is one who, without making the activity

a vocation, or without holding himself or itself out to the
public as ready to act for all who may desire his or its
services, undertakes, by special agreement in a particular
instance only, to transport goods or persons from one
place to another either gratuitously or fat hire (Spguses
Perena vs. Spouses Zarate, GR No. 157917, August 29,
2012).

jC.

No presumption as
to
negligence

(Planters Products
vs. CA GR No.

i BJBj l U n i v e r s i t y o f S a n t o T o ma s
2 0 1 5 G olden N otes

4
|
NOTE: The terms "public utility and "public service" are
used interchangeably (Perez, 2006).
Certificate of public convenience (CPC)
it is an authorization issued for the operation of public
services for which no franchise, either municipal or
legislative, is required bylaw, such as a common carrier.

T ransportation

laws

Certificate of public convenience is not necessary

before a carrier can be considered a common carrier

Grounds that oppositors may raise to the application

for a certificate of public convenience

. A person or entity is a common carrier even if he did not

secure CPC. Its liability as a common carrier arises as soon
as it acted as a common carrier, without regard as to
whether or not such carrier has complied with the
requirements of the applicable regulatory statute and
implementing regulations and has been granted a
certificate of public convenience or other franchise (De
Guzman vCA. G.R. No. L-47822, December22, '1988).

1. The area has already a well-established operator - Prior

operator rule (Mandbusco, Inc. vs. Francisco, G.R. L-23688,
April30,1970).
Prior Operator or Old Operator Rule
The rule allows an existing franchised operator to invoke
a preferential right within the authorized territory as long
as he renders satisfactory and economical service (Martin,
1989). The prior operator must first be given the
opportunity to extend its service in order to meet public
needs in the matter of transportation (ibid).

Certificate of public convenience (CPC) v. Certificate

o f public convenience and necessity (CPCN)
CPC

Third Operator Rule

- CPCN

Issued whenever the Public

Service
Commission
(Commission) finds that
the operation of the
proposed public service
will promote the public
interests in a proper and
suitable manner, for which
a municipal or legislative
franchise is NOT necessary
(Public Service Act, Sec. 16

Issued upon approval of

any franchise or privilege
granted by any political
subdivision
of
the
Philippines when in the
judgment of the political
subdivision
of
the
Philippines when in the
judgment
of
the
Commission such franchise
or privilege will properly
conserve
the
public
m
interest
(Public Service Act, Sec. 16
_______________________ L M

On the other hand, under the Third Operator Rule, where

two operators are more than serving the public there is
no reason to permit a third/operator to engage in
competition with them. The factthat itis only one trip and
of little consequence is not sufficient reason to grant the
application (Yangco v. Esteban, G.R. No. 38S86, Aug. 18,
1933).
2. Where there are various applicants for a public utility
over the same territory, all conditions. being equal,
priority in the filing of the application for CPC becomes a
factor - Prior applicant rule.
Prior Applicant Rule

It presupposes a situation when two interested persons

apply for a.certificate to operate a public utility in the
same community over which no person has as yet granted'
any certificate [Martin, 1989).

Instances where a certificate of public convenience is

not necessary (WAR-PIPA)
1.
2.
3.
4.
5.
7.
8.

Warehouses
'
Animal-drawn vehicles or banco powered by oar or
by sail; tug boats and lighters
Radio companies, except as to fixing of rates
Eubilc market
Ice plants
Public utilities operated by the nati onal government
or political subdivision except as to rates.
Airships except as to fixing rates

3. Interpose an objection stating that the grant of the

application would result to a ruinous competition (ttalili
vs. Ice and Cold Storage Industries, Inc* G.R. L-1871,
November 18, 1949). One of the purposes of PSA is to
protect and conserve the investments which have already
been made for that purpose by public service operators Protection o f investment rule (Batangas Trans. Co. vs.
Orianes, G.R. L-28865, December 19,1928).

Requirements for the grant of certificate of public

convenience (COPS)
1.
2.
3.
4.

NOTE: Mere possibility of reduction in the income of an

existing operator holding a public service permit does not,
of itself, establish that issuing a permit to another to
operate within the same territory will result in ruinous
competition. To prove the latter, ft should be shown that
the oppositor will not obtain sufficient profits to pay a
dividend or reasonable interest upon invested capital
(Halili vs. Ice and Cold Storage Industries, Inc, supra).

Applicant must be a itizen of the Philippines. If the

applicant is a Corporation, 60% of its capital must be
owned by Filipinos.
Applicant must prove the operation of proposed
public service will promote public Interest in a
proper and suitable manner.
Applicant must prove Eublic necessity.
Applicant must have Sufficient financial capability to
undertake proposed services and meeting
responsibilities incidental to its operation (KMU
Labor Center vs Garcia, supra).

4. Attack the citizenship of the applicant (Sec. 11, A rt XH

of the 1987Constitution prohibits the granting offranchise
or certificate for the operation of public utility in favor of
non-Filipino citizens)\ or
5. The applicant does not have the necessary financial
capacity (KMULabor Center vs. Garcia, supra).

115

U n i v e r s i t y of S a n t o T o m a s
F aculty of Ci vi l Law

M ercantile Law
to justifiable exceptions. The primary consideration in the
grant of a certificate of public convenience must always be
public convenience. (Fortunato F. Halili v. Ruperto Cruz,
G.R No. L-21061, June 27, 1968). In this case, Bayan Bus
Lines had been given an opportunity to improve its
service but despite its efforts, its services still proved
inadequate' which rendered the need to avail of the.
services of Pasok Transportation, Inc. as the addition
would better serve public convenience, which is the
paramount consideration in the granting of a certificate of
public convenience.

Exceptions to the application of Prior operator rule or

Protection of investment rule
1.

Where public interest would be better served by the

new operator (Intestate Estate ofTeojilo Tiongson vs.
Commission, G.R>L-247Q1, December16,1970).

2.

Where the old operator has foiled to make an offer to

meet the increase in traffic (Manila Yellow Taxicab
Co., Inc vs. Castelo, GRNo. L-131910, May 30,1960).

3.

Where the certificate of public convenience granted

to the new operator is a maiden certificate, which
does, not Overlap with the entire route of the old
operator but only a short portion thereof as a
convergence point (Mandbusco, Co. vs. Francisco,
supra).

4.

If the application of the rule will be conducive to

monopoly of the service, and contrary to the
principle that promotes healthy competition (Villa
Rey Transit, Inc vs. Pangasinan Trans. Inc., G.R L17684-85, May30,1962).

5.

If the old operator unjustifiably abandoned his

service for two or three years by not registering the
necessary equipment forfeits his right to said
equipment and the service authorized to him
(Farinas vs. Estate ofFlorencio Buan, GR No. 12306-7,
November29,1961).

6.

The service of the prior operator is inefficient.

7.

The prior operator denies that there is a need to

expand his service.

8.

The prior operator has abandoned his service.

9.

The prior operation is operating less units than he

was authorized.

100% foreign corporation may own facilities and

equipment of a public Utility such as EDSA LRT III
While the Constitution requires that a franchise is needed
for the operation of public utility and that no franchise
shall be granted to corporation without at least 60% of its
capital owned by Filipinos, it does not require however, a
franchise before one can own the facilities needed to a
public utility. The right to operate apublic utility may
exist independently and separately from the ownership of
the facilities thereof. One can own facilities without
operating them as a public utility, or conversely one may
operate a public utility without owning the facilities
(Tatad, et al. vs. Sec Garcia and EDSA LRT Corp Ltd., April
16,1995).
Certificate of public convenience does not confer
upon the bolder any proprietary right or interest In
the route covered thereby
A CPC does not confer upon the holder any proprietary
right in the route covered thereby (tuque v. Villegas, G.R
No. L-22545, November 28,1969).However, with respect
to other persons and other public utilities, a CPC as
property, which represents the right and authority to
operate Its facilities for public service, cannot be taken or
interfered with without due process of law. Appropriate
actions may be maintained in courts by the holder of the
certificate against those who have not been authorized to
operate in competition with the former and those who
invade the rights which the former has pursuant to the
authority granted by the Commission (AL Animen<
Transportation Co. vs. Golingco, GR No. 17151, April 6,
1922).

10. The prior operator was given the opportunity to

expand his service and foiled to do so.
Q: Bayan Bus Lines had been operating satisfactorily
a bus service over the routeManfla to Tarlac and vice
versa via the McArthur Highway. With the upgrading
of the new North Expressway, Bayan Bus Lines service
became adequate despite its efforts of improving the
same. Pasok Transportation, In c now applies for the
issuance to It by the Land Transportation Franchising
and Regulatory Board of a certificate of public
convenience for the same Manila - Tarlac Manllaroute. Could Bayan Bus Lines, Inc. Invoke die
prior operator rule against Pasok Transportation, Inc?
Why? (2003 Bar)

Under the PSA, a CPC can be sold by the holder thereof

because it has considerable material value and is
considered a valuable asset (Raymundo vs. Luneta Motor
Co., G.R No. 39902, November29,1933). It is a "property"
and and it can be the subject of sale or attachment (CogeoCubao Operators and Drivers Association vs. CA, G.R No.
100727, March 18,1992), Raymundo v. Luneta Motor Co.,
supra)
Approval by the Commission of the sale, encumbrance
o r lease of property is not a condition precedent to
the validity of a contract

A: No, Bayan Bus Lines Inc. cannot invoke the prior

operator ru le rs a genera] principle, public utility
operators must be protected from ruinous competition,
such that before permitting a new operator to serve in a
territory already served by another operation the latter
should first be given an opportunity to- improve his
equipment and service. This principle, however, is subject
*

" U n i v e r s i t y o f S a n t o T om
2 0 1 5 G olden N otes

as

While in the old law, the sale without the approval of the
Public Utility Commission was declared null and void,
under PSA, the new law, the sale may not only be
negotiated but completed before said approval In other

116

T ransportation Laws
words, the approval by the Commission is not a condition
precedent to the validity of the contract The approval Is
. only necessary to protect public interest (Darang vs.

carrier because the degree of diligence required of a

common carrier is not the diligence of a good father of a
family but extraordinary diligence, i.e., diligence of the
greatest skill and utmost foresight

Belizar, G.R No. 1-19487, January31,1967).

However, In case die registered owner leased to another
a vehicle being used for public service, the former will still
be' liable to a customer whose goods were
misappropriated by the latter if there was no approval of
tiie PSC since the lease is not binding upon the parties

Duration for the exercise of extraordlnaiy diligence,

by the common carrier in connection to the transfer
ofgoods
,
ltiasts fromthe time the goods are unconditionally placed
in the possession of, and received by the carrier for
transportation until the same are delivered, actually or
constructively, by the carrier to the consignee, or to the
person who has a right to receive them (Art 1736, NCC).

(Gaftsan vs. Alday, G.R. 1-30212, Septemeber30,1987).

Liability of a holder, of Certificate of Public
Convenience
GR: The holder of the CPC(registered owner) is primarily
and vicariously liable for the negligent operation of the
vehicle (Ibid, pg. 138; Art 2176, in relation to Art 2180,

NOTE: Thus, this duty remains in full force and effect even
when they are temporarily unloaded or stored in transit,
unless the shipper or owner had made use of the right or
stoppage in transit (Art 1737, NCC),

NCC; Filcar Transportvs. Espinos G.R. No. 174156,June20,

2012).

However, this extraordinary liability continues to be

operative even during the time the goods are stored in a
warehouse of the carrier at tfile place of destination, until
the consignee has been advised of the arrival of the goods
and has been reasonable opportunity thereafter to
remove them or otherwise dispose of them (NCC, Art
1738).Hence, where the consignee failed to claim a
machinery after its arrival and the carrier deposited it in
a warehouse, the carrier is not liable for the damages
sustained by the machinery after its delivery to the
warehouse (Sea-LandService, Inc v. CA, G.R 122605, April

XPNs: The registered owner is not liable if:

1. The vehicle was taken or stolen from his garage;
2. The vehicle was driven without his knowledge or
consent (ibid, pg. 138, citing Duavit vs. CA, G.R No. 82318,

May 8,1989 and Dvquillo vs. Bayot, G.R. L-4S080, April 3,

1939).
Note: The registered owner cannot exculpate himself
from vicarious liability by proving who the supposed
. transferee or owner is (ibkL, pg. 139, citing Orix Metro

Leasing vs.Mangalinao, G.R'174089,January25,2012).

30,2001).

DI LI GE NCE REQ UI RED OF C O M M O N CARRIERS .

Duration for the exercise o f extraordinary diligence

by .the common carrier In connection to
transportation of passengers
I
The duty of the common carrier commence from the
moment the person who purchases the ticket from.the
carrier presents himself at the proper place and in a
proper manner to be transported. The relation .of carrier
and passenger continues untflthe passenger has been
landed at the port of destination and has left the vessel
owner's dock or premises. Once created, the relationship
will not ordinarily terminate until the passengerhas, after
reaching his destination, safely alighted from the carriers
conveyance or had a reasonable opportunity to leave the
carrier's premises (Aboitiz Shipping Corp. v. CA, G.R No.

(2002,2008 Bar)
The diligence required of common carriers is
extraordinary diligence (NCQArt 1733). The nature of the
business of common carriers and the exigencies of public
policy demand that they observe extraordinary diligence

(Martin, 198).
It is that extreme measure of care and caution which
persons bf unusual prudence and circumspection use for
securing and preserving tiieir own property or rights. The
law requires common carriers to render service with the
greatest skill and utmost foresight (JLoadmasters Services

vs. Glodel Brokerage, GR 197446, January 10,2011).

84458, Nov. 6,1989).

Reason for the requirement of extra-ordinary
diligence
1.
2.

Q: Fil-Asia Air Flight 9 I 6 was on a scheduled

passenger flight from Manila when it crashed as it
landed at the Cagayan de Oro airport; the pilot
miscalculated the plane's approach and undershot
the runway. Of die 150 people on board, ten (10)
passengers died a t the crash scene.

Nature of the business of common carrier which is

public service;
Public policy, the common carriers are supposed to
serve the public interest and therefore, they have to
exercise extra-ordinaiy diligence [Martin, 1989).

Of the ten who died, one was a passenger who

managed to leave the plane but was run over by an
ambulance coming to the rescue. Another was an
airline employee who hitched a free ride to Cagayan
de Oro and who was not In the passenger manifest

Q: Why is the defense of due diligence in the. selection

and supervision of an employee not available to a
common carrier? (2002Bar)
A: The defense of due diligence in the selection and
supervision of an employee is not available to a comon

117

U n iv ersity of S a n to Tomas
F a c u l t y o f C i v il - La w

i
^

.>

Mercantile Law
Exercise of extraordinary diligence in the carriage of
goods v. Exercise of extraordinary- diligence in the
transport of passengers

It appears from die Civil Aeronautics Authority

1Investigation that the co-pilot who had control of the
plane's landing had less than the required flying and
landing time experience, and should not have been In
control of the plane at the time. He was allowed to fly
as a co-pilot because of th e scarcity of pilots Philippine pilots have been recruited by foreign
airlines under vastly improved flying term s and
wages so that newer and less trained pilots are being
locally deployed. The main pilot, on the other hand,
had a very high level of blood alcohol a t the time of the
crash.

* E X T R A O R D IN A R Y D IU G K N C Ii in.
C n ir in jt.'of G o o d s V T l ' n i n s p o r t o i P a s s e n g e r s

1736).

You are p art of the team th at the victims hired to

' handle the case for them as a group. In your case
conference,;the following questions came up;
a.

b.

Shipping Corp. vs. CA G.ft

84458. November6,1989).
Continues until the goods
are delivered, actually or
constructively, by the
carrier to the consignee, or
to the person who has a
right to receive them. (NCC,
Art 1736) |

Explain die causes of action legally possible

under the given facts against the airline and
the pilots; whom will you specifically Implead
in these causes o f action?
H ow w tilyouhandlethe cases of the passenger
ru n over by th e ambulance, and the airline
employee allowed to hitch a free rid e to
Cagayan de Oro? (2013 Bar)

Continues
until
the
| passenger has been landed
1 at tiie port of destination
I and has left the vessel
owner's dopk or premises
I (Aboitiz, supra).

Note: This duty remains in

full force and effect even \
when they are temporarily

A:
a) A complaint for breach of contract of carriage can be
filed against Fil-Asia Air for failure to exercise
extraordinary diligence in transporting the passengers
safety from their point of embarkation to their destination

unloadedorstored in transit
unless the shipper or owner
had made use of the right or.
stoppage in transit (NCQ
i
Art 1737). j

(NCQ Art 1755).

It also continues even

during tiie time the goods
are stored in a warehouse of
the carrier W the place of
destination j until
the
consignee has been advised
of the arrival of the goods 1_ ?
and has been given a
reasonable
opportunity
thereafter to remove them
or otherwise dispose of .
them (NCQArt 1738)
GK: There is a presumption There is a presumption of
of negligence if the goods negligence if there is death
are lost, { destroyed or or injuries to passengers
deteriorated (NCQ Art (NCQArt 1756)

A complaint based on a quasi-delict can be filed against

the pilots because of their fault and negligence (NCQ Art
2176). Fil-Asia Air can be Included, for negligence in the
selection and supervision of the pilots (NCC, Art 2180).

A third cause of action maybe a criminal prosecution for

the reckless imprudence resulting in homicide against
two pilots. The airline will be subsidiary liable for the dvil
liability only after the pilots are convicted and found to be
insolvent
b) It is the driver of the ambulance and his employer who
should be held liable for damages, because a passenger
was run over. This is in accordance with Articles 2176 and
2180 of the Civil Code. There could also be a criminal
prosecution for reckless imprudence resulting in
. homicide against the ambulance driver and the
consequent dvil liability.

1735)
XPNs: 1. Natural disaster or
calamity Which is the
proximate,cause of the loss
' (flood, storm, earthquake,
lightning)
2. Acts of public enemy in
war, whether international
or civil;
!
3. Act of, omission of the
shipper or passenger;
4. Character of the goods or
defects in the packing or
container;

Since the airline employee was being transported

gratuitously, Fil-Asia Air was not required to exercise
extraordinary diligence for his safety and only ordinaiy
care (Lara v. Valencia, G.R. L-9907, June30,1958).

I IPS J U n i v e r s i t y of S a n t o T omas
2015GOLDBN N otes

Commences from the

moment the person who
purchases the ticket from
the carrier presents
himself at the proper place
and in a proper manner to
be transported (Aboitiz

Commences from the time

the
goods
are
unconditionally placed in
the possession of, and
received by the carrier fpr.
transportation (NCC,. Art

118

T ransportation Laws
5. Order or act of competent
public authority;
6. Exercise of extraordinary
diligence.
The carrier and shipper Cannot be dispensed with
may
agree
on
the or lessened by stipulation.
observance of diligence to a
degree
less
than
extraordinary (but not total
exemption), provided the
stipulation is:
(1) In writing;
(2) Supported by a.valuable
consideration other titan
service rendered by the
carrier; and
(3) Reasonable, just and not
contrary to public policy #

Dimaampao, supra, pg. 137)

Q: X, while driving his Toyota Aids, tried to cross the
railway trac t ofPhilfppine (xxx line 2 unread text xxx)
approached Blumentritt Avenida Ext, applied its
horn as a warning to all d ie vehicles that might be
crossing the railway tra c t but there was really
nobody manning die crossing. X was listening to his
lpod touch, hence, he did no( hear th e round of the
.horn of th e train and so his car was hit by the train. As
a result o f die accident X suffered some injuries and
his car w as totally destroyed as a result of the im pact
Is PNR liable? (2012 Bar)

'

Culpa criminal
Note: If the driver is
convicted and it turns out
that he iis insolvent; the
heirs/ passengers may run
after the employer of the
driver, pursuant to the
employer's
subsidiary
liability under Article 103, in
relation to Arts. 100 and
102. RPC
Tort

Against the carrier and

driver operating the 7
other vehicle atJault

citing Tiu vs. Arriesgado, 6.R

No. 138060, September 1,
2004).
v

LIABILITIES OF C O M M O N CARRIERS

Presumption of negligence in the carriage of goods

(1997,2001,2008 Bar)

BA S I S OF CAUSE OF AC TI ON
A G A I N S T T H E C OM MO N V
CARRIER

Tort

Against the negligent

driver

BASIS 0E CAUSE OF
/. . ACTI ON
..

Note: The liability of the

common carrier and his
driver as well as the
operator of the other vehicle
and his driver is joint and
several Q. Dimaampao,

Causes o f action for failure to observe diligence

required

Third p e r S d n who
suffereddamages. ...
Shipper o f the goods
damaged '
. Heir/s o f the deceased
passengers or the
passenger him selffor.
the Injuries sustained
by him

THE INJURED
; . PASSENGER OR 11IS
. HEIRS.. IF THE V,.:
- PASSENGERDIES:T'-,v

Against the common Subsidiaiy liability

carrier at fault

A: PNR is liable because Railroad companies owe to the

public a duty of exercising a reasonable degree of care to
avoid injury to person and property at railroad crossings
which means a flagman ora watchman should have been
posted to warn the public at all times.

.T E R S O N W H O H A S
CA US E 0 E ACTI ON

). CAUSE OF ACTION 0E

(extra-contractual

negligence)
Breach of the contract of
carriage fCulpa Contractual)
Breach of the contract of
carriage (Culpa Contractual)

In all cases other than those mentioned in Nos. 1,2,3,4.

and 5 of Article 1734 of die NCC, if die goods are lost
destroyed' or deteriorated, common carriers are
presumed to have been at fault or .to have, acted
negligently (NCC, Art 1735).
Presumption of negligence in die transportation of
passengers (1990,1994 Bar)
In case of death of or injuries to passengers; common
carriers are presumed tx>have been at fault or to have
acted negligently (NCC, Art 1756).
Presumption of negligence is rebuttable

Both articles 1735 and 1756 of the NCCprovides that such

presumption may be refuted by proving observance of
extraordinary diligence as prescribed by article 1733 of
the NCC.
Note: Though it is true that common carriers are
presumed to have been at fault or to have acted
negligently if the goods transported by them are lost,
destroyed, or deteriorated, and that the common carrier
must prove that it exercised extraordinary diligence in

119

U n iversity of S a n to Tomas
Faculty of C ivil Law

i >

Mercantile Law
order to overcome the'presumption, the plaintiff must
still, before the burden is shifted to the defendant prove
that the subject shipment suffered actual shortage. This
can only be done If the weight of the shipment at the port
of origin and its subsequent weight at the port of arrival
have been proven by a preponderance of evidence, and it
can be seen that the former weight is considerably greater
than the latter weight; taking into consideration the
.exceptions provided in Article 1734 of the Civil Codeln
this case, respondent -failed to prove that the subject
shipment suffered shortage, for it was not able to
. establish that the subject shipment was. weighed at the
port of origin at Darrow, Louisiana, U.SA and that the
actual Weight of the said shipment was 3,300 metric tons.
(Asian Terminate, Inc. v. Simon Enterprises, fnc, G.R No.

be considered included in the "analogous cases" used in

Article 2219 of the NCC. This is likewise to consider that
Art 2176 of the NCC expressly excludes the cases where
there is a "pre-existing contractual relation between the
parties (Versoza vs. Baytan, etal, G.R L-14092, April 29,

1960).
. XPNs: Moral damages may be recovered even in case of
breach of contract of transportation in the following
cases:
1. Where the mishap results in the death of the
passenger (M. Ruiz Highway Transit Inc vs. CA, G.R

L-16086, May29,1964).
2. Where it is proved that the carrier was guilty of
fraud or bad faith, even if death does not result (Rex
Taxicab Co. vs. Bautista, GR No. L-15392, September
30,1960).

177116, February27,2013). .
Q: Peter so hailed a taxicab owned and operated by

NOTE: Although the relation of passenger and carrier is

"contractual both In origin and nature" nevertheless "the
act that breaks the contract may be also a tortwhen said
act is done with gross negligence or with bad faith (Air

Jimmy Cheng and driven by Hermie Cortez. Peter

asked Cortez to take him to his office in Malate. On the
way to Malate, th e taxicab collided with -a passenger
jeepney, as a result o f which Peter was injured Le.he
fractured his left leg. Peter sued Jimmy for damages,
based upon a contract of carriage, and Peter won.
Jimmy wanted to challenge the decision before the SC
on die ground th at the trial court erred in not making
an express finding as to whether o r not Jimmy was
responsible for. the collision and, hence, civilly liable
to Peter. He w ent to see you for advice. He wenjtto see
you for advice. W hat will you tell him? Explain (1990
Bar)

France v Carrascoso, G.R No. L-21438, September 28,

1966).
I
*
Q: Vivian Martin was booked by PAL, which acted as
ticketing agent of Far East Airlines, for a round trip
flight on the latter's aircraft, from Manila-HongkongManila. The ticket was cut by an employee of PAL The
ticket showed that Vivian was scheduled to leave
Manila at 5:30p.m. on 05 January 2002 aboard Far
East's Flight F007. Vivian arrived.at the Ninoy Aquino
International Airport an hour before the time
scheduled m her ticket, b at was told that Far. East's
Flight 007 nad left at 12:10p.m. It turned out that the
ticket was inadvertently cut and wrongly worded.
PAL employees manning the airports ground
services nevertheless scheduled her to fly two hours
later aboard their plane. She agreed and arrived In
Hongkong safety. The aircraft used by Far East
Alrltnes developed engine trouble, and did not make
it to Hongkong but returned to Manila Vivian sued
both airiines, PAL and Far East; for damages because
. of her'having unable to take the Far East flight. Gould
either o r both airlines be held liable to Vivian? Why?
(2003 Barjj

A: 1 will advise limmy to desist from challenging the

decision. The action of Peter being based in culpa
contractual, the carrier's negligence is presumed upon the
breach of contract The burden of proof instead would lie
in jimmy to establish that despite an exercise of utmost
diligence the collision could not have been avoided.
Q:-In a court case involving claims for damages
arising from death and fnjuiy of bus passengers,
counsel for the. bus operator .file sa dem urrer to
evidence arguing th at th e complaint should be
dismissed because the plaintiffs did not submit
any evidence th at the operator o r Its employees
w ere negligent If you w ere th e judge, would you
dismiss the complaint? (1997 Bar)

A: The instant petition was based on breach of contract of

carriage; therefore, Vivian can only sue Far East Airlines
alone, and not PAL, since the latter was not a party to the
contract However; this is not to say that PAL is relieved
from any liability due to any of its negligent acts. In
China Air Lines, Ltd v. Court of Appeals, while not exactly
4 In point; however, illustrates the principle which governs
this particular situation. In that case, the carrier (PAL),
acting as an agent of another carrier, is also liable for its
own negligent acts or omission in the performance of its
duties. Far East Airline may also hie a third-party
complaint against PAL for the purpose of determining
who was primarily at fault between them. It is but logical,
fair and equitable to allow BA to sue PAL for
indemnification, if it is proven that the latter's negligence
was the proximate cause of Vivian's unfortunate
experience^ instead of totally absolving PAL from any

A: No. In the .carriage of passengers; the failure of the

common carrier to bring the passengers safely to their
destination immediately raises the presumption that
such failure is attributable to the carrier's fault or
negligence. In the case at bar, the fact of death and injury
of the bus passengers raises the presumption of fault or
negligence on the part of die carrier. The carrier must
rebut such presumption. Otherwise, the conclusion can
be properly made that the carrier failed to exercise
extraordinary diligence as required by law.
v Moral damages in case of breach of contract of
transportation
. GR: Moral damages are not recoverable in breach of
contract of transportation because such contract cannot
s?,|P j | |

Un iv er sity

of

Santo T omas

2 0 1 5 GOLDCN N o t b s

120

T ransportation L aws
liability. (British Airways v. CA, G.R. 121824, January 29,

a. X as tihe owner Is exempt from liability because

he was not the one driving.

1998)

b. X as the owner is exempt from liability because

precisely the arrangement is one under the
"boundary system."

Boundary system
! .' Under this system the driver is. engaged to drive the
pwner/operator's unit and pays the latter a fee commonly
; called boundaiy for the iise of the unit Whatever he
earned in excess of that amount is his income (Paguto

c. X will not be exempt from liability because he

remains to be die registered owner and the
boundaiy system will not allow the
circumvention of die law to avoid liability.

. Transport Corp. v. NLRC, G.R. No. 119500, August28,1998).

Hie gasoline consumed by the jeep is for die account of
the driver (National Labor Union v. Dinglasan, G.R. No. L-

d. Y is the only one liable because he drove

recklessly.

14183, Nov. 4,1993)..

A: C. X will pot be exempt from liability because he

remains to be the registered owner and the boundary
system will not allow the circumvention of the law to
avoid liability.

. Relationship between the owner of die vehicle and

r *die driver under a boundaiy system arrangement
The relationship between jeepney owners/ operators on
; one hand and jeepney drivers on the other under the
" boundaiy system isthat ofemployer-employee and not of
. .lessor-lessee (Martinezv. NLRC, G.R. No. 117495, May29,

Kabitsystem

>/

The kabit system is anarrangement whereby a person

who has been granted a CPC allows other persons who
own motor vehicles to operate them under his license,
sometimes for a fee or percentage of the eaniings (Lim v.

1997).
0

The owner of th e public vehicle operating under die

boundaiy system is not exempt from liability in a case
of injury to o rd eath of passengers

CA, G.R. No. 125817,January 16,2002)

NOTE: Although not outrightiy penalized as a criminal
offense, the kabit system is invariably recognized as being
contrary to public' policy and therefore, void and
inexistent under A rt 1409 of the New Gvil Code. It is a
fundamental principle that die court will not aid either
party to enforce an illegal contract; but will leave them
both where It finds them (Lita Enterprises, Inc v. IAC, G.R.

To exempt from liability the owner of a public vehicle who

Operates it under die "boundaiy system on the ground
that he is a mere lessor would be n.ot only to abet flagrant
violations of the PSA, but also to place the riding public at
the mercy of reckless and irresponsible drivers.
Moreover, due care in die selection of employees is called
for by Article 2180 of the Gvil Code. Failing on this, the
owner of the vehicle, who is likewise the employer, shall
not be exempt from liability (Hernandez vs. Dolor, G.R.

No. 64693, April27,1984)

Q: Discuss the kabit system" in land transportation
and its legal consequences (2005 Bar)

160286, July30,2004).
Q: Baldo is a driver of Yellow Cab Company under
die boundary system . While cruising along the
South Expressway, Baldo's cab figured In a collision,
kfllinghis passenger, Pietro. The heirs of Pietro sued
Yellow Cab Company for damages, but the latter
refused to pay d ie beirs, insisting that it Is not liable
because Baldo is not its employee. Resolve with
reasons. (2005 Bar)

A: The "kabit system is an agreement whereby a

person who has been granted a certificate of convenience
allows another person who owns motor vehicles to
operate under such franchise for a fee. It has been
identified as one of the root causes of the prevalence of
graft and corruption in the government transportation
offices. It is recognized as a contract which is against
public policy and therefore void and inexistent under A rt
1409 (Lita Enterprises, Inc vs. IAQ G.R. L-64693, April 27,
1984). As a consequence, both the owner of the certificate
of public convenience and the actual owner of the motor
vehicle should be held jointly and severally liable for
damages to third persons as a consequence of the
negligent operation of the motor vehicle.

A: Yellow Cab Company shall be liable with Baldo, on

-a solidary basis, for the death of passenger Pietro.
;Baldo is an employee of Yellow Cab under the
boundary system. As such, the death of passenger
Pietro is breach of contract of carriage, making both
the common carrier Yellow Cab and its employee,
Baldo, solidarity liable (Hernandez v. Dolor, G.R. No.

The registered owner of the vehicle may not be

allowed to prove that there is already a transfer of
ownership to another person under the kafa'it system

160286, July30,2004).
Q: X owns a fleet of taxicabs. He operates it through
what is known as boundaiy system. Y drives one of
such taxicabs and pays X a fixed amount of P h p l ,000
daily under the boundaiy system. This means that
anything above P hpl,000 would be die earnings of Y.
Y, driving recklessly, hit an old lady crossing the
street Which statem ent is most accurate? (2012 Bar)

One of the primary factors considered in the granting of a

CPC for the business of public transportation is the
financial capacity of the. holder of the license, so that
liabilities arising from accidents may be duly
compensated. The kabit system renders illusory such
purpose and, worse, may still be availed of by the grantee

121

Un iv e r s it y of S anto T omas
F aculty of C ivil Law

Mercantile L a w .
to escape civil liability caused by a negligent use of a
vehicle owned by another and operated under his license.

for himself a certificate of public convenience for its

operation. Thus, per the records of the Land
Transportation Franchising and Regulatory Board,
Enteng remained its registered owner and operator.
One day, while the jeepney was traveling southbound,
it collided with a ten-wheeler truck owned by
Emmanuel. The driver of the truck admitted
responsibility for the accident, explaining that the
truck lost its brakes.
.
.
.

Procopio sued Emmanuel for damages, but the latter

moved to dismiss the case on the ground that
Procopio is not the real party in interest since he is
not the registered owner of file jeepney. Resolve the
motion with reasons (2005 Bar)

If a registered owner is allowed to escape liability by

proving who the supposed owner of the vehicle is, It
would be easy for him to transfer the subject vehicle to
another who possesses no property with which to
respond financially for the damage done (Urn v. CA,

supra).
Q: Can the grantee of CPC engaged in a "kabit system
be held liable for damages arising from the crime of
reckless im prudence resulting to the death and
injuries to third persons, to which the driver was
convicted? \
A: Yes. The driver, the operator, and the real owner of the
vehicle are jointly and severally liable for damages.
However, the registered owner or operator has the right
to be indemnified by the real or actual of the amount that
he may be required to pay as damage for the injury
caused. Recovery by the registered owner or operator
may be made in any forxneither by a cross-claim, third
party complaint, or an independent action,and the result
is the same (Perez, 2009, citing Jereos v. CA, G.R. L-48747,

A: The motion to dismiss should be denied. In the case

of him v. Court of Appeals, G.R. No. 125817, January 16,
2002, the Supreme Court held .that Procopio may sue for
damages against Emmanuel despite the existence of kabit
system because, (a) neither parties to th? kabit system is
being held liable for damages; (b) the case arose from the
negligence of another vehicle using the public road to
whom no representation, or misrepresentation, as
regards ownership and operation of the passenger
jeepney was made to whom such representation, or
misrepresentation was necessary (Villanueva, 2009)

September20,1982; Zamboanga Tram. Co. v. CA, 1-25292,

November29,1969).
Q: Johnny owns a Sarao jeepney. He asked his
neighbor Van if he could operate the said jeepney
under Van's certificate of public convenience. Van
agreed and, accordingly, Johnny registered his
jeepney under Van's name. On JunelO, 1990, one of
the passenger Jeepneys operated by Van bumped
Tomas. Tomas was injured and in due time, he filed a
complaint for damages against Van and bis driver for
the injuries h e suffered. The court rendered judgment
in favor of Tomas and ordered Van and his driver,
Jointly and severally, to pay Tomas actual and moral
damages, attorney'sfees, and costs.

Q: X owns a passenger jeepney covered by Certificate

of Public Convenience. He allowed Y to. use its
Certificate of Convenience for a consideration. Y
therefore was operating the passenger jeepney under
the same Certificate of Public Convenience (Kabit
System) under the name of X. The passenger jeepney
m et an accident Who m il be liable? (2012 Bar)

A: Xand Y will be jointly and severally liable.

VIGILANCE OVER G OO DS
'

The Sheriff levied on the jeepney belonging to

johnny but registered in the name of Van. Johnny
filed a 3rd party claim with bie Sheriff alleging
ownership of th e jeepney levied upon and stating
that th e jeepney was registered in the name of Van
merely to enable Johnny to make use of Van's
certificate of public convenience. May the Sheriff
proceed with th e public auction of Johnny's jeepney.
Discuss with reasons. (1990 Bar)

Presumption on the
deterioration of goods

Q: Procoplo purchased an Isuzu passenger jeepney

from Enteng, a holder of certificate of public
convenience for th e operation of public utility plying
the Caiamba-Los Banos route. While Procoplo
continued offering the jeepney for public transport
services, he did n o t have the registration of the
vehicle transferred in his name. Neither did he secure
of

S anto T omas

destruction,

or

XPNs: When the same is due to any ofthe following causes

only; (FA2-CO)
1. fortuitous events (Flood, storm, earthquake, lightning
or other natural disaster or calamity). Provided, the
/oilowing conditions are present: (1994-1996 Bar)
a. Natural disaster was the proximate and only cause;
b. Carriejr exercised due diligence to prevent or
minimize loss before, during and after the occurrence
of the natural disaster; and
c. The common carrier has not negligently incurred
delay in transporting the goods.(NCC, Art 1739-1740).
d. The common carrier exercised due diligence to
prevent br minimize the loss before, during or after its
occurrence.

L-26815, May 26,1981).

Un iv e r sit y

doss,

'

GR: The common carrier is presumed to have been at fault

or to have acted negligently when the goods transported
are lost, destroyed or deteriorated.(NCC, Art 1735).

A: Yes, the Sheriff may proceed with the auction sale of

Johnny's jeepney. In contemplation of Jaw as regards the
public and third persons, die vehicle is considered the
property of the registered operator (Santos v. Sibug, G.R.

2 0 1 5 Golden Notes

EXEMPTING-CAUSES

122

T ransportation Laws
2. Defective brakes cannot be considered fortuitous in
character (Vergara v. CA, G.R. No. 77679, September 30,

2. Act of the public enemy In war, whether International

or civil, provided:
j
a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the pet (NCC,
Art 1739-1740).

198.).
Occurrence of a typhoon as a fortuitous event
GR: If all the elements of a natural disaster or calamity
concur and there was no contributory negligence or delay,
the occurrence of a typhoon as a fortuitous event. This
holds true especially if the vessel was seaworthy at the
time it undertook that fateful voyage and that it was
confirmed with the Coast Guard that the weather
condition would permit safe travel of the vessel to its
destination (Philippine American General Insurance Co.,

3. Act or omission of the shipper or owner of the goods,

provided:
a. If proximate and only cause - exempting
b. If contributory negligence - mitigating
4. The Character of the goods or defects in the packing or
in the containers; provided, carrier exercised due.
diligence to forestall or prevent loss (NCC, Art1742).

'

Incv. MGGMarine Services, Inc, G.R. No. 13564S, March 8,

2002).

NOTE: If the feet of improper packing is known to the

carrier or its servants, or apparent upon ordinary
. observation; but it accepts die goods notwithstanding
such condition, it is not relieved from responsibility for
loss or injury resulting there from (Southern Lines Inc, v.

The loss of cargoes due to the sinking of a seaworthy

tugboat which was suddenly tossed by waves of
extraordinary height is due to amorce raajeure (Philippine

American General 'Insurance Company v. PKS Shipping

Company, GR. 149038, April9,2003).

CA, GRNo. L-16629,January31,1962).

5. Order or act of competent authority; provided, the
authority is with power to issue the order (Art 1743). If
the officer acts without legal process, the common carrier
. will be held liable (Ganzon vs. CA, GRNo. Lr48757, May 30,

XPN: If a vessel sank due to a typhoon, and there was

failure to ascertain the direction of the storm and the
weather condition of the path they would be traversing, it
constitutes lade of foresight and minimum .vigilance over
its cargoes taking into account the surrounding
circumstances of the case. Thus, the common carrier will
still be liable (Aruda v. CA 6.R. No. 98243,July1,1992)

1988).
. NOTE: In all cases other than those enumerated above,
there is presumption of negligence, even if there is an
agreement limiting the liability of the common carrier in
.the vigilance over the goods.

However, where a vessel encountered stormy weather

and the coils of wire it was transporting became rusty
because rain entered the hatch of the vessel, the damage
was not due to a fortuitous event, because heavy rains are'
foreseeable and rain would not have entered the hatch if
it was closed property (Eastern Shipping Lines v. CA, GR.

R E Q U I R E M E N T OF A B S E N C E OF NEGLIGENCE

Requisites o f a fortuitous event (FEU-1) *.

97412,July12,1994)
1.

The debtor mustbe free from any participation In or

aggravation of the injury to the creditor.

< 2.

The Event must be such as to rend er it impossible for

the debtor.to fulfill his obligation in a normal manner.

-. 3.

The event must be Unforeseen or unavoidable.

4.

Q: On a d ea r weather, M/V Sundo, carrying insured

cargo, left theport of Manila bound for Cebu. While at
sea, die vessel encountered a strong typhoon fordng
the captain to steer the vessel to thenearest island
where it stayed for seven days. The vessel ran out of
provisions for Its passengers. Consequently, the
vessel proceeded to Leyte to replenish its supplies.

The cause of the breach of obligation must be

Independent of the will of the debtor (Real v. Belo, GR

a. Assuming that the cargo was damaged because

of such deviation, who between the insurance
. company and the owner of the cargo bears the
loss? Explain.

No. 146224, January26,2007).

Mechanical defects are not considered fortuitous
events

b. Under what circumstances can a vessel properly

proceed to a port other than its port of
destination? Explain. (2005 Bar)

Mechanical defects in the carrier are NOT considered

a caso fortuito that exempts the carrier from
responsibility (Sweet Lines, Inc. v. CA, GRNo. L-46340, Apr.
29,1983) Other SC decisions on the matter are:

A:
a) The insurance company is liable. It is an instance of
a valid deviation because the strong typhoon is a
fortuitous event over which neither the master nor the
owner has any controL Deviation is likewise proper in
order to avoid a peril. (Sec.124 (b)) Art 1734 of the New
Civil Code further provides that common carriers are
responsible for the loss, destruction, deterioration of the
goods unless the same Is due to any of1the following

1. Tire blowout of a jeep is not a fortuitous event where

there exists a specific act of negligence by the carrier
consisting of the feet that the jeepney was overloaded
and speeding at the time of the incident (Juntilla v.

Fontanar, GR No. L-45637, May 31,1985)

123

Un iv e r sit y of S anto T omas

F aculty of Civil Law

v X-

Mercantile Law
A bus operator is not liable for the.injuiy suffered by a
passenger when a bystander stoned the bus, because, a
common carrier is not liable for the injury of passengers
caused by strangers over whom it had no control and the
bus operator is only responsible if the bus operator could
have prevented such Injury by the exercise of the
diligence of a good father of a family, for the bus operator
is not an jsurer of the absolutely safety of passengers

causes Only, among others is when there is flood, storm,

earthquake, lightning or other natural disaster or
calamities. Moreover, a common carrier is bound to
transport cargo and passengers with extraordinaty
diligence.' Such deviation is justproper in its exercise of
extraordinary diligence.
b) Sec.124 of the Insurance Code provides that a
deviation is proper when:
(a)
When caused by die circumstances over which
,
neither the master nor the owner of the ship has any
control;

(Pilapilv. CA, GR. No. 52159, December22,1989).

Q: M. Dizon Trucking entered into hauling contract
with Fairgiiods Co whereby the former bound itself to .
haul the latter's 2000 sacks of soya bean meal from
Manila Pojrt Area to Calamba', Laguna. To carry out
faithfully its obligation Dizon subcontracted with
Enrico Reyes the delivery of 400 sacks of the Soya
bean meaL Aside from die driver, three male
employees of Reyes rode on the truck with the cargo.
While the truck was on its way to Laguna two
strangers suddenly stopped the truck and hijacked
th e cargo.| Investigation by die police disclosed that
one of the hijackers was armed with a bladed weapon
while die other was unarmed. For failure to deliver
the 400 sacks, Falrgoods sued Dizon for damages.
Dizon In turn setu p a third party complaint against
Reyes whfdi the latter registered on the ground that
theloss was due to force majeure. Did the hijacking
constitute! force majeure to exculpate Reyes from any
liability? (1995 Bar)

(b.) When necessaty to comply with a warranty, or

to avoid a peril, whether or not the peril is insured
against;
(c.)
When made in good faith, and upon reasonable
grounds of belief in its necessity to avoid a peril; or
(d.). When made in good faith, for the purpose of
saving human life or relieving another vessel hi
distress.
Fire is not considered a natural disaster
This must be so as it arises almost invariably from some
act of mail or by human means. It does not fall within die
categoiy of an act of God UNLESS caused by lightning or
by other natural disaster or calamity. It may even be
caused by the actual fault or privity of die carrier (Eastern
Shipping Lines v. 1AC, CRNo.L-69044, May29,1987).

A: No. Theihijaddng in this case cannot be considered as

force majeure. Only one of the two hijackers was armed
with a bladed weapon As against four male employees of
Reyes, two (2) hijackers, with only one of them being
armed witji a bladed weapon, cannot be considered force
majeure. The hijackers did not act with grave or
irresistible threat, violence, or force.

But if the outbreak of Are is due to'a crack in the auxiliaiy

engine fuel oil service truck, which resulted in the loss of
cargoes, that is not due to a force majeure but to
negligence (Edgar Cakaliong Shipping Lines, Inc v. UCPB

GeneralInsurance Company, Inc, G.R. No. 146018, June 25,

2008).

ABS ENCE OF DELAY

NOTE: In case that the goods have been already deposited

in the warehouse of Bureau of Customs then the goods
was destroyed by fire, the carrier is not anymore liable

Rules regarding die time of delivery of goods and

delay

(Servando vs. Philippine Steam Navigation, GR No. L36481-2, October23,1982).

Common c a rrie rs liability forfhe acts of strangers or
criminals

1. If there Is an agreement as to time o f delivery - delivery

must be within the time stipulated in the contract or
bill oflading.

GR: A common carrier is liable even for acts of strangers

like thieves or robbers.

2. Ifthere is no agreement - delivery must be within a

reasonable time (Saluda fir. v. CA, G.R No. 9SS36,

March 23,1992).

XPN: Where such thieves or robbers acted "with grave or

irresistible threat, violence or force." The common carrier
is not liable for the value of the undelivered merchandise
which was lost because of an event that is beyond his
control (De Guzman v. CA, supra).

Liability of the carrier if there is delay in the delivery

ofgoods
The carrier shall be liable for damages immediately and
proximately resulting from such neglect of duty (ibid;

NCC, Art 1170).

When an airline company was not authorized to search

passengers for firearms* the loss of the jewelry and cash
of a passenger because of an armed robbery committed
by other passengers is a force majeure, for which the
airline company is not liable (Quisumbing v. CA, G.R. No L-

However, where the delay in the transportation of the

remains of a deceased person was due to the fault of .the
mortuary 'service, who erroneously switched the casket
with that of another deceased person, tile airline company
cannot be held liable for damages because of the delay

50076, September14,1990).

(Saludo v. CA, supra).

U n iv e rs ity o f S a n to Tomas
2 0 1 5 G olden. N o t e s

124

T ransportation Law s

Although the delivery of the suitcase of a passenger was

delayed by eleven days, an airline company cannot be
held liable for moral damages, exemplary damages, and
attorney's fees, where the airline company was not guilty
of bad faith and exerted efforts in tracing the suitcase
(Philippine Mr lines v.' Miano, G.R No. 106664, March 8,

Contributoiy negligence on the part of the passenger does

not justify the common carrier's exemption from liability

(Martin, 1989).
Q: Nelson owned and controlled the Sonnet
Construction Company. Acting for the company,
Nelson contracted the construction of a building.
Without-flrst installing a protective net atop the
sidewalks adjoining die construction ' site, tbe
company proceeded with the construction work. One
day, a heavy piece of lumber fell from die buildings It
smashed a taxicab which a t that time had gone
offroad and onto die sidewalk in order to avoid the
traffic. The taxicab passengers died as a result

1995).
Effect to the limited liability In case of an unjust delay
In die transportation o f goods or a deviation from
stipulated or usual route
If the common carrier, Without just cause, delays the
transportation of the goods or changes the stipulated or
usual route, die contract limiting die common carrier's
.liability cannot be availed of in case of die loss,
destruction, or deterioration of the goods (NCC, Art 1747).

a. Assume that the company had.no more account

and property in Its name. As counsel for the heirs of
die victim, whom will you sue for.-damages, and
' what theory will you adopt?,
b. If you were the counsel for Sonnel Construction,
how would you defend you client? What would be
your theory?
c Gould the heirs hold die taxicab owner and driver
liable? Explain. (2008 Bar)

A stipulation limiting the common carrier's liability

'for delay on account of riots is valid
An agreement limiting the common carrier's liability for
delay on account of strikes or Hots is valid (NCC, Art

1748).
D U E DfLIGENCE-TO P R E V E N T OR I,ESSEN LOSS

a. I will sue Nelson as owner of Sonnel Corporation

invoking the Doctrine of pierdng the veil of corporate
fiction. As a general rule, die liability of a corporation is
separate, and distinct from the person composing i t
However, when the veil of corporate fiction Is used as a
shield to perpetrate fraud, to defeat public convenience,
or to avoid a dear legal obligation, this fiction shall be
disregarded and the individuals composing it will be
treated identically..

.Duty o f die common carrier before, during and after a

natural disaster o r acts of a public enemy as
contemplated under Article 1734of die NCC
'The common carrier must exercise due diligence to
prevent or minimize loss before, during and after the
]occurrence of flood, storm or other natural disaster or an
, act of a public enemy in order that the common carrier
may be exempted from liability for the loss, destruction or
deterioration of the goods (NCC, Art 1739).
v.r
NOTE:This exemption from liabilityalso requires thatthe
;common carrier must prove that die natural disaster or
the act of the public enemy is the proximate and only
cause of the loss (ibid.). Farther, if the common carrier
negligently, incurs delay in transporting the goods, a
Inatural disaster shall not free such carrier from
responsibility (NCC, Art 1740%

In the case at bar, Sonnel was negligent in not installing a

protective net atop the sidewalk before the beginning of
the construction work. Since the company had no more
account and property in its name, the heirs can rightfully
pursue the claim against the owner instead. The doctrine
of separate personality cannot be invoked to avoid
liability, much more when it is used to perpetuate an
injustice.
b. I shall raise the affirmative defense of contributory
negligence. The proximate cause of death is the violation
of the taxi driver of traffic rules and regulations when it.
drove offroad to avoid heavy traffic. The lumber that fell
from the building was only the immediate cause of death
of the victims. I will further substantiate my defense by
invoking the principle thatmy client, Sonnel Construction,
had exercised due diligence in the selection and
supervision of its employees.

Duty of the common carrier if the loss, destruction, or

deterioration of the goods was caused by the
'character of the goods, o r die faulty nature of the
' packing or the containers
.If the loss, destruction, or deterioration of the goods was
caused by die character of die goods, or the faulty nature
^of the packing or die containers, the common carrier must
exercise due diligence to forestall or lessen the loss.

c. Yes. Both taxicab owner and driver may be held

liable based on breach of contract of carriage and
negligence in the selection and supervision of employees
for quasi-delict The driver can be held criminally liable
for reckless imprudence resulting to homicide, lie can
also be held liable for damages under quasi-delict as
provided in Article 2180 an employer may be held
solidarily liable for the negligent act of his employee.
Hence, in this case, the taxicab owner is exempted from

:^TsvV.-'CONTRIBUTORY'NEGLIGENCE!.

Contributory negligence is die failure of a person who has

een exposed to irijuiy by the fault or negligence of
Another, to use such degree of care for his safety and
protection an ordinarily prudent man would use under
the circumstances (Martin, 1989, citing Rakes vs Atlantic

[GulfCo., G.R. No. 1719, January23,1907).

125

Un i v e r s i t y o f S a n t o T o m a s
' F aculty , of C i vi l Law

M e r c a n t il e L a w
liability while the taxi cab driver is liable solely and
personally for criminal prosecution.
Rule if there is contributory negligence on the part of
the shipper
If the shipper or owner merely contributed to the loss,
destruction or deterioration of the goods, the proximate
cause thereof being the negligence ofthe common carrier,
the latter shall be liable for damages^ which however, shall
be equitably reduced (NCC, Art 1741).
Rule if there is contributory negligence on the part of
thesblpper

The execution of a receipt or bill of lading Is not

required for the commencement of the responsibility
to observe extraordinary diligence
The requirement to observe extraordinary diligence
begins with die actual deiivety of the goods for '
transportation, and not merely with the formal execution '
of a receipt oVbifl of lading: die issuance of abill of lading
is not necessaty jto complete delivery and acceptance by
the carrier (Companfa Maritime/ v. Insurance Co. of North

' America, G.R. NoJl-18965, October30,1964).

ACTUAL OR CONSTRUCTIVE DELIVERY

Party to wfaom delivery should be made

If the shipper or owner merely contributed to die loss,
destruction or deterioration of die goods, the proximate
cause thereofbeing the negligence of the common carrier,
the latter shall be liable for damages, which however, shall.
be equitably reduced (NCC, Art 1741).
DURATION OF LIABILITY
DELIVERY OF GOODS TO A COMMON CARRIER

Duration of the extraordinary responsibility o f the

common carrier
It lasts from die time the goods are unconditionallyplaced
in the possession of, and received fay die carrier for
transportation until the same are delivered, actually or
constructively, by die carrier to the consignee or to the
person who has a right to receive tiiem(NCC, Art 1736).
Meaningofthephrasse "Unconditionally placed in the
possession of, and received by the carrier for
transportation"
It is the delivery of the goods to the carrier for immediate
transportation, that is, as soon as the delivery is complete
so as to place on die carrier die exclusive duty of seeing
after their safety (Perez,2006citing CharlesJ. Webb &Sons

It must be delivered, actually or constructively, to the

consignee orto the person who hasarightto receive diem

(Artl736,NCC).
NOTE: Deiivety of the cargo to the customs authorities is
not delivery to the consignee, orto die person who has a
right to receive diem (Lu Do &LuYm Corp. vs. Blnamira,

G.R. No. L-9840, April22,1957).

Constructive delivery

There is constructive deliveiy when deiivety is effected

not by actually transferring the possession of thing to the
vendee (in this case, the other party, either the carrier or
the consignee) but by legal formalities or by symbolic
tradition (Pineda, 2010).
i
Party liable for the misdelivery by a carrier who was
chosen by the buyer
Misdcliveiy of the goods is attributable to the carrier and
not to the seller. And, since the cairier was chosen and
authorized to make the delivery by the buyer itself, the
seller cannot be held responsible for such misdelivery

(Smith, Beli& Ca[Phils.]vs. Gimenez, G.R No:L-17617,)une

29,1963)
I

vs. CentralR Co. ofNJ, 36 F. 2d 702).

TEMPOj&\RMillMLOADING OR STORAGE

NOTE: When the goods are unconditionally placed lii die

possession and control of the common carrier, and upon
their receipt by the carrier for transportation, the contract
of carriage was deemed perfected The fact thatpart of the
shipnienthad not been loaded on board the lighter did not
impair the said contract of transportation as the goods
remained in the custody and control of the carrier, albeit
still unloaded (Ganzon vs. CA, supra).
Liability governed by Philippine law even if cargo was
transhipped
The liability of a shipping company for damage to cargo it
shipped to Davao City is governed by Philippine law even
if the cargo was transshipped to the United States,
because as against the first shipping company, Davao City.
was the destination (Lorenzo Shipping Corporation v.

Right of stoppage in transitu

It is the right jxerdsed by the seller by stopping the
.delivery of the goods to a certain buyer or consignee
(because of Insolvency) when such goods are already In
transit (NCC, Art 1530).
NOTE: The seller may exercise this right either by
obtaining actual possession of the goods or by giving
notice of his claim to the carrier or other bailee in whose
possession the 4oods are. Such notice may be given either
to the person in actual possession of the goods or to his
principal. In the latter case, the notice, to be effectual,
must be given at such time and under such circumstances
that the principal, by the exercise of reasonable diligence,
may prevent a delivery to the buyer (NCC, Art 1532).

v'J k
A
c m

* pr
NOTI

Chubb and Sons, Inc., G.R. 147724, June8,2004).

T
j

U n iv e rs ity o f S a n to Tomas
2 015G olden Notes

-0

T ransportation Laws
Rule as to unloading, storage and stoppage in transitu
GR: The common carrier's duty to observe extraordinary
diligence in the vigilance over the goods remains in full
force and effect even when they are temporarily unloaded
or stored.in transit'
XPN: When the shipper or owner has made use of the
right of stoppage in transit (NCC, A rt 1737).
Diligence required to be exercised by the carrier if the
right of stoppage in transit was exercised
The .diligence required is Ordinary diligence because of
the following:
a. It is holding the gbods in the capacity of an ordinary
bailee or warehouseman and not as a carrier
b. There is a change of contract from a contract of carriage
to a contract of deposit (NCC, A rt 1737).
Obligation required of the common* carrier in case of
stoppage In transitu
When notice of stoppage in transitu is given by the seller
to tiie carrier, he mustredeliver the goods to, or according
to the directions of, the seller. The expenses of such
delivery must be borne by the seller (NCC, Art 1532).
NOTE: If the seller instructs to deliver it somewhere else,
a new contract of carriage is formed and the carrier must
be paid accordingly.
- S TI P UL AT I ON FOR L I MI TA TI O N OF LIABILI TY'1

Valid stipulations that a common carrier of goods may

indicate in a contract in order to escape liability
1. Astipulation limiting the liability of the common carrier
for the loss, destruction, or deterioration of the goods to a
degree less than extraordinary diligence, provided it be:
a. In writing, signed by the shipper or owner;
b. Supported by a valuable, consideration other than
T tiie service rendered by the common carrier, and
c. Reasonable, just and not contrary to public policy.
2. An agreement limiting the common carrier's liability for
delay on account of strikes or riots (NCC, Art 1748).
3. A stipulation that the common carrier's liability is
limited to the value of the goods appearing In the bill of
lading, unless the shipper or owner declares a greater
value (NCC, A rt 1749,1998,2002 Bar).
4. A contract fixing the sum that may be recovered by tlife
owner or shipper for the loss, destruction, or
deterioration of the goods (NCC, A rt 1750).
NOTE: Notwithstanding these valid stipulations, a
common carrier can be held liable for the loss, or
destruction or deterioration of the goods. If the common
carrier, without just cause, delays the transportation of
the goods or changes the stipulated or usual route, the
contract limiting the common carrier's liability cannot be

availed of in case of the loss, destruction, or deterioration

of the goods (NCC, Art 1747).
Q: X took a plane from Manila bound for Davao via
Cebu where there was a change of planes. X arrived in
Davao safely but to his dismay, his two suitcases were
left behind in Cebu. The airline company assured X
that the suitcases would come In the next flight but
they never did. X datm ed P2,000.00 fpr the loss of
both suitcases, but the airline was willing to pay only
F500.00 because the airline ticket stipulated that
unless a higher value was dedared, any claim for loss
cannot exceed P250 for each piece of luggage. X
reasoned out that he did not sign the stipulation and
in fact had not even read i t Xdid not declare a greater
value despite the fact that the derk had called the
attention to the stipulation in the ticket (1998 Bar)
A: X is bound by the stipulation written in the ticket
because he consented to the terms and conditions thereof'
ftom the moment he availed the services of the carrier.
The faetthat he did notsign the ticket and he was not able
to declare the true value of his luggage is not a valid claim
in order for the carrier to pay for the value of the lost
luggage. As a general rule, the liability of the common
carrier shall not exceed the stipulation (n a contract of
carriage even if the loss or damage results from the
carrier's negligence (Eastern and Australian Shipping Co.,
. v. Great American Insurance Co., G.R. No. L-37604, October
23,1981). However, it is subject to an exception aS when
the shipper or owner ofthe goods declares a greater value
and pays corresponding freight (Art 1749). X, therefore is
entitled to P500 for the two pieces of luggage lost
Q: Suppose A was riding oii an airplane of a common
carrier when an accident happened and A suffered
injuries. In an action by A against the common
carrier, the latter claimed that:
,
a)
There was a stipulation in the ticket
issued to A absolutely exempting the carrier
from liability from the passenger's death or
injuries and notices were posted by the common
carrier dispensing with the extraordinary
diligence of the carrier, and
b)
A was given a discount on his plane fere
thereby reducing the liability of the common
carrier with respect to A in particular. Are those
valid defenses? (2001 Bar)
A:
a) No. Article 1757 provides that responsibility of a
common carrier for the safety of passengers as
required in Articles 1733 and 1755 cannot be
dispensed with or lessened by stipulation, by the
pasting of notices, by statements on tickets, or
otherwise.
b) The defenses available to any common carrier to
limit or exempt it from liability are:
1. Observance of extraordinary .diligence,
2. The proximate cause of the incident is a
fortuitous event or force majeure,

:!
;

il
|
jj
S

M ercantile Law
Q: Discuss whether o r not the following stipulations
in a contract of carriage of a common carrier are
valid:

3. The actor's omission of the shipper or owner of

the goods,
4. The character o f die goods or defects in the
packing or in the containers, and ,

1. A stipulation limiting the sum that may be

recovered by the shipper or owner to 90% of the
value of the goods in case of loss due to theft

5. Order or act of competent public authority, with

out the common carrier being guilty of even
simple negligence (NCC, Art 1734).

2. A stipulation that in the event of loss,

destruction orj deterioration of goods on account of
tiie defective condition of the vehicle used in the
contract of carriage, the carrier's liability is limited to
the value of the goodsappearing in thebill of lading
unless the shipper or owner declares a higher value
(2002 Bar)

Annulment of a stipulation limiting the common

carriers liabilityby the shipper o r owner
A stipulation limiting the common carrier's liability may
be. annulled by the shipper or owner if -the common
carrier refused, to cany the goods unless the shipper or
owner agreed to such stipulation [NCC, Art 1746).
However, under this provision, annulment of the
agreement limiting the carrier's liability is still necessary
(Martin, 1989).
'

A:
j
1. . Invalid. IArticle 1745 provides that the following
or similar stipulations shall be considered unreasonable,
unjust and contrary to public policy, among which is the
common carriers liability for acts committedoy thieves or
robbers who do not act with grave and irresistible force,
threat or violence is dispensed with or diminished.

Effect of the stipulation to limit liability to" the

presumption of negligence of the carrier

2. Valid. The stipulation limiting the carrier's liability

to the value of the goods appearing in the bill of lading
unless tiie shipper or owner declares a higher value, is
expressly recognized in Article 1749 of the New Civil
Code.

Even If there is an agreement limiting the liability of the

common carrier in the vigilance over the goods, the
common carrier is still disputably presumed to have been
negligent-in case of its loss, destruction or deterioration

(NCC, A rt 1752).

LIMITATION OF LIABILITY TO FIXFD AMOUNT

VOID STIPULATIONS

Requirements in order that a stipulation which limits

tiie liability-of common carriers in the carriage of
goods be valid

Void stipulations in a contract of carriage of goods

(CR*UELED)
1. That the common carrier need notobserve any

A contract fixing the sum that may be recovered for tiie

loss, destruction, and deterioration of goods is binding
provided that it is:
1. just and reasonable under tiie circumstances and
2. It has been fairly and freely agreed upon (NCC, Art

diligence in the Custody of the goods

2.

That the goods are transported a t the Bisk of the

owner or shipper

3.

That the common carriers, liability for acts

committed by thieves, or of Robbers who do not act
with grave or irresistible threat, violence or force, is
dispensed with or diminished

4.

Any similar stipulation that is Unreasonable, unjust

and contrary to public polity

5.

That die common carrier shall Exercise a degree of

. diligence less than that of a good father of a family, or
a man of ordinary prudence in the vigilance over the
movables transported

6.

1750).
LIMITATION OF LIABILITY IN ABSENCE OF
' -DECLARATION OF GREATER VALUE

Extent of tiie liability of tiie common carrier in case

th ere is a stipulation fixing specified amount
I
GR: The liability of the common carrier shall not exceed
tiie stipulation in a contract of carriage even if tiie loss or
damage results from the carrier's negligence (Eastern and
4

That the common carrier will not be liable for any

That the common carrier shall not be responsible for
the acts or omissions of his or its Employees

.8.

That the common carrier is not responsible for the

loss, destruction or deterioration ofgoods on account
of the Reflective condition of the car, vehicle, ship,
airplane or other equipment used in the contract of
carriage (NCC, Art 1745).
Un iv e r s it y

of

S anto T omas

The
] i
theif
shan be
1.1 s i
N lH
them <
gue*+s;
pre ^
sub.
tiieiri I

Australian Shipping Co. vs. Great American Insurance Co.,

GR No. L-37604, October23,1981).

Loss, destruction, or deterioration of the goods

7.

Rule! ;
cus*od

XPN: Where the shipper or owner of the goods declares a

greater value: and pays corresponding freight (NCC, Art
1749).
The liability of an airline company for lost baggage is
limited- to tne amount stated in the ticket unless the
passenger declared a higher valuation and paid additional
fare (Pan American World Airways, Inc vs. Intermediate

Appellate Court G.R. No. 70462, August 11,1988).

128

4. Thj t
the loss
sen

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T ransportation La w s
But when the goods being shipped are packed in cartons
placed in containers supplied by the carrier and the
number of cartons is disclosed in the shipping documents,
it Is the number of cartons and not of the containers that
should be used in computing the liability of the carrier for
die loss ofdie goods, as itisthe cartons that constitute the
packages (Eastern Shipping Lines, Inc vs. Intermediate
Appellate Court R No. L-71478, May29,1987).

5. The common carrier cannot free himself from

responsibility by posting notices to the effect that he is not
liable for the articles brought by the passenger. Any
stipulation between the common carrier and the shipper
whereby die responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall
be void (NCQArt 2003).

A common carrier can be held liable for the loss of a

valuable Item stolen by other passenger when die
victim told the driver tiiathe has valuable Item (1997
Bar)

Requirements in order that a common carriers

extent o f liability may be Increased
The common carriers liability may be extended beyond
the specified amount mentioned i
1. The shipper or owner of the goods declares a
greater value and
'
2. Pays corresponding freight (NCC, Art 1749). .

Ordinarily, the common carrier Is not liable for acts of

other passengers. But the common carrier cannot relieve
itself from liability, if die common carrier's employees
could have prevented the act or omission by exercising
due diligence. In this case, the passenger asked the driver
to keep an eye on the bag which was placed beside the
drivers seat If the driver exercised due diligence, he
could have prevented the loss of the bag.
/
Q: A shipped thirteen pieces of luggage through LG
Airlines from Teheran to Manila as evidenced by LG
Air Waybill which disclosed that the actual gross
weight ofthe luggage was 180 kg. Z did not declare an
Inventory of die contents of the value of-the thirteen
(13) pieces of luggage. After the said pieces of luggage
arrived in Manila, the consignee was able to claim
from the cargo broker only twelve pieces, with total
weight 174kg.. X advised the airline of the loss o f one
ofthe 13 pieces ofluggage and ofthe contents thereof.
Efforts ofthe airline to trace the missing luggage were
fruitless. Since the airline foiled to comply with the
demand of X to produce the .missing luggage were
fruitless. Since the airline foiled to comply with the
demand ofX to produce the missing luggage^X filed an
action for breach of contract with damages against LG
Airlines. In its answer, LG Airlines alleged th at tile
Warsaw Convention which limits the liability of the
carrier, if any, with respect to cargo to a sum o f $20
per kilo or $9.07 pm* pound, unless a higher value is
declared in advance and additional chaigesare paid
by the passengers and the condition ofthe contract as
set forth In the .air waybill, expressly subject the
contract of the carriage of cargo to the Warsaw
Convention. May the allegation of the LG Airlines be
sustained? Explain. (1993 Bar)

LIABILITY. FOR BAGGAGE OF IM.S.SKNGEKS

CBECKFD-IN BAGGAGE-

Rule on checked-in baggage of passengers

The provisions of Articles 1733 to 1753 of the NCC shall
apply (NCC, Art 1754)
An airline company is liable for moral damages where it
left behind the luggage of a passenger and its employees
did not assist the passenger in locating his luggage but
Instead treated him boorishly (Pan American World

Airways vs. intermediate Appellate Court 6.11 No. 68988,

June21,1990).
. BAGGAGE IN POSSESSION OF PASSENGERS

Rules applicable when the baggage is in the personal

custody of the passengers
The rules in articles 1998 and 2000 to 2003 concerning
the responsibility of hotel-keepers for necessary deposit
shall be applicable (ibid): .
1. The common carrier shall be responsible forshipper's
baggage as depositaries, provided thatnotice was given to
them, or to their employees, of the effects brought by die
guests and that, on the part of the shipper, they take the
precautions which said common carriers or their
substitutes advised relative to the care and vigilance of
their effects (NCC, Art 1998).
2. The responsibility shall include the loss of, or injury to
tire personal property of the shipper caused by the
employees of the common carrier as well as strangers; but
not that which may proceed from anyforce majeure (NCC, *

Art 2000).
3. The act of a thief or robber, who has entered the carrier
is not deemed force majeure, unless it is done with the use
of arms or through an irresistible force (NCCpArL2001).

A: Yes. Unless the contents of a cargo are declared or the

contents of a lost luggage are proved by satisfactory
evidence other than the self-serving declaration of one
party, the contract should be enforced as it is the only
reasonable basis to arrive at a just award. The passenger
or shipper is bound by the terms of the passenger ticket
or the waybill (Pun American World Airways v. Rapadas,

C.R. No. 60673, May 19,1992).

. 4. The common carrier is not liable for compensation if

the loss is due to the acts of the shipper, his family, or
servants, or if the loss arises fronn die character of the
things brought into the carrier (NCC, Art 2002).

129

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M e r c a n t il e
SAFETY OF PASSENGERS

law

itself liable for any breach thereof (Pilapil v. CA G.R. No.

52159, Dec 22,1989).

Extent of th e extraordinary diligence of common
carrier to passengers (1996 Bar)

D U R A T I O N OF LIABILITYv.

Commencement of the duty to observe extraordinary

diligence over passengers

A common carrier is bound to carry the passengers safely

as far as human care and foresight can provide^ using the
utmost diligence of very cautious persons, with a due
regard for all the circumstances '(NCC, Art 1755).

The duty exists from the moment the person offers to be

transported places himself in the care and control of the
common carrier who accepts him as such passenger. The
duty continues urjtil the passenger has, after reaching his
destination, safely alighted from the carrier's conveyance
or has had a reasonable opportunity to leave the carrier's

Who are not considered passengers (WAMU)

1.

One who has boarded a IKrong vehicle, has been

properly informed of such fact, and on alighting, is
injured by the carrier.

2.

Invited guests and Accommodation passengers. v

3.

One who attempts to board a Moving vehicle,

although he has a ticket; unless the attempt be with
tile knowledge and consent of the carrier.

departure (La MaUorca vs- CA, GR Np. 1-20761, July 27,

4.

1966; Aboitiz Shipping, supra).

W A I T I N G F O R CARRIER OR B O A R D I N G OF CARRIER

Duty :bf thp iCommon carriers

in */h o ld in

, g of
passengers

One who remains on a carrier for an Unreasonable

length of time after he has been afforded every safe
opportunity to alight

It is the duty of common carriers of passengers, including

common carriers by railroad train, streetcar, or motorbus,
to stop their conveyances a reasonable length of time in
order to afford passengers an opportunity to board and
enter, and they arejiable for injuries suffered by boarding
passengers resulting from the sudden starting up. or
jericing of their !conveyances while they are doing so

NOTE; The carrier is thus NOT obliged to exercise

extraordinary diligence but only ordinary diligence in
these Instances

(Dangwa vs. CA, G.R No. 95582, October 7,1991)-.

VOID STIPULATIONS

Q: A bus of GL Transit on its way to Davao stopped to

enable a passenger to alight At that m om ent Santiago
who had been waiting for .a ride, boarded the bus.
However, the bus driver failed to notice Santiago who
was still standing on the Iras platform, and stepped on
th e accelerator. Because of the sudden motion,
Santiago slipped and fell down suffering serious
injuries. May jSantiago hold GL Transit liable for
breach of contract of carriage? Explain (1996 Bar)

Stipulations limiting th e liability'of common carrier

in case o f Injury o r death
GR: The responsibility of a common carrier for the safety
of passengers cannot be dispensed with or lessened by
stipulation, by posting of notices, by statements on tickets,
or otherwise (NCC, Art 1757).
XPN: When a passenger is carried gratuitously, a
stipulation limiting tiie common carrier's liability'for
negligence is valid (NCC, Art 1758).

A: Yes. Santiago may hold GL Transit liable for breach of

contractof carriage. It was the duty of the driver,when he
stopped the bus, to do no act that would have the effect of
increasing the peril to a passenger such as Santiago while
he attempting to board the same. When a bus is not in
motion there is no necessity for a .person who wants to
ride the same to signal his intention to board. A public
utility bus, once it stops, is in effect making continuous
offer to bus risers. It is the duty of common carriers of
passengers to stop heir conveyances while they are doing
so. Santiago, by stepping and standing on the platform of
thg bus is already considered as a passenger and is
entitled to all the rights and protection pertaining to a
contract of carnage (Dangwa Trans. Co. v. CA G.R. 95582,

NOTE: The passenger must be carried gratuitously. If it is

only a reduction of fare, then any limitation of the
common carrier's liability is not justified (ibid;2001,2009

Bar).
XPN to th e XPN: Notwithstandingthe exception, common
carriers will be liable nevertheless forwillful acts or gross
negligence (ibid).
Assumption of risk on the part of passengers
Passengers must take such risks incident to the mode of
travel. The passenger must observe the diligence of a good
father of a family to avoid injury to himself (NCC, Art

October 7,1991).
Q: City Railways, Inc. (CRI) provides train service, for
a fee, to commuters from Manila to Calamba, Laguna.
Commuters a re required to purchase tickets and then
proceed to designated loading a n d . unloading
facilities to board the train. Ricardo Santos purchased
the ticket for Calamba and entered the station. While

1761).
NOTE: Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to perform
certain duties to the public as the law imposes, and holds

University

2015G olden

Santo T omas
N otes

of

130
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T ransportation Laws
The passenger is not considered negligent If the bus
started moving dowdy when the passenger is
boarding the same

waiting! he had an altercation with the security guard

of CRI leading to a fistfight. Ricardo Santos fell bn die
railway fust as a train was entering the station.
Ricardo Santos was run over by die train. He died. In
action for damages filed by the heirs of Ricardo
Santos, CRI Interposed lack of cause of action,
contending that the mishap occurred before Ricardo
Santos boarded the train and that it was not guilty of
! negligence. Decide. (2008 Bar)

Further, even assumingthat the bus had "just started" and

"was still In slow motion" at die point where the victim
had boarded and was on its platform, the victim cannot be
considered negligent under the said circumstances
(Dangwa v. CA, ibid).
Q: P, a sales girl in a flower shop at the Ayala Station
of the Metro Rail Transit (MRT) bought two tokens or
tickets, one for her ride to work and another for her
ride home. She got to her flower shop where she
usually worked from 8 a.m. to 5 p.m. At about 3 p.m.,
while P was attending to her duties at the flower shop,
two crews of Che MRT got into a fight near die flower
shop, causing Injuries to P in the process. Can P sue
die MRT for contractual breach as she was within the
MRT premises where she would shortly take h er ride
home? (2011 Bar)
,

A: The contention of CRI must fail. In the case of Light

Rail Transit Authority vs. Navidad, G.R. No. 14580,4
February 6,2003, the Supreme Court held that the duty of
a common carrier to provide safety to Its passengers is not
only during the course of die trip but for so long as the
passenger are within its premises and where they ought
to be in pursuance to the contract- of carriage.
Furthermore, the New Civil Code provision provides that
the common carrier will still be liable even though its
employees acted beyond the scope of their work.
Therefore, CRI is liable for die damages the heirs of
Ricardo Santos had suffered.

A: No, since P had no intention to board an MRT train

coaqh when the incident occurred.

When a Public Utility Vehtde is not In motion, it Is not

necessary for a person who wants to ride the same to
signal his intention to board

A R R I V A L A T DE S TI NA TI O N

Liability for death or injury to passengers upon

arrival at destination

When the bus is not in motion there is no necessity for a

person who wants to ride the same to signal his intention
to board. A public utility bus, once it stops, is in effect
makingacontinuous offer to busriders. Hence, itbecomes
the duty of the driver and the conductdr, every time the
bus stops, to do no act that would have die effect of
increasing die peril to a passenger while he was
attempting to board the same. The premature
acceleration of the bus in this case was a breach of such
duty (Dangwa Trans. Co. v. CA, supra).

Once created, the relationship will not ordiriarity

terminate until the passenger has, ,after reaching his
destination, safely alighted from the carrier's conveyance
or had a reasonable opportunity to leave die carriers
premises All persons who remain on the premises a
reasonable time after leaving the conveyance are to be
deemed passengers, and what is a reasonable time or a
reasonable delaywithin this rule is to be determined from
all the circumstances, and includes a reasonable time to
see after his baggage and prepare for his departure (La
Mallorca v.CA,GN No. L-21486, May 14,1966).

Common carrier may be held liable to. a passenger

who died while trying to board their vehicle
It is the duty of common carriers of passengers to afford
passengers an opportunity to board and enter, and they
are liable for injuries suffered by boarding passengers
resulting from the sudden starting up or jerking of their
conveyances while they are doing so. The victim, by
stepping and standing on the platform of the bus, is
already considered a passenger and is entitled all the
rights and protection pertaining to such a contractual
relation (ibid).

The victim's presence in a vessel after 1 hour from his

disembarkation is not enough in order to absolve the
carrier from liability in his death
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination and
has left the vessel-owner's premises (Aboitiz Shipping
Corporation v.CA, GRNo. 84458, November6,1989).
Q: Robert De Alban and his family rode a bus owned
by Joeben Bus Company. Upon reaching their desired
destination, they alighted from the bus but Robert
returned to get their baggage. However, his youngest
daughter followed faim without his knowledge. When
he stepped into the bus again, the bus accelerated that
resulting to Roberts daughter death. The bus ran
over her. Is the bus company liable?

A person who is merely stepping on die platform of a

bus is already considered a passenger
Aperson, by stepping and standing on the platform of the
bus, is already considered a passenger and is entitled all
the rights and protection pertaining to such a contractual
relation. Hence, it has been held that the duty which the
carrier owes to its patrons extends to persons boarding
cars as well as to those alighting therefrom (Dangwa v. CA,
ibid).

A: Yes. The relation of carrier and passenger does not

cease at the moment the passenger alights from the
carrier's vehicle at a place selected by the carrier at the
point of destination, but continues until the passenger has

131

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M ercantile La w
had a reasonable time or reasonable opportunity to leave
the current premises (la Mallorca v. CA, CR L-20761,July
271966).
' LIARILITYFOR ACTS OF OTHERS
EMPLOYEES

Common carriers are liable for the acts o f their

employees
Common carriers are liable for the death of or injuries to.
passengers through the negligence or willful acts of the
formers employees, although such employees may have
acted beyond the scope of their authority or in violation
of the orders of the common carriers. The liability of the
common carriers does not cease upon proof that they
exercised all die diligence of a good father of a family in
the selection and supervision of their employees (NCC,

Art 1759).
NOTE: The liability of die common carrier to the personal
Valence of its employees or agents upon its passengers
extends only to those acts which die carrier could foresee
or avoid through the exercise of the diligence required.
Liability of die common carrier as regards to the acts
of employees may not be limited by stipulation

The common carrier's responsibility cannot be eliminated

or limited by stipulation, by the posting of notices, by
statements on the tickets or otherwise (NCC, Art 1760).
Rationale behind th e carriers liability
The basis of the carrier's- liability for assaults on
passengers committed by Its drivers restson the principle
that it is the carrier's implied duty to transport the
passenger safely. As between the carrier and the
passenger, the former must bear the risk of wrongful acts
or negligence' of the carriers employees against
passengers, since it, and not the passengers, has power to
select and,remove them (Maranan v. Perez, GR Noe L-

22272,June26,1967).
Q: H ie AAA Bus Company picks np passengers along
EDSA. X, th e conductor, while on board toe bus, drew
his gun and randomly to o t toe passengers inside. As a
result, Y, a passenger, was to o t and died instantly. Is
AAA Bus Company liable? (2012 Bar)
A: Yes. The bus company is liable because common
carriers are liable for the negligence or willful act of its
employees even though they acted beyond the scope of
their responsibility.
OTHER PASSENGFRS AND STRANGERS

Extent of liability o f common carriers for acts of co

passengers o r strangers (1997,2005 Bar)
A common carrier is responsible for injuries suffered by a
passenger on account of the willful acts or negligence of
other passengers or of strangers, if the carrier's
ifF ijl

UNiVEKsrrv o f S a n t o T o m a s
2 0 1 5 G olden N o t e s

employees through the exercise of the diligence of a good

father of a family would have prevented or stopped the act
or omission [NCC,Art 1763).
Q: P rode a Sentinel Liner bus going to Baguio from
Manila. At a stop-over in Tarlac, die bus driver, die
conductor, and die passengers disembarked for
lunch. P decided, however, to remain In the bus, die
door of which was not locked. At, this point V, a
vendor, sneaked into toe bus and offered P some
refreshments. When P rudely declined, V attacked
him, resulting in P suffering from bruises and
contusions. Does be have cause to sue Sentinel Liner?
(2011 Bar)
A: Yes# si ace the carrier's crew did nothing to protect a
passenger who remained in the bus during the stop-over.
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antoinette denied her
baggage to be inspected invoking her right to privacy.
Should the jeepney operator be held liable for
damages^
A: No. The operator is not liable for damages. In overland
transportation, the common carrier Is not bound nor
empowered to make an examination on the contents of
packages or bags, particularly those handcanied by
passengers (Nocum v. Laguna Tayabas Bus Company, G.R

No. L-23733, October31,1969).

Q: In the questionabove, if it were ah airline company
involved, would your answer be the same7 (1992 Bar)
A: No. The common carrier should be made liable. In case
of air carriers, it is unlawful to carry flammable materials
In passenger aircrafts;, and airline companies may open
arid investigate suspicious packages and cargoes
pursuant to RA 6235.
Q: A passenger was injured because- a bystander
outside toe'bus buried a stone. Is toe bus company
liable? (1994 Bar)
A: No. There is no showing that any isuch incident
previously happened so as to impose an obligation on the
part of the personnel of the bus company to warn the
passengers and to take rite necessary precaution. Such
hurling of a stone constitutes fortuitous event in this case.
The bus company is not an Insurer of the absolute safety
of its passengers (Pilapilvs. CA, GR No. 52159, December

22,1989)1
The registered owner of the vehicle may be held liable
for damages suffered by a third person in the course
of the operation of the vehicle

servi

nfth.* !**
J i I

The registered owner of a public service vehicle is

responsible for damages that may arise from
consequences incident to its operation or that may be
caused to any of the passengers therein (Gelisan vs. Alday,

G.R No. 1-30212, September30,1987).

1H

T r a n s p o r t a t i o n La w s
Also, the liability of the registered owner of a public
service vehicle for damages arising from the tortious acts
of the driver is primary, direct; and joint and several or
solidary with the driver (Philtnanco Service Enterprises,

2.

An indemnity for loss of laming capacity of the

deceased;

3.

Moral damages;

4.

Exemplary damages;

5.

Attorney's fees and expenses of litigation;

Inc vs. CA G.R No. 120553,June 17,1997).

Q: Marltes; a paying bus passenger, was b it above her
left eye by a stone buried atthe bus by an unidentified
bystander as the bus was speeding through the
National Highway. The bus owner's personnel lost no
time in bringing Marftes to the provincial hospital
where she was confined and treated. Marites wants to
sue the bus company for damages and seeks your
advice Whether she can legally hold the bus company
liable. What will you advise her? (1994 Bar)

6.

interest in proper cases (Brifias v. People,G.R No. L-

30309, Nov. 25,1983).

7.

Hospital and funeral expenses

NOTE: Carrier is not liable for exemplary damages where

there is no proof that it acted in a wanton, fraudulent
reckless, oppressive or malevolent manner.

A: As counsel, I will advise her that the company-is not

liable. As a general rule, if the death or injury was due to a
>;cause beyond the control ofthe carrier, it will not be liable
to the passenger. However, it mu!st do everything in its
'power to try to prevent any passenger from getting hurt
Article 17,63 provides that although a common carrier is
responsible for the death or injuries suffered by a
passenger on account of die willful acts or negligence of
other passengers, such is not applicable in this case. The
driver has no control over the situation It happened while
die bus was speeding through the national highway and
such event occurred haphazardly, without any
contributory negligence on the part of the carrier nor
]fven if extraordinary diligence be exercised, die same
wpuld not prevent the event from happening because
; such is independent and out of control of the driver. More
- to the point, the carrier cannot be faulted and be liable for
;damages because it immediately responded to die injury
suffered by die passenger. Furthermore, as held In the
case of Pilapil v. CA, there Is no showing that any such
incident previously happened so as to impose an
^obligation on die part ofthe personnel ofthe bus company
<,to warn the passengers and to take die necessary
^precaution. Such hurling of a stone constitutes fortuitous
' event in this case. The bus company is not an insurer of
-the absolute safety of its passengers.
v
'
.
"
' ..
.The registered owner of the vehicle may be held liable for
damages suffered by a third person in the course of the
Operation of die vehicle. The registered owner of a public
^service vehicle is responsible for damages that may arise
from consequences incident to its operation or that may
be caused to any of the passengers therein (Gelisan vs.

Jurisprudential indemnity of a common carrier in

case of death of a passenger

In case of death of a passenger, the common carrier is

liable to pay .50,000 Pesos as indemnity for die life pf a
passenger (Victory Liner v s.Gammad,: G.R No. 159636,

Noyember.22004).
Formula for computing the indemnity for lost
'earnings in case of death of a victim
The formula for the computation of unearned income is;
1. Net Earning Capacity = Life Expectancy x (Gross annual
income - Reasonable and necessary living
expenses).
2. Life expectancy is determined in accordance with the
formula: 2 /3 x (80 - age of deceased atthe time of
death)(Hefts of Ochoa vs. VS.G & S Transport

Corporation, G.R No. 170071, March 09,2011).

NOTE: When there is no showing that die living expenses
constituted the smaller percentage ofthe gross income,
the Court fixes the living expenses at half of the gross
income.
Liability with regard to moral damages
GR: Moral damages are not recoverable for breach of
contract of carriage in view of Art 2219-20 of the Civil
Code.

yilday, G.RNo. 1-30212, September30,1987).

XPN:
1. Where the mishap results in the death of the passenger
2. Where it is proved that the common carrier was guilty
of fraud or bad faith, even if death does not result

Also, the liability^ of the registered owner of a public

service vehicle for damages arising from the tortious acts
pf the driver is primary, direct, and joint and several or
solidary with the driver (Philtranco Service Enterprises,

Inc vs. CA G.R No. 120SS3;June 17,1997).

Jurisprudential amount of moral damages to which

the heirs of a deceased passenger are entitied to
recover

EXTENT OF.I;!ABiLITV.FOR DAMAGES "A;

Kinds of damages that may be recovered In case of

fdeath of a passenger (DEMEk-AIH)

The current jurisprudential award for die loss of life of a

passenger is 100,0000 pesos by way of moral damages

;1 ' An indemnity for the Heath of the victim

(Victory Liner vs. Gammad, Ibid, Heirs of Ochoa v VS.G& S

Transport Corporation, Ibid).

133

U n iv e rs ity of S a n to Tomas
F a c u l t y of C i v i l Law

{ ?
ypr?*

M e r c a n t i l e La w
Defenses available in culpa contractual (FEC)

1. Exercise of extraordinaty due diligence

.2. fortuitous event
3. Contributory negligence of passengers - it does not
bar recovery of damages for death, or injury if the
proximate cause is the negligence of the common
carrier but the amount of damages shall be equitably
reduced (NCC, Art 1762}.

Action to enforce liability of the employer of die

negligent driver under A rt 103 of the RFC vs. Action
based on quasi-delict

The diligence of the passenger may be considered in

determining liability in case of injury
The passenger must observe the diligence of a good father
of a family or ordinary diligence to avoid injury to hlmsejf
(NCC,Art 1761}. th is means that if the proximate cause of
the passenger's injury Is his negligence,, the common
carrier is not liable.
Options available to recover damages in case of death
o r injuries to persons, which resulted from a collision
DEFENDANT OF THE :
CASE '

BASIS OF
: 'CIVIL'

... . .."

2. As a contract, it names the contracting parties, which

include the consignee, fixes the route, destination,
and freight rate or charges, and stipulates the rights
and obligations assumed by the parties (Phoenix

Assurance Co., Ltd. v. United States Lines, G.R. No* L24033, Feb.22,1968).

May be filed by the third

persons . or
the
passengers against the
driver (may also be die
owner) at fault if his act
amounts to a crime.

3. As a documentoftitle it regulates the relations between

a carrier and a holder of the same.
NOTE: In the absence of a bill of lading, their respective
claims may be determined by legal proofs which each of
_,the contracting parties may present in conformity with
law.

If the owner is an
employer erf the driver,
then die former has a
subsidiary liability (Art
brought oh the ground of
civil liability arising from
crime under. Art. 100 of

Un iv e r s i t y

S anto T omas
Notes

of

The defense of due

diligence iq/selection and
supervision of employees
may be invoked.

It is a receipt for the goods shipped and a contract to

transport ancji deliver the same as therein stipulated.
*. ~ "i .
1. As a receipt, it redtes die date and place of shipment;
describes the goods as to quantity, weight
dimensions, identification marks and condition,
quality, and value.

both vehicles and the

owners thereof.

103, Revised Penal Code

1RPC)') for an action

201SGolden

Liability Is primary and

direct
Action may proceed
independently from the
criminal action.

THREE-FOLD CHARACTER OF A BILL OF LADING

(Carpio vs. Doroja, GR No.

84516, December 5,
>1989.]
Crime

Employer :| Is
only
subsidiarily liabla
There must hje a judgment
of conviction against the
negligent driver otherwise
the action against the
employer
would
be
premature. I
The defense ojfdue diligence
In selection and supervision
of employees cannot be
invoked.
[
f.

IntemationalfPhils] vs. CA, GJLNo. 166520,26July 2010;

.1992,1998 Bar). .

If file owner is an
employer of the driver,
still file former has a
primary liability for an
action brought on the
ground of quasi delict
under A rt 2180, NCC.

3. Culpa
criminal

ART. 2 1GO, NCC (QUA.S1, DKI.iCTJ

It is a written acknowledgment of receipt of goods and

agreement toj transport them to a specific place and to a
named person or to his order (Unsworth Transport

1. C u lp a .: Contract of Riled against the common

carrier wherein He is a
contractual carriage
passenger. (NCC, Art
1733,1755-1764}
2. Culpa ... Quasi-delict May be filed by third
persons or the passenger
aquiliana
against the drivers (may
also be the owners) of

...

. AR T.. UH, RPC

RILL OF LADING '

LIABILITY
(Damages)

the RPC (Carpio vs.

Dorofa, supra.)

....

134

T ransportation Laws
6. Through- Issued by a carrier who is obliged to use die
facilities of other carriers as well as his own facilities
for die purpose of transporting the goods from the
city of the seller to the city of the buyer, which bill of
lading is honored by the second and other interested
carriers who do not issue their own lading.

Two types of bill of lading

1. Negotiable - If issued to the bearer or to the order of

any person named in such bill.
2. Non-negotlable - If issued to a specific person named in
. such bill.

7. Custody-The goodsare already received by the carrier

but the vessel indicated has not yet arrived in die
port

X Is a trader of school supplies in Calapan, Oriental

C Mindoro. To bring the school supplies to Calapan, it
has to be transported by a vessel Because there were
/: so many passengers,-the two (2) boxes of school
- supplies were loaded but the shipping company was
not able to issue the Bill of Lading. So, on board, the
i Ship Captain issued instead a "shipping receipt" to X
-. indicating the two (2) boxes of school supplies being
.'. part of the cargo of the vessel Which phrase
therefore, fs the most accurate? (2012 Bar)

8. Port- The vessel indicated In the bill of lading that will

transport the goods is already in theport
Q: A bill of lading Indicated that the contract of
carriage was under a "said to weigh" clause. What are
the responsibilities of the shipper and die carrier?.
A: This means that the shipper was solely responsible for
the loading of the container, wjiiie the carrier was
oblivious to the contents of the shipment The arrastre
operator was, like any ordinary depositary, duty-bound to
take good care of the goods received from the vessel and
to turn the same over to the party entided to their
possession, subject to such qualifications as may have
validly been imposed in the cpntract between the
parties. The arrastre operator was not required to verify
the contents of the container received and to compare
them with those declared by the shipper because, as
earlier stated, the cargo was at the shippers load and
count {Asian Terminals Inc vs. Simon Enterprises, Inc, G.R.
No. 177116, February27,2013).

a. the owner of the vessel is not liable because no bill

of lading was Issued to X hence, no. contract of
carriage was perfected.
b. it is possible to have a contract of carriage of caigo
even without a bill of lading, and the "shipping
| receipt" would be sufficient.
c. the only acceptable document of title Is a Bill of
. Lading.
d. None of the above.
- A: B. Although Article 359 of the Code of Commerce
provides that "the shipper as well as the carrier of
merchandise or goods may mutually demand that a bill of
lading be made," still, said bill of lading is not
, indispensable. For as long as there is a meeting of the
: minds of the parties, a contract of carriage exists even in
the absence of a bill of lading (Perez, supra, citing Robles
..' vs. Santos, 44 OG 2268, September, 6, 1947; Compania
' Maritima vs. Insurance Co. ofNA, G.R. No. L-18965, October
30,1964).

DELIVERY 0 P . G 0 0 D S

The surrender of the bill of lading is necessary upon

delivery of the goods
If the carrier fails to require such surrender.

Technical jargon
'

1.

Ifnon-negotiable-Action against the carrier does not

lie.

2.

If negotiable - Action by the shipper may lie against

the carrier

On Board-States that the goods have been received on

board the vessel which is to carry the goods and is
issued when goods have been placed aboard a ship
with every reasonable expectation that the shipment
is as good as on its way.

However, where the seller instructed the shipping

company to deliver the cargoes to the buyer without
requiring the presentation of the bill of lading, die
shipping company is not liable for releasing the cargoes
to the buyer (Macam vs. CA, G.R. No. 125524, August 25,
1999):

2. Receivedfor Shipment BUI- States that the goods have

been received for shipment with or without
specifying the vessel by which the goods are to be
shipped and are issued whenever conditions are n o t.
normal and that there is insufficiency of shipping
space.

NOTE: The surrender of the original bill of lading is not a

condition precedent for a common carrier to be
discharged of its contractual obligation. If surrender of
the original bill of lading is not possible, acknowledgment
of the delivery by signing the delivery receipt
suffices (National Trucking and Forwarding Corporation
vs.-Lorenzo Shipping Corporation, G.R No. 153563,
February27,2005).

3. Clean - Does not contain any notation indicating defect

in the goods.
?, 4. Foul - Contains a notation indicating a defect In the
goods.
S. Spent - If the goods were already delivered but the bill
' of lading was not returned.

1 35

U n iv e rsity of S a n to Tomas
F aculty of C ivil L aw

Mercantile L aw
Period o f delivery of goods

Requisites before claim for damages under A rt 366

may be demanded

If a period has been fixed for the delivery of the goods, it

must be made within such time, and, for failure to do so,
the carrier shall pay the indemnity stipulated in the bill of
lading, neither the shipper nor the consignee being
entitled to anything else (Code ofCommerce [CC],A rt370).

1.

Consignmei it of goods through a common carrier, by

a consignor in one place to a consignee in another
place; and

2.

The delivery of the merchandise by the carrier to the

consignee at the place of destination (New Zealand

Duty of tiie carrier if th ere is no period of tim e fixed

for the delivery of goods

Ins. Co, ltd. v. Choa Joy, G.R. No. L-7311, Sept 30,
. 19SS).
j

The carrier shall be under the obligation to forward them

with the first shipment of the same or similar
merchandise he may make to the point where he must
deliver them, and should he' hot do so, the damages
occasioned by the delay shall be suffered by him (CC,Art

Effect of paying (he transportation charges in the

filing of an actijm on account of damages to goods
1.

3S8).

I f paid before checking the goods - The right to file a

claim Is not waived.

2. . If paid after, the goods were checked - The right to file

a daim is aireadywaived (Southern lin^J Inc v. CA,

Determination of indemnity if the same is not

stipulated

aR. No. L-16629, Jan.31,1962).

If no indemnity has been stipulated and the delay exceeds
the time fixed In the bill of lading, thecarrier shall be liable
for the damages which the'delay may have caused (CC,Art
370):
*

NOTE: The filing of claim is a condition precedent for

recovery of damages.
Doctrine of combined or connecting services

Grounds for the refiisal o f a consignee to take delivery

o f the goods (JPLD2)

The carrier which delivered the goods to tiie consignee

shall assume the obligations, rights and actions of those
who preceded him in the conveyance of the goods.

1. When a art of the goods transported are delivered

and the consignee is able to prove that he cannot
make use of the part without the others; CC, Art 365)
2.

The shipper or consignee should proceed against the one

who executed the connect-or against the others who
received the goods without reservation. But even if there
is reservation, they are not exempted from liabilities that
they may have incurred by reason of their own acts (CC,

If tiie cargo consists of Liquids and they have leaked

out, nothing remaining in the containers but onefourth 04) of.their contents,* on account of inherent
defect of cargo; (CC, Art 687)

3.

If the goods are Damaged and such damage renders

the goods useless for the particular purpose for
which there are to be used; (CC, Art 365)

4.

When there is Delay on account of the fault of the

carrier; (CC, Art 371)

Art 373).
The carrier may then file a third-party complaint against
the one who is really responsible. The carrier is an
indispensable party. But the shipper or consignee may
sue all of them as alternative defendants.
Commencement of action if delivery was made to
arrastre operator

NOTE; In ail cases, the shipper may exercise the right of

abandonment by notifying the carrier. Ownership over
damaged goods passes to the carrier and carrier must pay
shipper the market value of the goods at point of
destination.
;

1.

Commencement of action should be computed from the

time of delivery to the arrastre operator. To use as basis
for computing the one year period, the deliveryto the
consignee would be unrealistic and' might generate
confusion between the loss or damage sustained by the
goods while in the carrier's custody and those occurring
while in the arrastre operator's possession (Martin,

. .. PERIOD FOR FILING CLAIMS - .' . V.

Immediately after delivery - if the damage is

1989).

apparent; or
2.

Within 24 hours from delivery - If the damage is not

apparent (Code ofCommerce, Art 366)

A claim against the arrastre operator must be filed within

fifteen days from the delivery of goods (international

Container Terminal Services, Inc. vs. Prudential Guarqntee

and Assurance Company, Inc G.R. No. 1-134514, December
8,1999).

Applicability of Article 366 of the (o d e o f Commerce

RB
HB
Char

It applies in case of domestic transportation (inter-island)

where there is damage to the goods transported.

Un iv e r s it y

2015G olden

S anto T omas
N otes

of

The filing of a provisional claim is substantial compliance

with the provision in the management contract of the
arrastre operato r that a formal claim for the loss of goods

136

n
t 1

T ransportation Laws
must be filed within thirty days from the filing of the entry

time oruSe for the conveyance .of goods, in consideration

of the payment of freight (Caltex vs Sulpicio Lines, G.R No.

;('Metro Port Service Inc. vs. Intermediate Appellate Court,

CP No. 66253, August31,1992).

131166, September. 30,1999).

NOTE: The 1 year period of prescription is not applicable

to misdelivery or conversion of goods.

Classes of charter party

1; Bareboat or demise - the ship owner gives possession
of the entire vessel to the charterer. In turn, the charterer
supplies, equips, and mans the vessel The charterer is the
owner pra hac vice (2004 Bar).

PERIOD FOR FILING ACTIONS

For coastwise or carriage within the Philippines, Within 6

yearsifnobill oflading has been Issued or within lOyears
If a bill of has been issued. For international carriage from
foreign port to the Philippines.within 1 year from delivery
of goods or the date when the goods have been delivered.
'NOTE: The compliance with a requirement in the bill of '
lading that the consignee must file a claim for loss or
damage to die goods shipped within thirty days from
delivery is a condition precedent to the accruarof a right
VOf action against the carrier (Philippine American General

insurance Ca v. Sweet Lines, Inc, G.R No. 87434, August 5,

1992).

As owner pro hac vice of the vessel, the charterer assumes

the rights and liabilities of the owner to third parties who
deal with the vessel, It is the charterer and its agent who
, are liable for the wages of seamen hired by (he master of
the vessel, as the master.of the vessel is acting in behalf of
the charterer (Litonjua Shipping Cov Inc vs National

Seamen Board, G.R No. L-51910, August 10, 1989, 1991,

Bar).
Owner pro hac vice
The charterer is considered the owner of the vessel
afor the voyage or service stipulated. The charterer,
.not the owner of the vessel, is liable for vessel's
. expenses, induding seaman's wages.

Q: Aldro of Tokyo, Japan sent various goods to his

friend Juan in Cebu City, Philippines, through one of
.die vessels ofW orth Well Shippers, Inc, an American
corporation. En route to Cebu City, die vessel had two
stops, first in Hong Kong, and second, in ManflaMVhile
travelling from Tokyo to Hong Kong the goods were
damaged. What law will govern? (2013 Bar)

2. Contract of affreightment - the .owner of the vessel

leases apart or all of its space to haul goods for others. It
can either be:
a Timecharter- Vessel is chartered for a particular
time or duration. While the ship owner still retains
possession and control of the vessel, the charterer
has the right to uise all vessel's fadlities. The
charterer may likewise designate vessel's
destination.

A: D. Philippine Law
Q: Assuming Philippine law to be applicable and Juan
.fails to file a claim with the carrier, may he still
-commence an action to recover damages with the
court? (2013 Bar)

Since in a time .charter the shipowner retains

possession and control of the ship, the ship remains
a common carrier. (PlantersProducts, Inc vs CA G.R

v:A: B. Yes, provided he files the complaint within 10 years

.

i from delivery.

No. 101503, September 15,1993)

MARITIME COMMERCE

b. Voyagecharter- Vessel is chartered fora carriage

of goods from one or more ports of loading to one
or more ports of unloading.

Agents of maritime commerce

1. Ship-owners and ship agents
2. Captains and masters-of the vessel
. 3. Officers and Crews of the vessel
4, Supercargoes (Sundiang, Sr, &Aquino, 2011)

Voyage charter
Avoyage charter is a contract wherein the ship was leased
for a. single voyage for the conveyance of goods, in
consideration of the payment of freight. The shipowner
retains the possession, command and navigation of the
ship, the charterer merely having use of the space in die
vessel in return for his payment of freight

Supercargoes
: Persons especially employed by the owner of a cargo to
take charge of and sell to the best advantage merchandise
which has been shipped, and to purchase returning
cargoes and to receive freight; as he may be authorized.

An owner who retains possession of the ship remains

liable as carrier and must answer for loss or non-delivery
of the goods received for transportation (Cebu Salvage

CH AR TE R P A R T I E S T

Corp. vs Philippine HomeAssurance Corp., G.R No. 150403,

Jan. 25,2007).
.

Charter party contract

NOTE: The same concept applies to a time charter.

i^A contract whereby the whole o r part of the ship is let by
.the owner to a merchant or other person for a specified

137

U n iv e r s it y o f S a n t o Tomas
Faculty of Civil Law

\
*;

Mercantile L aw
-

.......... 1-

1 1 ...........

.......
a. Mfar - There Is a governmental prohibition of
commercial intercourse, intended to bring about an.
entire cessation for the time- being of all trade
whatever.
b. Embargo - A proclamation or order of State,
usually issued in times of war or threatened
hostilities, | prohibiting the departure of ships or
goods from some or all the ports of such State until
further oraer; or
c. Blockade - Asort of circumvallation around a place
by which all foreign connection and correspondence
is, as far as human power can effect it, to be cut off.
d. PROhibltion to receive cargo atportof destination.
e. Inability of the vessel to Navigate (Code of

Bareboat or demise charter party v. Contracts of

affreightment
BARHBOAT/pnMLSE CHARTER CONTRACT

CONTRACT
AI-TREiGHTMENT

Negligence of the charterer.

gives rise to its liability to
others.
Charterer is regarded as
owner pro hac vice. Ship
owner
temporarily
relinquishes possession and
u t t iic i J i i i p u
the
w c vessel
ycoacu
|
ownership
of

OF

Ship owner remains liable

and carrier must answer
for any breach of duty.
Charterer is not regarded
as owner. Ship owner
retains ownership over
the vessel
,

(Coastwise Lighterage vs. CA, GJL Na 114167, July 12,

1995)
A w ritten contract of affreightment may be amended by
oral agreement and since in such a case the terms of the
contract shall be those embodied in the bill of lading, no
demurrage charges can be collected where this was not
stipulated in the bill of lading (Market Developers, lac v.

Intermediate Appellate Court G.R. Na L-47978, September

8,1989%
Q: For the transportation of its cargo from thelPortof
Manila to the Port o f Kobe, Japan, Osawa&Go*
chartered bareboat M/V. H o g . o f Karagatan
Corporation. M/V Hog m et a sea aeddent resulting in
th e loss of tiie cargo and the death o f some o f the
seamen manning the vesseLWho should bear the loss
of the cargo and the death o f th e seamen? Why?
As Osawa & Co. should bear the loss because ft chartered
bareboat M/V Hog which in effect' gave it exclusive
control over the vessel. In a demise, in contrastto other
charters, the charterer is considered the owner pro hac
vice. The charterer is accordingly liable in personam for
all liabilities arising out of the operation of the vessel; he
is responsible for the actions of the roaster and crew

(Litonjua Shipping Company, Inc v. National Seamen

Board and Gregorio P. Candongo, G.R. No. 51910, August
10,1989).
Instances when a charter party may be rescinded
1. At the request of the charterer by: (FARER)
a. Eailure to place vessel at charterer's disposal
b. Abandoning the charter and paying half the price
c. fietum the vessel due to pirates, enemies, and bad
weather
d. Error in tonnage or flag
e. Arrival at portfor Repairs - if repairs take less than
30 days, pay full freightage; if more than, freightage
in proportion to the distance covered.
2. At the request of the ship owner: (Sa-Te)
a. If extra lay days TErminate without the cargo being
placed alongside vessel; and
b. SAle by the owner of the vessel before loading by
the charterer.
3. Due to fortuitous event: (WEB-Pro-N)

Commerce, Art. 640).

LI ABILITY OF SHIPOWNERS AND SHI FLING AGENTS

Three-fold character of the captain (GVG)

v

1.
2.
3.

General agent of the ship owner

Vessels te chnical director
Government representative of the flag he navigates
under

Inherent powers of the ship captain (A2-C3-0)

1. To Appoint or make contracts with the crew in the ship
agent's absence, and to propose said crew, should said
agent be present; but the ship agent may not employ any
member against the captain's express refusal
2. To Command the crew and direct the vessel to the port
of its destination, in accordance with the instructions he
may have received from the ship agent '
3. To impose Correctional punishment:
a. Upon those who fail to comply with orders; or
b. Those wanting in discipline
4. To make Contracts for the charter of.the vessel in the
absence of the ship agent or of its consignee
5, To Adopt all proper measures to keep the vessel well
supplied and equipped, purchasing all that may be.
necessary for the purpose, provided there is no time to
request instruction from the ship agent

6. To flrder, in .similar urgent cases while on a voyage, the

repairs on the hull and engines of the vessel and in its
rigging and equipment, which are absolutely necessary to
enable it tc> continue and finish its voyage (Code of
Commerce, Art 610).
I
Obligations of the captain
1. Inventory of equipment
2. Keep a copy of Code of Commerce on board
3. ' Have a log Book, freight book, accounting book
4. Conduct a marine survey of vessel before loading
' 5. Remain on board while loading
6. Demand pilot on departure and on arrival at each
port (
7. Be on deck when sighting land

; i

I r :

>

TRANSPomrATioN Laws
8.
9.
10.
11.
12.
13.
14.
15.
16.

Q: Under a charter party, XXO Trading Company

shipped sugar
to
Coca-Cola
Company
through
SS
Negros Shipping Coip* insured by
Capitol Insurance Company. The cargo arrived but
with shortages. Coca-Cola demanded from Capitol
Insurance Co. P500.000 in settlement for XXO
Trading. The MMRegional Trial Court; where the civil
suit was filed,*' "absolved the insurance company,
declaring that under the Code of Commerce, the
dripping
agent
is civilly
liable
for
damages in favor of third persons due to the conduct
of the carrier's captain, and the stipulation in th e
charter party exempting the owner frvm liability Is
not against public
policy.
Coca-Cola
appealed.
Will
Its
appeal prosper? Reason
briefly. (2004Bar)

Arrivals under stress: to die marine protest in 24

hours
Record bottomiy loan with Bureau of Customs
Keep papers and properties of crew members who
might die
Conduct himself according to the instuctions of the
'ship agent
Report to ship agent on arrival
Observe rules on the situation of lights and
maneuvers to prevent collisions
Remain on board until the last hope to save the vessel
is lost and to abide by the decision of the majority
whether to abandon or not
In case of shipwreck: file marine protest; within 24
hours
Comply with rules and regulation on navigation (CC,

Art 612).
A: No. The appeal of Coca-Cola will not prosper. Under
Article 587 of the Code of Commerce, the shipping agent
is civilly liable for damages in favor m third persons due
to. the conduct of the carrier's captain, and the shipping
agent can exempt himself therefrom only by abandoning
tire vessel with all his equipment and the freight he may
have earned during the voyage. On the other hand,
assuming there is bareboat charter,-tiie stipulation in the
charter party exempting the owner from liability is not
against public polity because the public at large is not
involved (Home Insurance Co. vs. American Steamship

LI ABI LI TY FOR ACTS OF TH E CA P TA I N

Cases where the ship owner/agent shall be liable to

the damages caused by die captain
1. Damages suffered by the vessel and its cargo by reason
of want of skill or negligence on his part
2. Thefts committed by the crew, reserving his right of
action against the guilty parties;

Agencies Inc, GJLNo. L-25599, April4,1968)

3. Losses, fines; and confiscations imposed an account of
violation ofcustoms; police, health, and navigation laws
and regulations;

EXCEPTIONS TO THE RULE.

Exemption from liability of the captain for loss o r

injury to personsor cargo

4. Losses and damages caused by mutinies on board the

vessel or by reason of faults committed by the crew in
the service and defense of the same, if he does notprove
that he made timely use of all his authority to prevent
or avoid them;

The captain shall not be liable for the loss or injury to

persons or cargo if the loss or the injury is based o.n the
following causes:
1. Force majeure
2. Obligations contracted for the vessel's benefit; except
when the captain expressly agrees to be liable.

5. Those caused by the Misuse of the powers;

6. For those arising by reason of his going out of his course
. or taking a course which he should not have taken
without Sufficient cause, in the opinion of the officers of
. the vessel,, at a meeting with the shippers or
supercargoes who may be on board. No exceptions
whatsoever shall exempt him from this obligation;

A captain may not have himself substituted by

another
)
A captain may not have himself substituted n the absence
of consent from tee ship agent; and should he do so he
shall be liable for all the acts of the substitute. (CC, Art

61S)

7. For those arising by reason of his Voluntarily entering

a port other than that of his destination, outside of die
cases or without the formalities referred to in Article
612; and

Q: T, the captain of MV Don Alan, while asleep in his

cabin, dream t ofan Intensity 8.0 earthquake along the
path of his ship. On waking up, he immediately
ordered the ship to return .to port. True enough, the
earthquake and tsunami struck three days later and
his ship was saved. Was the deviation proper? (2011
Bar)

8. For those arising by reason of non-observance of the

Provisions contained in the regulations on situation of
lights and manoeuvres for the purpose of preventing
collisions (Code o f Commerce, A tt 618).

A: Nq, because no reasonable ground for avoiding a peril

existed at the time of the deviation.

NOTE: Ship owner/agent is not liable for the obligations

contracted by the captain if the latter exceeds his powers
and privileges inherent in his position of those which may
have been conferred upon him by the former. However, if
the amount claimed were used for the benefit of the
vessel, the ship owner or ship agent is liable.

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Mercantile L aw
contracts, except by reason of insubordination in
serious matters, robbety, theft, habitual
drunkenness, or damage caused to the vessel or to
its cargo through malice or manifest or proven
negligence (CC, A rt 605).

Instances when may th e captain and crew members

rescind their contractual employment
In case of: (WOND)
1. War
2. Outbreak of disease
3. Mew owner of vessel
*
4. Change of destination (CC, Art 647).

ii. If the captain should be the vessel's co-owner, he

may not be discharged unless ship agent returns
his amount of interest therein. In the absence of
agreement between the parties, interest shall be
appraised by experts appointed in the manner
established by civil procedure.

Shipowner of a vessel
The person in possession, management, control over the
vessel, and the right to direct her navigation. While in
their possession, the ship owners also receive freight
earned and paid.

Doctrine of inscrutable fault (1995,1997 Bar)

Under this doctrine, where fault is established but it
cannot be determined which of the two vessels were at
fault, both shall be deemed to have been at fault
1

#
Doctrine of limited liability (1991,1994,1997,2000,
2008 Bar)

Ship agent
The person entrusted with provisioning or representing
the vessel in the port in which it may be found. Hence,
whether acting as agent of die ownerof die vessel or as
agent of the charterer, he will be considered as the ship
agentand may be held liable as such, as long as he is the
one that' provisions or represents the vessel (Macondray
&Co., Inc. v. Provident Insurance Corp, G.R. No. 154305, Dec

Also called the "no vessel, no liability doctrine," it

provides that liability of ship owner is limited to ship
owner's interest over the vesseL Consequently, in case of
loss, the ship owner's liability* is also extinguished.
Limited liability likewise extends to ship's appurtenances,
equipment freightage, and insurance proceeds. The ship
owner's or agenfs liability is merely co-extensive with his
interest in the vessel, such that a total loss of the vessel
results in the liability's extinction. The vessel's total
destruction Extinguishes maritime liens because there is
no longer any res to which they can attach (Monarch
Insurance v. CA, G.R No. 92735, June 8,2000).

9,2004).
Civil liabilities of ship owners and agents
1. Damages suffered by a 3rdperson for tort committed by
the captain;
2. Contracts entered for provisioning and repair of vessel;
3. Indemnities in favor of 3rd persons arising from the
conduct of the captain from the care of goods; and
4. Damages in case of collision due to fault or negligence
or want of skill of the captain.
5. Damages for the acts of the captain.

Rationale of the doctrine: the Real and Hypothecary

nature of Maritime Law
To offset against innumerable hazards and perils in sea
voyage and to encourage ship building and maritime
commerce. By abandonment the ship owner and ship
agent exempt themselves from liability, thus avoiding the
possibility of risking his whole fortune In the business.

Powers, functions, and liabilities of ship agents (ID)

1. Indemnity for expenses incurred for ship's benefit
2. Discharge of captain and/or crew members.
The following are the rules observed by the ship agent:
a. Captain and/or crew member's contract not for a
definite period or voyage:i. Before vessel sets out to sea: Ship agent at his
discretion may discharge the captain and
members of the crew. Ship agent must pay captain
and/or crew members salaries earned according
to their contracts, and without any indemnity,
whatsoever, unless there is an expressed
agreement;

Q: On October 30, 2007, M/V Pacific, a Philippine

registered vessel owned by Cebu Shipping Company
(CSQ, sank on her voyage from Hongkong to Manila.
Empire Assurance Company (Empire) is the insurer of
the lost cargoes loaded on board the vessel which
were consigned to Debenhams' company. After it
indemnified Debenhams, Empire as subrogee filed an
action for damages against CSC
a. Assume that the vessel was seaworthy. Before
departing, the vessel was advised by the Japanese
Meteorological Center that it was safe to travel to its
destination. But while at sea, the vessel received a
report of a typhoon moving within its general path. To
avoid the typhoon, the vessel changed its course.
However, it was still at the fringe of die typhoon when
It was repeatedly hit by huge waves, foundered and
eventually sank. The captain and the crew were saved
except three (3) who perished. Is CSC liable to

ii. During voyage: Captain and/or crew member shall

receive salary until return to the port where
contract was made. Article 637 of die Code of
Commerce enumerates the just causes for
discharge.
b. Where captain and members of die crew's contracts
with ship agent be for a definite period or voyage:
i. Captain and/or crew members may not be
discharged until after the fulfillment of their

VTW

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TRANSPORTATION LAWS
Cases In which the doctrine .of limited liability Is
allowed (1994,2004 Bar) (SOLE)

empire? W hat principle of maritime law is

applicable? Explain.
. b. Assume the vessel was not seaworthy as in fact
its hull had leaked, causing flooding in the vessel, will
your answer be the same7 Explain,
c. Assume the facts in question (b). Can the heirs of
the three (3) crew members who perished recover
from CSC? Explain fully. (2008 Bar)

1. Civil liability of the Ship agent or shipowner for the

indemnities in favor of third persons; (CC, Art 587)
2. Civil liability of the co-flwpers of the vessel for the
results ofthe acts ofthe captain; (CC,Art 590)

A:
a) No. The principle of limited liability will apply because
the exclusively real and hypothecaiy nature of maritime
law operates to limit the liability of die ship owner to the
' value of Ae vessel, earned freightage and proceeds of the
insurance,.if any "No vessel, No liability,'' expresses in a
nutshell die limited liabilityrule (Monarch Insurance v. CA,
G.R No. 92735, June.8,2000). The total destruction of the
vessel extinguishesmaridmelienasthere isnolongerany
res to which it can attach. In this case, die ship was
seaworthy. It exercised extraordinary diligence when it
changed its course to avoid the typhoon but
unfortunately, it was hit fay huge waves and sank. Since ,
the vessel sank a t no fault by CSC, it cannot be held liable
by virtue of "No vessel, ho liability rule
b) No. The insurance company is not liable for loss if
the vessel is not seaworthy (Tiangco Company v. Hanson,

3. If the vessel and her cargo be totally Lost; by reason of

capture or shipwreck, all die rights shall be extinguished,
both as regards die right ofthe crew to demand wages and
the right of the ship agent to recover die advances made;

(CC,ArL643)ar
4. Extinction of dvil liability incurred by the shipowner or
agent in cases of maritime collisions (CC Art 837).
i

Exceptions to the doctrine of limited liability 1. Repairs and provisioning of die vessel before the loss of
the vessel; (CC.Art 586)

2. insurance proceeds. If tile vessel is insured, the

proceeds will go to the persons entitled to daim from the
shipowner; (Vasquez vs. CA, G.R. No. L-42926, Sept 13,
1985)

Orth, and Stevenson, Inc,GLR. No. L- 610607, April 18,1958

)A ship is seaworthy if it is reasonably fit to perform the

3. When the shipowner Is guilty of fault or negligence;

service and to encounter die ordinary perils of die voyage

contemplated by the parties to the policy (ICP, Sec 114).
In this case, there was a leak in the hull ofthe ship making
it unseaworthy; thereby, insurance company is exempt
from liability.

s
$

NOTE: But if the captain is the one who is guilty,

doctrine may still be invoked, hence, abandonment is
still an option.

I9

4. Private carrier; or
t

c) Yes, Although the proximate cause of death of die

crew members is their negligence in not attending to the
ship's seaworthiness which is their duty to do so and the
company cannot be blamed for the acts imputable to its
employees' negligence; however, they can claim against
the employees compensation because the accident
: causing their death occurred during the course of
employment and there was no notorious negligence on
the part.of the crew members as to exempt the heirs from
" claiming under the employee's compensation. The fund
used for: payment of claims is derived from the State
Insurance Fund, which, upon payment will be
reimbursed by the employer.

5. Voyage is not maritime in character.

Q: A cargo ship of X Shipping, Co. ran aground off the
coast of Cebu during a storm and lost all Its cargo
amounting to PhpSO Million. The ship Itself suffered
damages estimated at Php80 Million.
The cargo owners filed a suit against XShipping but it
invoked the doctrine of limited liability since its
vessel suffered an Php80 Million damage, more than
the collective value of all lost caigo. Is X Shipping
correct? (2011 Bar)
A: No, since XShipping neither incurred a total loss nor
abandoned its ship.

Person who can invoke the limited liability rule

The only persons who could avail of this are the
shipowner and the shipping agent He is the very person
whom the Limited Liability Rule has been conceived to -*
protect The petitioners cannot invoke this as a defense

(Philippine Trigon Shipyard Corporation, et at vs.

Crisostomo G. Concepcion, et al, G.R. No. 160088, July 13,

ACClQENTSi'ANP DAMAGES IN MARITIME COMMERCE

Acddents In maritime commerce (CASA)

1. Collision
2. Averages
3. Shipwreck
4. Arrival under stress

2011).

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Mercantile Law
G E N E R A L AV E R A G E

2. Fuel for the vessel if there is more than sufficient fuel

for die voyage (Rule IK York-Antwerp Rule)

Averages
Jettison (2000,2009 Bar)
All extraordinary or accidental expenses which may be
incurred during the voyage for the preservation of the
vessel or cargo or both.
Kinds of averages
1. General average - Damages or expenses deliberately
caused in order to save die vessel, its cargo or both from
real and known risk.
2. Particularaverage - Damages or expenses caused to the
vessel or cargo that did not inure to die common benefit,
and borne by respective owners.
General average v. Particular average
GEN ER AL A V E R A G E .

Both the ship and cargo

are subject to the same
danger
There is a deliberate
sacrifice of part of the
vessel, cargo, or both
Damage or expenses
incurred to the vessel, its
cargo, or both, redounded
to the benefit of the
respective owners.
All those who have
benefited shall satisfy the
average.

P A R T I C U L A R AVE RA GE /

No common danger to both

tiie vessel and the cargo
Expenses and damages are
not deliberately made
Did not inure to common
benefit and profit of all,
persons interested in the
vessel and her cargo.
Only the owner of the goods
benefiting from the damage
shall bear the expense of
average.

Requisites of general average (CD-PS)

1.
2.
3.
4.

ommon danger present;

Deliberate sacrifice of part of the vessel or cargo;
Successful saving of vessel and/or cargo; and
Eroper procedure and legal steps.

Person^ liable for th e am ount of the general averages

All persons having ah interest in the vessel and cargo
therein at the time of the occurrence of the average shall
contribute (CC, A rt 812).
Personwho shall b e liable for the amount of the
particular averages
The owner of the things which gave rise to the expenses
or suffered the damage shall bear the simple or particular
averages (CC, A rt 810).
Goods not covered by general average even if not
sacrificed
1. Goods not recorded in the books or records of the vessel
(CC, A rt 855(2])

| Univeksity
2 0 1 S G olden

S anto T omas
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of

Act of throwing overboard part of a vessel's cargo or hull in hopes of saving a ship from sinking
Goods, jettisoned for the common safety, shall not pay
freight; but its latter amount (freight lost) shall be
considered as general average, computing the same in
proportion to the distance covered when they were
jettisoned (Code of Commerce, A rt 660).
Orderof goods to be cast overboard In case of jettison
1. Those on deck, preferring the bigger bulk with least
value.
2. Those below upper deck, beginning with the heaviest
with least utility.

1 between overseas andV inter-island

Q: Distinguish
trade regarding reimbursement and payment of
general averages on jettisoned deck caigo.

s .1-n rd
los^
*jjj

A:
1. In case Of overseas trade, the York-Antwerp Rules
prohibit the loading of cargo on deck. In case such
cargo is jettisoned, the owner will not be entitled to
reimbursement in view of the violation. If the cargo
were saved, the owner must contribute to general
average.
2.

In case of interisland trade, the York-Antwerp Rules

allow deck cargo. If the cargo loaded on deck is
jettisoned as a result of which the vessel was saved,
the cargo owner is entitled to reimbursement If the
cargo is saved, the cargo owner must contribute to
the general average.
i

Reason: In interisland trade, voyages are usually short and

there are intervening islands and the seas are generally
not rough. In overseas trade, the vessel is exposed for
many days to the peril of the sea making deck cargo is
dangerous to navigation.
; COLLISIONS

Collision

I
It is the impact of two moving vessels.
Allision
It is the impact between a moving vessel and a stationary
one.

Error in extremis
The sudden movement made by a faultless vessel during
the third zone of collision with another vessel which is at
fault under the second zone. Even if sudden movement is
wrong, no responsibility will fall on the faultless vessel.

CO

n
Ev(j
cargo!
the shij
ex<!
Coi

1959

T ransportation Laws
Rules governing liabOides o f parties in case of
collision

Role of a "protest" with respect to collisions (2007

Bar)

1. 'One vessel atfault-The ship owner of such vessel shall

be. liable for all resulting damages.

The action for recovery of damages arising from collisions

cannot be admitted if a protest or declaration is not
presented within twenty-four hours before the
competent authority of the point where the collision took
place, or that of the first port of arrival of the vessel, if in
Philippine territory, and to (he Filipino consul if it
occurred in a foreign countr y (CC,Art 835].

2. Both vessels at fault - Each vessel shall suffer their

respective losses but as 'regards the owners of the
cargoes, both vessels shall be jointly and severally liable
(1991,1995,1998 Bar).
3. Vessel at fault not.known - Each vessel shall suffer its
own losses and both shall be solidarity liable for loses or
damages on the cargo. (Doctrine ofInscrutable Fault)

NOTE: Failure to make a protest is not an impediment to

the maintenance of a civil action based on quasi-delict
Instances when a protest is required

4. Fortuitous event- Each shall bear its own damage (1995

Bar).

Arrival under stress; (CC, Art 612 [8])

Shipwreck; (CQArts. 601 [15], 843)
3. If the vessel has gone through a hurricane or where
the captain believes that/the cargo has suffered
damages or averages; (CC, Art 642) and
4. .Maritime collision (CC, Art 835).
1.

5. Third vessel atfa u lt- The third vessel shall be liable for
losses and damages sustained.
Zones of time in die collision of vessel

1. First z o n e all time up to the moment when risk of

Persons who can file a maritime protest

collision begins.
NOTE: One vessel is a .privileged vessel and the
other is a vessel required to take action to avoid
collision.
2. Second zone - time between moment when risk of
collision begins and moment it becomes practically a
certainty.
NOTE: In this aone, the conduct of the Vessels is
primordial. It is in this zone that vessels must
observe nautical rules, unless a departure therefrom
becomes necessaiy to avoid imminent danger. The
vessel which, does not make such strict observance
isliable. '

2. The captain in cases oft

a. Arrival under stress
b. Shipwreck; or
c Ifthe vessel has gone through a hurricane or where
the captain believes that die cargo has suffered
damages or averages.
Q; Two vessels figured in a collision resulting in
considerable loss of cargo. The damaged vessels wore
safely conducted to a p o rt Kirn, a passenger and Ruby,
a shipper who suffered damage to his cargo, did not
file maritime p ro test Can Kim and Ruby successfully
maintain an action to recover losses and damages
arising from the collision? (2007 Bar) .

3. ThirdZone - time when collision is certainand up to the

time of impact
NOTE: An error at this point no longer bears any
consequence.
Even if a collision which resulted in the damage to the
cargoes of a vessel was due to (he fault of die other vessel,
the shipowner is 'Still liable where the vessel did not
exercise due diligence to avoid collision (Maritime

Company o f the Philippines vs. CA, G.R. No 47004, March 8,

1989).
A vessel is guilty of negligence even if it correcdy

1. In case of maritime collision, the passenger or other

persons interested who may be on board the vessel or
who were in a condition who can make known their
wishes (CC,Arts. 835-836) or the captain himself (Verzosa
and Ruiz vs. Lim, G.R. No. 20145, Nov. 15,1923).0

navigated to the right to avoid the collision where it did

not make such maneuver at an early stage and allowed the
two vessels to come to close quarters (Mecenas vs. CA, G.R.

A: Ruby, the shipper can successfully maintain an action

to recover losses and damages arising from die collision
notwithstanding his failure to file a maritime protest since
the filing thereof is required only on die part of Kim, who,
being a passenger of the vessel atthe time of the collision,
was expected to know the circumstances of the collision.
Kim's failure to file a maritime protest will therefore
prevent him from successfully maintaining an action to
recover his losses and damages (CC, Art836).
Shipwreck

No. 88052, December14,1989).

The loss of the vessel at sea as a consequence of its

grounding, or running against an object in sea or on the
coast if.the wreck was due to malice, negligence, or lack
of skill of the captain, the owner of the vessel may demand
indemnity from said captain.

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M ercantile Law
Person who shall bear th e losses in shipwreck

Also, the deterioration of goods due to delay in their

transportation is not covered by Sec. 6 of COGSA (Mitsui

GR: The loss of a ship and her cargo shall fall upon their
respective owners (CC, A rt 840)

OSK Lines Ltd.vs.CA, G.R No. 119571, March 11,1998).

NOTI CE OF LOSS OR DAMAGE

XPN: If the wreck was due to malice, negligence, or lade of

skill of the captain, or because the vessel put to sea was
insufficiently repaired and equipped, the ship agent or the
shippers may demand indemnity from the captain for the
damage caused to the vessel or to the cargo by die
accident (CC, Art 841)

Notice Is not required to be filed In case of damage to

goods under the COGSA
There is no consequence on the right to bring suit if no
notice is filed unlike under the Code of Commerce. It only
gives rise to a presumption that the goods are delivered
in the same condition as they are shipped.

Arrival under stress

It is the arrival of a vessel at die nearest and most
convenient port, if during the voyage the vessel cannot
continue the trip to the port of destination on account of
the lack ,of provisions, well-founded fear of seizure,
privateers or pirates, o r by reason of-any aeddent of the
sea disabling it to navigate (CC,Art 819).
NOTE: In arrival under stress, die captain must file a
Protest which is merely a disdaimer for the shipowner
n o t to be liable.

Overseas Chartering & Shipping N.V. vs. Philippine First

Insurance Company, Inc, G.R No. 143133, June 5,2002).
There is also no consequence if the .^ansportatioii
charges and expenses are paid unlike under the Code of
Commerce.
PERIOD OF PRESCRIPTION

Time when suits for lossor damage of cargo should be

brought (1992,1995,2000,2004 Bar)

Instances when arrival under stress is unlawful (Iff-

DM)

The suit should be brought within one year from:

1. Delivery of the goods, in case of damage; or
2. th e date when die goods should have been delivered,
in case of loss.

1.

Lack of provisions is due to negligence to cariy

c according to usage and customs
2. Risk of enemy not well known of manifest
3. Refect of vessel is due to improper repair; or
4. Malice, negligence, lack of foresight or skill of captain

NOTE: The parties may agree to extend the one-year

.period to file' a case under the Carriage of Goods by Sea

(CC, Art 820).

(Universal Shipping lines, Inc vs. Intermediate Appellate

Court G.R No. 7412S,July31,1990).

'CARRIAGE OF GOODS UY SEA ACT (COOSA)

a p p l i c a t i o n

Failure to file notice of loss does not bar an action against

the carrier if the action was filed within one year (Belgian

of cogsa

Q: To whom should such deliveiy be made as basis of

die computation of the one-year period?

It will only be applied in terms of loss or damage of goods

transported to and from Philippine ports in foreign trade.
It may also apply to domestic trade when there is a
paramount clause in the contract

A: The one-year period Is computed from the deliveiy of

goods to the operator and not to the consignee.
Instances when the one-year period applies (APIS)

Param ount Clause - i t is a stipulation or dause either on

the bill of lading or charter party stipulating the laws that
the parties agreed to be used of that particular transport
In the event that there win be a breach, the parties shall
follow the law stipulated in the paramount clause (Martin,

1. Amendment of pleadings for suing the wrong party

2. filing ofthird party complaint
3. Loss or ! damage to cargo, occluding delay or
misdelivery
4. Subrogation (NCC,Art2207).

1989).
The Carriage of Goods by Sea Act applies up to the final
port of destination even if the transhipment was made on
an inter-island vessel (Sea LandServiceInc. vs. IAC, G.R No.

Time whenj the one year period in the COGSA is

..interrupted

75118, August31,1987).

1. When an action is filed in court; or

2. When there is an agreement between the parties to
extend it!

Cases covered uuder the COGSA

It applies only in case of non-deliveiy or damage, and not
to misdelivery or conversion of goods (Ang vs. American
Steamship Agencies, Inc, G.R No. L-22491,Jan.27,1967).

A rt 1155 of the Civil Code (providing that the

prescription o f actions is interrupted by the making
of tin extra} ididal written demand by the creditor) is
not applical >Ie to actions brought under die COGSA

'

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T ransportation Laws
the loss and damage that the goods on board his
vessel suffered.

. Written claims do not toll the running of the one-year

. prescriptive period under the COGSA since matters .
affecting the transportation of goods by sea must be :
dedded as soon as possible (pole Philippines* Inc vs.
. Maritime Company o f tite Philippines, HR No. L-61352

Since Seaboard, New World's insurer, covered the

goods with a marine insurance policy. New World
sent it a formal dalm dated November 16, 1993.
Replying on February 14,1994, Seaboard required
New World to submit to It an Itemized list of the
damaged units, parts, and accessories, with
corresponding values, for the processing of the dalnr.
But New World did not submit what was required of
it; insisting that the Insurance policy did notindude
the submission of such a list in connection with an
insurance daim. Reacting to this, Seaboardrefosed to
process the daim.

February27,1987).
- Persons who can give notice to, and bring suit against .
, the carrier (SCA)
I*'- The Shipper
.. 2. The Consignee; or
3. Any legal holder ofthe bill of lading like the indorsee,
subrogee, or the insurer of die goods (Kuy vs. Everett.
/
Steamship Corporation, HR No. L-55S4/ May 27,
)
19S3).

On October 11,1994 New World filed an action for

spedfic performance and damages against all th e'
respondents before the RTC. On August 16,2001 the
RTC rendered a decision absqMng the various
respondents from liability with the exception of NYK.
The RTC ruled, however, that petitioner New World
filed its daim against the vessel owner NYK beyond
the one year provided under the Carriage of Goods by
Sea Act (COGSA). New World filed Its complaint on
October 11,1994 when the deadline for filing the
action (on or before October 7,1994) had already
lapsed. On appeal, the CA rendered Judgment on
January 31,2006, affirming tire RTCs rulings except
with respect to Seaboards liability, b the Decision of
CA correct?

; The one-year preset iptive period within which to file

a case against die carrier also applies to a claim filed
by an insurer who stands as a subrogee to tite Insured
d.
. The one-year prescriptive period within which to file a
' -case against tite carrier also applies to a claim filed by ah
Insurer who stands as a subrogee to the insured. Also,
whether the Insurer files a third party complaint or
maintains an independent action is of no moment
, (Filipino Merchants Insurance Co* Inc vs. Alejandro, HR

No. L-54140, Oct 14,1986).

Where an insurer was sued by the consignee of imported
. goods filed a third-party complaint against the carrying
/ vessel more than a year alter the delivery of the goods, the
' third party complaint .is barred by the one:year
/prescriptive period under the COGSA, as otherwise the
prescriptive period can be avoided by the consignee by
filing a claim against the insurer (Filipino Merchant

A: No. With respect to the prescriptive period, the last day

for filing such a suit fell on October 7,1994. The record
shows that petitioner NewWorld filed its formal claim for
its loss with Seaboard, Its insurer, a remedy it had the
right to take, as early as November 16,1993 or about 11
months before the suit against NYKwould have fallen due.

insurance Co* Inc vs. Alejandro, ibid)

NOTE; The ruling in the above-dted case should apply
only to suits against the carrier filed either by the shipper,
the consignee or the insurer, not to suits by the insured
against the insurer. The basis of the insurer's liability is
>/the insurance contract and such claim prescribes in 10
years, in accordance with Art 1144 of the Civil Code

In the ordinary course, if Seaboard had processed that

claim and paid tite same, Seaboard would have been
subrogated to petitioner New Worlds right to recover
from NYK. But Seaboard made an unreasonable demand
on February 14,1994.for an itemized list of the damaged
units, parts, and accessories, with corresponding values
when it appeared settled that New Worlds loss was total
and when the insurance policy' did not require the
production of such a list in the event of a claim.

.(Mayer Steel Pipe Corporation vs. CA, G.R No. 124050,June

y 19^ 1997)
Q; New World bought from DMT Corporation (DMT)
: through its agent; Advatech Industries, Inc
(Advatech) three emergency generator sets. DMT
shipped tite generator sets by truck from Wisconsin,
United States, to LEP Profit International, In c (LEP
Profit) In Chicago, Illinois. From there, the shipment
" went by train to Oakland, California, where it was
loaded on S/S California Luna V59, owned and
operated by NYK Fil-Japan Shipping Corporation
(NYK) for delivery to petitioner New World in Manila.
NYK unloaded the shipment in Hong Kong and
"transshipped it to S/S ACX Ruby V/72 that it also
/ow ned and operated. On its Journey to Manila,
: however, ACX Ruby encountered typhoon Kadiang
whose captain filed a sea protest on arrival a t the
Manila South Harbor on October 5,1993 respecting

Notwithstanding the fact that the case was filed beyond

the one-year prescriptive period provided for under
COGSA, the suit will not be dismissed if the delay was not
due to the claimant's fault Had the insurer processed and
- examined New World's claim promptly - either rejecting
or paying New World, the latter could have taken judicial
action on time. But as in this case, the insurer made an
unreasonable demand for an itemized list of damages
which caused the delay. The insurer therefore should bear
the loss with interest on account ofsuch delay (New World

International Development Phils Inc v. NYK-FILJAPAN

Shipping Corp., G.R No. 171468, August24,2011, in Divina,
2014)

14 c
145

U n i v e r s i t y of S anto T omas
F aculty of C ivil L aw

J*'*"*!

Mercantile Law
With respect to Seaboard's liability, the marine open
policy that Seaboard issued to New World was an all-risk
policy. Such a policy insured against all causes of
conceivable* loss or damage except when otherwise
excluded or when the loss or damage was due to fraud or
intentional misconduct committed by the insured. The
policy covered all losses during die voyage whether or not
arising from a marine peril (New World International

A: Section 3 will prevail. Any clause. Sec 3 of the COGSA

provides that any covenant, or agreement in a contract of
carriage relieving the carrier or the ship from liability for
loss or damage to or in connection with the goods or
lessening such {liability otherwise than as provided, shall
be null and void and of no effect (K Elser, tnc vs, CA,

Development Phils. Inc. v. NYK-FILJAPANShipping Corp.,

G.R. No. 171468, August24.2011.)

THE WARSAW CONVENTION

G.R No. 1-6517, November29,1954).

The Warsaw Convention (WC) for Unification of Certain

Rules Relating to International Carriage by Air provides
for rules applicable to international transportation by air.
The Philippine^ is one of the signatories to WC (Santos III

Prescriptive period in case of misdelivery and

conversion of goods

vs. Northwest Orient Airlines, G.R. No. 101538, June 23,

1992). Hence, this has the force and effect of law in the
Philippines (Cathey Pacific Airways, Ltd. vs. CA, G.R. No.
60501, March 5,1993).

In case of misdeliveiy or conversion, .the proper periods

are:
1. If there is a written contract - 10 years (NCC, Art

1144)
2. Oral contract - 6 years (NCC, Art 1145)
3. For quasi-delict - 4 years (NCC, Art 1146)

APPLICABILITY\

The WC applies to an international carriage of persons,

luggage or goods performed by aircraft for reward. It
applies equally to gratuitous carriage by aircraft
performed by an air transport undertaking (WC,A r tlfl)).

NOTE: The prescriptive period for an action against a

broker is ten years and not one year under the COGSA,
since the broker is not a carrier, chatterer Or holder of the
bill of .lading (Reyma Brokerage Inc vs. Philippine Home

Assurance Corporation, G.R No. 93464, October 7,1991).

International carriage
'LIMITATION OF LIABILITY

Any carriage in which, according to the contract made by

the patties, the place of departure and the place of
destination, whether or not there be a break in the
carriage or a tijansshipment; are situated either:
1. Within die territories of two High Contracting
Pardes;|or
2. Within the territory of a single High Contracting
Party, if there is an agreed stopping place within a
territory subject to the sovereignty, suzerainty,
mandate or authority of another Power, even
though chat Power is not a party to the Convention
(WC,Art 1[2J).

Amount o f th e carrier's liability under the COGSA

1.
2.

The liability limit is set at $500 per package or

customary freight unless the nature and value of such
goods is declared by die shipper.
Shipper and carrier may agree on another maximum
amount; but not more than amount of damage
actually sustained.

NOTE: When die packages are shipped in a container

supplied by carrier and the number of such units is stated
in the bill of lading, each unit and not the container
constitute die "package."

NOTE: High Contracting Parties are the signatories to the

WC and those which subsequently adhered to i t (Mapa vs.
CA, G.R. No. 122308,July8,1997)

Instances where there is no liability under COGSA

(FDUD)
1.
2.
3.
4.

Q: How should carriage performed by several

successive air carriers be treated under Warsaw
Convention?

If the nature or value of goods knowingly and

fraudulently misstated by shipper
If damage resulted from Dangerous nature of
shipment loaded without consent of carrier
JfUnseaworthiness not due to negligence
If Deviation was to save life or property at sea.

A: A carriage to be performed by several successive air

carriers is deemed, for the purposes of WC to be one
undivided canjiage, if it has been regarded by die parties
as a single operation, whether it had been agreed upon
under the form of a single contract or of a series of
contracts (WC, Art 1 (3J).

Q: Clause 18 of the bill of lading provides that the

owner should not be liable for loss o r damage of cargo
unless w ritten notice thereof was given to die carrier
within 30 days alter receipt o f die goods. However,
. Section 3 o f the COGSA provides th at even if a notice
o f loss o r damage is not given, "that fact shall not
affect o r prefudice th e right of.the shipper to bring
. su it within one year after d ie delivery o f the goods."
Which o f these two provisions should prevail?

U n iv ersity of S an to Tomas
2015GbLDEN N o t e s

NOTE: Such rarriage does not lose its international

character meiely because one contract or a series of
contracts is to be performed entirely within a territory
subject to die sovereignty, suzerainty, mandate or
authority of same High Contracting Party (Ibid).

146

T ransportation Laws
" 1 -- .
3. Delay in the transport by air of passengers baggage or
goods.

. Documents o f carriage issued under WC

The following are the documents of carriage:
1.
Passenger Tidcet
2.
Luggage Ticket
3.
Air Consignment note

NOTE: The listis not exclusive.

Venue in die filing of an action for violation of a
contract of International carriage

Function o f th e air consignment note

It is primafade evidence of:
1. The conclusion of the contract
2. Receipt of the goods
3. Conditions of carriage (WC, Art 11 [1]).

An action for damage must be brought at the option o f the

plaintiff, in the territory of one of the High Contracting
Parties, either before the court:
1. of the domicile of the carrier or .
2. of his principal place of business, or
3. where the ticket was purchased, or
4. at the place of destination (WC, Art 28 [1]).

Exercise of the consignor of its right to dispose of the

goods

LIMITATION OF UARILITY

The consignor may exercise its right to dispose of the

goods by:

Limitations to the liability of aiy carriers (1993 Bar)

1. Withdrawing them at the aerodrome of departure or

destination, or.

1. In the carriage of persons' - 250,000 francs for each

passenger. Nevertheless, by special contract, the carrier
and the passenger may agree to a higher limit of liability..

2. Stopping them in the course of the journey on any

landing, or

2. In the carriage ofregistered baggage and ofcargo - Two

hundred and fifty (250) francs per kilogramme, unless the
passenger or consignor has made, at the tithe when the
package was handed over to the carrier, a special
declaration of interest in deliveiy at destination and has
paid a supplementary sum If the case so requires.

3. Calling for them to be delivered at the place of

destination or in the course of the journey to a person
other than the consignee named in the air consignment
NOTE, o r4. Requiring them to be returned to the aerodrome of
departure (WC, Art. 12).

3. As regards objects of which the passenger takes charge

himself- Five thousand (5,000) francs per passenger (WC,
Art 22).

NOTE: In the exercise of this right, (he carrier or other

consignors must not be prejudiced. For the carrier to obey
thd orders for'disposition, the carrier must require the
production of the part of the air consignment note
delivered to the consignor (ibid).

NOTE: Carrier is not entitled to the foregoing limit if the

damage is caused by willful misconduct or default on its
part (WC, Art 25). Where the loss of the baggage of a
passenger was due to the fault or reddessness of an
airline company, the limitation on tire liability of airline
companies under the Warsaw Convention is not
applicable (Alitalia v. IAC, 6.R. No. 71929, December 4,
1990);

Time when th e right to disposition ceases to continue

It ceases as soon as the consignee, on arrival of the goods
at the place of destination, require the carrier to hand
over to him the air consignment note and to deliver the
goods to him, on payment of chaige due and on complying
with the conditions of carriage set out in the air
consignment notefWC Art 13)

Stipulation relieving the carrier from or limiting its

liability Is not valid
Any provision tending to relieve the carrier of liability or
to fix a lower limit than that which is laid down in this
Convention shall be null and void but the nullity of such
provision does not involve the nullity of the whole
contract (WC, Art 23(1)).

Where the supervisor of the consignee signed the deliveiy

receipt for the goods shipped, the consignee cannot sue
the shipping company for non-delivery of the goods

(Republic vs. Lorenzo Shipping Corporation, G.R. No.

153563, Februry 7,2005).

Exceptions to these limitations (WD-PG)

LIABILITIES UNDER THE CONVENTION:
1.

Jdflllful misconduct

2. fiefeult amounting to willful misconduct

1. Damage sustained in the event of the death or

wounding of a passenger taking place on board the
aircraft or in the course of any of the .operations of
embarking or disembarking;

3.
4.

Accepting Eassengers without ticket

Accepting goods without airway bill or baggage
withoutrbaggage check

2. Loss or damage to any check baggage or goods

sustained during the transport by air;

147
n

Un i v e r s i t y o f S a n t o T o m a s
Faculty of C i vi l Law

M ercantile L aw
Time when the right to damages will be extinguished

evidenced by" a flagrantly or shamefully wrong or

improper conduct (Luna vs. CA, GR No. 100374-75

The right to damages shall be extinguished if an action is

not brought within two years, reckoned from the date of
arrival a t the destination, or from die date on which the
aircraft Ought to have arrived, or from the date on which
(he carriage stopped.

November27,1992).
' of the
1 carrier In- guessing which luggage
The act
contained the firearm constitutes willful misconduct
Theguessfry of which luggage contained the firearms

NOTE: Despite the express mandate that an action for

damages should be fried within 2 years from the arrival at
die place of destination, such rule shall not be applied,
where delaying tactics were employed by airline itself in
a case where a passenger wishes to settle his complaint
out-of-court but the airline gave him the runaround,
answering the passenger's letters but not giving in to his
, demands^hence, giving the passenger no time to institute
* the complaint Within the regimentary period (United

Airlines vs. Uy, G.R No. 127768, Nov. 19,1999).

amounted to willful misconduct under Section 25(1) of

the Warsaw Convention (NorthwestAirlines vs.CA,GR No.

Iavvfi I
attrtb

120334,January20,1998).
The allegation of willful misconduct resulting in a
to rt Is insufficient to exclude the case from the realm
of Warsaw Convention

-vs

A cause of action based on tort did not bring the case

outside the sphere of the Warsaw Convention (Ihuillervs.

British Airways, GRNo. 171092, March IS, 2010).

A person cannot recover a claim covered by Warsaw
Convention after the lapse two years

A claim covered by the Warsaw Convention can no longer

.be recovered under local law, if the statute of limitations
of two years has already lapsed (PAL v. Savitto, G.R. No.

149547,July4,2008).
However; the action filed by a passenger of an airline
company for loss of his luggage is not haired by the twoyear prescriptive period under the Warsaw Convention,
where the passenger immediately made a demand upon
the airline company and the action was delayed because
of the evasion of the airline company (UnitedAirLines, Inc.
k Courto f Appeals, G.R No. 124110, April20,2001).
Where an airline company failed to deliver the baggage of
a passenger on time, a passenger may maintain an action
for damages under the Civil Code even if he did not-file a
claim with the airline company within fourteen days as
required by the Warsaw Convention, for he may still sue
under the Civil Code (Luna v. CA, G.R No. 100374-75,

NOT

No c

November27,1992).
-

'WILLFULL MISCONDUCT

The definition, of "willful misconduct" depends in some

measure on which court is deciding the issue. Some
common factors that courts will consider aire:
1. Knowledge that an action wiQ probably result in
. injury or damage
2. Reckless disregard of the consequences of an
action, or
3. Deliberately failing to discharge a duty related to
safely.
Courts may also consider other factors.
v-

The failure of the carrier to deliver the passenger's

..luggage a t the designated time and place does not ipso
facto constitutes willfiil misconduct
There must be a showing that the acts complained of
were impelled by an intention to violate the law, or were
in persistent disregard of one's rights. It must be
* 1 0 1 ii U n , v e r s i t y of S a n t o T o m a s
2 0 1 5 G olden N otes

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corj

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