A. Letters of Credit

1. Definition/Concept

That issued by one merchant to another for the purpose of attending to a commercial transaction.[footnoteRef:1] [1: Art. 567]

An instrument issued by a bank on behalf of one of its customers, authorizing an individual or a firm to draw drafts on the bank or one of its correspondents for its account under certain conditions of the credit.[footnoteRef:2] [2: Commercial Law Review, C. Villanueva, 2004 ed.]

An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.[footnoteRef:3] Through it, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. [3: Prudential Bank vs. CA, 216 SCRA 257]

2. Governing laws

1. Code of Commerce1. Uniform Customs and Practice for Documentary Credits[footnoteRef:4] [4: The Uniform Commercial Practice for Documentary Credits allow Letters of Credit to be payable to order.]

3. Nature of letter of credit

The LC is a financial device[footnoteRef:5] developed as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. [5: mode of payment]

4. Parties to a letter of credit

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

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

c. Seller/exporter/beneficiary one who sells the goods to the buyer, and who delivers the draft and documents to the issuing bank to recover payment.[footnoteRef:6] [6: The number of parties may be increased. Modern letters of credit are usually not made between natural persons. They involve bank-to-bank transactions.]

d. Advising/notifying bank the correspondent bank[footnoteRef:7] of the opening bank through which it advises the beneficiary of the LC. [7: agent]

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

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

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

a. Rights and obligations of parties

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

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

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

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

5. If a bearer does not make use of letter of credit within agreed period, or if none, within 6 months from date if in the Philippines, and 12 months if outside the Philippines, it shall be void.[footnoteRef:8] [8: Arts. 569-572]

5. Basic Principles of letter of credit

a. Doctrine of independence

The three (3) basic contracts are distinct and independent, and the undertakings of the respective parties in each are neither subject to claims and defenses nor affected by the breach in the others.

b. Fraud exception principle

When the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.[footnoteRef:9] [9: Transfield Phils, Inc. vs. Luzon Hydro Corporation, Australia and New Zealand Banking Group Limited and Security Bank Corp., G.R. No. 146717, November 22, 2004]

c. Doctrine of strict compliance

It espouses that the documents tendered by the seller/beneficiary must strictly conform to the terms of the LC.[footnoteRef:10] [10: i.e. they must include all the documents required by the LC (Feati Bank vs. CA)]

B. Warehouse Receipts Law

1. Nature and Functions of a Warehouse Receipt[footnoteRef:11] [11: A warehouse receipt is a written acknowledgment by the warehouseman that he has received the goods described therein and holds the same for the person to whom it is issued or as the latter may order. It is a contract between the owner of the goods or the person authorized by the owner to transfer ownership or possession over the goods, on one hand, and the warehouseman, on the other hand, for the latter to store the goods and the former to pay the compensation for that service. A warehouseman is a person lawfully engaged in the business of storing goods for profit.]

a. To whom delivered:

1. To the person lawfully entitled to the goods2. To the person named in a non-negotiable receipt or to his assignee3. To the lawful holder of a negotiable receipt

b. Kinds:

1. Negotiable warehouse receipts - a warehouse receipt wherein it is expressly stated that the goods are deliverable to bearer or to the order of a person specified therein.[footnoteRef:12] [12: A warehouse receipt stating that the goods are deliverable to bearer is a negotiable warehouse receipt. If the words "non-negotiable" are inserted in the receipt, the insertion is void, and the receipt remains negotiable.]

2. Non-negotiable warehouse receipts - a warehouse receipt in which it is stated that the goods received will be delivered to the depositor or to any specified person. The receipt should be stamped on its face "non-negotiable." A holder of a non-negotiable receipt not stamped "non-negotiable" believing it to be negotiable may treat the receipt as negotiable.[footnoteRef:13] [13: A non-negotiable warehouse receipt, if not stamped with the words "non-negotiable," may make a warehouseman liable for damages suffered by a holder of such receipt who purchases it for value supposing it to be negotiable. The said holder may treat, as his option, such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable.]

c. Distinction between a Negotiable Instrument and a Negotiable Warehouse Receipt

Negotiable instrument Warehouse receipt[footnoteRef:14] [14: even if negotiable, is not a negotiable instrument within the meaning of the Negotiable Instruments Law]

Subject is moneySubject is merchandise

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

Intermediate parties become secondarily liableIntermediate parties are not liable for the warehouseman's failure to deliver the goods.

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

Rights of a holder of a negotiable warehouse receiptRights of a transferee of a non-negotiable warehouse receipt

1. Such title to the goods as the person negotiating the receipt to him has had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt has had ability to convey to a purchaser in good faith for value;

1. Such person acquires thereby as against the transferor the title of the goods subject to the terms of any agreement with the transferor.

2. The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman had contracted directly with him.

2. If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt.

3. Prior to the notification of the warehouseman by the transfer or transferee of a non-negotiable receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.[footnoteRef:15] [15: Sec. 42]

2. Duties of a Warehouseman

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

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

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

3. Warehousemans Lien

All lawful charges for storage and preservation of the goods, all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering, and other charges and expenses in relation to such goods, also all reasonable charges and expenses for notices and advertisements of sale, and for the sale of the goods where default has been made in satisfying the warehousemans lien.

C. Trust Receipts Law

1. Definition/Concept of a Trust Receipt Transaction

A trust receipt transaction is any transaction by and between a person referred to as the entruster, and another person referred to as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents

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

b) to manufacture or process the goods with the purpose of ultimate sale. In the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or

c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments,

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

b) to deliver them to a principal; or

c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewal.The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of the Decree. [footnoteRef:16] [16: Sec. 4]

a. Loan/security feature

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

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

1. Goods are owned by the bank, and are only released to the importer in trust after the grant of the loan. The bank acquires a security interest in the goods as holder of a security title for the advances it made to the entrustee. 2. Entrustee must deliver money or return unsold goods to entrustor3. Bank is preferred over other creditors. 4. Bank is also not liable to buyer of goods as vendor5. Purchaser from entrustee gets good title. 6. No particular form is required for trust receipt2. Rights of the Entruster[footnoteRef:17] [17: Entruster" refers to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction, and any successor in interest of such person.]

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

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser.

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

(a) to the payment of the expenses thereof;

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

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

The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last known business address.[footnoteRef:18] [18: Sec. 7]

a. Validity of the security interest as against the creditors of the entrustee/innocent purchasers for value

The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.[footnoteRef:19] [19: Sec. 12]

3. Obligations and Liability of the Entrustee

The entrustee shall

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

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

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

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

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

(6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.[footnoteRef:20] [20: Sec. 9]

The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.[footnoteRef:21] [21: Sec. 10]

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

Keep said goods or proceeds separate and capable of identification.

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

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

c. Liability for loss of goods, documents or instruments

The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.[footnoteRef:22] [22: ibid.]

d. Penal sanction if offender is a corporation

The penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.[footnoteRef:23] [23: Sec. 13, last sen.]

4. Remedies available

The entrustor can:

a. Cancel trust and take possession of the goofs

b. File a 3rd party claim or separate civil action at any time upon default or failure of entrustee to comply with terms and conditions of the trust agreement.[footnoteRef:24] [24: Prudential Bank vs. NLRC, 251 SCRA 421, 1995 Failure to turn over proceeds of the sale of goods or to return unsold goods is a public nuisance to be abated by the imposition of penal sanctions (Tiomico vs. Court of Appeals, 1999) The offense is malum prohibitum. There is no need to prove damage to the entrustor. (Metropolitan Bank vs. Tonda, 2000), or intent to defraud (People vs. Cuervo, 1981) Offense: estafa under Art. 315 of the Revised Penal Code.]

D. Negotiable Instruments Law[footnoteRef:25] [25: Negotiable instrument (NI) A written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law, Professors Sundiang and Aquino)]

1. Forms and Interpretation

a. Requisites of Negotiability

1. Must be in writing and signed by the maker or drawer;[footnoteRef:26] [26: Any kind of material that substitutes paper is sufficient. With respect to the signature, it is enough that what the maker or drawer affixed shows his intent to authenticate the writing. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) Signature, binding so long it is intended or adopted as the signature of the signer or made with his authority. No person liable on the instrument whose signature does not appear thereon. One who signs in a trade or assumed name liable to same extent as if he had signed in his own name. (Sec. 18, NIL) Signature of party may be made by duly authorized agent; no particular form of appointment necessary. (Sec. 19, NIL) "In writing" - includes print; written or typed ]

1. Must contain an unconditional promise or order to pay a sum certain in money;[footnoteRef:27] [27: Where the promise or order is made to depend on a contingent event, it is conditional, and the instrument involved is non-negotiable. The happening of the event does not cure the defect. The unconditional nature of the promise or order is not affected by: a) An indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount; or b) A statement of the transaction which gives rise to the instrument Where the promise or order is subject to the terms and conditions of the transaction stated, the instrument is rendered non-negotiable. The NI must be burdened with the terms and conditions of that agreement to destroy its negotiability. (Cesar Villanueva, Commercial Law Review, 2004 ed.) But an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3) The dates of each installment must be fixed or at least determinable and the amount to be paid for each installment. A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical computation. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)]

1. Must be payable on demand, or at a fixed or determinable future time;1. Must be payable to order or to bearer;[footnoteRef:28] and [28: The instrument is payable to order where it is drawn payable to the order of a specified person, or to him or his order. (Sec. 8) The payee must be named or otherwise indicated therein with reasonable certainty. The instrument may be made payable to the order of: a. A payee who is not the maker, drawer or drawee b. The drawer or maker c. The drawee d. 2 or more payees jointly e. One or some of several payees f. The holder of an office for a time being Payable to BearerThe instrument is payable to bearer: a. When it is expressed to be so payable; or b. When it is payable to a person named therein or to bearer; or c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or d. When the name of the payee does not purport to be the name of any person; or e. When the only or last indorsement is an indorsement in blank. (Sec. 9) An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. If it is originally a bearer instrument, it will always be a BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specially, it can no longer be negotiated further by mere delivery, it has to be indorsed. A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383) Fictitious payee rule: It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he is till fictitious or non-existent under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. (Reviewer on Commercial Law, Professors Sundiang and Aquino)]

1. When the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.[footnoteRef:29] [29: Applicable only to a bill of exchange A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or more drawees in the alternative or in succession. (Sec. 128)]

b. Kinds of negotiable instrument

Promissory noteAn unconditional promise in writing 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.[footnoteRef:30] [30: Sec. 184]

Bill of exchangeAn 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 at a fixed or determinable future time a sum certain in money to order or to bearer.[footnoteRef:31] [31: Sec. 126]

CheckA bill of exchange drawn on a bank payable on demand.[footnoteRef:32] It is the most common form of bill of exchange. [32: Sec. 185]

2. Completion and delivery

a. Insertion of date

Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.[footnoteRef:33] [33: Sec. 13]

b. Completion of blanks

Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And 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 facie authority to fill it up as such for any amount. 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. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.[footnoteRef:34] [34: Sec. 14]

c. Incomplete and undelivered instrumentsIf completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract even in the hands of a holder in due course but subsequent indorsers are liable. This is a real defense.[footnoteRef:35] [35: Sec. 15]

d. Complete but undelivered instruments

1. Between immediate parties and those who are similarly situated, delivery must be coupled with the intention of transferring title to the instrument.

2. As to a holder in due course, it is conclusively presumed that there was valid delivery; and3. As against an immediate party and remote party who is not a holder in due course, presumption of a valid and intentional delivery is rebuttable.[footnoteRef:36] [36: Sec. 16]

3. Rules of interpretation

a. Discrepancy between the amount in figures and that in words the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount.b. Payment for interest is provided for interest runs from the date of the instrument, if undated, from issue thereof.c. Instrument undated consider date of issue.d. Conflict between written and printed provisions written provisions prevail.e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;f. If one signs without indicating in what capacity he has affixed his signature, he is considered an indorser.g. If two or more persons sign We promise to pay, their liability is joint[footnoteRef:37] but if they sign I promise to pay, the liability is solidary.[footnoteRef:38] [37: each liable for his part] [38: each can be compelled to comply with the entire obligation (Sec. 17)]

4. Signature

a. Signing in trade name

One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.[footnoteRef:39] [39: Sec. 18]

b. Signature of agent

The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.[footnoteRef:40] [40: Sec. 19]

Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.[footnoteRef:41] [41: Sec. 20]

c. Indorsement by minor or corporationThe indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.[footnoteRef:42] [42: Sec. 22]

d. Forgery[footnoteRef:43] [43: Persons precluded from setting up defense of forgery1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors.2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery.]

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

1. Signing of anothers name with intent to defraud; or2. Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.[footnoteRef:44] [44: 1 Agbayani, 1992 ed.]

General Rule:

When a signature is forged or made without the authority of the person, the signature[footnoteRef:45] is wholly inoperative.[footnoteRef:46] [45: not instrument itself and the genuine signatures] [46: Legal Effects:1. No right to retain the instrument2.To give a discharge therefore3. To enforce payment thereof against any party thereto, can be acquired through or under such signature]

Exception:

Unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.[footnoteRef:47] [47: Sec. 23]

5. Consideration

Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. Every person whose signature appears thereon is presumed to have become a party thereto for value.[footnoteRef:48] [48: Sec. 24 What constitutes value: a. An antecedent or pre-existing debt b. Value previously given c. Lien arising from contract or by operation of law. (Sec. 27)]

6. Accommodation party

One 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. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.[footnoteRef:49] [49: Sec. 29]

7. Negotiation

a. Distinguished from assignment

Negotiation Assignment

The transfer of the instrument from one person to another so as to constitute the transferee as holder thereof.[footnoteRef:50] [50: Sec.30]

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.[footnoteRef:51] [51: Timoteo B. Aquino, Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents Assignment may be effected whether the instrument is negotiable or non-negotiable. (Sesbreo vs. CA, 222 SCRA 466)]

b. Modes of negotiationIssuanceFirst delivery of the instrument complete in form to a person who takes it as a holder.[footnoteRef:52] [52: Sec. 191 Steps: 1. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and 2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. (The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.)]

Subsequent Negotiation1. If payable to bearer, a negotiable instrument may be negotiated by mere delivery.

2. If payable to order, a NI may be negotiated by indorsement completed by delivery.[footnoteRef:53] [53: In both cases, delivery must be intended to give effect to the transfer of instrument. (Development Bank vs. Sima Wei, 219 SCRA 736)]

Incomplete negotiation of order instrument

Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein and he also acquires the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is made.[footnoteRef:54] [54: Sec. 49]

c. Kinds of Indorsement

SpecialSpecifies the person to whom or to whose order, the instrument is to be payable.[footnoteRef:55] [55: Sec. 34]

BlankSpecifies no indorsee. a. Instrument becomes payable to bearer and may be negotiated by delivery.[footnoteRef:56] [56: id.]

b. May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement.[footnoteRef:57] [57: Sec. 35]

AbsoluteOne by which indorser binds himself to pay:a. Upon no other condition than failure of prior parties to do so;b. Upon due notice to him of such failure.

ConditionalRight of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions.[footnoteRef:58] [58: Sec. 39]

RestrictiveWhen it either:a. Prohibits further negotiation of the instrument; orb. Constitutes the indorsee the agent of the indorser; orc. Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive.

QualifiedConstitutes the indorser a mere assignor of the title to the instrument.[footnoteRef:59] [59: Sec. 38 It is made by adding to the indoser's signature words like "sans recourse, without recourse", "indorser not holder", "at the indorser's own risk", etc.]

JointIndorsement payable to two (2) or more persons.

IrregularA person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery.[footnoteRef:60] [60: Sec. 64]

8. Rights of the Holder[footnoteRef:61] [61: Holder - a payee or endorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191)]

a. Holder in Due Course[footnoteRef:62] [62: A holder who has taken the instrument under the following conditions: 1 .Instrument is complete and regular upon its face; 2. Became a holder before it was overdue and without notice that it had been previously dishonored; 3 For value and in good faith; and 4. At the time he took it, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (Sec. 52) Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the NIL. The weight of authority sustains the view that a payee may be a holder in due course. Hence, the presumption that he is a prima facie holder in due course applies in his favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003)]

1. May sue on the instrument in his own name;2. May receive payment and if payment is in due course, the instrument is discharged;3. Holds the instrument free from any defect of title of prior parties and free from defenses available to parties among themselves; and

4. May enforce payment of the instrument for the full amount thereof against all parties liable thereon.[footnoteRef:63] [63: Secs. 51 and 57]

b. Defenses against the Holder

In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.[footnoteRef:64] [64: Sec. 58]

9. Liabilities of Parties

a. Maker

The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.[footnoteRef:65] [65: Sec. 60]

b. Drawer

The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will 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 amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.[footnoteRef:66] [66: Sec. 61]

c. Acceptor

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

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

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

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

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

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

(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.[footnoteRef:67] [67: Sec. 64]

Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser.[footnoteRef:68] [68: ibid.]

e. Warranties

Every person negotiating an instrument by delivery or by a qualified indorsement warrants:

(a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.[footnoteRef:69] [69: Sec. 65]

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

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

b) That he has a good title to it;

c) That all prior parties had capacity to contract;

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

e) He engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay. it.[footnoteRef:70] [70: Sec. 66]

10. Presentment for Payment

The production of a Bill of Exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or the production of a Promissory Note to the party liable for the payment of the same.[footnoteRef:71] [71: Sec. 70]

a. Necessity of presentment for payment

Presentment for payment is necessary in order to charge the drawer and indorsers.[footnoteRef:72] [72: Sec. 70, last sen.]

b. Parties to whom presentment for payment should be made

To the person primarily liable or if he is absent or inaccessible, to any person found at the place where the presentment is made.[footnoteRef:73] [73: Sec. 72]

c. Dispensation with presentment for payment

1. In order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument.[footnoteRef:74] [74: Sec. 79]

2. In order to charge an indorser when the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented.[footnoteRef:75] [75: Sec. 80]

d. Dishonor by non-payment[footnoteRef:76] [76: Effect: There is an immediate right of recourse by the holder against persons secondarily liable. However, notice of dishonor is generally required. (Sec. 84)]

1. Payment is refused or cannot be obtained after due presentment for payment;1. Presentment is excused and the instrument is overdue and unpaid.[footnoteRef:77] [77: Sec. 83]

11. Notice of Dishonor

Notice given by holder or his agent to party or parties secondarily liable that the instrument was dishonored by non-acceptance by the drawee of a bill or by non-payment by the acceptor of a bill or by non-payment by the maker of a note.[footnoteRef:78] [78: Sec. 89]

a. Parties to be notified

Given to secondary party or his agent.[footnoteRef:79] [79: Sec. 97]

b. Parties who may give notice of dishonor

Given by holder or his agent, or by any party who may be compelled by the holder to pay.[footnoteRef:80] [80: Sec. 90]

c. Effect of notice

Immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.[footnoteRef:81] [81: Sec. 151]

d. Form of notice

1. By bringing verbally or 2. By writing to the knowledge of the person liable the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.

e. Waiver

Either before the time of giving notice, or after the omission to give due notice. Waiver may be expressed or implied.[footnoteRef:82] [82: Sec. 109]

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

1. If it appears in the body or on the face of the instrument, it binds all parties; but1. If it is written above the signature of an indorser, it binds him only.[footnoteRef:83] [83: Sec. 110]

f. Dispensation with notice

1. When party to be notified knows about the dishonor, actually or constructively;[footnoteRef:84] [84: Secs. 114-117]

1. If waived;[footnoteRef:85] and [85: Sec. 109]

1. When after due diligence, it cannot be given.[footnoteRef:86] [86: Sec. 112]

g. Effect of failure to give notice

An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission.[footnoteRef:87] [87: Sec. 117]

12. Discharge of Negotiable Instrument

a. Discharge of negotiable instrument

A release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated.[footnoteRef:88] [88: The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.]

b. Discharge of parties secondarily liable

1. By any act which discharges the instrument;1. By the intentional cancellation of his signature by the holder;1. By the discharge of a prior party;1. By a valid tender of payment made by a prior party;5. By the release of the principal debtor, unless the holders right of recourse against the party secondarily liable is expressly reserved;6. By any agreement binding upon the holder to extend the time of payment or to postpone the holders right to enforce the instrument.[footnoteRef:89] [89: Sec. 120]

c. Right of party who discharged instrument

Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:

(a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.[footnoteRef:90] [90: In the following cases, the agreement to extend the time of payment does not discharge a party secondarily liable: a) where the extension of time is consented to by such party; b) where the holder expressly reserves his right of recourse against such party. Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of the parties subsequent to him. (Sec. 121) Sec. 121]

d. Renunciation by holder

The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon.[footnoteRef:91] [91: Sec. 122]

13. Material alteration

a. ConceptAny alteration which changes:

a) The date; b) The sum payable, either for principal or interest; c) The time or place of payment: d) The number or the relations of the parties; e) The medium or currency in which payment is to be made; f) Adds a place of payment where no place of payment is specified, or g) Any other change or addition which alters the effect of the instrument in any respect, is a material alteration.[footnoteRef:92] [92: Sec. 125]

b. Effect of material alteration

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

When an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.[footnoteRef:93] [93: Sec. 124]

14. Acceptance

a. DefinitionThe signification by the drawee of his assent to the order of the drawer. It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him.

b. Manner

Must be in writing and signed by the drawee and must not express that the drawee will perform his promise by any other means than the payment of money.[footnoteRef:94] [94: Sec. 132]

The holder of the bill presenting the same for acceptance may require that the acceptance be written on the bill, and if such request is refused, may treat the bill as dishonored.[footnoteRef:95] [95: Sec. 133]

c. Time for acceptance

The drawee is allowed twenty-four (24) hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation.[footnoteRef:96] [96: Sec. 136]

d. Rules governing acceptance

The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored.[footnoteRef:97] [97: Sec. 133]

Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value.[footnoteRef:98] [98: Sec. 134]

An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value.[footnoteRef:99] [99: Sec. 135]

Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same.[footnoteRef:100] [100: Sec. 137]

A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by nonpayment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment.[footnoteRef:101] [101: Sec. 138]

An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn.[footnoteRef:102] [102: Sec. 139]

An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere.[footnoteRef:103] [103: Sec. 140]

An acceptance is qualified which is:

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

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

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

(d) Qualified - as to time;

(e) The acceptance of some, one or more of the drawees but not of all.[footnoteRef:104] [104: Sec. 141]

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 non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto.[footnoteRef:105] [105: Sec. 142]

15. Presentment for Acceptance

a. Time/place/manner of presentment

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

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

c. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.[footnoteRef:106] [106: Sec. 143]

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

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

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

b. Effect of failure to make presentment

The drawer and all indorsers are discharged.[footnoteRef:107] [107: See sec. 144, last sen.]

c. Dishonor by non-acceptance

When duly presented for acceptance acceptance is refused or cannot be obtained; orWhen presentment for acceptance is excused bill is not accepted.[footnoteRef:108] [108: Sec. 149]

16. Promissory Notes[footnoteRef:109] [109: A promise to pay money]

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. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.[footnoteRef:110] [110: Sec. 184]

17. Checks

a. Definition

A bill of exchange drawn on a bank payable on demand.[footnoteRef:111] [111: Sec. 185]

b. Kinds[footnoteRef:112] [112: Cesar Villanueva, Commercial Law Review, 2004 ed.]

Cashiers CheckOne drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance.[footnoteRef:113] [113: Tan vs. CA, 239 SCRA 310]

Managers CheckA check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashiers check as to the effect and use.

Memorandum CheckA check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word memorandum, memo or mem on the check.

Certified CheckAn agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment.[footnoteRef:114] [114: Sec. 187]

c. Presentment for payment

(1) Time

Within reasonable time after its issue.[footnoteRef:115] [115: Sec. 186]

(2) Effect of delay

The drawer will be discharged from liability thereon to the extent of the loss caused by the delay.[footnoteRef:116] [116: Ibid.]

E. Insurance Code

1. Concept of Insurance

An agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.[footnoteRef:117] [117: Sec. 2, par. 2]

2. Elements of an Insurance Contract

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

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

3. The insurer assumes that risk of loss;

4. Such assumption is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing somewhat similar risks; and

5. The insured makes a ratable contribution[footnoteRef:118] to a general insurance fund. [footnoteRef:119] [118: premium] [119: A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements, it is a risk-distributing device (The Insurance Code of the Philippines Annotated, Hector de Leon, 2002 ed.)]

3. Characteristics/Nature of Insurance Contracts

ConsensualIt is perfected by the meeting of the minds of the parties.

VoluntaryThe parties may incorporate such terms and conditions as they may deem convenient.

AleatoryIt depends upon some contingent event.

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

ConditionalIt is subject to conditions the principal one of which is the happening of the event insured against.

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

PersonalEach party having in view the character, credit and conduct of the other.[footnoteRef:120] [120: ibid.]

4. Classes

Marine[footnoteRef:121] [121: Coverage: A. 1. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation; 2. Persons or property in connection with marine insurance; 3. Precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and 4. Bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99) Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque v. IAC, 139 SCRA 596) B. Marine Protection and Indemnity Insurance]

Insurance against risks 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.[footnoteRef:122] [122: Sec. 99]

Fire[footnoteRef:123] [123: Prerequisites to recovery: 1. Notice of loss must be immediately given, unless delay is waived expressly or impliedly by the insurer 2. Proof of loss according to best evidence obtainable. Delay may also be waived expressly or impliedly by the insurer It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance. The determination is important for 2 reasons: 1. Rules on constructive total loss and abandonment applies only to marine insurance; 2. Rule on co-insurance applies primarily to marine insurance; 3. Rule on co-insurance applies to fire insurance only if expressly agreed upon. (Commercial Law Reviewer, Aguedo Agbayani, 1988 ed.)]

A contract by which the insurer for a consideration agrees to indemnify the insured against loss of, or damage to, property by hostile fire, including loss by lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies.[footnoteRef:124] [124: Sec. 167]

Casualty[footnoteRef:125] [125: Classifications: 1. Insurance against specified perils which may affect the person and/or property of the insured. (accident or health insurance) Examples: personal accident, robbery/theft insurance 2. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to or damage to property of others. (third party liability insurance) Insurable interest is based on the interest of the insured in the safety of persons, and their property, who may maintain an action against him in case of their injury or destruction, respectively. Examples: workmens compensation, motor vehicle liability]

Insurance covering loss or liability arising from accident or mishap, excluding those falling under other types of insurance such as fire or marine.[footnoteRef:126] [126: Sec. 174]

Suretyship[footnoteRef:127] [127: It is essentially a credit accommodation. It is considered an insurance contract if it is executed by the surety as a vocation, and not incidentally. (Sec. 20) When the contract is primarily drawn up by 1 party, the benefit of doubt goes to the other party (insured/obligee) in case of an ambiguity following the rule in contracts of adhesion. Suretyship, especially in fidelity bonding, is thus treated like non-life insurance in some respects. Nature of liability of surety: 1. Solidary; 2. Limited to the amount of the bond; 3. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (Sec. 176)]

An agreement whereby a surety guarantees the performance by the principal or obligor of an obligation or undertaking in favor of an obligee.[footnoteRef:128] [128: Sec. 175]

Life

Insurance on human lives and insurance appertaining thereto or connected therewith which includes every contract or pledge for the payment of endowments or annuities.[footnoteRef:129] [129: Sec. 179]

Compulsory Motor Vehicle Liability Insurance[footnoteRef:130] [130: Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained (Shafer v. Judge, RTC, 167 SCRA 386). Claimants/victims may be a passenger or a 3rd party It applies to all vehicles whether public and private vehicles. It is the only compulsory insurance coverage under the Insurance Code. ]

A species of compulsory insurance that provides for 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 motor vehicle by its owner.

5. Insurable Interest

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

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

In Life/Health[footnoteRef:131] [131: General rule: There is no limit in the amount the insured can insure his life. Exception: In a creditor-debtor relationship where the creditor insures the life of his debtor, the limit of insurable interest is equal to the amount of the debt. If at the time of the death of the debtor the whole debt has already been paid, the creditor can no longer recover on the policy because the principle of indemnity applies.]

Every person has an insurable interest in the life and health:

1. of himself, of his spouse and of his children; 2. of any person on whom he depends wholly or in part for education or support;

3. of any person under a legal obligation to him to pay money or respecting property or services, of which death or illness might delay or prevent performance; and 4. of any person upon whose life any estate or interest vested in him depends.[footnoteRef:132] [132: Sec. 10 When it should exist: When the insurance takes effect; not thereafter or when the loss occurs.]

In Property

Every interest in property whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that the contemplated peril might directly damnify the insured,[footnoteRef:133] which may consist in: [133: Sec. 13]

1. an existing interest;

2. any inchoate interest founded on an existing interest; or

3. an expectancy coupled with an existing interest in that out of which the expectancy arises.[footnoteRef:134] [134: Sec. 14 The measure of insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof (Sec. 17)When insurable interest should exist: It must exist at the time the policy is taken and at the time the loss incurred but it need not exist in the meantime.]

c. Double Insurance[footnoteRef:135] and Over Insurance[footnoteRef:136] [135: Requisites: 1. Person insured is the same; 2. Two or more insurers insuring separately; 3. Subject matter is the same; 4. Interest insured is also the same; 5. Risk or peril insured against is likewise the same. Effects: Where double insurance is allowed, but over insurance results: (Sec. 94) 1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts; 2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured; 3. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy; 4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; 5. Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. Additional or Other Insurance Clause A condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property insured. It is lawful and specifically allowed under Sec. 75 which provides that (a) policy may declare that a violation of a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it. A stipulation against double insurance. Purposes: 1. To prevent an increase in the moral hazard 2. To prevent over-insurance and fraud. To constitute a violation of the clause, there should have been double insurance. ] [136: Effect in case of loss: 1. The insurer is bound only to pay to the extent of the real value of the property lost; 2. The insured is entitled to recover the amount of premium corresponding to the excess in value of the property;]

Double insurancewhere same person is insured by several insurers separately in respect to same subject and interest.[footnoteRef:137] [137: Sec. 93]

Over-insurance

when the insured insures the same property for an amount greater than the value of the property with the same insurance company.

d. Multiple or Several Interests on Same Property

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

6. Perfection of the Contract of Insurance[footnoteRef:138] [138: Tort Theory What is being followed in insurance contracts is what is known as the cognition theory. Thus, an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge. (Enriquez vs. Sun Life Assurance Co. of Canada, 41 Phil. 269)]

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

a. Offer and Acceptance/Consensuality

Applicant usually makes the offer to the insurer.

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

Approval of the application by the insurer is necessary to perfect contract. If made: - w/ payment of premium policy becomes effective - w/o payment effective upon payment of premium

(1) Delay in acceptance

Situation where applicant submits application for insurance, but due to negligence of company, w/c takes an unreasonably long time before processing the application, the applicant dies before the application is processed, thus, the contract is not perfected.[footnoteRef:139] [139: Remedy: Insurer liable for damages (Tort Theory) in the amount of the face value of the policy, w/c is given to the estate of the deceased applicant. (not to beneficiary because contract not perfected. Also, no contractual liability also bec. no contact)]

(2) Delivery of Policy

The act of putting the insurance policy[footnoteRef:140] into the possession of the insured.[footnoteRef:141] [140: the physical document ] [141: Effects of Delivery:Where delivery is conditional Non-performance of Condition precedent prevents contract from taking effectWhere delivery is unconditional Delivery corresponding terms of application consummates the contract and policy delivered becomes final contract bet the partiesWhere premium still unpaid after unconditional delivery Policy will lapse if premium unpaid at time and manner specified in the policy, in the absence of any clear agreement that insurer will extend credit. Individual life insurance contracts usually stipulate that: 1) Premium be paid and 2) Policy be delivered to the insured while he is alive and in good health. Concurrence of both is necessary. (see Perez v CA case)]

Actual delivery of the policy is not essential unless the parties have so agreed in clear language. Constructive delivery may be sufficient.[footnoteRef:142] [142: Vda. De Sindayen case Whether or not policy was delivered after its issuance depends not upon manual possession by the insured but rather upon the intention of the parties as manifested in their acts or agreements. Whether or not delivery to agent is delivery to insured is a question over w/c there has been many conflicting opinions.]

b. Premium Payment[footnoteRef:143] [143: Basis of the right of the insurer to collect premiums: Assumption of risk. General rule: No policy issued by an insurance company is valid and binding until actual payment of premium. Any agreement to the contrary is void. (Sec. 77) Exceptions: 1. In case of life or industrial life insurance, when the grace periods applies; (Sec. 77) 2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78) 3. Section 77 may not apply if the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462) 4. Where a credit term has been agreed upon. (UCPB vs. Masagana Telemart, 308 SCRA 259) 5. Where the parties are barred by estoppel. (id., 356 SCRA 307) Section 77 merely precludes the parties from stipulating that the policy is valid even if the premiums are not paid. (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462) Effect of Acknowledgment of Receipt of Premium in Policy: Conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid. (Sec. 78)]

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

c. Non-Default Options in Life Insurance

Cash Surrender ValueThe amount the insured, in case ofdefault, after the payment of at least three (3) full annual premiums, is entitled to receive if he surrenders the policy and releases his claims upon it. It is the portion of reserve on a life policyNature: Premium is uniform throughout lifetime of policy, so during the earlier years of the policy, the premium charges will be more than the actual cost of the protection against the risk in order to meet the higher cost of risk during the latter years of the policy when the insured is older.[footnoteRef:144] [144: Reserve Value - Surrender Charge = Cash Surrender Value]

The more premiums he has paid, the greater will be the CSV but the value is always a lesser sum than the total amt. of premiums paid.CSV is the amount company holds in trust for insured deliverable upon demand. So long as the policy remains in force, the company has practically no beneficial interest in it except as its custodian; this is the practical, though not the legal, relation of the company to this fund.[footnoteRef:145] [145: Effect: Surrender policy; terminates the contract of insurance]

Extended InsuranceDepends on availability of CSV.[footnoteRef:146] [146: Effect: Policy continues in force from date of default, for a period During extended period: If insured dies, beneficiary can recover face amount of policy. Insured can also reinstate the policy w/in this period. Beyond extended period: If he survives No benefits. He cannot even reinstate the policy by paying past premiums; has to purchase new policy Better option if insured not in good health or geriatric]

Either stated or equal to the amount of the cash surrender value, taken as a single premium, will purchase; the insured is given the right, upon default, after the payment of at least three full annual premiums to have the policy continued in force from the 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 Also called term insurance, temporary insurance or paid-up extended insurance

Paid-up InsuranceAmount of Insurance that the CSV, applied as a single premium, can purchase.[footnoteRef:147] [147: Effect: Policy continues in force from date of default for the whole period and under the same conditions of the original contract w/o further payment of premiums. However, in case of death of insured, he may recover only the paid-up value of the policy w/c is much less than the original amount agreed upon. (In other words, na-reduce yung original insurance contract to one with a lower value)]

Better option if insured is still young and in good health because unlike extended insurance, he may later reinstate policy if he wishes

Automatic Premium LoanUpon default, insurer lends/advances to the insured without any need of application on his part, amount necessary to pay overdue premium, but not to exceed the CSV of the policy.Only applies if requested in writing by the insured either in the application or at any time before the expiration of the grace period.[footnoteRef:148] [148: Effect: Insurance continues in force for period covered by the payment. After period, if insured still does not resume paying his premiums, policy lapses, unless there remains CSV.]

If there is still CSV, auto premium loan continues until it is exhausted.Advantageous to the insured because it helps to continue the contract and all its features in full force and effect.Insured under no legal obligation to repay loan

d. Reinstatement of a Lapsed Policy of Life Insurance[footnoteRef:149] [149: Sec. 227 (j) Requisites: a) Exercised w/in 3 years from default b) Insured must present evidence of insurability satisfactory to the company c) Pay all back premiums and all his indebtedness to the insurance company d) CSV has not been duly paid nor the extension period expired Insurability does not mean that insured is in good health. Other factors affect insurability like nature of work, age, etc.]

1) Does not create a new contract, merely revives the old policy.[footnoteRef:150] [150: Thus, insurer cannot require higher premium than amount stipulated in the contract.]

2) Required by Insurance Code for every individual and industrial life policy.3) Not required that three (3) annual premiums have been paid.4) Application for reinstatement must be filed during the insureds lifetime.e. Refund of Premiums[footnoteRef:151] [151: There is no right to recovery of premiums in life insurance because it is not a divisible contract. It is not an insurance for any single year, w/ a privilege of renewal from year to year by paying the annual premium. It is an entire contract of insurance for life subject to discontinuance and forfeiture for non-payment of any of the stipulated premiums.]

A person insured is entitled to a return of premium:

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

2) Where the insurance is made for a definite period and the insured surrenders his policy, before termination thereof[footnoteRef:152] [152: such portion as corresponds w/ unexpired time, as a pro rata rate, returned (Sec. 79) Exceptions: a) Short period rate agreed upon and appears on face of policy (exception to pro rata rate). b) Life insurance (exception to applicability of this section). c) When the contract is voidable because of fraud or misrepresentations of the insurer or his agent (Sec. 81) d) When the contract is voidable because of the existence of facts of w/c the insurer was ignorant w/o his fault (ibid.); e) When the insurer never incurred any liability under the policy because of default of the insured other than actual fraud (ibid.); f) When there is over insurance (Sec. 82); g) When rescission is granted due to the insurers breach of contract]

7. Rescission of Insurance Contracts

a. Concealment[footnoteRef:153] [153: Requisites: a. A party knows a fact which he neglects to communicate or disclose to the other. b. Such party concealing is duty bound to disclose such fact to the other. c. Such party concealing makes no warranty as to the fact concealed. d. The other party has not the means of ascertaining the fact concealed. e. Material Effects: Entitles insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter (Sec. 27). Good Faith is not a defense in concealment. Sec. 27 clearly provides that, the concealment whether intentional or unintentional entitles the injured party to rescind the contract of insurance. Test of Materiality: Determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the advantages of the proposed contract, or in making his inquiries (Sec. 31). Exception to Sec. 31: a. Incontestability clauseb. Matters under Sec.110 (marine insurance) The waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered. (Sunlife v. Sps. Bacani, 246 SCRA 268). The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated. (Sec.33) Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue. Reason: The insurer cannot rely on those statements. He must make further inquiry. (Philamcare Health Systems vs. CA, G.R. No. 125678, March 18, 2002).]

A neglect to communicate that which a party knows and ought to communicate.[footnoteRef:154] [154: Sec. 26]

There is concealment where the insured has knowledge of facts material to the risk, and good faith and fair dealing requires him to reveal them, and he fails to do so.[footnoteRef:155] [155: Villanueva, Phil Commercial Law, 1998 Ed., p. 177]

b. Misrepresentation/Omissions[footnoteRef:156] [156: Requisites of a false representation (misrepresentation): a. The insured stated a fact which is untrue. b. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead. c. Such fact in either case is material to the risk. Characteristics: a. It is not a part of the contract but merely a collateral inducement to it. b. It may be oral or written. c. It is made at the same time of issuing the policy or before but not after. d. It may be altered or withdrawn before the insurance is effected but not afterwards. e. It always refers to the date the contract goes into effect. Kinds: a. Affirmative affirmation of a fact when the contract begins; and b. Promissory promise to be performed after policy was issued. Effect of Misrepresentation: the injured party is entitled to rescind from the time when the representation becomes false.]

Factual statements made by the insured at the time of, or prior to, the issuance of the policy to give information to the insurer and induce him to enter into the insurance contract. They are considered an active form of concealment.

c. Breach of Warranties

General rule: Violation of material warranty or of a material provision of a policy will entitle the other party to rescind the contract.[footnoteRef:157] [157: Sec. 74]

Exceptions:

a) Loss occurs before the time of performance of the warranty.b) The performance becomes unlawful at the place of the contract.c) Performance becomes impossible.[footnoteRef:158] [158: Sec. 73]

Immaterial.[footnoteRef:159] [159: ex. Other insurance clause]

General rule: It will not avoid the policy.

Exception: When the policy expressly provides or declares that a violation thereof will avoid it.[footnoteRef:160] [160: Sec. 75]

8. Claims Settlement and Subrogation

a. Notice and Proof of Loss

Notice of Loss Proof of Loss

The formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against.[footnoteRef:161] [161: The purpose is to apprise the insurance company so that it may make proper investigation and take such action as maybe necessary to protect its interest.It is necessary as the insurer cannot be liable to pay a claim unless he receives notice of that claim]

The formal evidence given the insurance company by the insured or claimant under a policy of the occurrence of the loss, the particulars and the data necessary to enable the company to determine its liability and the amount. Is not tantamount to proof or evidence under the law on evidence.[footnoteRef:162] [162: Under Sec. 88, insurer is exonerated if notice of loss is not given to the insurer by the insured or by the person entitled to the benefit without unnecessary delay. It has been held however that formal notice of loss is not necessary if insurer has actual notice of loss already. Proof of loss is distinct from notice of loss and intended to: 1. give the insurer information by which he may determine the extent of his liability 2. afford him a means of detecting any fraud that may have been practiced upon him. The law does not stipulate any requirement as to the form in which notice or proof of loss must be given. However, according to De Leon, it is advisable to give the notice in writing for the protection of the insured or his beneficiary. Notice may be an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment Nature of notice and proof of loss Although they are in the form of conditions precedent, they are in the nature of conditions subsequent the breach of which affects a right that has already accrued (before the loss, insurers liability is contingent but with the happening of the loss, his liability becomes properly fixed). These conditions are intended merely for evidentiary purposes and do not form any part of the conditions of liability and are construed with much less strictness than those conditions that operate prior to loss.]

Other provisions:When a preliminary proof of loss is required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time.[footnoteRef:163] [163: Sec. 89]

All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived.[footnoteRef:164] [164: Sec. 90]

Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to take objection promptly and specifically upon that ground.[footnoteRef:165] [165: Sec. 91]

If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified.[footnoteRef:166] [166: Sec. 92]

b. Guidelines on Claims Settlement

(1) Unfair Claims Settlement; Sanctions

Unfair claim settlement practices:

a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue;

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

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

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

e) compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them.Sanction:

Considered sufficient cause for the suspension or revocation of the company's certificate of authority.[footnoteRef:167] [167: See Sec. 241 (1) & (3)]

(2) Prescription of Action

All criminal actions for the violation of any of the provisions of this Code shall prescribe after three (3) years from the discovery of such violation. Such actions shall in any event prescribe after ten (10) years from the commission of such violation.[footnoteRef:168] [168: Sec. 420]

(3) Subrogation[footnoteRef:169] [169: There can be no subrogation in cases: a. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage; b. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insureds claim for loss; c. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan Malayan Insurance Company v. CA, 184 SCRA 54) d. In life insurance e. For recovery of loss in excess of insurance coverage]

It is a process of legal substitution where the insurer steps into the shoes of the insured and he avails of the latters rights against the wrongdoer at the time of loss.[footnoteRef:170] [170: The principle of subrogation is a normal incident of indemnity insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent 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, 165 SCRA 536; see also Art. 2207, NCC)]

F. Transportation Law[footnoteRef:171] [171: The articles mentioned are under the Civil Code]

1. Common Carriers

Persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.[footnoteRef:172] [172: Art. 1732 The said article avoids any 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 (sideline). It also avoids a 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. Neither does the law distinguish between a carrier offering its services to the general public that is the general community or population and one who offers services or solicits business only from a narrow segment of the general population. A person or entity is a common carrier even if he did not secure a Certificate of Public Convenience (De Guzman vs. CA, 168 SCRA 612). It makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that the transportation should be by motor vehicle. (First Philippine Industrial Corporation vs. CA) One is a common carrier even if he has no fixed and publicly known route, maintains no terminal