TABLE OF CONTENTS I

Law on Business Transactions Obligations contracts

Sales Assignment

AgencyDeposit 108

Guaranty & Suretyship 117 Pledge 131

seal Mortgage 141 Chattel Mortgage 150

Antichresis 156

II Law on Business Entities

Partnerships 158 Private Corporations 179

III Law on Negotiable Instruments 202

vii

OBLIGATIONS1156 TO 1304

The basic law governing obligations in Republic Act 356, the “Civil code”, in Articles 1156 to 1304.

A. Nature, Sources and types of Obligations

1. Nature. An obligation is juridical necessity to give, to do or not to do. [1157]2. Sources of obligations. These five sources are:

(a) Law(1) Our legal system consists of constitution, statues and administrative rules and

regulations and orders.(2) Obligations of this type arise upon enactment of particular law.(3) Obligations derived from law are not presumed. [1158]

(b) Contract(1) A contract is a juridical convention manifested in legal form, by virtue of which

one or more persons bind themselves in favour of another or others, or reciprocally, to the fulfilment of a prestation to give, to do, or not to do.

(2) Obligations of this type arise upon perfection of contract. They are either.A] Obligations implied by law, orB] Obligations stipulated by parties.

(3) Contracts have force of law between contracting parties. [1154] This “circle of two is expanded to include their heirs and assignees.[1311]

(c) Quasi-contract(1) It is a contract implied in law, whereby a person performs a lawful, voluntary and

unilateral act which benefits another, who is deemed by law to have given consent thereto and to have assumed obligations arising from it.[ 2142]

Examples: A] Negotiorum Gestio. A person voluntarilt takes charge of the agency or

management of the neglected or abandoned business or property of another, without any power from the latter. The other party shall be liable for obligations incurred in his interest and shall reimburse the officious manager for the necessary and useful expenses and for the damages which the latter may have suffered in the performance of his duties. [ see 2144 and 2150]

B] Solutio Indebiti. A person pays or delivers a thing to another, where the latter has no right to demand it and it was unduly delivered through mistake. The other party is obliged to return it. [2154]

1] If an obligor, who is under an obligation with a period, but who is not aware of the period or believes that the obligation has become due and demandable, pays or delivers the the thing to his oblige, before it is due, is conferred by law the right to recover it, with the fruits and interests [see 1195]

2] If a borrower pays interest to the lender when there is no stipulation thereof, the lender is obliged to return it.[1960]

(2) Obligations of this type arise upon performance of unilateral and voluntary set.(d) Delict (1) it is an act or omission, usually attended by malice, and punished by law.(2) Obligations of this type arise upon commission or omission of the act.(e) Quasi- delict1. it is an act or omission, attended by fault or negligence, which causes damage to another. [2176]2. Obligations of this type arise upon commission or omission of the act.

B. GENERAL TYPES OF OBLIGATIONS1.A personal obligation is an obligation either to do or not to do.

(a) A positive personal obligation is an obligation to do.(b) A negative personal obligation is an obligation not to do.

2. A real obligation is an obligation to give.(a) A specific obligation is an obligation to deliver determinate when it is particularly

designated or physically segeregated from all others of the same class.[ 1459] (2) A determinate thing is a concrete[ly] particularized object, indicated by its own

individuality , while a generic thing is one whose determination is confined to that of its nature , to the genus (genero) to which it pertains , such as horse, a chair.4

(b) A generic real obligation is an obligation to deliver a generic object.3. An obligation “to do”includes all kinds of work or service, while an obligation”to give”is prestation which consists in the delivery of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its simple possession, or in order to return its owner.”

C. STANDARD OF CARE AND FORTUITOUS EVENTS1. The standard of care required in obligations.(a) obligation to give

(1) The standard of care to be observed by an obligor in his obligation to deliver a specific thing is the diligence of a good father of a family, unless is a specific lawor his contract requires a different standard of care. [1163]

(2) There is understandable no standard in an obligation to deliver a generic thing.(b) Obligation to do. The standard is the diligence of a good father of a family, unless a specific law or contract requires a different standard of care. [1173, par.2](c) Obligation not to do. There is understandably no standard in an obligation not to do.2. Fortuitous event.

(a) A Fortuitous event is an act accident independent of the obligor’s will to carry out some stipulation. For him to escape the imputation of not performing his obligation to must be placed in a situation A arising from an unforeseen event, not have avoided it, by reason of the fact that its unexpectedness and inevitability place it beyond human control.

(b) No person is responsible for a fortuitous event, except (1) When the law says so

a. Examples: 1. An obligor who has been in delay or has promised to deliver the specific

thing to two persons who do not have the same interest is liable for the loss of the thing to fortuitios event. [ 1165, par. 3]2. A depository , who uses he thing without the depositor’s permission, who delays its return, or who allows others to use it even though he himself may have been authorized to use it is liable for the loss of the thing to a fortuitous event. [1979(3);1979(2);1979(4)]2. when the contract says so.A) example : a depository is liable for the loss of the thing through a frortuitous event if it is so stipulated.[ 1979(1)]

3. when the nature of the obligation requires the assumption of risk.a. Example: a dog trainer who contracted to train someone else’s dog assumes the risk of

dog-bites.D. Specific Types of obligations

1. As to their immediate demand ability and extinguishment based on the occurrence of an event.a. A pure obligation is one without any condition or term. It is demandable at once.[1179,par.1]b. An obligation with either a condition or a term

1. A condition is a future and uncertain event.[see 1179,par.1]2. A term is duration of time culminating in a future and certain event.[ see 1193]

2. As to number of prestations — (a) A simple obligation is one which contains only one prestation. (b) A compound obligation is one which contains more than one prestation. (1) In an obligation with conjunctive prestations, all the prestations must be done. (2)In an obligation with alternative prestations, only one prestation needs to be done. [see 11991(3) In an obligation with facultative prestations, the one prestation agreed upon may be substituted with an-other, which obligor may do. [1206] 3. As to number of persons, and extent of rights and liability of the parties. (a) Individual (b) Collective

(1) In a joint obligation, each obligor answers only for a part of the whole liability and to each obligee belongs only a part of the correlative rights.8

(2) A solidary (also called joint and several) obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation.' Kinds of solidarity: 1] It is active, if solidarity is in favor of the creditors. It is passive, if solidarity is imposed on the debtors. 2] It is passive, if solidarity is imposed on the deptors3] Mixed b] The existence of solidarity between or among debtors determines the amount each of their creditors are entitled to, and conversely, the kind of solidarity between or among creditors determines the amount each of their debtors are liable for. c] Solidarity arises when: 1] the law says so. Examples: [a] The partners and their partnership are liable solidarily to a third person who, by any wrongful act or omission of a partner acting in the ordinary course of the partnership business or with authority from his co-partners, suffers loss or injury [see 1822 and 18241 [b] The partners and the partnership are liable solidarily where a partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it, or when the partnership in the course of its business receives money or property of a third person and such money or property is misapplied by any partner while it is in partners hip’s custody. [1823 and 1824]

[c] The principal is solidarily liable with his agent, if the principal allowed his agent to act as though he had full powers, even when the agent has exceeded his authority.[1911] [d] Two or more persons who appoint an agent for a common transaction or undertaking are solidarily liable to the agent for consequences of the agency. [1915] [e] Responsibility of two or more persons who are liable for a quasi-delict is solidary.[2194] Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such direc-tors or trustees are solidarily liable to the corporation, its stockholders or members and other persons for damages resulting from their acts.'° [g] Directors and officers who consent to the issuance of watered stocks or who having knowledge thereof do not forthwith express objection in writing and file the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received by the corporation at the time of issuance of the stock and the par or issued value of the same." 2] the contract says so. 3] the nature of the obligation requires it. [1207] En 4. As to divisibility. An obligation may either be divisible or indi-visible. (a) An obligation to give a definite thing or an obligation to do which is not susceptible to partial performance is indivisible.(b) The divisibility of an obligation to give and an obligation to do, whose object or service may be physically divisible is determined by — (1) law

a] A mortgage is indivisible. [2090] )b] A stock subscription contract is indivisible.12 (2) intent of the parties.

(c) The divisibility or indivisibility of an obligation not to do in is determined by the character of the prestation. [1225] E. Conditional Obligations

1. Types of conditions (a) A suspensive condition is a future and certain event the happening of which gives rise to the demandability of the obligation [or right]. It is also known as a condition precedent. Until and unless the event happens, the demandability of the obligation is "suspended," i.e., deferred.(1) A potestative condition [also called a 'facultative' condition], whether suspensive or resolutory in nature, is a future and uncertain event, the happening of which depends upon the sole will of one of the contracting parties. A] If the condition is potestative on the part of debtor, the obligation itself is void [1182, first sentence; 1186], unless the obligation is pre-existing. b] If the condition is potestative on the part of creditor, the obligation remains valid. C] If the condition is potestative on the part of a third person, the obligation remains valid. [1182]

d] If the condition depends upon chance, the obligation remains valid. [1182] (2) Positive, and negative (3) Possible, and impossible [1183]

(a) A positive impossible condition renders the ob-ligation void. [1183, first sentence](b) A negative impossible condition renders the ob-ligation pure, and therefore demandable

at once. [1183, par. 2] (4) With a determinate time, and without a determinate time [1184) a] A condition that an event will not happen at a determinate time renders the obligation effective from the moment the said time has elapsed or if it has become evident that the event cannot occur. [1185] (b) A resolutory condition is a future and uncertain event the happening of which causes the extinguishment of the obligation or right. It is also known as a condition subsequent. Before it happens, the obligation is demandable. [1181; 1179]

F. Obligations with a Term1. Types of term

(a) Suspensive term (ex die) (1) When its duration depends upon debtor's will, the court will fix the duration. [1197, par.

2] (2) Obligations for whose fulfillment a day certain has been fixed, shall be demandable only

when the day comes. [1198, par. 1]. But the rule admits of exceptions, such as: A] A thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. [1989, par. 1]. B] Unless the deposit is for a valuable consideration, the depositary who may have justifiable reasons for not keeping the thing deposited may, even before the time designated, return it to the depositor; and if the latter should refuse to receive it, the depositary may secure its consignation from the court. [1989] (b) Resolutory term (in diem)

G. Obligations with a Penal Clause 1. An obligation with a penal clause is actually a composite of two obligations: the principal

obligation and the accessory contingent obligation. 2. Kinds of penal clauses (a) As to origin

(1) It is denominated legal, when its existence is due to a law. (2) It is conventional, when its existence is due to the stipulation of the parties. (b) As to its purpose

(1) It is compensatory, when its purpose is restitutory. (2) It is punitive, when its purpose is retributive.

(c) As to its demandability or effect (1) It is subsidiary (also called alternative), when only the penalty can be enforced. (2) It is joint (also called cumulative), when both the principal obligation and the penal

clause can be enforced.

3. In case of non-compliance, the penalty shall substitute: (i) the indemnity for damages, and (ii) the payment of interests. [1226, par. 1]. (a) The creditor however may recover damages and/or interests in addition to the penalty:

(1) when so stipulated by the parties 111226, par. 1] (2) When the obligor refuses to pay the penalty [1226, par. 2] (3) When the obligor is guilty of fraud in the fulfilment of the obligation.[1226,par1]

H. Extinguishment of Obligations13 The debtor is liable with all his property, present’4 and future,15 for the fulfilment of his obligations, subject to the exemptions provided by law. [2236] General Types (a) By act of the parties (1) By act of the debtor (2) By act of the creditor (3) By acts of both debtor and creditor (b) By operation of law, e.g., compensation I. Performance and Payment

1.Performance in good faith (a) Good faith consists of the honest intention to abstain from taking an unconscionable and unscrupulous advantage of another. 16 (b) As a general principle, the creditor who is the victim of performance which has been attended by fraud, negligence, and delay is entitled to damages from the debtor. [11701 A debtor who is guilty of fraud, negligence or default in the performance of obligations and a debtor who fails in the performance of his obligation is bound to indemnify for the losses and damages caused thereby.’7

(1) Incidental fraud is the deliberate or intentional evasion of the normal fulfillment of an obligation’8

(2) The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. [11731 (3) Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. a] Demand is not necessary, however, in the following three instances: 1] when the obligation or the law expressly do declares. 2] when from the nature and circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service to be rendered was a controlling motive for the establishment of the contract. 3] when demand would be useless, as when the obligor has rendered it beyond his power to perform. b] In reciprocal obligations’9 neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. [1169] (4) The phrase “in any manner contravene the tenor” of the obligation, which is found in 1170, includes any illicit act which impairs the strict and faithful fulfillment of the obligation, or every

kind [of] defective performance.2° (c) Payment (1) Parties to payment a] Payment by an incapacitated person is generally not a valid payment. [1239] bi Payment may be made by a third person, but the creditor is not bound to accept it, if the third person has no interest in the fulfillment of the obligation, unless the parties have a stipulation to the contrary. [see 1236] 11 Such third person who pays is entitled to reimbursement from the debtor, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has benefited the debtor. [see 1236] 2] Such third person who pays without the knowledge or against the will of the debtor cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. [1237] 3] Payment made by a third person, who does not intend to be reimbursed by the debtor, is valid payment as to the creditor who accepts it. The payor’s act shall be deemed to be a donation, which requires the debt. or’s consent. [see 1238] c] Payment shall be made to the person in whose favor the obligation has been constituted or his successor in interest or any person authorized to receive it [12401. 1] Payment to an incapacitated person is valid payment, if he keeps the thing delivered or insofar as the payment has been beneficial to him. [1241] 21 Payment to a third person is valid payment insofar as it has redounded to the benefit of the creditor. [see 1241]

d] Payment made in good faith to any person in possession of the credit shall release the debtor from his obligation. [12421 (2) The obligation to pay money is a generic obligation.21 (3) Currency of payment. The repeal of RA 529 by RA 8183 has the effect of removing the prohibition on the stipulation of currency other than Philippine currency, such that obligations or transactions may now be paid in the currency agreed upon by the parties22 (4) Special forms of payment: a] Dacion en pago (or Dation in payment) [1245]. Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.23 bi Cession. Payment by cession is assignment by the debtor of all his property in favor of his credit ors. [1255] 11 1255 contemplates the existence of two or more creditors and involves the assignment of all the debtor’s property. ci Tender of payment and consignation 11 Tender of Payment. [a] Tender is the antecedent of consignation, that is, an act preparatory to the consignation which is the principal and from which are derived the immediate consequence which the debtor desires or seeks to obtain. Tender may be extrajudicial, while consignation is necessarily judicial? [b] A tender of payment, to be valid must be unconditional. The effect of a valid tender of payment is merely to exempt the deptor from payment of interest and or damage

[c] If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor

shall be released from responsibility by the consignation of the thing or sum due. [12561 [1] A tender of payment, even if valid, does not by itself produce legal payment, unless it is completed by consignation. Tender of payment alone is not a mode of extinguishing obligations. [1]Consignation must follow, supplement or complete the tender of payment if discharge of the obligation is to be obtained. 2] Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot ac ept or refuses to accept the payment, and it is generally requires prior tender of payment. 3] When tender alone is sufficient Tender is sufficient if it is done in the exercise or enforcement of a right (such as a right of repurchase) not in settlement of a debt. 4] When consignation alone is sufficient. Consignation alone shall release the debtor from responsibility: [a] when the creditor is absent or unknown, or does not appear at the place of payment. [b] when the creditor is incapacitated to receive the payment at the time it is due. [c] when, without just cause, the credit or refuses to issue a receipt. [d] when two or more persons claim the same right to collect. [e] when the title of the obligation has been lost. [1256] dl Application of payments3° [12521 1] The rules on application of payments giving preference to secured obligations, are only operative in cases where there are several distinct debts.3’

J. Loss of the Object 1. A thing is said to be lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered. [1189(2)] 2. A generic obligation is not extinguished by the loss of a thing belonging to a particular genus.32 3. Impossibility of performance (a) The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties.33 When the service required by the contract has become so manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (1) The law recognizes exceptions to the principle of obligatory force of contracts. One exception is laid down in Article 1266. This article applies only to obligations “to do”, and not to obligations “to give.”35

K. Condonation or Remission of the Debt 1.Condonation is the creditor’s gratuitous release of the debtor from his obligation to him. L. Confusion or Merger of Rights

1. Confusion or merger of rights arises when characters of credit or and debtor are merged in the same person (e.g., a promiss ory note is, after a series of transactions, assigned or negotiated to its maker) (a) In confusion, there is one person, who is creditor and debtor of himself. M. Compensation 1. Compensation takes place when two persons, in their own right, are creditors and debtors of each other. [1278]. (a) In compensation, there are two persons, who are credit ors and debtors of each other. N. Novation 1. Novation is the extinguishment of an obligation by substitution or change of the obligation by a subsequent one which extinguishes or modifies or principal conditions or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.36 (a) Novation, unlike the modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old.37 2. types (a) As to its nature or how it is reached (1) Express novation (2) Implied novation. The issue as to whether novation has indeed arisen arises in this type, in light of precept that novation is not presumed. [1292] The issue as to whether there is implied novation arises in cases of: (i) change in principal obligations, and (ii) legal subrogation. (b) Objective (or Real) (1) Change in the Object [1291(1)] (2) Change in the Principal Conditions [1291(1)] (c) Subjective (or Personal) (1) Substitution is the change in debtors. It may be through either delegacion or expromision. [1291(2)] a] Delegacion (“ex delegatio”) requires the consent of the old and new debtors and the creditor. 1] If the new debtor pays, he will have rights to reimbursement [1236, par. 21 and subrogation. [12371 2] If the new debtor becomes insolvent, an action against original debtor is revived, except when the insolvency was already existing and of public knowledge, or known to the debtor when he delegated his debt. [12951 b] .Expromision (“ex promisio”) 1] with consent of the old debtor [12931 [a] If the new debtor pays, he will have rights to reimbursement [1236, par. 2] and subrogation. [1237] [b] If the new debtor becomes insolvent, an action against original debtor is revived, except when the insolvency was already existing and of public knowledge, or known to the debtor when he delegated his debt. [1295] 2] without consent or against will of the old debtor [1293] [a] If the new debtor pays, he will have a right to beneficial reimbursement only. [1236, par. 2] [b] If the new debtor becomes insolvent or fails to fulfill obligation, it shall not give rise to liability of old debtor. [1294] (2) Subrogation is the change in creditors. It transfers to the person subrogated, the credit and all rights appertaining to the old creditor, either against (i) the debtor, or (ii) third persons, who may be

guarantors, or mortgagors, subject to stipulation in conventional subrogation [1291(3); 1303]. Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.38 It may either be legal or conventional.39 a] Conventional subrogation. [1300] It is that which takes place by agreement of the parties;4°hence consent of old and new creditors and debtor is necessary. [see 1301] b] Legal subrogation. Legal subrogation is that which takes place without agreement of the parties, but by operation of law because of certain acts.41 1] when legal subrogation exists: [a] The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. [20671 [b] If a person’s property has been insured and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract, the insurance company shall be subrogated to the rights of the insured person against the wrongdoer or the person who violated the contract. [see 22071 2] when legal subrogation is presumed to exist: [a] when the creditor pays another credit or who is preferred, with or without the debtor’s knowledge. [b] when a third person, not interested in obligation, pays with the debtor’s express or tacit approval. [ci when a person, interested in the fulfillment of obligation, pays with or without the debtor’s knowledge, without prejudice to the effects of confusion as to said person’s share. [1302]

Contracts 1305 to 1422 The basic law governing contracts is the Civil Code, in articles 1305 to 1422. A. Nature and Types of Contract

1.Nature. (a) A contract is a meeting of the minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. [13051 (b) A contract is a juridical convention manifested in legal form, by virtue of which one or more persons bind thems elves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do.’ 2. Types of contracts. The classification of contracts have for their purpose the determination of applicable provisions of law. An example would be the dichotomy between executory and executed contracts; the Statute of Frauds apply to the former only. (a) As to method of offer and acceptance, i.e., how offer and acceptance are manifested. (1) Unilateral. A unilateral contract is one in which only one party makes a promise, in exchange for an act or a forbearance by the other party. a] One party agrees to fulfill his promise(s) if the other performs his requested act or forbearance. b] A loan, whether commodatum or mutuum, is a unilateral contract.2 (2) Bilateral. A bilateral contract is one in which each of the parties makes a promise. a] A sale is a bilateral contract, as the seller promises to deliver and transfer ownership over the

object, while the buyer promises to pay the price. [1458] b] Both parties agree to fulfill his promise(s) if the other performs his promise. (b) As to nature of agreement or how it is reached. (1) Express. An express contract is one in which the intent of the parties is disclosed by their words, oral or written. a] An express contract is a contract entered into by means of letters, in which the offer and the acceptance have been manifested by appropriate words.3 (2) Implied. An implied contract is one in which the intent of the parties is inferred from their conduct, as when a person operates and opens to the public a soft drinks dispenser, and another inserts a bill to retrieve a soft drink can. a] An implied contract is that which the consent of the parties is implied.4 bi An implied contract, in the proper sense, arises where the intention of the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts, or as it has been otherwise stated, where

2Some jurisprudence have held that a loan is not a unilateral contract. However, some authorities have proffered the opinion loan is a unilateral contract. I share this view. This characteristic flows from the fact that it is a real contract, i.e., it is perfected by delivery of the object to the borrower. In exchange for the lender’s act, the borrower makes a promise: to repay there are circumstances which, according to the ordinary course of dealing and the common und erstanding of men, show a mutual intent to contract.5 1] A contract of sale can be express or imp lied. [1483] 2] There is no implied contract of guaranty; a contract of guaranty can only be express. [see 20551 (c) As to manner of perfection. The perfection or birth of the contract takes place when the parties agree upon the essential elements of the contract.6 (1) Consensual contracts [13181 a] A consensual contract is perfected by mere consent (on the object and cause of the contract) by the parties. (2) Formal (or Solemn) contracts a] A formal contract is perfected upon consent of parties and execution of the required writing. 11 A contract of partnership whereby immovables or real rights are contributed as capital needs to be a formal contract. [see 17711 b] A contract partly in writing and partly oral, is in legal effect, an oral contract.7 (3) Real contracts [13161 a] A real contract is perfected upon consent of the parties and delivery of object. b] Deposit, loan8 and pledge are real contracts. [see 1316] (4) Contracts are enforceable only from the moment of perfection.9 (d) As to their consideration. [1350, 1378] (1) Onerous. In onerous contracts, the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other. [1350] (2) Remuneratory. In remuneratory contracts, the cause is the service or benefit which is remunerated. [1350] (3) Purely beneficent or gratuitous. In contracts of pure beneficence, the cause is the liberality of the

benefactor. [13501 (e) As to their enforceability in court (1) Enforceable. An enforceable contract is one which a party can sue upon. (2) Unenforceable. An unenforceable contract is either a valid contract which a party cannot sue upon, bec use it lacks some legal requirement, or a void contract which a court will not enforce. (0 As to stage of completion (1) Executed. An executed contract is one where both parties have performed their promises. (2) Executory. An executory contract is one where one party has not fully performed his promise. (g) As to their independence (1) Principal (2) Accessory B. Two Important Principles Relating to Contracts Principle of mutuality of contracts (a) The contract must bind both parties; its validity or cornpliance cannot be left to the will of one of them. [13081 (1) A contract is the law between the parties.’° (b) Independent of their motives and the value of their bargain, both parties must be bound to the contract. 2. Principle of relativity of contracts (a) Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. [13111 (1) The heir is not liable beyond the value of the property he received from the decedent. [1311] (b) It is a basic principle in civil law that, with certain except ions, a contract can only bind the parties who had entered into it or their successors who assumed their personalities or their juridical positions, and that, as a consequence such contract can neither favor nor prejudice a third person.’ (1) There are two sets of exceptions to the above rule: a] The contract does not take effect insofar as the assigns or heirs, when the rights and obligations are not transmissible because of 11 the nature of the right or obligation, 2] stipulation of the parties, or 3] provision of law (e.g., 1939 which provides that a contract of cominodatum is purely personal) hi The following contracts affect third persons, even if they are neither parties, assigns nor heirs: 11 a pour autrui contract [1311, par. 2] 2] a contract creating real rights [1312] 3] a contract which defrauds creditors of either party [13121 4] a contract which has been violated at the inducement of a third person [1314], and 5] a contract done on behalf of a person who has authorized a third person, to do so, or who by law is represented. [1317]

C. Essential Requisites of a Valid Contract C-i. Consent.

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. [see 1319, par. 1] (a) “Meeting of minds.” The term “minds” refers to the capacity of parties to act, or capacity to enter into contract [381 (1) Legal Capacity, i.e., capacity of parties to act, or capacity to enter into contract a] Minority 1] Age of majority starts at eighteen years. [see 1327(1)112 2] Minors are protected by law from contracts they enter into. b] Mentality. Soundness of mind is affected by — II Insanity 21 Imbecility 3] State of being a deaf-mute 4] Prodigality [see 1327(2)] c] Civil interdiction 1] Civil interdiction is an accessory penalty that deprives the criminal offender during the time of his sentence of the rights of parental authority, or guardianship, either as to the person or property of any ward, of marital authority, of the right to manage his property and of the right to dispose of such property by any act or any conveyance inter vivos.13 2] Those civilly interdicted are prohibited by law to enter into any contract of conveyance of property. (b) “Meeting of minds.” The word “meeting” in the term “meeting of minds” refers to the presence of genuine consent. (1) Consent may be express or implied14 a] Absence of consent renders the contract inexistent (and void). (2) Consent, albeit purportedly present, is not genuine, if it had been vitiated by any of the five “vices of consent” a] Mistake hi Violence c] Intimidation dl Undue influence e] Fraud 1] Vitiation of consent, by any of the five vices, renders the contract voidable. (3) Simulated or fictitious contracts a] Absolutely simulated contracts are void. [13461 b] Relatively simulated contracts: 1] Those that do not prejudice a third person bind the parties to their real agreements. [1346] 2] Those that prejudice a third person are rescissible. [see 1381(3)] 3] Those that are not intended for any purpose are void. 2. Offer and Acceptance (a) The offer must be certain. (1) Offer, distinguished from invitations to make an offer. a] An advertisement is not an offer; it is an invitation to persons to make an offer. b] An invitation to bid is not an offer, but is an invitation to make an offer. ci Auction is also an invitation to make an offer. dl A purchase order is merely an offer to buy.’6 (b) Revocation or withdrawal (1) By the offeror a] It can be withdrawn anytime, unless it is an option, which was granted in exchange for a

consideration, either paid or promised. [see 1324] (2) By operation of law a] Death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed terminates the offer. [see 13231 b] The loss or destruction of the determinate object during the offer period terminates the offer. c] The supervening illegality of the object during the offer period terminates the offer. (c) Rejection, by the offeree (1) Counteroffer a] A qualified acceptance or one that involves a new proposal constitutes a counteroffer and is a rejection of the original offer.’6 [see 1319, par. 1]

(d) Acceptance, by the offeree (1) It may be express or implied. [13201 (2) It must be absolute. [1319, par. 1] It must be unqualified. a] Only an absolute and unqualified acceptance of a definite offer manifests the consent necessary to perfect a contract.’7 3. Mistake (a) The concept of error must include both ignorance, which is the absence of knowledge with respect to a thing, and mistake, which is a wrong conception about said thing, or a belief in the existence of some circumstance, fact or event, which in reality does not exist.18

(b) In order that mistake may invalidate consent, it should refer to — (1) the substance of the thing which is the object of the contract, or (2) those conditions which have principally moved one or both parties to enter into the contract. [1331, par. 1] (c) Mistake as to identity or qualifications of a party does not vitiate consent, unless such identity or qualifications were the principal cause of the contract. [see 1331, par. 2] (d) Mistake of law, distinguished from mistake of fact. (1) There is a question of law when the doubt or differences arise as to what the law is on a certain state of facts. There is a question of fact when the doubt or differences arise as to the truth or the falsehood of alleged facts.’9 (2) Mistake of fact — but not mistake of law — can vitiate consent; ignorance of law does not excuse anyone from compliance with it.2° (e) There is no mistake if party alleging it knew the doubt, contingency or risk affecting the object of the contract. [1333] (f) Simple mistake of account does not give right to annual contract but only to correct it. [1331, par. 3] 4. Violence (a) Violence is any serious or irresistible force exerted on a person to obtain his consent to the contract. [13351 (b) Violence which may have been employed by a third person is sufficient to vitiate consent. [13361 5. Intimidation (a) There is intimidation when a person is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent to a contract. [13351

(b) It must consist of specific acts, and not “collective” or “general” duress that coax consent.21 It should be based on real, imminent, or reasonable fear for one’s life and limb. It should not be inspired by speculative, fanciful, or remote fear.22 (c) Duress, which may have been employed by a third person is sufficient to vitiate consent. [13361

6. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. [1337] (a) In the absence of a confidential or fiduciary relationship between the parties, the law does not presume that one person exercised undue influence upon the other. A confidential or fiduciary relationship may include any relation between persons, which allows one to dominate the other, with the opportunity to use that superiority to the other’s disadvantage. Included are those of attorney and client, physician and patient, nurse and invalid, parent and child,guardian and ward, member of a church or sect and spiritual adviser, a person and his confidential adviser, or whenever a confidential relationship exists as a fact.23 7. Fraud (a) In general. Fraud consists of intentional acts to deceive and deprive another of his right or in some manner injure him.24 The essence of fraud is the intentional and wilful employment of deceit deliberately done or resorted to in order to induce another to give up some right.25 (1) Causal Fraud. The kind of fraud that will vitiate a contract refers to those insidious words or machinations resorted to by one of the contracting parties to induce the other to enter into a contract which without them he would not have agreed to. Simply stated, the fraud must be the determining cause of the contract, or must have caused the consent to be given.26 a] It should be distinguished from 1] Fraud in the execution of the instrument. [1170] When there has been a meeting of the minds but the parties’ true intention is not expressed in the instrument, due to mistake, fraud, inequitable conduct or accident, a party may ask for reformation of the instrument. [see 1359] 21 Fraud in the performance of the contract. This is known as “incidental fraud” and gives right to damages. [1344, par. 2] bi Concealment. Failure to disclose facts, when there is a duty to reveal them as when the parties are bound by confidential relations, constitutes fraud. [1339] 1] Silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made.27 c] Misrepresentation is leading someone to believe something untrue to be true or something not existing to be existing. 1] A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former’s special knowledge. [13411 21 The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. [1340] 3] Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. [1342] [a] In a contract of sale, only the sellers and buyers are held chargeable with misrepresentation as against each other.28 dl The fraud must not have been employed by both contracting parties. [1344, par. 1] a] Fraud employed by both parties on each other results in a valid contract? (f) Simulation is “the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a juridical act which does not exist or is different from what that which was really executed. The requisites of simulation are: (a)

an outward declaration of will different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons.3° C-2. Object It must exist. 2. It must be within commerce of man. (a) All rights which are not intransmissible may be the object of contracts. (1) Political rights conferred upon citizens, like, one’s right to vote, the right to present one’s candidacy to the people and to be voted to public office, are rights of individuals, which the law and public policy have deemed wise to exclude from the commerce of man.3’ (b) A river, which is part of the public domain, is outside the commerce of men.32 3. It must not be contrary to law, morals. 4. If it is service, it must be possible. (a) Impossible service [1409(5)1, should be distinguished from impossibility of performance. [1266, 1267] C-3. Consideration Consideration is presumed to exist and is lawful. [see 13541 (a) But the absence or illegality of the consideration renders the contract inexistent or void. [see 1352, 1409(3)] (b) The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. [1352] 2. The statement of a false cause in a contract renders the cont ract void, unless it is proved that the contract was founded upon another consideration which is true and lawful. [see 1353]

3. Inadequacy of consideration shall not invalidate a contract, except in cases specified by law or unless there has been fraud, mistake or undue influence. [see 13551 C-4. Delivery (in addition to consent, object and consideration), in few occasions, is necessary for perfection In a real contract, in addition to the three essential requisites of consent, object and consideration, delivery of the object to the other contracting party is the act that perfects the contract. (a) Commodatum, deposit, mutuum (or simple loan), and pledge are real contracts. [1316; 19331 (b) Mortgages, whether the object is real estate or chattel, are not real contracts. C-5. Form (in addition to consent, object and consideration), in few occasions, is necessary for perfection In a formal or solemn contract, in addition to the three essential requisites of consent, object and consideration, the execution of the required writing by the contracting parties is the act that perfects the contract. (a) A partnership contract where contribution consists of immovables or real rights, must be in a public instrument; otherwise it is void. [17731 (b) Contract for the sale of ships and vessels.33 2. The requirement of a writing for the validity of a contract is different from the requirement of a writing for the enforceability of a contract. D. Defective Contracts Rescissible contracts 2. Voidable contracts 3. Unenforceable contracts 4. Void or inexistent contracts

D-1. Rescissible Contracts

1. Types (a) Those entered into by guardians on behalf of their wards, who suffer lesion of more than a quarter of the value of the latter’s property. (b) Those entered into by agents on behalf of absent principals, who suffer lesion of more than a quarter of the value of the latter’s property (c) Those in fraud of creditors. (d) Those whose objects are under litigation. (e) Others (e.g., see 1526, 1534) 2. Rescissible contacts are valid until they are rescinded. 3. Presumptions of fraud. (a) Gratuitous alienation, if debtor did not reserve sufficient property to pay debts prior to such alienation, is presumed fraudulent. (b) Onerous alienation, by a person against whom a court judgment has been made or against whom a writ of attachment has been issued, is presumed fraudulent. 4. The person who files a suit for rescission must have suffered damage. 5. The relief of rescission is subsidiary or secondary (i.e., cannot be a principal remedy) (a) Prescriptive period to bring action is four years. 6. Rescission requires mutual restitution. D-2. Voidable Contracts

1. Types: (a) A contract where one of the parties is without capacity to give consent. (b) A contact where consent of one of the parties is vitiated by mistake, violence, intimidation, undue influence or fraud.

2. Voidable contracts are valid unless they are annulled. 3. A voidable contract may be ratified. (a) Ratification means that one under no disability voluntarily adopts and gives sanction to some unauthorized act or defective proceeding, without which his sanction would not be binding on him. It is this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore unauthorized, and becomes the authorized act of the party so making the ratification.34 This subsequent approval validates contract from its inception and extinguishes action to repudiate contract. (b) Period within which to ratify: (1) within four years after reaching age of majority or from termination of guardianship (2) within four years after intimidation, violence or undue influence has ceased or after mistake or fraud was discovered. (3) Inaction and lapse of prescriptive period results in a “ratified” contract. (c) Effects of ratification. Ratification cleanses “defective” contract and extinguishes the action to annul. [1396 and 1392] 4. Even without suffering damage, the incapacitated party or the party whose consent had been vitiated may ask for annulment. 5. Mutual restitution is required by annulment. [1398]

(a) Exceptions to this requirement are: (1) When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make restitution except insofar as he has been benefited by the thing or price he received. [1399] (2) The person who, is obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. [14001 (3) As long as one of the parties does not restore what he is bound, by the decree of annulment, to return, the other cannot be compelled to comply with what is incumbent upon him. [1402] D-3. Unenforceable Contracts An unenforceable contract is one which the law, through the courts, will not enforce, either because it is void, or because, though valid, its enforcement is barred for some statutory norm. 2. Types: (a) Void contracts (include those which are required to be in writing to be valid, but are not). (b) Contracts enumerated under 1403. (1) Contracts entered into on behalf of a person by another who has not been given such authority or who having been given such authority has acted beyond his authority. [1403(1)] (2) An oral contract, valid in all other respects, required by the Statute of Frauds to be in writing. [1403(2)] a] A contract partly in writing and partly oral, is in legal effect, an oral contract.35 (3) Contracts between persons who lack capacity to contract. [1403(3)] (c) Valid contracts which have prescribed. 2. Contracts required by the Statute of Frauds to be in writing: (a) Types (1) A contract not to be performed within a year. (2) A collateral contract, i.e., a special promise to answer for someone else’s debt or default.

(3) A contract in consideration of marriage, except a mutual promise to marry (4) A contract of sale of goods, personal property or chooses in action, where price is PhP500 or more. (5) A contract of lease for more than a year or of sale of real property or an interest therein. (6) A representation as to the credit of a third person. This is actually not a contract. (b) These contracts must be in writing and signed by the party being sued or his agent. (1) This requirement does not apply if contract has been totally or partially performed. a] Stated differently, the requirement applies only to executory contracts. bi A contract partially executed or one where one party has performed his obligation is an “executed” contract.37 (c) Contracts not within the coverage of the Statute of Frauds (these contracts can be oral): (1) Setting up boundaries on land38 (2) Partition of real property39 (3) Agreement creating a right of way3° (4) Agreement granting right of first refusal to buy land4’ (d) The writing need not be notarized.42 It may be done in several writings, not necessarily in one document.

(e) Ratification (1) Void or inexistent contracts cannot be ratified. [1409] (2) Contracts which had been entered into on behalf of persons without their authority or in excess

of their authority may be ratified by these persons. (3) Contracts within the Statute of Frauds which are not in writing may be ratified a] by acceptance of benefits from these contracts. bi by failure to object or waiver to presentation of oral evidence to prove them. [1405] (4) Contracts between incapacitated parties may be ratified by the parents or guardians of both parties. A contract ratified by guardian or parent of one of the parties results in a voidable contract. (f) Unenforceable contracts cannot be assailed by third persons. [14081 (g) The defense of prescription or statute of limitations may be waived. D-4. Void or Inexistent Contracts Some of the void contracts are enumerated in 1409. They include: (a) Those whose cause, object, or purpose is contrary to law, morals, good customs, public order or public policy. (1) An agreement, whereby one will be paid a commission based on sales for his actual or supposed influence with a public official in order that the principal’s import dollar allocation will not be reduced, is contrary to public policy. (2) All agreements the purpose of which is to create a situation which tends to operate to the detriment of the public interest are against public policy and void, whether in the particular case the purpose .of the agreement is or is not effectuated.45 (b) Those which are absolutely simulated or fictitious. (1) The characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects nor in any way alter the juridical situation of the parties. Thus, where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham. (c) Those whose cause or object did not exist at the time of the transaction. (1) A contract of purchase and sale is null and void and produces no effect where the same is without cause or consideration, in that the purchase price which appears thereon as paid had in fact never been paid by the purchaser to the vendor.47 (d) Those whose object is outside the commerce of men. (d) Those which contemplate an impossible service. (e) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained. (f) Those expressly prohibited or declared void by law. (1) Some contracts declared void by other provisions of law are: (a) Partnership contract which provides for contrib ution of immovables or real rights but which is not in a public instrument. [1771, 1773] (b) Contract of sale of a piece of land by an agent whose authority to sell it is not in writing. [1874] 2 Since void contracts cannot lapse into valid ones, the defense of nullity does not prescribe. [1410]

4. The right to set up the defense of illegality cannot be waived. [14091 5. The defense of illegality of contracts is not available to third persons whose interests are not directly affected. [14211 6. The principle of in pan delicto non oritur action denies all recovery to the guilty parties inter Se. it applies to cases where the nullity arises from the illegality of the consideration or the purpose of the contract. When two persons are equally at fault, the law does not relieve them. The exception to this general rule is when the principle is invoked with respect to inexistent contracts.

Sales 1458 to 1637 The Law on Sales, which is found in the Civil Code, is a branch of the Law on Obligations and the Law on Contracts. However some principles in the law on sales deviate from the principles of obligation and contract law to accommodate commercial needs. Many new provisions on the Title of Sales (including Assignment) are taken from the Uniform Sales Act, of the U.S. A. Nature, Purpose, Characteristics and Types Nature and Purpose. By the contract of sale a contracting party obligates himself to deliver, and to transfer the ownership of, a determinate thing, and the other party to pay therefore a price certain in money or its equivalent. [1458, par. 1]’ 2. Characteristics of sale (a) Sale is a consensual contract, because it is perfected by mere consent. [see 1475] (1) Contracts are enforceable from the moment of perfection.2 (2) A contract of sale may be (i) in writing, or (ii) by word of mouth, or (iii) partly in writing or partly by word of mouth. [1483] a] It is subject to the statute of frauds. [14831 (b) It may be an express contract, or an implied contract, as it may be inferred from the conduct of the parties. [14831 (c) It is bilateral because both parties exchange promises. (d) It is onerous because the thing sold is conveyed in consideration of the price and vice versa.4 In onerous contracts, the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other. [13501 (e) It is commutative because the thing sold is considered the equivalent of the price paid and vice versa.5 (1) It may be aleatory, in exceptional cases, as in the case of a sale of a hope, e.g., sweepstakes ticket. (f) It is nominate because it is given a special name or designation in the Civil Code. (g) It is principal because it does not depend on another contract for its own existence and validity. (h) It is subject to other applicable statutes. [14831 (1) Examples: al RA9211 “An Act regulating the packaging, use, sale, distribution and advertisements of tobacco products.”Sa hi RA 8970 “An Act prohibiting the manufacture, importation, distribution and sale of laundry and industrial detergents containing hard surfactants and providing penalties for violation thereof.”6 3. A contract of sale may be either absolute or conditional. [1458, par. 2] (a) It is absolute if none of the three principal obligations is subject to an express condition, whether suspensive or resolutory. (b) A sale is conditional if either the obligation of seller to transfer ownership of a thing7 or the obligation of buyer to pay the price8 is subject to a condition. [see 1545, par. 21 A sale may also be conditional if there is an obligation of buyer to resell the thing to seller, if the seller a retro exercises his redemption right.9 (1) An example of a sale subject to a suspensive condition is a contract to sell. (2) An example of a sale subject to a resolutory condition is apacto de retro sale. B. Parties, Requisites of the Contract and Form L The parties are the seller, who obligates himself to deliver and to transfer ownership of a thing

and the buyer who obligates to pay a price certain in money or its equivalent therefore. I Requisites of validity (a) Consent, freely and actually given to an offer and an acceptance by parties who have legal capacity. (1) Sale is a consensual contract, because it is perfected by mere consent. [see 1475] a] A sale by auction is perfected when auctioneer announces its perfection by the fall of the hamm er, or in other customary manner. [1476(2)1 In an auction, while there is a public invitation to bid, the buyer through the auctioneer may withhold acceptance until and unless certain conditions, e.g., a price level, are acceptable to him. bi A sale of large cattle however must be evidenced by a certificate of registration to be valid.10 (2) Capacity of the parties a] A person who is authorized in the Civil Code to obligate himself can enter into a contract of sale. [see 1489, par. 1] bi Age of majority begins at eighteen years. 1] Purchase by a minor or other incapacitated person of his necessaries11 is valid. He must pay a reasonable price for them. [1489, par. 2] 2] Certain persons, despite their capacity to act, are prohibited by law to buy specific property. [a] A guardian cannot buy his ward’s property. [1491(1)112 [hi An agent cannot buy his principal’s property whose administration or sale has been entrusted to him. [1491(2)] [c] An executor or administrator cannot buy property under administration. [1491(3)] [d] Public officers and employees cannot buy property of the state, and of its subdivision, or of any government owned or controlled corporation, whose administration has been entrusted to them. [1491(4)] Eel Justices, judges, court employees and prosecuting attorneys cannot buy the property and rights under litigation or levied upon. [1491(5)113 Contracts under 1491, being prohibited transactions, are therefore void.14 3] Husband and wife cannot sell to each other, except: [a] when there is a prenuptial separation of property, or [b] when there has been a judicial separation of property [1490] Contracts violative of 1490 are void. 15 41 The prohibitions in 1490 and 1491 apply to sales in legal redemption, compromises and renunciations. [14921 Contracts violative of 1492 are void.’6 51 The civil interdiction deprives a person of the right to dispose of his property by any act or any conveyance inter vivos.17 c] A private corporation cannot purchase alienable lands of the public domain. dl A foreign organization, despite its legal capacity, if it fails to meet or comply with statutory requirements, like capitalization levels — cannot sell on retail.18 (b) Object (1) It may be existing, or future, or contingent. a] Things having a potential existence are valid objects. A mere hope or expectancy may be an object, but the efficacy of the sale is subject to the condition that the hope or expectancy will come into existence. A vain hope or expectancy is not a valid object and makes the sale void. [see 14611 b] Goods which are existing, “future goods,” i.e., to be manufactured, raised or acquired by the seller after the sale,19 and goods whose acquisition by seller depends on a contingency which may

or may not happen [1462] are valid objects. c] Things subject to a resolutory condition [see 1465] are valid objects. 1] A piece of land sold a retro is subject to a resolutory condition because the sale is rescinded when the vendor exercises his right to repurchase the thing.2° (2) It must be licit. [see 1459] (3) It must be determinate, or at least determinable. A thing is determinate if particularly designated or physically segregated from all others of the same class; it is determinable if at the time the contract is entered into there will be no need of a new or further agreement between the parties to identifies it. [see 1460] a] Quantity 1] The sale of fungible goods maybe at a price fixed according to weight, number or measure. [1480, par. 3] 21 The sale of real estate with a statement of its area, may be at the rate of a certain price for a unit of measure or number. [see 1539, 1540, 1542] 31 An undivided interest in a thing may be a valid object. [see 1463] 4] An undivided share of a specific mass of fungible goods may sold by number, weight or measure. [see 1464] 51 A share in property which seller co-owns with other persons is a valid object. [4931 b] Quality 1] A sale of goods may be by description or by sample. [see 14811 (4) Service is not a proper object of sale; it is a proper object of a contract of labor (i.e., for a piece of work). [see 1642 and 1700 et seq.] (5) Risk of loss (i.e., “benefit to, injury, or loss of the object”) a] The total loss of the thing, before perfection of the contract, does not give rise to contract. [1493, par. 1] b] The partial loss of the thing gives the buyer the choice between — 1] withdrawing from contract, and 21 demanding the remaining part, paying a proportionate price. [see 1493, par. 2] c] The partial perish, total or partial deterioration in quality of specific goods gives the buyer a choice between considering the sale — 1] as avoided, or 2] as valid insofar as the existing goods or those which have not deteriorated, paying a proportionate price. [see 14941 d] The benefit to or injury to the thing sold, after

2] The sale of real estate with a statement of its area, may be at the rate of a certain price for a unit of measure or number. [see 1539, 1540, 1542] 31 An undivided interest in a thing may be a valid object. [see 1463] 4] An undivided share of a specific mass of fungible goods may sold by number, weight or measure. [see 1464] 51 A share in property which seller co-owns with other persons is a valid object. [4931 b] Quality 1] A sale of goods may be by description or by sample. [see 14811 (4) Service is not a proper object of sale; it is a proper object of a contract of labor (i.e., for a piece of work). [see 1642 and 1700 et seq.]

(5) Risk of loss (i.e., “benefit to, injury, or loss of the object”) a] The total loss of the thing, before perfection of the contract, does not give rise to contract. [1493, par. 1] b] The partial loss of the thing gives the buyer the choice between — 1] withdrawing from contract, and 21 demanding the remaining part, paying a proportionate price. [see 1493, par. 2] c] The partial perish, total or partial deterioration in quality of specific goods gives the buyer a choice between considering the sale — 1] as avoided, or 2] as valid insofar as the existing goods or those which have not deteriorated, paying a proportionate price. [see 14941 d] The benefit to or injury to the thing sold, after the perfection of the contract, shall be governed by 1163 to 1165, and 1262. [14801 e] All fruits from time of perfection of contract pert ain to buyer and shall be delivered together with the other accessions and accessories of the object. [1537] f] The loss, improvement or deterioration, with or without seller’s fault shall be governed by 1189. [15381 (c) Consideration. Price signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing of the price, put to the debit of the buyer and agreed to by him.21 (1) It must be in money or its equivalent. [1458 and 14681 a] An antecedent or pre-existing claim, whether for money or not, constitutes “value” where goods or documents of title are taken either in satisfaction thereof or as security therefor. [see 1636(1)] (2) It must be actual a] If the price is simulated, the sale is void, although the contract may be shown to have been a donation or some other act or contract. [1471] b] Gross inadequacy of price does not affect contract, unless 11 there is a defect in the consent, or 2] the parties intended a donation or some other act22 or contract. [1470] (3) It must be certain or ascertainable at time of perfect ion of contract. a] Price is certain if it is so, even if it is with reference to another thing certain or if its determination is left to judgment of a specified third person. [14691 The fixing of price cannot be left to discretion of one of contracting parties. [see 14731 1] If the third person is unable or unwilling to fix price, contract shall be inefficacious unless parties subsequently agree upon the price. 2] If the third person acts in bad faith or by mistake, the courts may fix price. 3] If the third person is prevented from fixing the price or terms by fault of the seller or buyer, the party not in fault may resort to reliefs allowed by law. [see 1469] b] If the price is not determinable, the contract is inefficacious. 1] However if the thing or a part of it has been delivered to and appropriated by the buyer, he must pay a reasonable price. [see 1474] c] The price of securities,23 grain, liquids, and other things is certain when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or mark et, provided said amount is certain. [1472]

(4) Payment term a] Earnest money is something of value to show that buyer was really in earnest, and given to seller to bind bargain?4 The amount is given as a part of purchase price and as proof of perfection of contract of sale. [1482125 b] Option money 1] Option money must be distinguished from earnest money. Earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract; earnest money is given only where there is a sale, while option money applies to a sale not yet perfected; and when earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives opt ion money, he is not required to buy, but may forfeit it depending on the terms of the option.26 ci Terms or manner of payment.27 Although the Civil Code does not expressly state that the minds of the parties must also meet on the terms or manner of payment of the price, the same is needed, otherwise there is no sale.28 (5) Buyer bears expenses for the execution of the sale, unless there is a contrary stipulation. [1487]29 3. Form (and Recording or Registration) (a) Subject to the provisions of the Statute of Frauds and any other applicable statute, a contract of sale may be: (i) in writing, or (ii) by word of mouth, or (iii) partly in writing or partly by word of mouth, or may be inferred from the conduct of the parties. [see 1483]° (1) A sale of large cattle however must be evidenced by a certificate of registration to be valid.31 (2) Under the statute of frauds, the following executory contracts of sale must be in writing, otherwise they cannot be enforced in a litigation: a] sale of property at a price of PhP500.00 or more, bi sale of real property or an interest therein regardless of the price, and c] sale of property not to be performed within a year from its date regardless of the nature of the property and its price.32 (b) Documents of title. A document of title is written acknowledgement by the party who issues it of the rights of ownership and control of another party over the goods said writing represents and describes. It includes a bill of lading, dock warrant, quedan or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possess ion or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by endorsement or by delivery; goods represented by such document. [1636(1)1 (1) Types. a] Bill of lading. [see 15031 A bill of lading is a written acknowledgment of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named or on his order.33 bi Warehouse receipt. A warehouse receipt is a written acknowledgment by a person who takes goods for storage of the rights of ownership and control of the person to whom he issued it. (2) Features and Incidents a] A document of title may be negotiable, i.e., when it states that the goods referred to therein will be deliverable to the bearer, or to the order of the person named therein [see 15071, or nonnegotiable. b] A negotiable bearer document of title can be negotiated by delivery [1508(1)1 c] A negotiable order document of title can be negotiated by delivery, if the person to whose ord er it was issued or a subsequent indorsee indorses it in blank or to bearer. [1508(2)1

dl A negotiable document of title either issued to bearer or issued to order which has been ind orsed to the order of a specified person shall be negotiable only by the endorsement of such indorsee. [see 1508, last par.] el A person to whom a document of title is negotiated acquires the title to the goods which the person negotiating had and the obligation of the bailee to hold possession of the goods for him [see 1513], while a person to whom a document has been transferred but not negotiated acquires title to the goods as against the transferor only and the right to notify bailee of the transfer. [see 1514] f] A person who for value negotiates, transfers or assigns a document of title warrants that: (i) the document is genuine, (ii) he has a legal right to transfer it,34 (iii) he has no knowledge of no fact which would impair the validity or worth of the document, and (iv) he has a right to transfer title to the goods and that the goods are merchantable and fit for a particular purpose. [see 1516] 11 But the indorser of a document of title will not be liable for failure of the bailee who issued the document or its previous indorsers to fulfill their respective obligations. [15171 g] A negotiable document of title shall neither be rendered nonnegotiable by words “not negotiable” or the like placed upon it, nor the obligat ions of the carrier, warehouseman or other bailee be limited thereby. [1510] C. Imp1ied Obligations of the Parties 2. Obligations of the Seller (a) To deliver the thing. (1) To deliver the accessions and accessories of the object. [1537] (2) The obligation to deliver is an obligation to give; therefore in case of breach, specific performance is available. (b) To transfer ownership of the thing. [1495] (1) This is an obligation to give a thing; therefore in case of breach, specific performance is available. (c) To preserve the thing from time of perfection of the contract of sale to time of delivery. Otherwise he can be held liable for damages. [1163; see 14941 (d) To put goods into a deliverable state. [1521, par. 5] (e) To warrant the object. [1545, et seq.] (f) To bear expense for the execution and registration of the sale, unless otherwise stipulated. [1487]

2. Obligations of the Buyer: (a) To pay a price certain of its equivalent. [1582 par. 11 (1) To pay interest on the price, in specific instances. [1589] (2) The obligation to pay price is an obligation to give a generic thing therefore in case of breach, specific performance is available. (b) To examine the goods. [1584] (c) To accept the goods. [1584]

D. Performance by the Seller of His Obligations 1. The thing is delivered when it is placed in the control and possession of buyer. [1497] (a) The obligation to deliver is performed by (1) Actual delivery [14971 a] Where by the contract the seller is bound to send

the goods to the buyer, but no time is fixed, he must send them within a reasonable time. [1521 par. 2] b] Where the goods are at time of sale in the possession of a third person, only when the third person acknowledges to the buyer that he holds the goods for the buyer, will obligation to deliver be deemed fulfilled. [1521, par. 31 (2) Constructive or Legal delivery a] Quasi -traditio or quasi-delivery, is accomplished by the execution or negotiation and delivery of a document of title or public instrument. [1498, par. 1, 1501] bi Traditio symbolica or symbolic delivery, happens such as when the keys of the place of depository or storage of the movable property are delivered. [see 1498, par. 21 c] Traditio longa manu, happens by mere consent or agreement of the parties if the thing cannot be transferred to buyer’s possession at time of sale [14991, as when seller transfers possession to buyer by merely pointing to the object sold. dl Traditio brevi manu [14991, occurs when the buyer acquires the owner’s title to the object which at the time of the sale is already in buye r’s possession by virtue of another title, e.g., as lessee. el Thaditio constitutum possessorium, occurs when the seller after the sale continues in possession of the object sold, not as owner anymore but in some other capacity. [1500]. This kind however runs the risk of being presumed an equitable mortgage. [see 1602(2)1 (b) The execution of a public instrument is equivalent to the delivery of the thing if from the deed the contrary does not appear or cannot clearly be inferred. [1498, par. 1] (1) There is symbolic delivery when the sale is made in a public document and nothing appears therein to the contrary either expressly or impliedly. a] But no such symbolic delivery can be deemed to take place, when there is in the document a stipulation to the contrary, such as “the vendors would continue in possession of the house” for four more months.37 (c) Delivery of goods to carrier for transmission to buyer pursuant to the contract is deemed delivery to buyer, except in cases provided for in 1503, pars. 1, 2 or 3, or unless a contrary intent appears. [1523, par. 1138 (d) Buyer bears expenses for putting goods into deliverable state, unless otherwise agreed. [1521, par. 51 (e) Seller is not bound to deliver, if buyer has not paid him price or if no period for payment has been fixed in contract. [15241 2. The ownership of the thing is transferred to buyer upon actual or constructive delivery. [1477; 14961 (a) The seller must have the right to transfer ownership at time object is delivered. [see 1459] (1) A person who sells goods, which he does not own, or which he has no authority to sell, conveys to buyer no better title than he (seller) had, unless the owner is precluded from denying the seller’s authority to sell. The following sales are excluded from this general rule: a] Sales made by the apparent owner of goods, which under provisions of factors’ acts, recording laws, or any other provision of law, enable him to dispose of them as if he were the true owner. b] Contracts of sale under statutory power of sale or under order of a court of competent jurisdiction. c] Purchases made in a merchant’s store, or in fairs, or markets, in accordance with the Code of Commerce and special laws. [see 15051 11 1434 supports the ruling that the seller’s “title passes by operation of law to the buyer.”39

(2) A seller who has a voidable title, which has not been avoided at time of sale, conveys to buyer a good title to the goods, provided the buyer buys them in good faith, for value and without notice of seller’s defect of title. [see 1506] (3) A buyer in good faith at a public sale of a movable, which its owner has lost or has been unlawfully deprived of, can only be dispossessed by its owner upon reimbursement of the price he has paid. [see 559, par. 2] (4) It the same thing should have been sold to different buyers, the ownership shall be transferred to: a] the person who first takes possession of the movable property in good faith. b] in case of immovable property 1] the person who in good faith first records his acquisition in the Registry of Property; 2] should there be no inscription, the person who in good faith was first in possession of the property; 3] should there be no possession, the person who presents the oldest title, in good faith. [1544] (b) Parties may stipulate however that ownership shall not pass until payment of the price. [see 1478] (1) Seller may reserve right of possession or ownership even if the goods have been delivered to a carrier or other bailee who will transmit them to buyer. [see 1503] (2) Until ownership of goods is transferred to buyer, the risk remains with seller, unless otherwise agreed. But when ownership is transferred to buyer, goods are at his risk, whether actual delivery has been made or not, except under two circumstances. [see 1504 further] 3. A warranty, in the law on sales, is an affirmation of certain facts about the quality of thing being sold or about the title the seller holds over it. A condition which one party has promised to the other shall happen or be performed may be treated as a warranty.4° (1) An express warranty is one created by the seller through his words, oral or written. An express warranty is any affirmation of fact or any promise [made] by seller relating to the goods, if natural tendency of such affirmation or promise is to induce buyer to purchase the goods, and if buyer purchases the goods relying thereon. [see 15461 (2) Implied warranties are those imposed by law or annexed by usage of trade. [see 1564] The implied warranties of the seller are: a] as to his right to sell and against buyer’s eviction. b] against hidden defects or encumbrances [see 15611 refers to merchantability and fitness.4’

E. Performance by Buyer of his Obligations

1. The buyer must pay the price of the thing sold at the time and place stipulated. (a) In the absence of stipulation, buyer must pay the price at the time and place of the delivery of the thing sold. [15821 2. Inspection of the goods sold (a) Buyer may inspect the goods before perfection of the contract. (b) Where buyer has not previously examined the goods which are delivered to him, he is not deemed to have accepted them, unless and until he has had a reasonable chance to examine them to ascertain whether they conform to the contract. [see 1584, par. 1] (1) Parties may however stipulate to the contrary. [see 1584, par. 1]. 3. Acceptance of the goods sold

(a) The buyer is deemed to have accepted the goods (1) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or (2) when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them. (b) Unless otherwise agreed, where the goods have been de-, livered to buyer and he refuses to accept them, having the’ right to do so, it is sufficient if he notifies the seller that he refuses to accept them. (1) The buyer is not bound to return them to seller. (2) The buyer shall be liable as a depositary however, if he voluntarily constitutes himself as such. [15871 (c) If buyer refuses, without just cause, to accept the goods, title passes to him from the moment they are placed at his disposal. (1) Parties may however stipulate to the contrary [see 15881

d) Acceptance by the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of any promise or warranty. [1586] (1) Parties may however expressly or impliedly agree on a discharge. [1586 1 (2) If the buyer fails to notify the seller of the breach in the promise or warranty within a reasonable’ time after buyer knows, or ought to know of such breach, seller may not be held liable for it. [1586]

F. Breach by the Seller, and Remedies of the Buyer

1.In general. The buyer may ask the court for either: (a) Specific performance plus damages (1) without an option given to seller to retain the goods on payment of damages. [15981 (b) Rescission of the contract, plus damages. [11911 2. If seller does not perform the condition upon which buyer’s obligation is subject or subordinated to, buyer may (a) refuse to proceed with the contract, or (b) waive performance of the condition [see 1545], or (c) also treat the non performance as a breach of warranty, if seller has promised that such condition shall happen or be performed [see 15451 3. If it is a sale of goods by description or by sample or by sample and description, and the bulk of the goods delivered do not correspond with description or the sample, or with the sample and description, buyer may rescind the contract. [14811 Where seller delivers to buyer goods, which he had contracted to sell, mixed with goods of a different description, buyer may accept the goods which conform to the contract and reject the rest. [see 1522, par. 31 4. If seller delivers goods less than quantity agreed upon, buyer may either (a) reject the goods, or (b) knowing that seller is not going to perform contract in full, accept or retain the goods delivered, but must pay for them at the contract rate [see 1522, par. 1] 5. If seller delivers a larger quantity, buyer may (a) accept the goods included in contract and reject the rest, or

(b) accept the whole delivery, which he must pay for at the contract rate [see 1521, par. 2] 6. If the sale of real estate is with a statement of its area, at the rate of a certain price for a unit of measure or number, buyer may (i) demand all that may have been stated in the contract and seller shall be obliged to deliver it all, or (ii) choose, if such delivery is not possible, between a proportional reduction of the price and the rescission of the contract provided that in the case of rescission, the lack in area should not be less than 1/10 of that stated [see 15391 If there is a greater area or number than that stated in the contract, buyer may either (a) accept the area included in the contract and reject the rest, or (b) pay for the same at the contract rate, if he accepts the whole area. [see 15401 But if the sale of real estate is for a lump sum, there shall neither be an increase of the price although it is a greater area or number than that stated in the contract, nor a decrease of the price although the area or number is less than that stated in the contract. [see 1542, par. 1] 7. In the case of double sale (a) of movable property, ownership passes to the person who took possession in good faith (b) of immovable property, ownership passes: (i) to the person who acquires it in good faith and first records it in the Registry of Property, (ii) if there is no inscription, to the person who first possesses it, or (iii) if there is no possess ion, to the person who presents the oldest title, in good faith. [1544] 8. If the buyer should be disturbed in the possession or owners hip of the thing or should have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend payment of the price until the seller has caused the disturbance or danger to cease, unless: I a) the latter gives security for the return of the price in a proper case, or (b) it has been stipulated that, notwithstanding any such contingency, the buyer shall be bound to pay the price. [1590]

G. Breach by the Buyer, and Reliefs of the Seller 1.In general. The seller may ask the court for either: (a) Specific performance plus damages (b) Rescission of the contract, plus damages [1191] (1) If the vendor should have reasonable grounds to fear the loss of immovable property sold and its price, he may immediately sue for the rescission of the sale. [1591] (2) In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time. agreed upon the rescission of the contract shall of right take place, the buyer may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. [1592] (3) In the sale of real estate on installment payments,42 the buyer, a] in case he has paid at least two years of installments, has the right to pay the unpaid installments within the total grace period earned by him.1] If the buyer fails to pay within the period, the seller may cancel the contract but shall refund to the buyer the cash surrender value of the payments equivalent to fifty per cent of the total payments made, and after five years of installments, an additional five per cent every year but not to exceed ninety percent of the total payments made. b] in case he has paid less than two years of installments, has the right to pay within a grace period of not less than sixty days from the date the installment became due. 1] If the buyer fails to pay within the period, the seller may cancel the contract.

(4) With respect to movable property, the rescission shall of right take place in the interest of the seller, if the buyer, upon the expiration of the period fixed for the delivery of the thing, should not have appeared to receive it, or having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment. [1593] (5) If it is a sale of goods and the seller: (1) has not been paid or tendered the whole of the price; or (2) has received as conditional payment a bill of exchange or other negotiable instrument, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency43 of the buyer, or otherwise: a] If ownership has passed to buyer, the unpaid seller has: 1] a possessory lien on the goods, or right to retain them for the price 2] a right of stoppage (resumption of possess ion) of the goods in transit,45 after he has delivered the goods to a common carrier for transmission to the buyer or the buyer’s agent, in the event the buyer becomes insolvent.46 3] a limited right of resale47 41 a limited right to rescind the sale [see 1526; 1531, par. 1(1)] bi If ownership has not passed to buyer, the unpaid seller has a right to withhold delivery also. [see 1526] ci If possession has not passed to buyer, unpaid seller has the right to retain possession of the goods until payment or tender of the price 1] where there is no stipulation as to credit, 2] where sale is on credit but credit term has expired,49 or 3] where buyer becomes insolvent. Unpaid seller may also exercise his right of lien even if he, as agent or bailee of buyer, is in possession of the goods. [1527] dl If part delivery has been made, unpaid seller may exercise right of lien, unless part delivery had been made with intent to waive the lien or right of retention. [15281 (6) If it is a sale of personal property, where the price is payable in installments, unpaid seller, alternatively, may: a] Exact fulfillment of the obligation, or b] Cancel the sale, if buyer has failed to pay two or more installments, or c] Foreclose the chattel mortgage (if there is one) on the thing sold, if buyer has failed to pay two or more installments. Seller shall have no further action against buyer to recover unpaid balance. Any agreement to the contrary is void. [see 1484] 1] The three remedies have been recognized as alternative, not cumulative, such that the exercise of one would bar the exercise of the others.5° 2] If he chooses the third remedy, 1484 provides that he shall have no further action against the purchaser to recover any unp aid balance of the purchase price. It even adds that any agreement to the contrary shall be void.5’ (7) If it is a lease of personal property with option to buy, where the lesson has deprived the lessee of possess ion or enjoyment of the thing, the same three alternative reliefs in 1484 are available. [1485] a] A stipulation that lesson shall not return to lessee the rentals paid shall be valid if not unconscionable. [14861 H. Extinguishment of Contract of Sale 1600 to 1623 Performance 2. Mutual agreement

3. Return of goods by the buyer to the seller in sale or return or sale on approval. [1502] 4. Rescission or Cancellation 5. Redemption

I. Absolute Sale, Distinguished from Conditional and Other Types of Sales 2.A contract to sell is one whereby prospective seller explicitly reserves the transfer of title to prospective buyer, until full payment of the price, such payment being a positive suspensive condition the failure of which is not considered a breach, casual or serious, but simply an event which prevents the obligation from acquiring any obligatory force.52 In a sale, seller promises to transfer ownership, subject to no condition, or contemporaneously transfers ownership in fulfillment of the promise, while in a contract to sell, seller promises to transfer ownership, upon fulfillment of one or more suspensive conditions. 2. An auction is a public sale to one who makes the highest or the best bid. [see 1476] 3.Lease of personal property with option to buy. [1485] Such a lease is deemed a contract of sale of personality payable in installments. a) The rentals paid by lessee to lessor are treated as installment payments of the purchase price. The full payment is a suspensive condition to the transfer of owners hip. 4. A sale or return is an arrangement in which buyer intends to resell the goods and gives him the option to return the goods instead of paying the price. [see 1502, par. 1] 5. A sale on approval is a sale that grants the buyer a period of time to try the goods before accepting them. When goods are sold on approval, title passes: (i) when buyer signifies his approval or acceptance to seller, or (ii) if he does not signify his approval or acceptance but retains the goods on the expiration of the time to return the goods or of a reasonable time. [see 1502, par. 2]. & A sale with right of repurchase is a contract of sale, wherein the seller is granted the right to re-acquire the object within a specified period of time. The right to repurchase or to redeem is in the nature of a resolutory condition.

7. Dation in payment (or dacion en pago) involves the alienation by a debtor of his property in favor of his creditor, and is deemed in the nature of a sale. [see 1245] Here, the “price has been paid” prior to delivery of the property and transfer of owners hip.

J. Sale, distinguished from other Contracts

1.Accepted unilateral promise to buy or sell. [1479, par. 2] (a) An option is a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a cert ain time, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or demand a sale. It is also sometimes called an “unaccepted offer.”53 It is not a sale of property but a sale of the right to buy said property or to sell it. 2. Contract of agency to sell. [see 14661 (a) The transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an agent who must account for the

proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the right to control sales, fix the price and terms, demand and receive the proceeds less the agent’s commission upon sale made.54 3. Contract for a piece of work. [see 1467] The contract of lease may be of things or of work and service. [1642] In a lease of work or service, a party binds himself to execute a piece of work or to render to the other party some service for a price certain. [see 1644] Sale has for its object tangible things, while a contract for a piece of work, services. 4.Donation is an act of liberality whereby a person disposes a thing or right gratuitously in favor of another, who accepts its. [725; 1470, 14711 Sale is typically an onerous contract,55 while donation is a gratuitous contract. A sale is a consensual contract, while donation i formal contract. By barter or exchange, a party binds himself to give one thing in consideration of the other party’s promise to give another thing. [1638] (a) If the consideration consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If their intention does not clearly appear, it shall be deemed a barter if the value of the thing given as part of consideration exceeds the amount of money or its equivalent; otherwise, it is a sale. [1468] 6. A bailment is the delivery of property by a party to another for some specific purpose, under obligation to redeliver when it has served its purpose or when it is reclaimed, or to otherwise deal with it in some other way in accordance with the contract. 7.Expropriation. [1488] Expropriation is the means or process of taking private property, by the state in the exercise of its power of eminent domain, for public use upon payment of just compensation.

Assignments 1624 to 1635 The basic law governing assignment of contractual rights is the Civil Code, in articles 1624 to 1635.

A. Nature and Characteristics of a Contract of Assignment Contract of assignment (a) An assignment is a transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of an estate or right therein. It includes transfers of all kinds of property, and is peculiarly applicable to intangible personal property and accordingly, it is ordinarily employed to describe the transfer of non-negotiable choses in action and of rights in or connected with property as distinguished from the particular item or property.’ (b) An assignment of credit is an agreement by virtue of which the owner of a credit (known as the assignor), by a legal cause — such as sale, dation in payment, exchange or donation — and without the need of the debtor’s consent, transfers that credit and the accessory rights to another (known as the assignee), who acquires the power to enforce it, to the same extent as the assignor could have enforced it against the debtor.2 To assign a contract is to transfer one’s rights under it. Such transfer may be effected: (a) by act of parties, as where one person transfers his contract rights to another, and (b) by operation of law, as in the case of death or bankruptcy.

2.Characteristics of Assignment

(a) A contract of assignment of rights is consensual, bilateral, and nominate. It may be either onerous or gratuitous. B. The Parties, the Requisites and the Incidents of Assignment 2.The parties to an assignment are the assignor, the one who conveys the rights, and the assignee, the one to whom the rights are conveyed. 1. Requisites of Assignment (a) Consent, freely and actually given to an offer and an acceptance by parties who have legal capacity — (1) An assignment of credit and other incorporeal rights shall be perfected in accordance with 1475. [1624] a] The contract is perfected at the moment there is a meeting of minds upon the object of the contract and upon the price. [see 1475] (2) The assignment of credit does not require the debtor’s consent for the validity thereof and so as to render the debtor liable to the assignee.3 a] In an assignment of credit, consent of debtor is not essential for its perfection; his knowledge thereof or lack of it affects only the efficaciousness or inefficaciousness of any payment he might make.4 (b) Object (1) All rights, except those which by their nature, or by stipulation of the parties, or by provision of law are intransmissible, may be the object of contract of assignment. [1347, par. 1; 1311, par. 1] a] A solidary creditor cannot assign his rights without the consent of the others. [1213] b] A general partner’s interest in the partnership is assignable. [see 1813] c] A limited partner’s interest in the partnership is assignable. [1859, par. 1] d] A partner’s right in specific partnership property is not assignable, except in conjunction with the assignment by all the partners of their rights in the property. [1811(2)1 1] This principle in partnership law is an exception to the general rule, laid down in 1463 (under the Law on Sales), that “the owner of a thing may sell an undivided interest therein.” 2] Without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to possess partnership property or assign their rights in specific partnership property, for other than a partnership purpose. [1850(4)] el A mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. [2128] ii The lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary. [1649] g] Copyright (2) Assignment of a credit includes all accessory rights, such as a guaranty, mortgage, pledge or preference. [1627] (3) In an assignment, title is transferred but possession need not be delivered.5

(c) Consideration (a) In assignments, a consideration is not always a requisite, unlike in sales. It is immaterial whether or not assignee paid any consideration.6 Form (and Recording or Registration) (a) An assignment of a credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument. [1625] b) An assignment which involves real property shall produce no effect as against third persons, unless the instrument

is recorded in the Registry of Property. [1625] 4.The execution of the instrument is equivalent to the delivery of incorporeal property if from deed the contrary does not appear or cannot clearly be inferred. [1501, 1498, par. 1] (a) Otherwise, transfer of possession to buyer of the titles of ownership or the use by buyer of the rights with seller’s consent is delivery. [1501]

C. Implied Obligations of the Assignor 2. Credit, as object of assignment (a) To be responsible for the existence and legality of the credit, at time of the sale and for specified expenses. [see 1628, par. 1 and 1616]. (1) Exception: If credit was sold as doubtful. [1628, par. 1] (b) To be responsible for solvency of the debtor (1) if parties have so expressly stipulated a] but have not stipulated on duration of assignor’s liability, this liability shall 1] last for one year, from time of the assignment if the period [of the credit] had already expired. [see 1629, par. 1] 2] cease one year after maturity of the credit, if the credit should be payable within a term or period which has not yet expired. [see 1629, par. 21 (2) if insolvency was prior to sale and of common knowledge. [1628, par. 1] (c) To be answerable, if he was in bad faith, for the payment of all expenses and for damages. [1628, par. 31 2. Inheritance, as object of assignment (a) To be answerable only for his character as an heir, if he had assigned his inheritance without enumerating the things of which it is composed. [16301 (1) If he had profited by some of the fruits or received anything from the inheritance sold, he shall pay the vendee thereof, if the contrary has not been stipulated. [1632] 3. Totality of certain rights, rents or products, as objects of assignment (a) To answer for the legitimacy of the whole [of certain rights, rents, or products] in general, if he had sold it for a lump sum. (1) He shall not be obliged to warrant each of the various parts of which it may be composed, except in case of eviction from the whole or the part of greater value. [16311

D. Implied Obligations of the Assignee Inheritance, as object of the assignment (a) To reimburse vendor for all that latter may have paid for debts of and charges on the estate and satisfy the credits he may have against the same, unless there is an agreement to the contrary. [1633]

E. Rights of Debtor (Obligor) 1. To extinguish a credit or other incorporeal right in litigation sold, by reimbursing the assignee price the latter paid, judicial costs, and interest on the price from the day on which the same was paid. [1634, par. 1]

(a) Debtor may exercise his right within thirty days from date the assignee demands payment from him. [16341 The right of debtor to reimburse assignee does not apply to assignments or sale made to: (a) A co-heir or co-owner of the right assigned. (b) A creditor in payment of his credit. (c) The possessor of a tenement or piece of land which is subject to the right in litigation assigned. [16351

F. Extinguishment of Assignment

1.Performance or payment by the debtor in favor of the assignee. 2. A debtor who, before having knowledge of the assignment, pays the creditor is released from the obligation. [1626]

Agency 1868 to 1932

The basic law governing agency is the “Civil Code,” in articles 1868 to 1932.

A. Nature, Purpose and Parties to Agency 1.Agency is a fiduciary relationship created by contract, whether express or implied agreement or by law, whereby one party is authorized to act on behalf of and bind another to transactions with a third party. 2. The purpose is the execution of a juridical act or acts in relation to third parties.’ 3. The party who is authorized is called the agent, while the party who authorizes or on whose behalf the agent acts is called the principal. The party who transacts with the principal, through the agent, is called a third party. (a) In the opinion of Manresa, an agent is one who accepts another’s representation to perform in his name certain acts of more or less trancendency.2

B. Manner by which Agency may be Created

Contract. By the contract of agency, a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter [1868 and 1491(2)1 (a) Express and implied contracts of agencies. A contract of agency may be created through either

(1) Express appointment and acceptance (2) Implied from the acts of principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another is acting on his behalf without authority. a] Acceptance by the agent may also be express or implied from his acts which carry out the agency, or from his silence or inaction according to the circumstances. [1870] b] Between persons who are present, acceptance of the agency may also be implied if the pr1nci- pal delivers his power of attorney to the agent and the latter receives it without any objection. [1871] c] Between persons who are absent, acceptance of the agency cannot be implied from the silence of the agent, except: 1] when principal transmits his power of attorney to agent, who receives it without any objection. 2] when principal entrusts to him by letter or telegram a power of attorney with respect to the business in which he is habitually engaged as an agent, and he did not reply to the letter or telegram. [1872] L Law. An agency relationship may arise by operation of law. (a) Certain organizations are conferred by law with juridical personality, but being artificial persons they can only act through natural persons. (1) A corporation can act through a collegial body, called the board of directors or board of trustees.3 (2) A partnership can act through its partners. [1800 to 1803] (3) A legitimate labor union can act through its officers and representatives.4 (b) Authorities have recognized that estoppel, ratification and necessity, under certain circumstances to proximate or parallel the relationship of agency. (1) Agency by estoppel. One who clothes another with apparent authority as his agent and holds him out to the public as such, cannot be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith, and in the honest belief that he is what he appears to be.5 (2) Ratification. Ratification creates an agency through the approval of an unauthorized act after the other party has performed it. [see a1so1898, 1910, par. 2] (3) Necessity. In the case of a person who declines an agency, he assumes a temporal but necessary agency with respect to the custody and preservation of the goods forwarded to him by the owner until the latter shall have appointed an agent. [see 1885]

C. Classifications of Agencies and Distinctions

1.As to scope of agent’s authority (a) General. A general agency comprises all the business of the principal. [1876] (1) An agency couched in general terms comprises only acts of administration, even if the principal should state that he withholds no power or that the agent may execute such acts as he may consider appropriate, or even though the agency should authorize a general and unlimited management. [1877]

(b) Special. A special agency comprises one or more specific transactions. [1876] 2. As to their duration (a) Agency at will [see 1919(1) and 1920] (b) Agency for a specific object or purpose [see 1919(5)] (c) Agency with a period or term [see 1919(6)] (d) Agency coupled with an interest [see 1927, 1930] (1) Defined. An agency coupled with interest is a] one where a bilateral contract depends on it, or b] the means of fulfilling an obligation already contracted, or ci the appointment in the partnership contract of a partner as the manager: 1] The partner who has been appointed manager in the articles of partnership may execute all acts of administration despite the opposition of his partners, unless he should act in bad faith; and his power is irrevocable without just or lawful cause. The vote of the partners representing the controlling stock shall 11e necessary for such revocation of power. [1800, par. 1] (2) An agency coupled with an interest exists when the interest possessed by the agent is not in the proceeds arising from the exercise of the power, but an interest in the subject matter of the power.6

D. Characteristics of Contract of Agency

1. A contract of agency is consensual, as it is perfected by mere consent. [1868] 2. It is unilateral if it is gratuitous; but is bilateral if there is to be a compensation. 3. It is principal because it can stand by itself without the need of another contract. 4. It is nominate because it has its own name. [1307] 5. Agency may be oral, unless the law requires a specific form. [1869, par. 21 (a) The Statute of Frauds requires an agency agreement, that by its terms is not to be performed within a year from its making, to be in writing to be enforceable. [see 1403(2)(a)] (b) A contract of agency to sell on commission basis does not belong to any of the three categories of contracts covered by 1357 and 1358 and not one enumerated under 1403. Hence it is valid and enforceable in whatever form it may be entered into.7 6. Like a partnership contract, it is a “relation” contract (as distinguished from a “transaction” contract, such as a contract of sale). It exacts a fiduciary standard in the relations between the parties.

E. Requisites of Contract of Agency 1. Consent. There must be capacity and mutual assent on the parts of the principal and the agent8 (a) Capacity of the principal. (1) Any natural person, who is capacitated to act for himself, can act through an agent. (2) A natural person’s lack of capacity cannot be modified or corrected by his appointment of an agent. Such lack of capacity can be modified by the courts through the appointment of a guardian. (3) Artificial persons, which are vested, by law, with juridical personality can only act through agents. a] An unincorporated organization is without any juridical personality and therefore cannot appoint agents. 1] A partnership, albeit unincorporated, is vested by law with a juridical personality and therefore can appoint agents.

21 A cooperative upon issuance of its certificate of registration by the Cooperative Development Authority acquires juridical personality,9 and hence can appoint agents. bi A person who acts as an agent without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal.10 (b) Capacity of the agent. (1) A contract of agency entered into by a minor is voidable at his instance. (2) A contract entered into by a minor, who has been appointed an agent, by a principal, who is of age, can not be repudiated by the principal on the ground of estoppel. The object of contract of agency (a) The subject matter of the contract is service or performance of an act in representation or on behalf of his principal [1347, par. 3; 1868] 3. Consideration (a) An agency is presumed to be for a compensation unless there is proof to the contrary. [see 1875 and 1903]

F. Authority The authority of the agent may be general, or special. 2. The agent’s authority may be express, or implied by habit, custom or acquiescence. 3. Insofar as third persons are concerned, the authority may be actual or apparent. (a) Apparent authority is based on estoppel and can arise from two instances: first, the principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority.” 4. If a person specially informs another or states by public advertisement that he has given a power of attorney to a third person, the latter thereby becomes a duly authorized agent, in the former case with respect to the person who received the special information, and in the latter case with regard to any person. The power shall continue to be in full force until the notice is rescinded in the same manner in which it was given. [1873] 5. Power of attorney (a) A power of attorney must be in writing and signed by the principal. (1) 1878, in relation to 1874, requiring that the authority of the agent be “in writing” does not necessarily require that the authority of the agent be in a public document. It is enough that it be “in writing.”’2 (b) The purpose in giving a power of attorney is to substitute the mind and hand of the agent for the mind and hand of the principal.” 6. Special powers of attorney are necessary in the following cases: (a) To make such payments as are not usually considered as acts of administration. (b) To effect novations which put an end to obligations already in existence at the time the agency was constituted. (c) To compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the venue of an action or to abandon a prescription already acquired. (1) The power granted to an agent to institute a suit and to appear at pre-trial and enter into any stipulation of facts and/or compromise agreement does not include the authority to sell the land by way of compromise and any sale affected under such authority is void.14

(d) To waive any obligation gratuitously. (e) To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration. (1) When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void. [1874] (2) A sale of land through an agent requires two writings: a] The authority of the agent to sell the land should be in writing; otherwise the sale is void. [1874] bi The contract of sale should be in writing, as it falls within the Statute of Frauds; otherwise the contract is unenforceable. [1403(2)(e)] (3) The instrument where contract of agency is written may or may not contain the authority to sell the principal’s land or any interest therein. Thus a contract of agency may be oral, but any authority (given to the agent) to sell the land or any interest therein, issued pursuant to the contract, must be in writing, for the resulting contract of sale to be valid. (0 To make gifts, except customary ones for charity or those made to employees in the business managed by the agent. (g) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are under administration. (1) If he has been authorized to lend money at interest, agent cannot borrow it without consent of the principal. [1890] (2) If he has been empowered to borrow money, he may himself be the lender at current rate of interest. [1890] (h) To lease any real property to another person for more than one year. (i) To bind the principal to render some service without compensation. (j) To bind the principal in a contract of partnership. (k) To obligate the principal as a guarantor or surety. (1) To create or convey real rights over immovable property. (m) To accept or repudiate an inheritance. (n) To ratify or recognize obligations contracted before the agency. (o) Any other act of strict dominion. [18781

G. Implied Obligations of an Agent to his Principal’5 1. To render the service or to perform the acts in representation or on behalf of the principal. [1868; relate to 1491(2)] (a) By his acceptance, agent is bound to carry out agency and is liable for damages which, through his non-performance, the principal may suffer. [1884, par. 11 (1) Exception. The agent is not to carry out an agency if its execution would manifestly result in loss or damage to the principal. [1888] (b) If he declines agency, the person is bound to observe the diligence of a good father of family in custody and preservation of goods forwarded to him by the owner until the latter shall have appointed an agent. [see 1885] 2. To act within the scope of his authority, and in the execution of the agency act in accordance with the principal’s instructions. [1881, first sentence; 1887, par. 1] (a) In default of instructions, the agent shall do all that a good father of family would do, as required by the nature of the business. [1887, par. 2] (1) An agent is required to act with the care of a good father of a family and becomes liable for the darn- ages which the principal may suffer through his non- performance.16

3. To prefer the interests of his principal over his own interests. [see 1889] (a) The agent shall not acquire by purchase, either in person or through another, the property whose administration or sale may have been intrusted to him, unless the principal gives his consent. [1491(2)] (1) In regard to property forming the subject matter of the agency, he is estopped from acquiring or asserting a title adverse to that of the principal. His posit ion is analogous to that of a trustee and he cannot consistently, with the principles of good faith, be all owed to create in himself an interest in opposition to that of his principal or cestuique trust.’7 (b) If agent prefers his interests, he shall be liable to his princ ipal for damages. 4. To not borrow, without the consent of his principal, money which he has been authorized to lend at interest. [see 1890] 5. To pay interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the agency. [see 1896] (a) An agent shall be liable for any interest upon any sums he may have applied to his own use, from the day on which he did so, and upon those which he still owes, after the expiration of the agency, from the time of his default.’8 6. To render an account of his transactions. [see 1891] 7. To deliver to the principal whatever he may have received by virtue of the agency, even though it may not be owing to the principal. [see 1891] (a) The right to a commission does not make one a joint owner with a right to money collected, but establishes the relat ion of principal and agent, the agent is under obligation to turn over to the principal the amount collected minus his commission. But the agent, having unlawfully retained more than his commission, is guilty of estafa.’9 8. To be responsible for the acts of the substitute he appoints, (a) if the principal has neither permitted nor prohibited him to appoint a substitute, or (b) if he was given the power to appoint, but the principal did not designate the person, and he appoints one who is notoriously incompetent or insolvent. [1892] (1) Principal may bring action against substitute also, in cases (a) and (b), with respect to obligations which the latter contracted under the substitution. [1893] H. Implied Obligations of a Principal to his Agent To pay the agent his compensation, unless it is a gratuitous agency. [see 1875 and 1903] 2. To advance to agent, upon agent’s request, the sums necessary for the execution of the agency. [see 1912 par. 1] (a) The principal however will not be liable for the following expenses: (1) if agent acted in contravention of principal’s instruct ions, unless principal should wish to avail of the bene fits derived from the contract. [1918(1)] (2) when expenses were due to agent’s fault. [1918(2)] (3) when agent incurred them knowing that an unfavorable result would ensue, if the principal was not aware thereof. [1918(3)] (4) when it was stipulated that agent would bear the expenses or would be allowed only a certain sum. [1918(4)1 3. To reimburse the agent for sums advanced plus interests, even if the business or undertaking was not successful, provided the agent is free from all fault. [see 1912, pars. 2 and 3] 4. To indemnify agent for all damages which the execution of the agency may have caused the agent, without agent’s fault or negligence. [1913] (a) Agent’s lien. The agent may retain in pledge the things which are the object of the agency until the principal reimburses such advances made by the agent and indemnifies the agent for such

damages suffered by the agent. [1914]

I. Stipulations of Principal and Agent They may stipulate that agent shall advance necessary funds. [see 1886] (a) Agent is not be bound by such stipulation when principal becomes insolvent. [see 1886] 2. The principal may prohibit the agent to appoint a substitute. (a) All the acts of the substitute appointed against the prohibition shall be void. [1892] 3. A stipulation which exempts the agent from the obligation to render an account of his transactions is void. [see 18911

J. Implied Obligations of the Principal to a Third Party To comply with all obligations which the agent contracts within scope of his authority. [1910, par. 1] (a) The agent is not personally liable to the third party with whom he contracts, unless (1) he expressly binds himself, or (2) he exceeds the limits of his authority without giving such party sufficient notice of his powers. [1897]

(b) Principal is not bound to comply with any obligation wherein agent has exceeded his power, except when principal ratifies it expressly or tacitly. [1910, par. 2] 2. To be solidarily liable with the principal, if principal allows him to act as though he had full powers, when he in fact has exceeded his authority. [see 1911] 3. To be liable in damages to the third person whose contract must be rejected, where two persons contract with regard to the same thing, one of them with the agent and the other with the principal and the two contracts being incompatible with each other, the one of the prior date to be preferred and the later one rejected. [1916 and 19171 K. Implied Obligations of an Agent to a Third Party To be personally liable to third party with whom he contracts if (a) he expressly binds himself, or (b) he exceeds the limits of his authority without giving such party sufficient notice of his powers. [1897] (1) As a general proposition, an agent who duly acts as such is not personally liable to third persons.

a] Exception: The agent is liable for damages arising from a tort committed by his employee.20 2. To be solely liable in damages to the third person whose contract must be rejected, where two persons contract with regard to the same thing, one of them with the agent, who had acted in bad faith, and the other with the principal and the two contracts being incompatible with each other, the one of the prior date to be preferred and the later one rejected. [1916 and 19171 L. Extinguishment of Contract of Agency An agency may be terminated either: (a) by the acts of the parties themselves, or (b) by operation of law. 2. Acts of the parties (a) Both parties consent to terminate the agency. (b) By unilateral act of either principal or agent (1) Revocation of the agency by the principal [1919(1)]

a] Such revocation may be express or implied. [see 1920] ii The agency is revoked if the principal directly manages the business entrusted to the agent and deals directly with third persons. [1924] 2] A general power of attorney is revoked by a special one granted to another, as regards the special matter involved in the latter. [1926] b] Revocation of an agency for the purpose of contracting with specified persons shall not prejudice the latter if they were not notified thereof. [see 1921] c] If agent had general powers, revocation of agency does not prejudice third persons who acted in good faith and without knowledge of revocation. Notice of revocation in newspaper of general circulation is however sufficient. [see 1922] dl The appointment of a new agent for the same business or transaction revokes previous agency on the day notice thereof is given to former agent, without prejudice to 1921 and 1922. [1923] el When two or more principals have granted a power of attorney for a common transaction, any one of them may revoke the agency without consent of the others. [1925] f] An agency cannot be revoked if a bilateral contract depends upon if, or if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership and his removal from the management is unjustifiable. [19271 11 A power of attorney can be made irrevocable by contract only, in the sense that the principal may not recall it at his pleasure; but coupled with interest or not, the authority certainly can be revoked for a just cause, such as when the attorney-in-fact betrays the interest of the principal.21 (2) Withdrawal of the agent [1919(2) and 19281 a] If principal suffers any damage because of withdrawal, agent must indemnify him therefor, unless agent should base his withdrawal upon the impossibility of continuing the performance of the agency without grave detriment to himself. [19281 b] Agent, who withdraws for a valid reason, must continue to act until principal has had reasonable opportunity to take steps to meet situation. [1929] (3) If it is an agency at will, either party may terminate it at any time. (4) The party who terminates the agency, before the spec ific object or purpose is achieved or before its period or term has ended, is liable for breach of contract if termination is before specified period of time, unless the termination is for a valid cause. 3. Termination by operation of law (a) Death, civil interdiction, insanity, insolvency of either the principal or the agent. [1919(4)1 (1) Agent must finish business already begun on death of principal, should delay entail any danger. [1884, par. 2] (2) Anything done by agent, without knowledge of death of principal or of any other cause which extinguishes agency, is valid and shall be effective with respect to third persons who have contracted with him in good faith. [1931] (3) Agency shall remain in force and effect even after principal’s death, if it has been constituted in common interest of principal and of agent, or in the interest of a third person who has accepted the stipulation in his favor. [19301 (4) If agent dies, his heirs must notify principal and in the meantime adopt measures as circumstances may demand in the principal’s interest. [1932] (b) Dissolution of the firm or corporation which entrusted or accepted agency.22 [1919(4)]

(c) Accomplishment of objective or purpose of the agency. [1919(5)] (1) An agency to sell a piece of land ends when the land is sold. (d) Expiration of period for which agency was constituted. [1919(6)] (1) An agency for a year ends at year’s end. 4. Third parties who have dealt with agent or have known of agency must be given notice if agency terminated by acts of the parties. [see 1921 and 1922]

Loan Commodatum & Mutuum 1933 to 1961

The basic law governing loans is the Civil Code, in articles 1933 to 1961

Commodatum 1933, 1934, 1935 to 1952

A. Nature, Purpose and Characteristics A contract of commodatum is an essentially gratuitous contract of loan of a thing which the bailee can use but which he is bound to return. [see 19351 (a) Precarium. A precarium is a contractual relation where the bailor may demand the thing loaned at will. 2. The purpose of commodatum is to afford bailee use of thing loaned. [19351 (a) Commodatum and precarium are bailments, as the thing loaned is the thing that will be returned to the lender. (b) If purpose is not use of the thing by bailee, but safekeeping by the bailee, the contract is deposit. [19621

3. CharacteriStics of commodatum. (a) It is perfected by delivery of the object; hence it is a real contract. [1316; 19331 (b) It is a unilateral contract, as it is the bailee who only makes a promise, i.e., to return the object. (c) It is gratuitous essentially. [see 1933, par. 2] (d) It is purely personal. [19391 (e) In the case of a precarium (i.e., a relation where neither the duration of the contract nor the use of the thing has been stipulated, or the use of the thing is merely tolera ted by the owner), the contract is revocable at will of the bailor. [see 1947]

B. The Parties and the Requisites of Commodatum The parties to a contract of commodatum are the bailor (the party who delivers the object) and the bailee (the other party to whom the object is delivered). 2. Requisites of Validity (a) Consent (b) Object (1) The object may be immovable property or movable1 property, which is not consumable. [see 1937 and 1933, par. 1] a] If object is consumable, contract becomes mut uum generally. 11 Consumable goods may be the object of commodatum, if the purpose is not consumption of the object.2 [see 1936] [a] Example: Consummable goods are loaned for the purpose of their exhibition. 2] While money is consumable, if it deposited in a bank account only “for purposes of incorporation,” contract between the parties is deemed a commodatum, and not a loan.3 (2) Bailor need not be owner of the object. [1938] (3) Ownership of the object is not passed on to baileee. The same object must be returned by bailee to bailor. a] Lender-owner who retains ownership, bears the risk of loss of the object. [1933] h] Bailee is not liable for the loss of the thing if it is due to a fortuitous event. 1] Bailee is liable for the loss of the thing, even if it should be through a fortuitous event: >Lt [a] if he devotes the thing to any purpose different from that for which it has been loaned, [b] if he keeps it longer than the period stipulated, or after the accomplishm nt of the use for which the commodatum has been constituted, [c] if the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event, [d] if he lends or leases the thing to a third person, who is not a member of his household, or [e] i1 being able to save either the thing borrowed or his own thing, he chose to save the latter. [19421 (c) Consideration. The contract of commodatum is gratuitous. [see 1933] (1) If any compensation is to be paid by him who acquires the use, the contract ceases to be commodatum [see 1935]; it becomes a lease of things.4 (d) Delivery of the object to the bailee perfects the contract. [1316; 1933, par. 1] (1) Only possession of the object is transferred to the bailee. (2) Ownership is not passed on to the borrower.5

a] If ownership is transferred to borrower, contract is mutuum. [1933, par. 41 (3) An accepted promise to deliver an object by way of commodatum is binding upon the parties, but the commodatum itself shall not be perfected until the delivery of the object. [19341 C. Implied Obligations of the Parties Obligations of the Bailee to the Bailor (a) To not lend or lease the object to a third person. (1) Bailee may allow his household to use the object. a] However, bailee must not allow members of his household to use the object, if there is a stipul ation prohibiting their use of the object, or if the nature of the object forbids such use. [see 1939(2)1 (b) To pay for the ordinary expenses for the use and preservation of the object. (c) To be liable for the loss of the thing, even if it should be through a fortuitous event, in the following instances: (1) if he devotes the thing to any purpose different from that for which it was loaned. (2) if he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. (3) if the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event. (4) if he lends or leases the thing to a third person, who is not a member of his household. (5) if, being able to save either the thing borrowed or his own thing, he chose to save the latter. [19421 (d) To not retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. [see 1944] (e) To be liable solidarily with a co-bailee, if the thing is loaned in the same contract to him and another bailee. [19451 2. Obligations of the Bailor to the Bailee (a) To not demand the return of the object until after the expiration of the period stipulated or after the accomplishment of the purpose of the commodatum. (1) He may demand its return for temporary use, if in the meantime he should have urgent need of the object. While the object is in the possession of the bailor for his temporary use, the contract of commodatum is suspended. [19461 (b) To refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the bailor’s knowledge before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger. (1) To bear equally with the bailee extraordinary exp enses, which arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault. a] The parties may adopt a stipulation to the contrary. [1949] (2) Bailee is not entitled to reimbursement of ordinary expenses, i.e., those incurred by bailee for the purpose of making use of the thing. [see 1950] (3) Bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. [19521

D. Stipulations of the Parties 1.A stipulation that bailee may use fruits of thing loaned is valid. [1940]

E. Special Rights of the Bailee 2.The bailee has a right of retention of the object for damages he suffers by reason of the flaws of the object which bailor knew of but did not advise bailee about. [1944; 1951] F. Modes of Extinguishment Commodatum (a) Death6 of either the bailor or the bailee. [1939(1)] (b) Expiration of the period stipulated. [see 1946, par. 11 (c) Accomplishment of the use for which the commodatum has been constituted. [see 1946, par. 1] (d) Revocation by the bailor, on any of the following acts of ingratitude: (1) If the bailee should commit some offense against the person, the honor or the property of the bailor, or of his wife or children under his parental authority. (2) If the bailee imputes to the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the bailee himself,

his wife, or children under his authority. (3) If bailee unduly refuses bailor support when the bailee is legally or morally bound to give support to the bailor. [see 1948 and 765] 2. Precarium (a) At will of the bailor. [see 1947] (b) Death of either the bailor or the bailee. [1939 (1)] (c) Accomplishment of the us for which the precarium has been constituted. [see 1946, par. 1]

II. Mutuum (or Simple Loan) 1933, 1934, 195310 1961

A. Nature, Purpose and Characteristics 1. A contract of mutuum or simple loan is one whereby a person receives money or any other fungi ble7 thing from another pers on, and acquires ownership thereof, but is bound to pay such other person an equal amount of the same kind and quality. [see 1953] A “loan” means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest.8 2. Being a loan for the consumption of the object, mutuum is not a bailment. 3. Characteristics of mutuum (a) It is a real contract, because the contract is perfected by delivery of the object. [1934] (1) An accepted promise to deliver something by way of simple loan, however, is binding upon parties. [see 1934] (b) A contract of loan is a unilateral10 contract, as only the borrower makes a promise, i.e., to repay the amount borrowed with an amount of the same kind and quality. [1933, par. 1] (c) It is a principal contract. (d) No special form is required for its validity.” B. The Parties and the Requisites of Mutuum

L The parties to a contract of simple loan are the lender and the borrower. (a) Banks are entities engaged in the lending of funds obtained in the form of deposits.’2 (b) Financing companies are engaged, in ‘financial leasing’, which is a mode of extending credit through a non- cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money.’3 2. Requisites of Validity (a) Consent (b) The object of a contract of simple loan is money or any other fungible thing. [see 1953] (1) Fungible goods are goods of such a nature or mass that one or part of it may be replaced by another or part of the same kind or mass. Examples of such goods are palay, corn, gasoline, oils a] Act 2137 “The Warehouse Receipts Act” defines fungible goods as goods which any unit is, from its nature or by mercantile custom, treated as the equivalent of any other unit.’4 b] If object is not fungible, the contract is barter. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quali ty is considered a barter. [see 1954] (2) Consumable goods are the proper objects of mutuum as mutuum is a loan for consumption of the object. b] If object is not consumable, contract is commod atum. 3. Consideration. Mutuum may be either gratuitous or with interest. [1933, par. 3] (a) A contract, under any cloak or device intended to circumvent the laws against usury, is void. The borrower may recover in accordance with law on usury’5 [see 1957] (1) Usurious contracts are governed by the Usury Law and other special laws, so far as they are not inconsistent with the Civil Code.16 [1961] a] CB Circular no. 9O5,’ which took effect on Dec. 22, 1982, suspended the effectivity of the Usury Law.18 b] But while the Usury Law remains suspended, the courts have exercised the prerogative to declare certain stipulations on interest to be illegal for being excessive or unconscionable.19 (2) Principles on Interests a] No interest shall be due unless it has been expressly stipulated in writing. [1956] 1] 1956 applies only to interest for the use of money. It does not comprehend interest paid as damages.2° ‘5Our usury law is Act 1655. The stipulation regarding the usurious interest is void, and the whole interest, not merely the excess, may be recovered. [Act 2655, sec. 6] 21 If the interest is payable in kind, its value shall he appraised at the current price of the products or goods at the time and place of payment. [19581 3] Interest as “cost of money” needs to be distinguished from interest as penalty. The essence or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded.2’ 4] Without prejudice to 2212, interest due and unpaid shall not earn interest. [a] However, parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. [see 1959] Interest due and unpaid shall not earn interest, unless parties stipulated to capitalize the interest due and unpaid, which as added to the principal, shall earn new interest.22

[b] When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.23 b] Legal rate of interest was raised from 6% p.a. to 12% p.a. 24 c] While parties may stipulate on interests, there are certain obligations upon which the law, by itself, imposes interest, as follows: 1] The vendee shall owe interest for the period between the delivery of the thing and the payment of the price in the following three cases: [a] should it have been so stipulated; [bi should the thing sold and delivered produce fruits or income; [c] should he be in default, from the time of judicial or extrajudicial demand for the payment of the price. [1589] 2] A partner who, has undertaken to contribute a sum of money, but fails to do so becomes a debtor for the interest and damages from the time he should have comp lied with his obligation. The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use. [1788] 3] If debtor incurs in delay, agreed upon indemnity applies; Ci) if there is none agreed upon, agreed-upon interest rate applies;and (ii)’if there is no agreed-upon interest rate’, legal interest applies. [22091’ 4] Damages in case of breach of contract. [2210] 5] Damages in crimes and quasi-delicts. [2211] 6] Solutio indebiti, where there is bad faith. [2159] e] In any event, interest due shall earn interest upon judicial demand. [2212; see sec. 5, Usury Law]25 4. Delivery of the Object (a) In simple loan, ownership of thing loaned passes to borrower. [1933, par. 4] A simple loan is therefore not a bailment. In a bailment, the object which is reconveyed is the one earlier conveyed. In a loan, the object is repaid with “an equal amount of the same kind and quality.” [1953] (1) If ownership is not transferred to borrower, contract is commodatum. [1933, par. 4] (2) In simple loan or mutuum, as contrasted to commodatum, the borrower acquires ownership of the money, goods, or personal property borrowed.26a] Borrower bears risk of loss of the thing because he becomes owner (unlike in commodatum, lender who retains ownership, bears risk and suffers loss of thing). (3) An accepted promise to deliver an object by way of mutuum or simple loan is binding upon the parties, but the mutuum or simple loan itself shall not be perfected until the delivery of the object. [1934]

C. Implied Ob1iga1ios of the Parties Obligations of the borrower to the lender: (a) To repay the object with “an equal amount of the same kind and quality.” [1953] (1) The obligations of a person who borrows money shall be governed by provisions of 1249 and 1250. [1955, par. 11 a] To repay in currency stipulated, and if it is not possible to deliver such currency, then in currency

which is legal tender in the Philippines. [see 1249, par. 1] b] Delivery of promissory notes payable to order, or bills of exchange or other mercantile documents produces the effect of payment only when they have been cashed, or when through fault of creditor they have been impaired. [see 1249, par. 2] c] In case an extraordinary inflation or deflation of the currency stipulated should supervene, value of the currency at time of establishment of the obligation shall be basis of payment, unless there is an agreement to the contrary. [12501 (b) If what was loaned is a fungible thing other than money, debtor owes another thing of same kind, quantity, and quality, even if it should change in value. In case it is impossible to deliver same kind, its value at time of perfect ion of the loan shall be paid. [1955, par. 2] 2. Obligations of the lender to the borrower: (a) To return interest, which has been paid when there has been no stipulation therefor, under the principle of solutio indebiti or natural obligation. [see 19601 (b) To return interest, which is not due but has been erroneously paid, under the principle of solutio indebiti.27 LAW ON BUSINESS TRANSACTIONS 105 LOAN: COMMODATLJM & MUTUUM D. Modes of Extinguishment 1. Payment [1231(1); 1232 et seq.] (a) Application of payments. [1252 et seq.] (b) Payment by cession. [12551 (c) Tender of payment and Consignation. [1256 et seq.] (1) Where a valid tender is made by debtors, no interest on the loan should accrue from date of tender. (2) A debtor, who offered check backed by sufficient de- posit or ready to pay cash, cannot be considered in delay, if creditor chose that means of payment.29 2. Condonation or remission of the debt. [1231(3); 1270 et seq.] 3. Confusion or merger of the rights of creditor and debtor. [1231(4); 1275 et seq.] 4. Compensation. [1231(5); 1278 et seq.] 5. Novation.3° [1231(6); 1291 et seq.] (a) Novation, by Substitution of the Debtor, distinguished from Assignment of Credit. The sale of a chattel subject of a mortgage with assumption of the loan secured thereby is tantamount to a substitution of debtor, which requires the consent of (and not just notice to) the creditor. Without such consent, the alienation of chattel is not binding on the creditor. On the other hand, the assignment of credit does not require debtor’s consent for the validity thereof and so as to render debtor liable to assignee.31 E. Loan, distinguished from other Contracts Sale. In a sale, the consideration is the price; a loan may be gratuitous or with interest. 2. Discounting. (a) To discount a paper is only ‘a mode of loaning money, with however two distinctions: (1) in a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always a double-name paper; a loan is generally a single-name paper.32 (b) There is a fine distinction between a discounting line and a loan accommodation. If the accounts receivable, like postdated checks, are sold for a consideration less than their face value, the transaction is one of discounting and is subject to the provisions of the Financing Company Act. The assignee is immediately subrogated as creditor of the accounts receitable. However, if the accounts receivable are merely used as collateral for the loan, the transaction is only a simple loan,

and the lender is not subrogated as creditor until there is a default and the collateral is forec losed.33

3. Trust Agreement. When the relation is purely that of debtor and creditor, the debtor cannot be held for the crime of estafaM by merely refusing to pay or denying the indebtedness. In order that a person can be convicted of estafa under saidartic le, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he has received. The obligation to deliver exactly the same money, that is, bills or coins, is non-existent in a simple loan of money because in the latter, the borrower acquires ownership of the money borrowed.35 4. Deposit. An instrument, acknowledging receipt of a sum of money as a deposit returnable two months after notice with interest, is evidence of a contract of loan and not of deposit. The obligation of the ‘depositary’ to pay interest to the ‘deposit or’ suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depositary should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan.36 5. Bank deposits are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings or current, are treated as loans and are covered by the law on loans. Current and savings deposits are loans to a bank because it can use the same.37 The relation existing between a depositor and a bank is that of creditor and debtor.38 F. Certain Types of Loans Loan on bottomry is a loan, which is taken by the shipowner or by his agent or by the ship captain, for use of the ship for a specified voyage or time and is secured by the ship, its keel or bottom and which by its peculiar nature is not to be repaid if the ship is lost during such voyage or time. (a) The ship captain is disallowed to borrow money on bottomry for his own transactions except on the portion of the vessel he owns.39 2. Loan on respondentia is a loan of money, which is secured by the goods laden on board a ship, and which by its peculiar nature is not to be repaid if the goods are lost during such voyage. (a) Contracts of loans entered into by the ship captain on res pondentia secured by the cargo are expressly declared void by law.4°

Deposit 1962 to 2004 A. Nature, Purpose, Types and Characteristics A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. [1962] 2. Purpose. The purpose of transfer of possession is safekeeping. (a) Where the principal purpose for receiving the object is not safekeeping, but some other purpose like a form of security for the payment of debtor’s obligation, there is no deposit.1 (b) If purpose is consumption of the object delivered, it is a mutuum. (c) When the depositary has permission to use the thing deposited, the contract becomes a loan or commodatum, except where safekeeping is still the purpose of the contract [1978], or when the

preservation of the thing deposited requires its use. [see 1977] 3. Types of deposit (a) Judicial. A judicial deposit or sequestration takes place when an attachment or seizure of property in litigation is ordered. [2005] (b) Extrajudicial. An extrajudicial deposit is either voluntary or necessary [1967]

(1) A voluntary deposit is that wherein the delivery is made by the will of the depositor. [see 1968] This is the contract of deposit. a] A warehouse receipt is an example. b] A contract for the rent of a safety deposit box is not an ordinary contract of lease but a special kind of deposit.2 (2) A deposit is necessary: a] when it is made in compliance with a legal obligation [1996(1)], or 1] This type shall be governed by the law establishing it, and in case of its deficiency, by the rules on voluntary deposit. [1997, par. 1] b] when it takes place on the occasion of any cal amity, such as fire, storm, flood, pillage, shipwreck, or other similar events. [1996(2)1 1] This type shall be regulated by the provisions concerning voluntary deposit and by 2168. [1997 par 21] c] The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary. [1998] 4. Characteristics of contract of deposit (a) It is a real contract, because the contract is perfected upon the delivery of the thing. [1316; 1963]

(1) An agreement to constitute a deposit, however, is binding. [1963] (b) It is unilateral, if it gratuitous deposit; it is bilateral, if not gratuitous. (1) If it is gratuitous, it is only the bailee, who makes a promise, i.e., to return the object. If it is not gratuitous, the parties exchange promises. (c) It may be entered into orally or in writing. [1969]

B. The Parties and the Requisites of Contract of Deposit The parties are the depositor (bailor) and the depositary (bailee). 2. Requisites of Validity (a) Consent (b) Object (1) Only movable4 things may be the object of a contract of deposit. [1966] (2) Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. [1980] a] Fixed, savings, and current deposits of money in banks and similar institutions are not true deposits.5 They are really loans to a bank because it can use the same and they earn int erest.6 (c) Consideration (1) A deposit is a gratuitous contract, except when there is an agreement to the contrary; or unless the deposit ary is engaged in the business of storing goods. [1965] (d) Delivery of the object to the bailee perfects the contract. [1316; 1962]

(1) Ownership is not transferred to depositary; (2) Only possession is transferred to depositary, who is obliged to return the same object to depositor. [1962] Hence, deposit is a bailment. C. Implied Obligations of the Parties 1. Obligations of the depositary to the depositor (a) To keep the thing safely and return it (together with its products, accessories and accessions) to the depositor or to his heirs or successors-in-interest, or to the person who may have been designated in the contract, at the place designated, if any. [see 1972, 1983 and 1987] (1) He must return the object to the depositor upon demand, even though a specified period of time for such return may have been fixed.7 [1989, par. 1] a] The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract.8 1] He is not however obliged to return the object if the object is judicially attached or if he has been notified of the opposition of a third person to the return or the removal of the thing deposited. In these instances, he must inform the depositor of the attachment or opposition. [1988] (b) To return the thing to the depositor before the time designated, if the depositary has justifiable reasons for not keeping thing deposited, unless the deposit is for a valuable consideration. (1) If the depositor should refuse to receive it, the depositary may secure its consignation from the court. [19891 (2) When the thing deposited is delivered closed and sealed, the depositary must return it in the same condition. a] He shall be liable for damages should the seal or lock be broken though his fault. Fault on the part of the depositary shall be a prima facie presumption. [see 1981] b] If the key has been delivered to him or when the depositor’s instruction as regards the deposit cannot be executed without opening the box or receptacle, depositary is presumed authorized to open a locked box or receptacle, when it becomes necessary for him to do so. [see 19821 (3) If there is solidarity among the depositors or the object is indivisible, the depositary must return the thing to any one of depositors. But if any one of the solidary depositors has made the demand, judicial or extrajudicial, for the object’s return, depositary must return the object to him. [1985 and 1214] a] Exception: In the event there is a stipulation as to whom the depositary should return it, ret urn must be made to him. [1985] (4) If there is no solidarity among the depositors and the thing is divisible, depositary should return only the depositor’s proportionate share. [1985] (5) If the depositor should lose his capacity to contract, depositary must return the object to the persons who may have the administration of the depositor’s property and rights. [1986] (b) To not use the thing deposited without the express permission of the depositor. If he does, he shall be liable for damages. (1) Depositary may use the thing, only when its preservation requires it use. [1977] (2) If depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract. [1978] (3) The permission to use the thing deposited shall not be presumed. [see 1978]

(c) To not deposit the thing with a third person, unless there is a stipulation to the contrary. (1) Depositary is responsible for the negligence of his employees. (2) Depositary is liable for the loss, if having been allowed to deposit the thing with a third person, depositary selects a person who is manifestly careless or unfit. [19731 (d) To be liable for the loss of the thing through a fortuitous event, in the following instances: (1) if it is so stipulated. (2) if he uses the thing without depositor’s permission. (3) if he delays its return. (4) if he allows others to use it, even though he himself may have been authorized to use the same. [19791 a] The burden of explanation of the loss rests upon the depositary and, the fault is presumed to be his.9 (e) To collect interests earned by certificates, bonds, securities or instruments, he holds, and take such necessary steps in order that the securities preserve their value and the rights corresponding to them according to law. (1) The lessor, in a contract of lease of safety deposit boxes, does not assume this obligation. [19751 (f) To give notice to the depositor and await depositor’s decision, before he makes any change in the way of the deposit. He may effect such change without waiting for depositor’s decision, if under the circumstances he may reasonably presume that the depositor would consent to the change if depositor knew of the facts of the situation or when delay would cause danger. [19741 (g) Obligations of a hotelkeeper (in the case of necessary deposit):

(1) To be responsible for effects brought and deposited by guests, provided that notice was given to the hotelkeeper or his employees, and that, on the part of the guests, they take the precautions which said hotelkeeper or his substitutes advised relative to the care and vigilance of their effects. [1998] (2) To be liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel. [1999] (3) The responsibility referred to in 1998 and 1999 shall include loss of, or injury to the personal property of guests caused by servants or employees of the hotelkeeper as well as by strangers; but not that which may proceed from any force majeure. The fact that travelers are constrained to rely on vigilance of keeper of the hotel or inn shall be considered in determining the degree of care required of him. [2000] a] The act of a thief or robber, who has entered the hotel, is not deemed force majeure, unless it is done with use of arms or through irresistible force. [20011 b] The hotelkeeper is not liable for compensation if the loss is due to the acts of the guest, his family, servants or visitors, or if the loss arises from the character of the object brought into the hotel. [2002] 2. Obligations of depositary to third person. (a) To advise the true owner of the thing deposited, if he should discover (1) the fact that the thing has been stolen and (2) the identity of the owner. [see 1984] 3. Obligations of the depositor to the depositary (a) To pay compensation, if there is such an agreement, or if depositary is engaged in the business of storing goods. [see 1965] (b) To bear transportation expenses, if at the time the deposit was made a place was designated for the return of the object. [see 19871

(c) To reimburse depositary for expenses incurred for the preservation of the object, if the deposit is gratuitous. [1992]

D. Special Rights of the Depositary 1. A deposit is deemed a pledge by operation of law, because the depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. [see 1994] 2 The hotelkeeper has the right to retain the things brought into the hotel by the guest, as a security for credits on account of lodging and supplies usually furnished to hotel guests. [20041

E. Rights of a Depositor who is with capacity but who has made a deposit with a depositary who is without capacity 1. With respect to the depositary, the depositor has right to an action to recover thing deposited while it is still in possession of depositary, or to compel latter to pay him the amount by which he may have enriched or benefited himself with the thing or its price. [see 19711 2. With respect to a third person, who has acquired the thing in bad faith, the depositor has the right to bring an action for recovery of the object. [see 1971] (a) One who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possess ion of the same. [see 5591

F. Obligations of a Depositary who is with capacity and who accepts a deposit from a depositor who is without capacity 1. To return the thing upon demand of the depositor’s guardian or administrator of the depositor, or by the depositor himself if he should acquire capacity. 2. To be subject to all the obligations of a depositary. [1970]

G. Stipulations of Parties; Limitations 1. Hotelkeeper cannot free himself from responsibility by posting notices to the effect that he is not liable for articles brought by guest. [2003] (a) “Exculpatory notices or clauses” and “Liability limitation notices or clauses” are disallowed. Any stipulation between hotelkeeper and guest whereby the responsibility of the former as set forth in 1998 to 2001 is suppressed or diminished shall be void. [2003] H. Modes of Extinguishment 1. Return of the thing deposited. 2. Loss or destruction of thing deposited. [1995(1)] (a) If depositary loses the thing by force majeure or government order and receives money or another thing in its place, he shall deliver the sum or other thing to depositor. [19901 3. Death’° of either depositor or depositary, in case of a gratuitous deposit. [1995(2)1 4. Consignation of the object, in appropriate cases.

Guaranty and Suretyship 2047 to 2081 Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property.1 The reference in 2047 to the provisions of Section 4, Chapter 3, Title I, Book IV of the New Civil Code on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn from the applicable provisions governing guaranty.2 A. Nature, Purpose, Characteristics and Distinctions of Contracts3 of Guaranty, and of Suretyship 1. (a) By guaranty, a person called a guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. [2047, par. 11 A guaranty is a collateral undertaking to pay the debt of another in case the latter does not pay the debt.4 (b) By suretyship, a person binds himself solidarily with the principal debtor [2047, par. 2] Suretyship5 is a contractual relation resulting from an agreement whereby one person, the surety, engages to answer for the debt, default or miscarriage. of another. known as the principal. Surety’s obligation is not an origin al and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to creditor or promise of (ho principal is said to be direct, primary and absolute; in other words. he is directly and equally bound with principal. Surety therefore becomes liable for the debt or duty of another although he posseses no direct or personal interest over the obligations nor does he receive any benefit therefrom. A contract suretyship is an agreement whereby a party called the surety guarantees the performance by another party, railed the principal or obligor, of an obligation or undertaking in favor third party called obligee. It Includes official recognizances, stipulations, bonds or undertaking issued by any company by virtue of or under the provisions Act 536.’ A contract of suretyship shall be deemed to be an insurance contract if made by a surety who or which, as such, is doing an insurance business. A contract of suretyahip Is an accessory promise by which a person binds himself far another already bound1 and agrees with the creditor to satisfy the obligation if the debtor does not.’

2. Purpose. In both suretyship and guaranty, the third party promises to fulfill obligation owed by debtor if debtor (ails to do so. (2047]3. Characteristics of Contract of Guaranty and of Suretyship (a) It. is consensual as it is perfected by mere agreement of the parties. (1) A contract of guaranty is not a formal contract and is valid in whatever form it may be.” (b) A guaranty is an accesesory’ contract. It cannot exist without a valid obligation [20521 (1) It can secure an obligation to give, to do or not to do. (2) A guaranty may be constituted to guarantee the performance of a voidable, unenforceable, natural or conditional obligation. 12052. 2053) (3) A guaranty may also be constituted, not only in favor of the principal debtor, but also in favor of another

guarantor, with the latter’s consent, or without his knowledge, or oven over his objection. (see 2051, per. 2) (4) A guaranty may secure future debts, the amount of which is not yet known: however, there can be no claim against guarantor until debt is liquidated. 120531 A guaranty may be for ieee but not more than the debt guaranteed. (see 2054) a] 2O54canalsoapplytosurety.” (5) If it be simple or indefinite, a guaranty shall comp rise not only the principal obligation, but also all its accessories. (see 2065 par. 2) (6) The subsidiary contract of guaranty becomes binding upon effectivity of the principal contraci14

(7) A suretyship or a guaranty cannot exist without a valid obligation.” (c) It Is an express contract [2055] There Is no Implied con- tract of guaranty. It is not presumed. [2055](d) It Is unilateral (in that only the guarantor ii obligated to the creditor and not vice verso).” (e) It is nominate.”

4. Distinction, between guaranty and suretyship. (a) The vital difference between a contract of surety and that of a guarantor is sometimes said to be, that a surety is charged as an original promisor while the engagement of the guarantor is a collateral undertaking. The obligation of the surety Is primary; the obligation of the guarantor is secondary.(b) A surety and a guarantor are alike in that each promises to answer for the debt or default of another. On the other hand, a surety and a guarantor are unlike in that the surety assumes Liability as a regular party to the undertaking, while the Liability of the guarantor depends upon an independent agreement to pay the obligation if the primary payor fails to do so. A surety is charged as an original promisor; the engagement of the guarantor is a collateral undertaking. Th. obligation at the surety is primary; the obligation at the guarantor is secondary.

B. The Parties and the Requisites of Contracts of Guaranty and of Suretyship

1.A contract of guaranty or suretyship has at least three parties They are the creditor, to whom payment or performance is owed. the principal debtor, who is bound to pay or perform, and the guarantor or surety, who agrees to pay or perform if the principal debtor does not pay or perform. There may be additional parties, such as the co-guarantor or co-surety, who Is one of two or more guarantors who collectively assume the accessory obligation, or the sub-guarantor, who assumes the obligation of a guarantor, in the event the latter does not pay or perform when his obligation is due. 2. Requisites to Validity of Contract (a) Consent (1) Guarantor must have legal capacity. [20561 a. A married woman may guarantee an obligation without husband’s consent, but shall not. Thereby bind the conjugal partnership, except in cases Provided by Law. 120491 (2) Guarantor must have qualities of integrity, capacity to bind himself and sufficient property to answer for the obligation guaranteed — to be present only at the time o(perfection o(contract olguaranty. (20561

a] The supervening incapacity of the guarantor will not operate to exonerate him of eventual liability he has contracted. From 2057, it is apparent that the supervening dishonesty of the guarantor (i.e.. the disappearance, of his integrity after he has become bound) does not terminate the contract but merely entitles the credit or to demand a replacement of the guarantor.’ (3) A person may bind himself as guarantor without the knowledge or consent of debtor or against will of debtor. (see 20501 (4) An offer to guarantee must be accepted to be effective. (b) The object is the promise mad, by the third person to fulfill the obligation of the debtor in case of debtor’s default, or (c) Consideration of contracts of guaranty and of suretyship (1) A guaranty is gratuitous, unless it stipulates otherwise. (2048; 2051, par. I) (2) If It is onerous, the cause of contract of guaranty is the same cause which supports the obligation as to principal debtor.a] The consideration necessary to support a surety obligation need riot pass directly to surety, a consideration moving to principal alone being sufficient, for guarantor or surety is bound by the same consideration that makes the contract effective between principal parties. It is not necessary that guarantor or surety receives any part of benefit, if such there be. accruing to principal” b] The consideration is called premium. in the case of a suretyship or bond, issued by a surety engaged in the insurance business. (3) Despite any agreement to the contrary no suretyship issued by an insurance company is valid and binding unless and until the premium therefore has been paid.

3. Form (a) It is enforceable only If it complies with the statute of frauds” 1403 requires a special promise to answer for the debt, default or miscarriage of another to be in writing. (1) ‘lest of a Collateral contract. The true test as to whether a promise is within the statute has been said to lie in the answer to the question whether the promise is an original or a collateral one. If the promise is an original or an independent one, i.e., if the promise or becomes thereby primarily liable for the payment of the debt, the promise is not within the statute. But, on the other hand, if the promise is collateral to the agreement of another and the promisor becomes thereby merely a surety the promise must be in writing.

A] The credit for the lumber sold and delivered by the plaintiffs to defendant’s contractor was ext ended solely and exclusively to the defendant himself under the verbal agreement had with him and therefore the provisions of the statute did riot require that it should be in writing. b] A verbal promise to pay a definite amount is not unenforceable as a special promise to answer for the debt, default or miscarriage of another,’ when it appears that the promise was in fact made to answer for one’s own debt, default., or miscarriage of one’s agent and duly authorized representative C. Implied Obligation of the Principal Debtor 1.To present a person, a guarantor, who possesses integrity, capacity to bind himself and sufficient property to answer for the obligation which he guarantees. (20661

D. Implied Obligation of the Creditor 1] To ask the court to notify- the guarantor of the action, in every action by the creditor, which must

be against the principal alone, except in the cases mentioned in 2069. 120621

E. Rights of the Guarantor 1.Before paying the creditor, to proceed against the principal to obtain release from th. guaranty, or to demand a security that shaft protect him from any proceedings by the creditor rind from the danger of insolvency of the debtor (a) when he is sued for the payment; (b) In case of Insolvency of the principal debtor. (c) when the debtor ham bound himself to relieve him from the guaranty within a specified period, and this period has expired; (d) when the debt has become demandable, by reason of the expiration of the period for payment; (e) after the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than 10 years; (f) if there are reasonable grounds to fear that the principal debtor intends to abscond; (g) if the principal debtor is in imminent danger of becoming insolvent. 12071] (1) 2071 provides for his protection before he has paid but after he becomes liable to do so.

2. To not be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. (20581 (a) This right of a guarantor is known as the benefit of excussion or right of exhaustion. (1) Debtor must set right up against creditor when the latter demands payment and must point out debt- or’s available property. 12060) (2) If guarantor has complied with 2060. the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence. 12061] (b) This right or benefit shall not take place (1) if guarantor has expressly renounced it. (2) if guarantor has bound himself solidarily with debtor. (3) if debtor becomes insolvent. (4) if debtor has absconded, or cannot be sued in the country, unless he left an agent. (5) if it can be presumed that execution on debtor’s property will not result in satisfaction of the obligation. (20591 (6) when a pledge or a mortgage has been given as a spelling security for the payment of the principal obligation

(c) A surety has no right to excussion.ae 3] To be benefit., but not be prejudiced, by any compromise between creditor and principal debtor. [20631

4. lb be reimbursed by the principal debtor, after having paid for him. This is known as the right to indemnity or reimbursement. (a) The indemnity comprises: (1) the total amount of the debt;

(2) the legal interest thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor; (3) the expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; (4) damages if they are due. (2066) a) 2066 provide. for the enforcement of the rights of the surety against the debtor after he has paid the debt.” (b) If the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement from the debtor until the expiration of the period unless the payment has been ratified by the debtor. [20691 (c) If the guarantor pays without notifying the debtor and the latter not being aware of the payment, repeats the payment, the guarantor has no remedy whatever against the debtor, but only against the creditor. (1) Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented by a fortuitous event from advising the principal debtor of the payment. and th. creditor becomes insolvent, the principal debtor shall reimburse the guarantor for the amount paid. (2070] (d) If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement. 12072) (e) The stipulation in the indemnity agreement allowing the surety to recover even before it has paid the creditor Is enforceable, In accordance therewith, the surety may demand from the indemnitors even before paying the creditors.

5. To be subrogated,after having paid the creditor, to all the rights which the creditor had against the debtor. This Is known as the right of subrogation. (a) If the guarantor pays on behalf of the debtor without the knowledge or against the will of the latter, the guarantor cannot compel the creditor to subrogate him in his right., such as those arising from a mortgage, guaranty or penalty. (see 1237) (b) If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made. (20681 (c) If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. 120671

F. Right of Co-Guarantor. ‘Tb enjoy the benefit of division. (a) The obligation to answer for the same debt is divided among the several guarantor.. (b) The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated (c) The benefit of division against the co-guarantors ceases in the same case.. and for the same reason as the benefit of excussion against the principal debtor. (2065) 2. To demand of each of the co-guarantors the share which is proportionately owing from him, in the case of one who has paid the debt. (a) In ca any o(the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion.

(b) This right of contribution shall not be available, unless the payment has been made in virtue via judicial demand or unless the principal debtor is insolvent. (20731 (1) 2073 deals with a situation which arises when one surety has paid the debt to the creditor and is seeking contribution from his cosureties. (c) Co-guarantors may set up against the one who paid, the same defenses which would have pertained to the principal debtor against the creditor, and which are not purely persona! to the debtor. (2074] G. Right and Obligation of Sub-Guarantor 1.To enjoy the benefit of excussion as against the guarantor and the principal. [2065J 2. To be responsible to the co-guarantors on the same terms as the guarantor, for whom he has bound himself, m case of Insolvency of said guarantor. (20751

H. Right of the Principal Debtor 1.To benefit, but not be prejudiced, by any compromise between guarantor and creditor. 120631

I. Extinguiahment at Guaranty The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes as all other obligations. (a) Some of the cause are: (1) Payment or performance of the principal contract. a) The guarantor is released, if the creditor voluntarily accepts an immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction. [2077](2) Novation o(the principal contract a) A material alteration at the principal contract effected by the creditor and the principal debtor without the guarantor’s consent completely discharge, the guarantor from all liability on the contract of guaranty. ii A change in. or part performance of, the contract which doe. not render the obligation more onerous, such as part payment by vendee ahead of the day stipulated or delivery by him to the vendors of more containers than was stipulated, cannot have the effect of releasing the vendor’s surety.” 2] Novation of the principal contract will not release a surety, who had given prior or continuing consent to any novation.3) Novation will not serve to release the surety, if she expressly waive, discharge in case of change or novation In the principal agreement” (3) Renunciation of the principal debt. (see 12731 (4) Merger o(the characters of creditor and debtor in the person of the principal debtor. lace 12761 (5) Compensation as regards what the creditor owes the principal debtor. [see 12801 2. Extinguishment of the Guaranty, independent of the principal contract (a) A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted. (20781 (b) An extension granted to the debtor by the creditor, with. out the consent of the guarantor, extinguishes the guaranty (1) The extension of the term, which in accordance with the provisions of 2079 produces the extinction of the liability of the surety, must of necessity be based on some mew agreement between the creditor and principal debtor, by virtue of which the creditor deprives himself of his right to immediately bring an action for the enforcement of his claim.

a] The creditor’s letter addressed to the principal debtor, granting extension of time for payment. without the knowledge and consent of the sure- ties, releases the latter from liability.4’ b) A letter sent to the debtor as an ultimatum and warning to pay the obligation within three days, failure o(which the necessary legal action would be taken, is not an agreement of an extension of the term.” (2 The theory behind 2079 is that an extension of time given to the principal debtor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.(3) The mere failure on the part of the creditor to demand payment after the debt has become due does not itself constitute any extension of time referred to herein. (2079) a) The mere failure to bring an action upon a credit as soon as the same or any part of it matures, does not constitute an extension of the term of the obligation and therefore does not release the guarantor.4 (c) If consignation having been made, the creditor should authorize the debtor to withdraw the same, the guarantor and sureties shall be released. (see 12611 (d) Any act of the creditor that prevents the guarantor., even though they be solidary, from being subrogated to the rights, mortgage., and preferences of the creditor. 120801

Pledge, Mortgage and Antichresis 2085 to 2141

The basic law governing pledges is found in Civil Code. A special law, referred to in 2123, governing primarily pawnshops and other establishments which are engaged in making ken. secured by pledges Is PD 114 Pawnshop Regulation Act. Contracts of security are either personal or real.While in contracts of persona1 security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety), in contracts of real security, such as a pledge. a mortgage or an antichresis, however, that fulfillment is secured by an encumbrance of property.

PLEDGE 2085 to 2123

A. Nature, Purpose and Characteristics of Contract of Pledge 1. Pledge is the bailment of personal property with the creditor, or with a third person by common agreement, as security for the performance of an obligation. (a) In a contract or pledge, the creditor is given the right to retain his debtor’s movable property in his possession, or in that of a third person to whom it has been delivered until the debt I. paid 2. Pledges may be constituted by contract or created by operation of law. (2093; 21221 3. The purpose is to constitute specific personal property as security for the compliance with a principal contract or obligation. (a) A pledge may exceptionally secure after-incurred obligations so long as these future debts are

accurat.ely described. (b) It is the essence of a contract of pledge that when the principal obligation becomes due, the things in which the pledge consists may be alienated for payment to creditor. (see 2086) (C) A pledge is a lien,’ which is possesory in nature. 5. Characteristics of a contract of pledge (a) It is a real contract, because it is perfected by delivery o( the object. [1316; 2093; 214O (I) A promise to constitute a pledge gives rise only too personal oction., between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another by offering in pledge as unencumbered things which he knew were subject to some burden or by misrepresenting himself to be the owner of the same. (20921 (b) It is an accessory contract, as it 1.. constituted to secure the fulfillment ala principal obligation. (20854.1)1 It cannot exist without a valid obligation. (2086; 2052, par. 11 (1) It may secure all kinds of obligations, whether pure or subject to a msuspensive condition, 120911 (2) It may secure the performance of a voidable or an unenforceable contract. (2086; 2052, par. 21 (3) It may secure a natural obligation. (2086; 2052, par. 21 (4) It may stand as security for any future (advances) or renewals thereof that pledgor may procure from pledgee.’ (c) It is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. [20891 (1) The indivisibility of the pledge is not affected by the fact that the debtors are not solidarily liable.[2090]

B. The Parties and the Requisite of a Contract of Pledge

1.Consent (a) The perties are, the pledgor. i.e., the owner of the security, and the pledgee, i.e.. to whom the debt thus secured Li delivered as security. (b) A pawnshop (also called pawnbroker or pawn-brokerage) refers to a person or entity engaged in the business of lending money on personal property delivered as security for (1) A pawnshop must comply with the registration licensing, capitalization requirements of PD 114 Pawnshop Regulation Act. (b) Third personal who are not parties to the principal obligation may secure the latter by pledging their own property. [see 5. par. 21. The pledgor does not have to be the principal debtor. (C) Form. A pledge does not take died against third persons if it Is not reduced to a public instrument, which must indicate the description o(the thing pledged and the date of the pledge. (2096) (I) A pawn ticket w the pawnbrokers receipt for a pawn. It is neither a security nor a printed evidence of indebtedness.2. Object (a) The pledgor must be the absolute owner of the object pledged or must have the free disposal of the property or must be legally authorized for the purpose of constituting the pledge. 12085(2) and (3)](1) Pledgor retains ownership of the object. a] With prior consent of pledgee, the pledgor can alienate the pledged property, subject to the pledge. [2097]

1.A pledgor who alienates pledged property, without prior consent of its pledgee, corn- mite a felony.’ 2) The pledged property remains with the pledges or the third person, by common agreement b] A pledgee must restore to the owner object. pledged without the owner’s consent, without any obligation on the owner’s part to make good the amount for which they were pawned.’ (b) All movable. which are within commerce of men may be pledged, provided they are susceptible of possession. (see [2094](1) lncorporeal right., evidenced by negotiable Instruments, bills of lading, shares of stock,” bonds, warehouse receipts and similar documents may also be pledged. (20951 (2) Under the Pawnshop Regulation Act. property that can be pawned shall include only such personal property as may actually be delivered to the control and possession of the pawnshop, provided however that certain specified chattels such a. guns, knives and similar weapon, whose reception in pawn Is expressly prohibited by other laws or regulation. shall not be included.(3) Ships and vessels, despite being movables, are howe ver appropriate objects of mortgage, instead of pledge.12 (4) If object is an immovable, contract might be a real mortgage. [2124] 3. Consideration (a) The consideration is the same as that of principal contract. (1) If the pledgor is a person other than principal debtor, the pledge may be either onerous or gratuitous. 4. Delivery of object. A contract of pledge is perfected by transfer of possession of the thing pledged to creditor or to a third pers on by common agreement. [2093] (a) Pledgor transfers possession, but not ownership, to pledgee or third person [see 2093] (1) If ownership is transferred, the contract may be a donation, sale, or barter. (b) Actual delivery v. Symbolic delivery (1) Symbolic delivery is sufficient in a pledge and can be the basis for conviction of pledgor for estafa13 a] The symbolical transfer of goods by means of delivery of the keys to the warehouse where the goods were stored is sufficient to show that depositary appointed by the common consent of the pledgor and the pledgee was legally placed in possession of the goods.’ (2) The delivery of possession referred to in 2093 and which is essential to the validity of a pledge means actual possession of the property pledged, and a mere symbolic delivery is not sufficient.15 (3) The requirement that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement, was complied with by the execution of the deed of assignment in favor of [the bank].16 It would therefore appear that symbolic delivery can be sufficient. (c) The instrument which evidences the incorporeal rights pledged shall be delivered to creditor, and if negotiable, must be indorsed. [2095] (d) The property held in lawful pledge by one cannot be pledged to another while the first pledge subsists, because the element of delivery to the second pledgee will be lacking.17

C. Implied Obligations of the Pledgee or Creditor

1.To take care of thing pledged with diligence of a good father of a family. [2099] (a) He shall be liable for the loss or deterioration of thing pledged. [see 2099] (1) This is an exception to the general rule that the owner of the thing suffers its loss.

(b) Pledgee is responsible for acts of his agents or employees with respect to thing pledged. [2100, par. 2] 2. To not use thing pledged, without the authority of the owner. (a) If he does so, or misuses the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. (b) When the preservation of thing pledged requires its use, he must use it but only for that purpose. [2104] 3. To not deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so [see 2100, par. 1] 4. To compensate what he receives, if the pledge earns or produces fruits, income, dividends, or interests, with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. [2102] 5. To bring actions which pertain to the owner of the thing pledged, in order to recover it from, or defend it against, a third person. [2103] 6. To not appropriate the thing pledged, or dispose of it. [2088] D. Implied Obligations of the Pledgor 1. To not ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. [21051 2. To be liable, if knowing flaws in the thing pledged he does not advise the pledgee, for damages the pledgee may suffer by son on of such flaws. [2101; 19511 E. Rights of the Pledgee or Creditor 1. To retain the thing in his possession or in that of the third pers on to whom it has been delivered, until the debt is paid. [2098] (a) In a contract of pledge, creditor is given the right to ret ain his debtor’s movable property in his possession, or in that of a third person to whom it has been delivered until debt is paid.18 2. To claim either another thing in lieu of the thing pledged or to demand immediate payment of the principal obligation, if he is deceived on the substance or quality of the thing pledged. [2109] 3. To be reimbursed for the expenses made for the preservation of the thing pledged. [2099] 4. To advise the pledgor, without delay, of any danger to the thing pledged. [2107] 5. To cause the public sale of the thing pledged if, without fault on his part, there is danger of destruction, impairment, or dimin ution in the value of the thing pledged. [21081

(a) The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing origin ally pledged. 6. To cause the public auction of the thing pledged if the credit has not been satisfied in due time. [2112] (a) If thing pledged is sold, (1) and the price of sale is more than amount of principal obligation, the debtor shall not be entitled to the excess, unless it is otherwise agreed. [2115] (2) and the price of the sale is less than amount of principal obligation, creditor shall not be entitled to recover the deficiency, despite any stipulation to the contrary. [2115] (b) If the thing is not sold at the first auction, pledgee may cause a second auction. [2112] (1) If there is still no sale, he may appropriate the thing pledge, but shall be obliged to give an acquittance for his entire claim. F. Rights of the Pledgor To alienate the thing pledged, with the consent of the pledgee and subject to the pledge. [2097]

(a) The ownership of the thing pledged is transmitted to the vendee or transferee, but the pledgee shall continue in possession. 2. To require that the thing be pledged with a third person if through the negligence or willful act of the pledgee, the thing is in danger of being lost or impaired. [21061 3. To demand the return of the thing, upon offering another thing in pledge, if there are reasonable grounds to fear the destruct ion or impairment of the thing pledged, without the fault of the pledgee. [2107] (a) The substitute must be of the same kind as the thing origin ally pledged and not be of inferior quality. 4. To redeem the property by satisfying the debt in due time. [see 2112]

(a) The pawner who fails to pay his obligation on date it falls due may, within 90 days from date of maturity of obligat ion, redeem the pawn by payment of the principal of debt with interest; provided however, that for purpose of comp uting interest due after maturity of obligation, the basis shall be sum of the principal of the obligation and interest earned at time obligation matured.’9 5. If the pledgor is a third person, he shall have the same rights as a guarantor, under articles 2066 to 2070 and 2077 to 2081. [2120] G. Stipulations of the Parties; Limitations Creditor cannot appropriate the things pledged or dispose of them. Any stipulation to the contrary is null and void. [see 2088] (a) Pactum commissoriurn is a stipulation whereby the thing pledged shall become the property of creditor in the event of non-payment of debt within the term fixed. Such stipulation is void.20 (b) The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the things given by way of pledge. Any stipulation to the contrary, termed pacturn cornmissorio, is null and void.2’ (1) What pactum commissoriurn prohibits is only automatic appropriation. If agreement is entered into that pledgee could purchase the thing pledged or mortgaged at current market price if debt is not paid on time, agreement is valid because this is not automatic appropriation.22 H. Modes of Extinguishment of a Contract of Pledge 1.The extinguishment of the principal obligation extinguishes the accessory contract of pledge.

2.The sale of thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses. [21151 3. The return of the thing pledged, by the pledgee to pledgor or owner extinguishes the pledge. [21101 4. The pledgee’s written renunciation or abandonment of the pledge .extinguishes the pledge. [2111] 5. The expropriation of the object extinguishes the pledge. [2103, par. 1] I. Pledges Created by Operation of Law Types [see 2121] (a) Agent’s lien. An agent has a lien on things which are the object of the agency until the principal effects the reimbursement of sums he had advanced for the execution of the agency and the indemnification of damages which the execution of the agency may have caused the agent. [1914; 1912; 1913] (b) The depositary may retain the object deposited with him until the full payment of what may be due him by reason of the deposit. [1994] (c) Hotelkeeper’s lien. The hotelkeeper has the right to ret ain the things brought into the hotel by the guest, as a security for credits on account of lodging and supplies usua lly furnished to hotel

guests. [2004] (d) Mechanic’s lien. A person who has executed work upon movable has a right to retain it by way of pledge until h is paid. [1731] (1) On the matter of existence of mechanic’s lien in favor of the corporation, which was engaged by plaintiff to install an air conditioner in his car, explicit is the provision of 1731 that the latter can legally retain, by way of pledge, the movable upon which it executed its work.(e) Warehouseman’s lien. A warehouseman has a lien on goods deposited or on the proceeds thereof in his hand for all lawful charges for storage and preservation of the goods and for money advanced, interest, insurance, transportat ion, labor, weighing, coopering and other charges and exp enses in relation to such goods, and also for all reasona ble charges and expenses for notice and advertisements of sale, and for sale of the goods where default has been made in satisfying the warehousing lien.24 2. Pledges created by operation of law are governed by the Artic les on contract of pledge on the possession, care and sale of the thing and on the termination of the pledge. [see 21211 (a) Object may be sold only after demand of amount for which the thing is retained. [2122] (b) Public auction shall take place within one month after such demand. (If, without just grounds, creditor does not cause the public sale to be held within such period, debtor may require return of object.) [2122] (c) After payment of debt and expenses, the remainder of the price of sale shall be delivered to obligor [2121]

Real Mortgage 2085 to 2092, 2124 to 2131 The basic law governing real estate mortgages is found in Civil Code. A special law is Act 3135 — “An Act to Regulate the Sale of property under Special Powers Inserted in or Annexed to Real Es ate Mortgages.”

A. Nature, Purpose and Characteristics of Real mortgage A mortgage is a lien on real property to secure performance of a contract or obligation.

(a) A mortgage creates a real right.

(1) As a real right, a recorded mortgage follows the property whoever is the owner.26 (b) A real estate mortgage may exceptionally secure after-incurred obligations so long as these future debts are accurately described 27 2. An equitable mortgage is one in which although it lacks some formality, form or word or other requisites, prescribed by a statu te, shows the intention of the parties to charge a real property as security for a debt and contains nothing impossible or contrary to law? (a) An equitable mortgage is “a mortgage masquerading as a sale.” 3. Characteristics of a contract of real mortgage (a) It is a formal contract. A public instrument is drawn up to encumber the real property covered thereby, but in order that a mortgage may be validly constituted, the document in which it appears must be recorded in the Registry of Property. [2125] (b) It is a unilateral contract, as only the mortgagee after perfection of the contract has a promise, albeit conditional, to keep.

(c) It is an accessory contract. (d) It is a subsidiary contract. (1) It is the essence of a contract of mortgage that when the principal obligation becomes due, the things mtrt ‘ gaged may be alienated for payment to creditor. [2086] (e) A real property mortgage is not a bailment as the object is not delivered to mortgagee.

B. The Parties and the Requisites of Contract of Real Mortgage 1. The parties are the mortgagor, i.e., the owner of the security, and the mortgagee, i.e., to whom the debt thus secured is due. (a) Third persons who are not parties to the principal obligation may secure the latter by mortgaging their own property [see 2085, par. 2]. The mortgagor does not have to be the principal debtor. (b) The mortgagor must be absolute owner of the thing mortgaged. [see 2085(2) and 2092] (1) A co-owner shall have full ownership of his part of the property and of the fruits and benefits pertaining to it, and he may mortgage it, and even substitute another person in his enjoyment, except when personal rights are involved. [493] a] The effect of the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon termination of the co-ownership. [4931 bi A mortgage executed before mortgagor became owner of the property, such as before issuance of a patent to the mortgagor, is void and ineffective.29 c] An exception, to the rule that a mortgage executed by one who is not the property owner is void, pertains to an innocent mortgagee for value. 1] An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 39 of Act 496, “Land Registration Act”, to include an innocent lessee, mortgagee or any other encumbrancer for value. It excludes a purchaser or mortgagee who has knowledge of a defect or lack of title in the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the property.[a] When a mortgagee relies upon what appears on the face of a Torrens title and loans money in all good faith on the basis of the title in the name of the mortgagor, only thereafter to learn that the latter’s title was defective, being thus an innocent mortgaged for value, his or her right or lien upon the land mortgaged must be respected and protected, even if the mortgagor obtained his title thereto through fraud.31 [b] Although a mortgagor is not the owner of the property mortgaged, the mortgage is valid if the mortgagee is an innocent mortgagee for value, having relied upon the mortgagor’s transfer certificate of title.32 (c) The mortgagor must have free disposal of his property, and in absence thereof, must be legally authorized for the purpose. [2085(3)] (1) In order that a contract of mortgage may be executed by the agent, a special power of attorney is necessary, for this contract creates a real right which limits the owner’s right of ownership.33 2. The Requisites of a Valid Contract of Real Mortgage (a) Consent (b) Subject matter of a real mortgage (1) Proper objects a] Immovables [2124(1)]

B] Alienable real rights [see 2124(2)] 1] A real right is the power belonging to a person over a specific thing, without a pass ive subject individually determined, against whom such right may be persona lly exercised.34 21 A mortgage contract whose objects are a house and a leasehold right over the land on which the house stands is a real estate mortgage and not a chattel mortgage.35 3] The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in mortgagor’s possession, or it passes into the hands of a third pers on. [21271 (2) Mortgagor retains legal title over the object a] A mortgage passes no title to mortgagee. By mortgaging a piece of property, debtor merely subjects it to lien but ownership thereof is not parted with.36 Thus, a mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt, and passes no title or estate to mortgagee and gives him no right or claim to possession of the property.b] As ownership of the object remains with mortgagor, the mortgagor-owner bears loss of mortgaged thing under the maxim res periit domino suo. The principal obligation is not extinguished by loss of the mortgaged property.38 (3) If the object, instead of being an immovable, is movable, the contract of security is not a real mortgage, but may either be a chattel mortgage or pledge. 3. Consideration (a) A mortgage is an accessory contract, the consideration of which is the same consideration of the principal contract without which it cannot exist as an independent contract.39 (b) The consideration of the accessory contract of a real estate mortgage is the same as that of the principal cont ract.40 For the debtor, the consideration of his obligation to pay is the existence of a debt. In the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voida ble or unenforceable debt.41 (c) If the mortgagor is a person other than principal debtor, the mortgage may be either onerous or gratuitous. 4. Form (and Recording or Registration) (a) The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in Chapter 3, Title XVI of Book IV of the Civil Code (i.e., articles 2124 to 2131) shall be governed by the provisions of the Mortgage Law and of the Land Registration Law.42 [2131] (1) No deed, mortgage, lease, or other voluntary instrument, except a will, purporting to convey or affect registered land shall take effect as a conveyance or bind the land, but shall operate only as a contract between the parties and as evidence of authority to Register of Deeds to make registration. The act of registration shall be the operative act to convey or affect the land insofar as third persons are concerned. (2) In order that a mortgage may be deemed to be legally constituted, it is indispensable that the instrument in which it appears be a public document and be recorded in the property register. Therefore, a mortgage in legal form is not constituted by a private document.45 (3) The owner of registered land may mortgage or lease it by executing the deed in a form sufficient in law. Such deed of mortgage or lease and all instruments which assign, extend, discharge or otherwise deal with the mortgage or lease shall be registered, and shall take effect upon the title only from time of registration. (b) To constitute the non-possessory lien on the property a public instrument is therefore necessary.

(1) The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it is constituted. [2126] (2) A recorded real estate mortgage is a lien inseparable from the property mortgaged, and until discharged, it follows the property.47 (c) The persons in whose favor the law establishes a mortgage have no other right than to demand execution and recording of document in which the mortgage is formalized. [2121, par. 2] (d) If instrument is not recorded, the mortgage contract is nevertheless binding between the parties. [21251 (1) An unregistered mortgage cannot be a bar to foreclosure.

C. Rights of the Creditor-Mortgagee 1.To alienate or assign the mortgage credit to a third person, in whole or in part. [2128] 2. To claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said person possesses (in the terms and with the formalities which the law has established). [2129] 3. To foreclose the mortgage. The amount realized from the foreclosure sale shall be paid to the person foreclosing the mortg age for the mortgage debt due. (a) In the event the proceeds of the sale are less than the mortgage debt, the creditor has a right to the deficiency.49

D. Rights of the Mortgagor To have a release from the mortgage, upon fulfillment of the principal obligation. 2. To be entitled to that part of the proceeds at the foreclosure sale in excess of the mortgage debt. 3. Equity of redemption. Equity of redemption is the right of mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the mortgage, but before the sale of the property or the confirmation of the sale,5° i.e., before sale is confirmed by the court.51 4. Right of redemption is available to mortgagor, in some cases. The right of redemption is the right of the mortgagor to repurchase the property even after confirmation of the sale, in cases of foreclosure by banks, within one year from registration of the sale.52 (a) Redemption of foreclosed real estate. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three months after foreclosure, whichever is earlier.53 E. Stipulations of the Parties; Limitations 1.Facto de non aliendo. A stipulation forbidding the owner from alienating the immovable mortgaged is void. [21301 2. Factum Commissorim. F. Extinguishment of Real Mortgage Extinguishment of the principal obligation

2. Loss of the object mortgaged, e.g., the house is razed by fire

Chattel Mortgage 416, 417, 1624, 1625, 2085 to 2092, 2140 and 2141 The provisions of the Civil Code on pledge54 insofar as they are not in conflict with the Chattel Mortgage Law55 shall be applicable [2141] to chattel mortgages. Other special laws that govern these and similar transactions are the Act 1508 — “Chattel Mortgage Law” and PD 1521 — “The Ship Mortgage Decree of 1978.”56

A. Nature, Purpose & Characteristics of a Chattel Mortgage 1.By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for performance of an obligation. [2140] (a) The old view that a chattel mortgage is a conditional sale and therefore transfers immediately the title to the chatt el mortgagee has been expressly repudiated by 2140. 2. Its purpose is to constitute a lien on specific movables. (a) The chattel mortgage lien attaches to the property wherever it may be.58 (b) While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted.59 (1) A promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon. The security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by making a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.6° 3. Characteristics of a chattel mortgage (a) It is a formal contract. (b) It is a unilateral contract. (c) It is an accessory contract. (1) The nullity of a mortgage does not render null and void the principal obligation which it guarantees. What is lost is the right to foreclose the mortgage.6’ B. The Parties and the Requisites of Contract of Chattel Mortgage The parties are the mortgagor (whether the debtor or not) and the mortgagee 2. The requisites of contract of chattel mortgage (a) Consent (b) Object (1) Besides those enumerated in 416, the term ‘personal property’ as used in sec. 2 of the “Chattel Mortgage Law” includes a] an interest in a business62

b] ungathered fruits63

c] vessels, and d] certificate of stock65

e] machinery placed by tenant in a plant belonging to another66 (2) The mortgage covers only the property described therein and not like or substituted property

later acq uired by mortgagor notwithstanding any contrary stipulation. [Act 1508, Sec. 7] Exceptions: a] After-acquired property in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods.67 (3) Mortgagor must be absolute owner of the thing mortgaged. [see 2085(2) and 2092] a] Each co-owner shall have full ownership of his part and of the fruits and benefits pertaining thereto, and he may alienate, assign or mortgage it, and even substitute another person in his enjoyment, except when personal rights are involved. [493]68 (4) Mortgagor must have free disposal of his property, and in absence thereof, must be legally authorized for the purpose. [2085(3)] (5) Delivery of the object of a chattel mortgage to the mortgagee is not required. a] If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge. [see 2140] b] A chattel mortgage is not a bailment as the object is not delivered to mortgagee (6) Mortgagor retains title over the object. (7) Loss of the object. The chattel mortgage on the crops growing on mortgagor’s land simply stood as security for the fulfillment of his obligation [to repay the loan] covered by the promissory notes and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops.69 (c) Consideration (1) The consideration is the same as that in the principal contract. If a person other than principal debtor is the mortgagor, the mortgage may be either onerous or gratuitous. (d) Form (and Recording or Registration) (1) In general a] A chattel mortgage has to be in a public instrument, because the Chattel Mortgage Law states that a chattel mortgage “shall be deemed to be sufficient, when made substantially in accordance with” its recommended form, which is a public instrument [see Sec. 5] b] But whether recording of the public instrument is a necessity is an issue 1] Recording is a requisite, as the Civil Code (which is a later law than the Chattel mortgage Law) states that “by a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation.” [see 2140] 2] Recording is not a requisite, as the Chattel Mortgage Law (which is a special law, as distinguished from the Civil Code, which is a general law) states that “a chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators unless the mortgage is recorded in the register of deeds.” [see sec. 4] 70

[a] If the deed of mortgage is not registered in the manner provided by law, the chattel mortgage is not valid as against either the judgment creditor or the court.[bi The omission or absence of an affidavit in good faith in a chattel mortgage vitiates the mortgage against credit ors and subsequent encumbrancers.72 A chattel mortgage may, however, be valid as between the parties without such an affidavit of good faith.73 (2) A chattel mortgage of a vessel is valid between parties even if it is not recorded. “No mortgage, which includes a vessel of domestic ownership or any port ion thereof, shall be valid, in respect to such vessel, against any person other than the mortgagor, his heir or assign, and a person having actual notice thereof, until such mortgage is recorded with the Philippine Coast Guard.”74 (3) A chattel mortgage of a motor vehicle is not valid between the parties if it is not recorded. “Mortgages and other encumbrances of motor vehicles, in order to be valid, must be recorded in the

Land Transportation Commission and must be properly recorded on the face of all outstanding copies of the certificates of registration of the vehicle concerned.”75

C. Rights of the Creditor-Mortgagee To alienate or assign the mortgage credit to a third person, in whole or in part. [2128] 2. To claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said person possesses (in the terms and with the formalities which the law has established). [2129] 3. To foreclose the mortgage. The amount realized from the foreclosure sale shall be paid to the person foreclosing the’ mortg age for the mortgage debt due. (a) In the event the proceeds of the sale are less than the mortgage debt, the mortgagee has a right to the deficiency. (a) The foreclosure and actual sale of a chattel, which had been bought on installments and then mortgaged to the seller, bars further recovery by the seller of any balance on the buyer’s outstanding obligation not so satisfied by the sale. [1484(3)176

D. Rights of the Mortgagor 1. To alienate the mortgaged property (a) The buyer however acquires the property subject to such liens and encumbrances as existed thereon at the time of the execution.77 (b) The mortgagor must secure the written consent of mortgagee before proceeding to\selL78 (1) But even if no consent is obtained from the mortgaged, the validity of the sale would not be affected.79 2. To have a release from the mortgage, upon fulfillment of the principal obligation. 3. To redeem the chattel, when the condition of the mortgage is broken, by paying or delivering to the mortgagee the amount due on the mortgage.8° 4. To be entitled to that part of the proceeds at the foreclosure sale in excess of the mortgage debt.81 E. Extinguishment of Chattel Mortgage 1. The extinguishment of the principal obligation extinguishes the chattel mortgage. (a) Any cancellation of mortgage of motor vehicles shall be recorded with the Land Transportation Commission.82 2. Loss of object (e.g., the growing crops are destroyed by flood or the mortgaged vessel has sunk) extinguishes the chattel mortgage (a) The loss of the object mortgaged, however, will not result in the extinguishment of the principal contract.83 3. Foreclosure sale of the object operates as a discharge of the lien.(a) Foreclosure of mortgages of motor vehicles shall be recorded with the Land Transportation Commission.85

Antichresis A. Nature, Purpose and Characteristics 1. An antichresis is a contract by which the creditor acquires the right to receive the fruits of an immovable of the antichretic debtor but with the obligation to apply them as payment of the interest, if owing, and thereafter, of the principal of the debt. [2132]

(a) An antichresis may secure after-incurred obligations so long as these future debts are accurately described. 2. Characteristics of antichresis (a) It is a formal contract. (1) The amount of the principal and of the interest shall be specified in writing; otherwise, the contract shall be void. [2134] (b) It is an accessory contract. B. Requisites of Antichresis 1. Consent 2. Object

(a) Only immovable and alienable real rights, in accordance with the laws imposed upon immovables, may be the obj ect of a contract of antichresis 3. The consideration is that in the principal contract.

Partnerships 1767 to 1867 Partnerships, whether they are general or limited, are governed by partnership law [see 45] and by agency law, which are both found in Civil Code. Agency law provides a supplemental framework for this relation as each partner is an agent of his co-partners and of partnership. Special laws, in some respects, like minimum capital requirements for partnerships engaged in specific economic activities, also apply suppletorily. The partnership contract governs the incidents of the partners hip relation, as the law allows it in many aspects.

A. Partnership as a Contract: Its Nature, Parties, Essential Requisites and Characteristics

A. Nature 1. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. [17671 2. Partnership is a relation (as distinguished from a transaction). B. A partnership is created solely by contract. 1. Essential requisites of the contract of partnership: (a) Consent. Generally, any person (entity) who has capacity to contract may become a partner. (1) A minor can enter into a partnership contract, but the contract will be voidable.

(2) Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. [1782] (3) Partnerships can enter into other partnership contracts.

(4) Corporations cannot enter into partnership cont racts.1 (b) The object is money, property or services. (1) One who contributes money or property is called a capitalist partner. (2) One who contributes services is called an industrial partner. (3) The law allows capitalist-industrial partners. . (c) The cause is the profits to be made and shared by the partners. 2. The contract of partnership may be either express or imp lied. (a) Express contract. It may be either oral or written. (1) Oral contract. It may be constituted in any form, except under certain circumstances. [see 1771] (2) Written contract. There are only two instances when the contract, to be valid, must be in writing:

a] The contract of partnership must be in a public instrument when immovables or real rights are contributed to the common fund. [1771] The contract is void if no inventory of said property is made, signed by parties and attached to the public instrument. [1773] 1] Public instrument is necessary when capital is PhP3,000 or more; it should be recorded in the Securities and Exchange Commission. But failure to comply with these requirements does not affect liability of partners and partnership towards third persons. [1772] 2] The written contract of general partn ership is called articles of partners hip. b] The contract of limited partnership must be in writing and filed with Securities and Exchange Commission. [see 1844] Otherwise, such partnership shall be deemed to be a general partnership. But if immovables have been contributed to the limited partnership and no public instrument is executed, not even a general partnership may arise. 1] The written contract of limited partnership is called certificate of limited partnership. (b) Implied contract (1) The agreement may be inferred from the conduct or behavior of the parties. a] An implied contract of partnership at will is deemed entered into by partners who continue their partnership at the end of its definite term or after the accomplishment of its specific undertaking. [1785] bi Our tax law may deem that an implied contract of partnership exists among co-owners, whose property is devoted to business and derives income.3. Characteristics of the contract of partnership (a) It is typically consensual;3 unless 1) the contribution consists of immovables or real rights (the law requires a public instrument), or (2) a limited partnership is being formed (the law requires a public instrument to be recorded with the SEC). (3) It is not a real contract, as its perfection does not depend on the delivery of the contributions to the partnership.4 (b) It is bilateral, as each of the contracting parties makes a promise. (It is not a unilateral contract, in which only one of the parties makes a promise). (c) It is onerous. (d) It is commutative (not aleatory). q (e) It is principal (not accessory).

B. Partnership as an Entity: Its Nature, Purpose, Characteristics and Types 1. Classes of Juridical Persons (a) The State and its political subdivisions. (b) Other corporations, institutions and entities for public interest or purpose, created by law. (c) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. [44] 2. Creation and Nature of a Partnership (a) The law does not create partnerships; it is created only by contract. (1) Co-ownership of property does not, of itself, establish a partnership, whether such co-owners do or do not share any profits made by the use of the property [1769(2)], although as stated above, our tax law may deem a partnership to exist through an implied contract. (2) The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership.5 (b) Characteristics of partnership as an entity or organization (1) A partnership is a juridical person. It has a personality separate and distinct from each partner. [see 17681 a] Juridical personality 1] The juridical personality of a general partnership, it is submitted, commences upon perfection of the contract.6 2] The juridical personality of a limited partnership, it is submitted, commences upon filing of a legally compliant certificate of limited partnership with the SEC. b] It has and operates under its own name. [1815, par. 11 1] The partnership name may or may not include name of partners. [a] Anyone who is not a partner but who allows his name in the firm name is liable as a partner. [1815, par. 2] 2] The partnership name shall contain the word “Company” or “Co.” For limited partnership, the word “Limited” or “Ltd.” shall be included. In case of professional partnership, the word “Company” need not be used.7 3] Partnership can own property, including immovables, in partnership name. [see 1774, 1819] 4] Partnership can sue and be sued in its own name. ci As an organization, the partnership begins from the moment of the execution of contract, unless otherwise stipulated. [1784] di An association or society whose articles are kept secret among members and where any member may contract in his own name with third pers on is not conferred a juridical personality. [1775] (2) The purpose of the partnership is to carry on a business or to exercise profession. [see 1767] a] The quintessential feature of a partnership is profit sharing. [see 1767] 1] The sharing of profits among persons raises a presumption of the existence of a partnership among them. [1769(4)] [a] This presumption is rebutted by the fact that profit sharing was only for the payment of a debt in installments, periodic wages, rent, annuity, or interests on loan, or the proceeds of a sale of business

or property by installment. [bi With no participation in the profits, a person cannot be deemed a partner since the essence of a partnership is that the partners share in the profits and losses.

2] The sharing of losses, if any, is subsumed in the purpose of sharing profits. (3) The life of a partnership is generally limited. (4) The general partners have unlimited liability for partnership debts. a] To limit this liability, one can be a limited partner in a limited partnership. 3. Types of Partnerships (a) As to object, i.e., as to what is contributed as capital (1) Universal partnership. a] In a universal partnership of present property, all property which belongs to each partner at time the partnership is constituted becomes property of partnership. [1779] 1] Property which a partner acquires subsequently by inheritance, legacy or donation cannot stipulated to be included. 21 Profits and fruits of above property may be stipulated for common enjoyment by partners. bI In a universal partnership of all profits, all profits that partners may acquire by their industry or work during existence of partnership belong to partnership. [1780, par. 1] In reality, services or industry are what are contributed. 1] Usufruct9 — but not ownership — of property partners possess at time of celebration of partnership contract, belongs to partnership. [1780, par. 2] 21 Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits. [1781] c] A universal partnership requires either that the object of the association be all the present property of the partners, as contributed by them to the common fund, or else all that the partners may acquire by their industry or work during the existence of the partnership.1° (2) Particular partnership — has for its objects: (i) determinate things, their use or fruits, or (ii) a specific undertaking, or (iii) exercise of a profession or vocation. [1783] a] General professional partnerships are explicitly recognized under the Tax Code and are not subject to tax on their income; but all other types of partnerships are. (b) As to liability of partners (1) General partnership a] General partners have unlimited liability for partnership debts. (2) Limited partnership is the type of partnership consisting of one or more general partners and one or more limited partners. [1843] a] Limited partners contribute money or property and are usually liable only to the extent of that contribution. [1845] b] Limited partners do not take part in management of partnership. If they do, they will be liable as general partners. [1848] (c) Partner by estoppel. A person, who by words or conduct represents himself or allows another to represent him to a third person as a partner in a partnership or with a person or persons who are not partners, can be liable to such third person, who relies on such representation. [see 1825]

a] Where two or more persons attempt to create a partnership, failing to comply with all the legal formalities, the law considers them as partners and the association is a partnership insofar as it is favorable to third persons by reason of the equitable principle of estoppel.” (c) As to duration [see 1785; 1829(1)(a) and (b)]

(1) Partnership for a fixed or definite term (2) Partnership for a particular undertaking (3) Partnership at will a] A partnership that does not fix its term is a partnership at will. The birth and life of a partners hip at will is predicated on the mutual desire and consent of the partners. Any one of the partners may, at his sole pleasure, dictate a dissol ution at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership, but that it can result in a liability for damages.12

C. Implied13 Obligations of Partners Among Themselves and to the Partnership

1.A partners’ obligations as regards capital contribution (a) To contribute an equal share to capital, unless otherwise stipulated [1790] (b) To be deemed a debtor of partnership for whatever he promised to contribute. [1786] (1) If he undertook to contribute money and fails to do so, his debt shall include interest and damages from time he should have complied with his obligation. [1788] (2) He is also bound to deliver fruits of property he agreed to contribute from the time they should have been delivered without need of demand. [17861 (3) He is bound for warranty against eviction’4 for property he has contributed. [1786] (c) To not engage, if he is an industrial partner, in business for himself, unless partnership permits him. (1) If he does so, the capitalist partners may exclude him from the firm or avail of benefits he obtained, with damages in either case. [1789] (d) To not engage, if he is a capitalist partner, in a business, competitive to the firm, unless otherwise stipulated. (1) If he does so, the partnership shall own profits he derived, but he shall bear all losses. [1808] (e) To sell his interest to other partners, if he should refuse to contribute additional capital, in case of imminent loss. (1) An industrial partner is not covered by this rule. (2) This rules may be negated by stipulation among the partners. [1791]

D. Property Rights of a Partner 1. His rights in specific partnership property (a) A partner is a co-owner with his partners of specific partnership property. (1) Subject to law and their agreement, he has an equal right with his partners to possess the property for partnership purposes; but has no right to possess it for any other purpose without his partners’ consent. [1811(1)] (2) He cannot assign his right in any specific property, except in conjunction with the assignment by his co partners of their rights to such property. [1811(2)]

a] Properties of. the partnership cannot be disposed of even by the party who contributed the same without the consent or approval of the partnership or of his co-partners.’5

(3) His right is not subject to attachment or execution, except on a claim against partnership. [see 1811(3)] (4) His right is not subject to legal support. [1811(4)] 2. His interest in the partnership (a) This interest consists of his share of the profits (during the life of the partnership) and of the surplus (at dissolution of the partnership). [1812] (1) Share in profits al Profits are distributed in accordance with their stipulated profit-sharing ratio in their contract. [1797]1] A stipulation which excludes a partner from any share in profit is void. [1799]. 21 The partners may entrust the designation of shares in the profits to a third person, but not to a partner. [17981 b] In the absence of a stipulation, the share of each partner in the profits shall be in proportion to what he may have contributed. 1] The industrial partner shall receive such share of the profits as may be just and equitable under the circumstances. a] If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital. [1797] (2) Share in the surplus a] The surplus consists of the assets that remain at dissolution, after all partnership claims or creditors have been paid. This is distributed among the partners as profits are. (3) A partner may assign his interest to another without getting consent of all his co-partners. [1804] a] The assignee acquires the right to receive the share in the profits, which the assigning partner would otherwise be entitled to in accordance with the partnership contract and to receive the share of his assignor’s share in the surplus. b] The assignee (sometimes referred to as sub- partner) is not substituted as a partner without consent of all other partners. [1804] c] The assignee does not acquire right to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transact ions, or to inspect the partnership books, mana ge partnership, to have an accounting, to inspect books, to possess or own any individual partnership property — merely receives rights in assigning partner’s share of profits and ret urn of partner’s capital contribution (unless partners agree otherwise). [18131 d] Such an assignment does not result in dissolution of the partnership [1813] unless: 11 such assignment constitutes a violation of the partnership agreement [see 1830(2)1, or 2] the other partners who have not assigned a their interest initiate dissolution [see [1830(c)], or 3] partner who made such assignment becomes insolvent or retires from the partnership. [see 1830(6)] (4) A partner’s interest may be subject to a court’s charging order to answer for his personal debts and liabilities. [see [814]

(5) A partner has the right to inspect books and to true and full information of partnership affairs. [1805, 18061

3. His right to participate in management (a) Each partner has an equal “voice” in the management of the firm. This property right, due to its fiduciary nature, can not be assigned to a third person, but may be delegated to a co-partner. (1) When manner of management has not been agreed upon. a] All of the partners shall be considered agents for partnership and for each other in partners hip business. [1803; 18181 In this sense, there exists a mutual agency of partners. N Strangers dealing with a partnership have the right to assume, in the absence of restrictive clauses in the co-partnership agreement, that every general partner has power to bind the partnership, specially those partners acting with ostensible authority.16 (2) When a partner is appointed manager. a] If the appointment is in articles of partnership, he may execute all acts of administration despite opposition of his partners, unless he acts in bad faith. His appointment is equivalent to an agency coupled with an interest. [see 1927] 11 His power can be revoked only upon — [a] lawful or just cause, and [b] the vote of partners representing the controlling interest [1800, par. 1117 b] If the appointment is made after partnership has been constituted, his power may be revoked at any time. [1800, par.21

(3) When two or more partners are appointed managers. a] Each may execute acts of administration, if there is no specification of their respective duties or no stipulation that one shall not act without the other’s consent. 1] If any should oppose, decision of majority shall prevail. In case of tie, “controlling interest” shall decide. [18011 b] If there is stipulation that none of the managers shall act without others’ consent, concurrence of all shall be necessary for validity of acts. [see 1802]

E. Implied Obligations of Partners and Partnership to Third Persons

1.To share, if he is a general partner, in the losses. (a) Losses are borne in accordance with their stipulated loss- sharing ratio in their contract. [17971 (1) A stipulation which excludes a capitalist partner from any share in profit is void. [1799]. (2) The partners may entrust the designation of shares in the losses to a third person, but not to a partner. [see 1798] (b) In the absence of a stipulated loss-sharing ratio, losses are borne in accordance with their stipulated profit-sharing ratio in their contract. (c) In the absence of any profit-sharing ratio, the share of each partner in the loss shall be in proportion to what he had contributed. (d) The law exempts the industrial partner from sharing in the losses. [1797, par. 21 2. To answer, as a partner, for liabilities of the partnership, with his personal assets. His liability is not limited to his capital contribution. (a) The partnership remains primarily liable for partnership contracts.

(b) Partners, including industrial partners, incur subsidiary and joint liability for all partnership contracts. [1816] (1) Any stipulation against such subsidiary liability is void, except as among the partners [1817]

(2) A partner may enter into a separate obligation to perform a partnership contract. [18161 (c) Partners, among themselves and with the partnership, incur solidary liability: (1) Where, by a wrongful act or omission, a partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, causes loss or injury to any person, not being a partner in the partnership, or incurs any penalty therefor. [1822]. (2) Where a partner misapplies money or property, which he, within the scope of his apparent authority, had received from a third person. [1823(1)] (3) Where a partner misapplies money or property, which, in the course of its business, it had received from a third person, while such money or property is in the custody of the partnership. [1823(2)1 a] The obligation is solidary because the law protects him, who in good faith relied upon the authority of a partner, whether such authority is real or apparent. That is why, under 1824, all partners, whether innocent or guilty, as well as the legal entity which is the partnership, are solidarily liable. However, as between the partners, justice also dictates that the innocent partner be reimbursed by the other partner for the payments made by the former representing the liability of their partnership to the creditors, as the other partner acted in bad faith in his dealings with the innocent partner.’8 3. To forfeit profits, in favor of the state, when an unlawful partnership is dissolved. [1770, par. 2] 4. A partner, who withdraws or retires from the partnership, is liable with the partnership and his co-partners for standing obligations. (a) A withdrawing partner remains liable to a third party creditor of the old partnership.’9 5. A newly-admitted partner is liable for partnership obligations arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property, unless there is a stipulation to the contrary [1826]. 6. Except by estoppel,’° persons who are not partners as to each other are not partners as to third persons. [1769(1)]

F. Dissolution, Winding up and Termination

1.The three final stages of a partnership are: (1) dissolution, (2) winding up, and (3) termination.2’ (a) Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. [1828] (1) Dissolution is that point of time the partners cease to carry on the business together.22 It should not be understood as necessarily including the winding up and termination of the partnership.2’ (b) Winding up is the process of settling affairs after dissolution. Examples of winding up: the paying of previous obligations, the collecting of assets previously demandable, even new business if need to wind, as the contracting with a demolition company for the demolition of the garage used in a “used-car” partnership.’4 (c) Termination is the point in time after all the partnership affairs have been wound up.25 2. Dissolution can occur, (a) Without violating partnership contract (1) By termination of definite term or particular undertaking stated in contract. [1830(1)(a)] (2) By express will of any partner, in case of partners hip by will. [1830(1)(b)] (3) By express will of all the partners, who have not assigned their interests or whose interests are not subject to charging orders. [1830(1)(c)] (4) By expulsion of a partner in accordance with contract.

[1830(1)(d)1 (b) In violation of partnership contract, by express will of a partner. [1830(2)1 (1) The term “retirement,” in a generic sense, means the dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that thereby dissolves it.26 a] Even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages, but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution. 27 b] For as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the purpose of unduly visiting harm and damage upon the partnership, bad faith cannot be said to characterize the act. Bad faith, in the context here used, is no different from its normal concept of a conscious and intentional design to do a wrongful act for the dishonest purpose or moral obliquity.28 (c) By an event which makes it unlawful for partners to carry on partnership business. [1830(3)1 (d) In case of loss of specific thing promised as contribution prior to delivery [1830(4)] (e) By death of a partner. [1830(5)] (1) While the death of a partner technically dissolves the partnership relationship among the partners in the sense that the connection of the deceased partner with the partnership is terminated, the business entity may still be continued by the surviving partners. The continuance of the business is allowable under article 1785. Thus, if the remaining partners of the dissolved partnership intended for all legal intents and purpose to continue the partnership business even after the death of a partner(s), there is continuity of personality of the partnership as there exists a partnership at will.29 (f) By insolvency of a partner or of partnership. [1830(6)] (g) By civil interdiction of a partner. [1830(7)] (h) By decree of court. [1830(8)] (1) On a partner’s application [1831, par. 1], on ground of a] Co-partner is judicially declared insane or is shown to be of unsound mind. b] Co-partner’s incapacity to perform his part of partnership contract. ci Co-partner’s misconduct, i.e., he is guilty of conduct that harms business. dl Co-partner continually or seriously breaches partnership agreement. e] Operations at a loss. f] “Equitable necessity” (2) On application of an assignee or a judgment creditor [1831, par. 21 a] At the end of specific term or accomplishment of particular undertaking. bi At any time, in case of a partnership at will, in case partner’s interest was assigned or charging order was issued. 3. At dissolution, the partners may elect either(a) to wind up and terminate the partnership, or (b) to not wind up and to continue the partnership. 4. Winding up is the process of settling accounts of partnership with an end in view of termination. (a) The partnership assets include: (1) all partnership property (2) partners’ contributions that are necessary for the payment of partnership liabilities. [1839(1)1 (b) Partnership creditors have first priority to partnership assets; any excess goes to personal creditors. [1827]

(c) The liabilities of the partnership shall rank in the order of payment, as follows: (1) Those owed to creditors other than partners. (2) Those owed to partners other than for capital and profit. (3) Those owed to partners in respect of capital. (4) Those owed to partners in respect of profits. [1839(2)]

G. Termination of Juridical Personality Upon its dissolution, the partnership continues and its legal personality is retained until the complete winding up of its business culminating in its termination.30

H. Extinguishment of the Partnership Contract The contract is extinguished at the termination of the partners hip. I. Limited Partnerships Unlike a general partnership that may be created orally, a limited partnership requires strict compliance with Civil Code to create it. (a) There must be filed a signed and sworn certificate of limited partnership with the SEC. [18441 (b) The partnership name must have word “Limited” or “Ltd.” (1) The name of a limited partner may not be used in the name of the limited partnership unless the name is also name of a general partner. [see 1846] (c) The names of the general and limited partners must be disclosed. (1) A limited partnership that has not complied with the law of its creation is not considered a limited partnership at all, but a general partnership in which all the members are liable.3’ 2. It requires at least one general partner who retains unlimited personal liability and at least one limited partner. [1843] (a) The contribution of a limited partner may be money or property, but not services. [1845] (b) The liability of a limited partner is limited to the amount of his capital contributions (with some exceptions). [18431 (1) A limited partner whose name appears in partners hip name is liable as a general partner to creditors who extend credit to the partnership (unless the creditors knew that the limited partner was not a general partner). [1846, par. 2] (2) A limited partner who takes part in control (i.e., management) of the business, becomes liable as a general partner. [18481 (3) If the certificate of partnership contains a false statement, one who suffers any loss by reliance on such statement may hold liable any party to the certificate, including a limited partner, who knew the statement to be false. [18471 3. A person may be a general partner and a limited partner at the same time, provided this fact is stated in the certificate. [18531 (a) He has all the rights and powers and is subject to all the restrictions of a general partner. (b) He has, in respect to his contribution, all the rights against the other members which he would have had if he were not also a general partner. 4. A limited partner may assign his interest. [1859]

Private Corporations A. Nature and Types of Private Corporations

1.Nature. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. [2] (a) The corporation is the creature of the state.’ 2. Laws governing private corporations (a) Batas Pambansa Big. 68, otherwise known as the Corporation Code is the general enabling statute for private corporations. (1) Specific statutes govern some specific economic or business activities. Examples: RA 8791 — “General Banking Law of 2000”;2 RA 8556 — “Financing Company Act of 1998” (b) Special statutes or charters create and govern government- owned and -controlled corporations. [4] An example is RA 85 — “Charter of the Development Bank of the Philippines.” 3. Types of Private Corporations (a) As to their capital structure (1) A stock corporation is one whose capital stock is divided into shares and is authorized to distribute to its shareholders dividends or allotments of surplus profits on the basis of the shares they hold. [31](2) A nonstock corporation is one whose capital is not so divided and whose income is not distributable as dividends to its members, trustees or officers. [3, 87] a] It is organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic services, or similar purposes, like trade, industry; agriculture and like chambers. [see 88] b] Term of office of its board members (except that of educational non-stock corporation) is 3 years. (b) As to the place of incorporation test, the nationality of a corporation is determined by the state of incorporation, regardless of the nationality of the stockholders. (1) A domestic corporation is one that is formed, organized or existing under Philippine laws. [123] (2) A foreign corporation is one that is formed, organized or existing under the laws of a country, other than the Philippines. [see 123] a] The Corporation Code and RA 8424 — “The National Internal Revenue Code of 1997” use the place of incorporation test. (c) As to the control test, the nationality of a corporation is determined by the citizenship of its controlling stockholders.4 (1) A corporation, at least 60% of whose stocks is owned by Filipinos or by another corporation at least 60% of whose capital stock is owned by Filipinos, is considered a 100% Filipino corporation. (2) A foreign corporation is one which does not satisfy the above requirement. a] The Constitution and RA 7042 “The Foreign Investments Act of 1991” use the control test. (d) As to Limit on Number of Shareholders (1) A close corporátion6 is one whose articles of incorporation provide that: (i) all its issued stock, exclusive of treasury shares, shall be held by not more than 20 persons, (ii) its issued stock shall be subject to specified restriction[s] on transfer, and (iii) it shall not list in stock exchanges or make any public offering of its stock. [96] a] Articles may provide that officers shall be elected or appointed by shareholders, directly. [97 last par.] bi A provisional director is one, who being neither a stockholder nor a creditor, is appointed by the SEC to have and exercise rights and powers of a duly elected director. [104, par. 2]

(2) Open corporation (e) As to Formation under the Law (1) A de jure corporation is one which has been formed in accordance with the law (2) A de facto corporation is one which operates but has not been formed in accordance with the law. [see 20] (3) Corporation by estoppel is a concept by which persons who assume to act as a corporation without having incorporated in compliance with law, are referred to. [see 21] a] Such persons are liable as general partners for debts, liabilities and damages for their acts. b] They are also precluded to use lack of corporate personality as a defense when such ostensible corporation is sued on any transaction it had entered into as a corporation or on any tort it had committed.

(f) Special corporations (1) Educational corporations [106] a] It may be either stock or non-stock corporation. b] It should have prior favorable recommendation of Department of Education. c] A non-stock educational corporation shall have 5 to 15 trustees (in multiples of 5). 1] The term of office of 1/5 of trustees shall expire every year, unless articles or bylaws say otherwise. 21 Majority of trustees make a quorum. 3] Bylaws define powers and authority of trustees. dl A stock educational corporation’s number and term of directors are similar to ordinary stock corporations. (2) Religious corporations may be either a corporation sole or a religious society. [109]

B. Creation and Organization of Private Corporations Five to fifteen natural persons, who are all of legal age and a majority of whom are residents of the Philippines may form a private corporation. They are called “incorporators.” [10] (a) Each incorporator must own or be a subscriber to at least one share of the capital stock. [101 (b) Incorporators adopt and sign the articles of incorporation, and file them with Securities and Exchange Commission.[141 (1) A corporation commences to have corporate existence and juridical personality from the date SEC issues certificate of incorporation. [see 19] a] A corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and transactions of its stockholders or members.7 1] But when the fiction of a separate corporate personality is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law cove rs and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.8 2] Where the corporation is a mere instrumentality of the individual stockholders, the latter must individually answer for the corporate obligations. To hold the latter liable for the corporation’s obligations is not to ignore the corporation’s separate entity, but merely to apply the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created that separate personality.9

2. The corporate term shall not exceed fifty years. (a) The corporation may be dissolved sooner. (b) This term may be extended for periods, each of which should not exceed 50 years. [see 11] 3. The Corporation Code does not set a minimum level of authorized capital stock, but some special laws do. [12] (a) At least 25% of authorized capital stock, stated in the articles, must be subscribed at time of incorporation [13] (b) At least 25% of subscribed capital stock must be paid at time of subscription. (1) Unless a special law requires a bigger amount, the paid-up capital should not be less than PhP5,000. [131 a] In the case of investment houses, the minimum paid-in capital is PhP300 million.’0 bI The minimum paid-in capital of any pawnshop which may be established shall be PhP100,000.00.” c] Financing companies shall have a paid-up capital of not less than PhP 10 million in case the financing company is located in Metro Manila and other first class cities, PhP5 million in other cities, and PhP2.5 million in municipalities.’2

C. Corporate Capital and Its Components Definitions (a) The authorized capital stock of a corporation is the maxim um number shares by type, as stated in the articles, which the corporation is permitted to issue. [(1) to (5) in chart below]. (b) The issued stock is equivalent to the subscribed stock, whether paid or not and whether the corresponding certificates of stock have been issued or not. The capital subscribed is the total amount of the capital that persons (subs cribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. It is the amount that the corporation receives, inclusive of premiums, if any, in consideration of the original issuance of the shares.’3 [(2) to (5) in chart below].

(1) The unissued stock is the portion of the authorized capital stock which has not been subscribed or paid; unsubscribed. [(1) in chart below]. (2) Overissued or spurious stock is stock issued in excess of the authorized capital stock. (c) The outstanding capital stock is the total number of shares of stock issued to subscribers or stockholders, whether paid or not, excluding treasury shares [see 137]. [(2) to (4) in chart below]. (d) Theasury stock are shares which have been issued and fully paid for, but subsequently reacquired by the corporation, by purchase, redemption, donation, or through some other legal means.14 [9] (1) It can be acquired only with unrestricted retained earnings. [41] (2) It may be acquired below or above par value.15 (3) It may be disposed at “a reasonable price” fixed by board of directors [9], i.e., even below par value. (4) It may be distributed as property dividend (but not as stock dividend). Unsubscribed

Subscribed Subscribed but

Subscribed Subscribed

(1) but unpaid; Delinquent (2)

unpaid; Not delinquent (3)

and paid, not in the Treasury (4)

and paid, but in the Treasury (5)

(e) Unrestricted retained earnings refer to the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as divid ends 17 (1) Par-value stock. Par value is the nominal amount set by the corporation for each share of stock, as stated in the articles of incorporation and restated in the certificate of stock. (g) No-par-value stock is stock issued without a set par value. (1) It may not be issued at less than PhP5.OO a share (2) Issued no-par value shares are deemed fully paid and non-assessable; holders shall not be liable to corporation or to its creditors (3) Banks, trust companies, insurance companies, buildi ng and loan associations, and public utilities are not permitted to issue no-par value shares [6, par. 1] (h) Stock split,’8 e.g., 1 share for 2 shares. It reduces par value proportionately, but increases number of shares; it does not increase or decrease capital. (i) Reverse stock split,19 e.g., 2 shares for 1 share. It decreases number of shares but increases par value of shares proportionately. It does not increase or decrease capital. (j) The “Trust Fund” Doctrine provides that subscriptions to capital stock of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims. This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corp oration Code, which allows distribution of corporate capital only in three instances: (1) amendment of the articles to reduce the authorized capital stock [see 38], (2) purchase of redeemable shares by the corporation, regardless of existence of unrestricted retained earnings [81,20 and (3) dissolution and eventual liquidation of the corporation. The doctrine is articulated further in Sec. 41 on the power of a corporation to acquire its own shares and in Sec. 122 on the prohibition against distribution of corporate assets and property unless the stringent requirements therefor are complied with.21 2. Classes of stock (a) A common stock is an equity instrument that is subordinate to all other classes of equity instruments.22 (b) Preferred shares may be given preference in the distribution of assets at liquidation, and in the distribution of dividends, or such other preferences stated in the articles of incorporation. [6] (1) They may be issued only with a stated par value. [6] (c) Founders’ shares are those classified as such in the articles and issued to the founders or organizers of a corporation. These shares may be given certain rights and privileges not enjoyed by owners of other stocks, except that exclusive right to vote or be voted in election of directors must not exceed 5 years subject to SEC approval. [7] (d) Redeemable shares (also known as callable stock) are stock, which the corporation undertakes to purchase or take up upon the expiration of a fixed period. [8] (1) The terms and conditions of redemption must be stated in the articles and certificated [81 (2) These shares may be redeemed, regardless of the existence of unrestricted retained earnings, provided corporation has, after such redemption, sufficient assets to cover debts and liabilities inclusive of capital stock. [8]23 (e) Under the doctrine of equality of shares — all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences.24 The Corporation Code now requires that the distinguishing features be stated

also in the certificate of stock.

(1) Shares may be divided into classes or series of shares or both, to have specific rights, privileges or restrict ions as stated in articles of incorporation. (2) No share may be deprived of voting rights except preferred or redeemable shares. (3) There must be a class or series of shares which have complete voting rights. 3. Subscription, Transfer and Consideration for Stock (a) A pre-incorporation subscription contract is a contract to purchase a given number of shares in a corporation to be organized. (1) It is irrevocable for at least 6 months from subscript ion date, unless a] all other subscribers consent to the revocation, or b] the incorporation fails to materialize within 6 months or within a stipulated longer period. [61] (2) It is irrevocable after the articles are filed with the SEC. (b) A subscription contract is a contract to purchase from an existing corporation a given number of its shares. (c) Consideration for stock issued by the corporation: (1) Cash paid to corporation. Promissory notes (except those issued by corporation itself) are not valid consideration. (2) Property actually received by corporation at a fair valuation equal to par or issued value of stock. (3) Labor or services already rendered to the corporation. a] Future services are not valid consideration. (4) Previous debt of the corporation. a] This refers to debt-to-equity conversion. (5) Amounts transferred from unrestricted retained earnings to stated capital.

a] This refers to distribution of stock dividends b] In the case of stock dividends, It is the amount that the corporation transfers from its surplus profit account to its capital account.25 (6) Outstanding shares exchanged for stocks in the event of reclassification or conversion. a] This refers to convertible stock converted to another class of stock. (d) Nature and Transfer of shares of stock (1) Shares of stock are personal property and may be transferred by endorsement by their owner or his attorney-in-fact or agent coupled with delivery of cert ificate.26 (2) No transfer is valid, except between parties, until it is recorded in corporation’s books. [63] (3) No shares against which corporation holds unpaid claim shall be transferable in the books. (e) Watered stock is stock issued by the corporation for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value. [651 (1) Any director or officer who consents to the issuance of watered stock or who having knowledge thereof, does not file a written objection with the corporate secretary shall be solidarily liable with the stockholder to whom the stock was issued, to the corporation and its creditors for the difference between fair value received by the corporation and the par or issued value of the stock. (f) Stock certificates (1) Stock certificate. The stock certificate is the paper representation or tangible evidence of the stock itself and of the various interests therein. It is an evidence of the holder’s interest and status in the corporation, his ownership of the shares represented thereby. It expresses the contract between the corporation and the stockholder.27 a] It is signed by the president or vice-president, and by the corporate secretary.

bi It is issued to the stockholder only upon payment to the corporation of the full amount of his subscription (and interest and expenses, in case of delinquent shares). [64] (2) Uncertificated securities, which include shares of stocks, are now allowed.

D. Powers of Private Corporations The Corporation Code vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code requires stockholders’ approval for certain specific acts.29 1. To sue and be sued in its corporate name. (a) The power of the corporation to sue is lodged with the board of directors that exercises its corporate powers.3° (b) A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue.31 A derivative suit is one where the corporation is the real party in interest while the stockholder filing the suit on the corporation’s behalf is only a nominal party.32 2. Of succession by its corporate name. 3. To adopt and use a corporate seal. 4. To amend its articles of incorporation. (a) To extend or shorten the corporate term. [37] (b) To increase or decrease capital stock. [381 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same. 6. In case of a stock corporation, to issue or sell stocks to subscribers and to sell treasury stocks; and in case of a non-stock corporation, to admit members. 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may require, subject to the limitations set by law and the Constitution. (a) A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the prope rty of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation’s board of directors.33 8. To enter into merger or consolidation with other corporations. 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes, provided that no corporation, domestic or foreign, shall give donations in aid of any political party or candid ate or for purposes of partisan political activity. 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees. 11. To exercise other powers essential or necessary to carry out its purpose or purposes, as stated in the articles of incorporation. [36] (a) An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law.34 12. To incur, create or increase bonded indebtedness. [38] 13. To deny pre-emptive right, if the corporation has such power granted by the articles of incorporation. [see 39] 14. To sell and dispose of its assets. [see 40]

15. To re-acquire its own shares. [see 41] 16. To invest corporate funds in another corporation or business. [see 42] 17. To declare dividends. [see 43] 18. To enter into management contract. [44]

E. The Board of Directors or Trustees, and Officers: Their Authority, Responsibility and Liability 1. Qualifications and Disqualifications of Directors or Trustees (a) Every director must own at least one share at all times; a trustee must be a member. (1) Anyone who ceases to own shall cease to be a director. (2) A majority of the directors or trustees must be Philippine residents. (b) Persons disqualified to be director, trustee or officer (1) one convicted by final judgment of an offense punishable by six-year imprisonment, or violation of the Corporation Code, committed within 5 years prior to election or appointment. 2. An independent director is a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.35 An independent director is a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests.36 3. Composition, Authority and Responsibility of the Board (a) A corporation may have 5 to 15 directors or trustees in its board. [14(6)] (b) They hold office for 1 year. (c) Collegially, the board (1) exercises the corporate powers. (2) conducts all the corporation’s business. (3) controls and holds all property of the corporation. (4) elect the officers of the corporation. (5) must perform duties enjoined on them by law and by-laws. (d) Unless articles or by-laws call for greater majority, a majority of the number of directors and trustees, as fixed in the articles constitutes a quorum. (1) Directors cannot attend board meetings by proxy a] But the SEC has allowed directors “to attend” through videoconferencing or teleconferencing, under the broad intent of RA 8792 “Electronic Commerce Act of 2OOO.” 4. Executive Committee [35] (a) It may created through the by-laws. (b) It is composed of at least 3 board members to be appointed by board.

(c) It may act on any matter within competence of board, as delegated by the by-laws or the board, except (1) approval of act which requires shareholder approval. (2) filling board vacancy. (3) adoption, amendment or repeal of by-laws. (4) amendment or repeal of board resolution, which expressly prohibits such. (5) distribution of cash dividends. 5. Liability of directors, trustees or officers [31] (a) Joint and several (i.e., solidary) liability for damages suffered by corporation, shareholders, members or other persons, arising from

(1) willful vote for or assent to patently urlawful corporate acts. (2) gross negligence or bad faith in directing corporate affairs. (3) acquisition of personal or pecuniary interest in conflict with duty as director or trustee. (b) Liability as a trustee, in case he acquires any interest adverse to the corporation in violation of his duty. 6. Officers [251 (a) The president must be a director. (b) The treasurer may or may not be a director. (c) The secretary must be a resident and a citizen of the Philippines. (d) There may be other officers as provided for in the by-laws. (e) Any two or more positions may be held concurrently by the same person except no one shall act as president and secretary, or as president and treasurer, at same time.

F. Shareholders: Their Rights and Liabilities

1.A Shareholder’s Major Rights. Holders of subscribed, but not fully paid, shares which are not delinquent have all rights of a stockholder. [72] (These rights are not enjoyed by treasury stock.) (a) Right to dividends [43] (1) Cash dividends a] Cash dividends on delinquent stock are not paid out to shareholder but are applied to unpaid subscription balance. (2) Stock dividends a] Stock dividends are withheld from delinquent stockholder until he pays unpaid subscription. (3) The board of directors of a stock corporation may declare dividends only out of the unrestricted retained earnings. [43] (4) Stock corporations are generally prohibited from retaining surplus profits in excess of 100% of their paid in capital stock. a] The law imposes upon a domestic closely-held private corporation an improperly accumulated earnings tax.38 (b) Right to residual assets, at dissolution of the corporation. Right to vote (1) Shares with voting rights enjoy the right al To elect directors. [24] 11 A shareholder may vote such number of shares for as many persons as there are directors to be elected, or 2] A shareholder may cumulate his shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares, or 3] A shareholder may distribute his votes among as many candidates he sees fit. b] To vote at all corporate acts requiring shareholder approval. (2) Shares with no voting rights, together with shares with voting rights, enjoy the right to vote a] To amend the articles of incorporation. [371 bi To adopt and amend the by-laws. c] To sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of the corporate property [40] d] To incur, create or increase bonded indebtedness. [38] el To merge or consolidate the corporation with another corporation or corporations. f] To invest corporate funds in another corporation or business. g] To dissolve the corporation. [6, par. 61

(3) Shareholders may attend meetings a] in person bi by proxy [58] 11 A proxy must be in writing, signed by the shareholder and filed with the corporate secretary before the meeting. 2] It is valid only for the meeting it was int ended, unless otherwise provided in the proxy 31 It shall not be valid for a period longer than five years at any one time. ci through a trustee with a voting trust agreement. [591 1] A voting trust is an agreement in writing whereby one or more shareholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding 5 years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement.39 21 The voting trust agreement must be in writing and notarized. 31 It must specif5r terms and conditions. 4] A certified copy must be filed with the corporation and the SEC; otherwise it will be ineffective and unenforceable. 51 It shall not be valid for a period not exceeding five years at any one time (unless it has been executed as a condition in a loan agreement). 6] Certificate of stock may be issued to the trustee and trustee may deliver to the transferors voting trust certificate. (4) Delinquent stocks are not entitled to vote or be voted for. [711 (d) Preemptive right is the shareholder’s right to subscribe to all issues or disposition of shares in proportion to one’s shareholdings, unless such right denied in the articles. [39] The right is intended to maintain “status quo” ownership and rights. (1) The right extends to a] Issue from unsubscribed authorized capital stock. b] New issue, i.e., any increase in authorized capital stock. c] Treasury shares being “disposed” by the corporation.4°

(2) This right does not extend to a] Shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the public, or b] Shares issued in exchange for property needed for corporate purposes or in payment of existing debts. [39] (e) Appraisal right involves the right to dissent and demand payment of fair value of one’s shares, in the following cases: (1) amendment to articles which causes changing or restricting stockholders’ rights or authorizing preferences, or extending or shortening corporate term. [see also 371 (2) sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of corporate property. (3) merger or consolidation. [811 2. A stockholder or member cannot be held personally liable for any financial obligation by the corporation in excess of his unpaid subscription.4’

G. Business Combinations of Private Corporations

1.A merger is a business combination where “two or more corporations merge into a single corporation, which shall be one of the constituent corporations” [see 76, par. 1142 (a) In a merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation.43 (b) As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts.” 2. A consolidation is a business combination where “two or more corporations consolidate into a new single corporation, which shall be the consolidated corporation.” [see 76, par. 1] 3. Merger or consolidation takes effect upon the issuance by the SEC of a certificate of merger or of consolidation. [79, par. 1] (a) For a valid merger or consolidation, the approval of the SEC of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations.45 4. A corporation may engage in a joint venture with another corporation.46 (a) A corporation cannot however enter into a partnership contract.47

H. Dissolution and Liquidation 1. Dissolution is the voluntary or involuntary cessation of a corporation’s business operations. 2. Liquidation. connotes a winding up or settling with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. I. Foreign Corporations 1.Generally, a ‘foreign corporation’ has no legal existence within the state in which it is foreign. This proceeds from the principle that juridical existence of a corporation is confined within the territory of the state under whose laws it was incorporated or organized, and it has no legal status beyond such territory49 2. The Corporation Code is silent as to what constitutes “doing” or “transacting” business in the Philippines. The term “implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object for which the corporation was organized.”5° (a) The purpose of the law in requiring that foreign corporations doing business in the Philippines be licensed to do so and that they appoint an agent for service of process is to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts.51 (b) Principles governing a foreign corporation’s right to sue in local courts: (1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts. (2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction. (3) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. It is not the absence of the prescribed license but the

“doing (of) business” in the Philippines without such license which debars the foreign corporation from access to our courts.

Negotiable Instruments The law governing negotiable instruments is Act 2031, otherwise known as the “Negotiable Instruments Law” A. Nature and Characteristics of Negotiable Instruments The two general types of negotiable instruments, under Act 2031, are the promissory note and the bill of exchange (also called a draft). (a) These negotiable instruments function as credit instruments or substitutes for cash, in the marketplace. 2. A negotiable promissory note is 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. [see 184] (a) It is a two-party instrument. The maker of the note promises to pay a specified sum of money to the payee. 3. A negotiable bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it [and] 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. [see 126] (a) It is a three-party instrument. The drawer of a bill orders the drawer to pay the payee a sum of money. (1) An inland bill is one which is both drawn and payable in the Philippines. [129] (2) A foreign bill is one which is: (i) drawn in the Philippines and payable elsewhere, or (ii) drawn elsewhere and payable in the Philippines, or (iii) drawn elsewhere and payable elsewhere. [see 129] (3) A check is a bill of exchange drawn on a bank payable on demand.[1851 4. A party to a commercial paper may transfer his rights therein: (i) by assignment, or (ii) by negotiation. (a) An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. Stated simply, it is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor.’ The assignment involves no transfer of ownership but merely effects the transfer of rights which the assignor has at the time, to the assignee.2 (b) Negotiation is the transfer of an instrument from one person to another in such manner as to constitute the transferee the holder thereof. [see 301 (1) In view of the principle of accumulation of secondary contracts, negotiation confers rights upon a holder, which assignment does not confer upon an assignee. a] A holder is (i) the payee or indorser of a bill or note, who is in possession of it or (ii) the bearer thereof. [see 191] (c) The validity of the underlying transaction that occasions the creation and issuance of an instrument is determined under the Civil Code, while the negotiability of an instrument is determined by Act 2031 the “Negotiable Instruments Law.” The consequences of an assignment of a commercial paper are defined by the Civil Code, while negotiation and its consequences of a negotiable instrument are defined by the Negotiable Instruments Law.

(d) Instead of being negotiated, a negotiable instrument may be assigned.3

B. Requirements of Negotiability These requirements must be on the face of instrument for it to be a negotiable instrument.4 (a) It must be in writing and signed by the maker or the drawer. [1(a)] (1) The writing must serve the purposes of relative permanence and portability. (2) The writing must be signed by maker (of the note) or drawer (of the bill). [1(a)] a] A signature serves the purposes of authentication and non-repudiation. (b) It must contain an unconditional promise or order to pay a sum certain in money. [1(b)] (1) A promise or an order which is subject to a condition renders the paper nonnegotiable. a] A condition, under Act 2031, is either 1] a future and uncertain event5 the payment is made contingent on, or 2] an extrinsic agreement, the payment is subject to. (2) A promise or an order which is subject to a term, does not render paper nonnegotiable. a] A negotiable instrument may “be payable on demand or at a fixed or determinable future time.” [1(c); see also 4] b] A term is a duration of time culminating in a future and certain event.6 (3) Money means a medium of exchange authorized or adopted by a domestic or foreign government and includes a monetary unit of account established by inter-governmental organization or by agreement bet ween two or more nations.7 a] The instrument remains to be negotiable if it gives the holder the option to require something to be done in lieu of payment of money. [5(d)] b] The instrument however is rendered nonnegotiable if it gives the maker or the drawee the option to do something in lieu of payment of money. (4) A statement which recites the transaction (e.g., “in payment of rentals” or “in payment for the purchase of office supplies”) from which the instrument originates, does not render instrument nonnegotiable as such statement is not a condition. An unqualified order or promise to pay is unconditional though coupled with a statement of the transaction which gave rise to the instrument. [3(b)] (5) A statement of reference to a fund — a] A statement, which indicates the particular fund from which payment of the sum shall be made renders the promise or the order conditional and the instrument nonnegotiable. [3, last par.] It is conditional because such fund may not exist or may be insufficient to pay in compliance with the order. b] A statement, which indicates the particular fund from which reimbursement of the sum paid shall be made, however does not constitute a condition and does not render paper nonnegotiable. An unqualified order or promise to pay is unconditional, though coupled with an indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount. [3(a)] Drawee pays from his funds and merely reimburses himself from the indicated fund. Whether the fund is inexistent or insufficient, payee or holder of the bill is not jeopardized. (6) An acceleration clause is a provision in the instrument that upon default in payment of any installment or of any interest the whole sum shall become due [see 2(c)] (c) It must be certain as to time of payment (1) An instrument is payable either on demand or at a fixed or determinable future time [see 1(c)]8 a] On demand includes 1] Payable on sight [7(a)]

21 Payable on presentation [7(a)] 3] No time for payment is stated [7(b)] b] It is payable at a determinable future time, which is expressed to be payable 1] at a fixed period after date or sight: “30 days after date” “30 days after sight.” Sight means the day the drawee sees and accepts the bill. “Sight” therefore does not apply to a note, as a note is not presented for acceptance. 21 on or before a fixed or determinable future time: “October 15, 2006” is a fixed future time “on or before October 15, 2006” is one on or before a fixed future time “30 days after sight” is one on or before a determinable future time

31 on or at a fixed period after the occurrence of a specified event which is certain to happen though the time of happening be uncertain c] Drafts may either be sight drafts or time drafts. 1] A sight draft is a bill that is payable on demand or at sight and requires no acceptance. 2] A time draft, also called an “after sight” draft, is payable at a fixed future time, such as “sixty days after date” of issue stated on the face of the draft, or at a determinable future time, such as “sixty days after sight”, i.e., after the expiration of the stipulated period of time after acceptance. (d) It must be payable “to order” or “to bearer” [1(d)]. These are the “indicative words” of negotiability.9 1] Instrument is payable to order if made payable to the order of a] A specified person, including the maker, drawer, or drawee. [see 8(a), (b) and (c)] “to the order of Edlyn Santos” b] Two or more persons jointly10 or solidarily. [8(d) and (e); see related 41, 68 and 128] c] The holder of an office. [8(f); see also 42] “to the order of Treasurer of University of the East” 2] Instrument is also payable to order if it is payable “to Edlyn Santos or order” 31 Instrument is not payable to order if it is only payable to a person. “to Edlyn Santos” 41 Instrument is payable to bearer

a] if it is expressed to be so payable. [9(a)] “Bearer” hi if it is payable to a person named in the instrument or bearer.” [9(b)] “Edlyn Santos or Bearer” c] if 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. [9(c)] dl if the name of the payee does not purport to be the name of any person. [9(d)] 11 A check drawn payable to the order of “cash” is a check payable to bearer.’2 e] when the only or last indorsement is an indorsement in blank. [9(e)] (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. [1(e)]

C. Issue and Negotiation Issue is the first delivery of the instrument, complete in form to a person who takes it as a holder. [191] (a) Delivery is transfer of possession, actual or constructive from one person to another. [191]. (b) Liability of the maker and the drawer begins on the issue of the instrument. Such issue must comply with two requisites: (i) the instrument must be complete in form, and (ii) the instrument must be delivered to a person who takes it as a holder. (1) Thus if Therese Santiago makes out a check and gives it to Antonico Gotuaco, with instructions to deliver it to Edlyn Santos, the transmittal to Antonico does not constitute issue. It is only when Edlyn Santos acquires it when the issue takes place.

(c) The date of delivery of an instrument is the date of its issue, regardless of the stated ‘issue date’ on the instrum ent or the absence of any date. [see 6(a) and 13] The payee acquires title as of the date of delivery. [12] 2. Negotiation is the transfer of an instrument from one person to another in such manner as to constitute the transferee the holder thereof [see 30 first sentence]. It means to transfer title or ownership to the holder. (a) Negotiation is the subsequent transfer by the payee to a third party, by the latter to a fourth, and so on. (b) Issue means the first delivery of the instrument, complete in form, to a person who takes it as a holder. [191] Issue constitutes the execution of the original contract, while negotiation constitutes the execution of as many secondary contracts, as there are negotiations. (1) Strictly speaking, an instrument is not “negotiated” until it leaves the hands of the payee, or person to whom it is issued. 3. Indorsement means an indorsement completed by delivery [191] (a) An indorsement is a written instruction of the owner of an instrument to pay the amount to a specified person, to his order or to bearer. (b) Indorsement is writing one’s name either at the back of the instrument itself or, if there is no more space therein, on an “allonge,” a paper attached to the instrument. (c) A person who signs an instrument otherwise than as maker, drawer, or acceptor is generally deemed to be an indorser. [see 17(f); 63] (d) The signature of the indorser, without additional words, is sufficient indorsement. [see 31] (1) An indorsement need not contain the “indicative words” of negotiability. [36, par. 2] “Pay to Liezel Alvarez” is of similar effect as “Pay to the order of Liezel Alvarez” or “Pay to Liezel Alvarez or order.” (2) An indorsement must be signed by the owner of the instrument or by his authorized agent. (e) The indorser’s contract. An indorser transfers his title in the instrument, undertakes to pay it under certain conditions and makes implied warranties about his transfer. (f) Indorsement must be of the whole instrument. (1) An indorsement which transfers a part only of the amount payable, does not operate as negotiation. [see 32] It operates as an assignment. a] A part indorsee of a promissory note is considered an assignee.’3 bi The only time indorsement of less than the amount payable is deemed to be a negotiation, is when the instrument has been paid in part, and the residue is being transferred. [see 32] (2) An indorsement which transfers the instrument to two or more indorsees severally does not also opera te as a negotiation. [see 321 D. Four Important Principles on Negotiability and Negotiation

An instrument, which is negotiable at its inception,’4 continues to be negotiable, until it is (a) restrictively indorsed under Sec. 36(a), or (b) discharged. [47] 2. An instrument may temporarily lose its quality or character of negotiability, when (a) it is indorsed to transfer a portion of the amount of the instrument, or to transfer to solidary indorsees [32]. The law says such does not operate as a negotiation; it operates as a transfer by assignment.(b) it is indorsed qualifiedly [38]. The indorsee is a mere assignee. (c) an order instrument is transferred for value by its holder without an indorsement. [49] 3. An instrument, which is an order instrument at its inception, is converted into a bearer instrument, when its only or last indorsement is in blank. [9(e)] 4. An instrument, which is a bearer instrument at its inception, does not lose its character of a bearer instrument, even if it is indorsed specially. [40] E. Kinds of Indorsements The quality, i.e., either bearer or order, determines whether an indorsement is needed to negotiate it.

(a) A bearer instrument may be negotiated by mere delivery, and does not require any indorsement to negotiate it. [301 (b) An order instrument may be negotiated only through ind orsement.[30] (1) A holder who, without indorsing an instrument paya ble to his order, transfers it for value, vests in the transferee: a] such title as the transferor had therein (i.e., the transfer operates as an assignment only), and bi the right to have the transferor’s indorsement. [491 2. The kind of indorsement determines (a) the kind of subsequent indorsement necessary to negotiate it and (b) the liability of the indorser. 3. The two broad classes of indorsements are: (a) General or Unqualified, and (b) Qualified (a) The general (or unqualified) indorsements are: (1) Indorsement in Blank v. Special Indorsement a] An indorsement in blank specifies no indorsee [see 34, second sentence]. The signature of the indorsee without additional words, is sufficient indorsement [31, second sentence] Example: Edlyn Santos makes a blank indorsem ent by affixing her signature at the back of a negotiable instrument. 1] An indorsee of a bearer instrument may negotiate it either by mere delivery [see 341 or by indorsement coupled with delivery. She may “blank indorse” it. [al This instrument retains its bearer quality and may be negotiated by mere de1ivery [see 301 21 A payee or indorsee may “blank indorse” an order instrument. Such blank indorsement on the order instrument converts the instrument into bearer instrument. The instrument is payable to bearer when the only or last indorsement is an indorsement in blank. [9(e)] [a] Such bearer instrument may be furt her negotiated by delivery without further indorsement. [see 301 [bi A holder can convert a blank indorsem ent into a special indorsement by writing any contract (consistent with the character of the indorsement) over the signature of the indorser in blank. [see 351 b] A special indorsement specifies the person to whom or to whose order, the instrument is to be payable [34 first sentence]. It specifies the name of the person to whose order the instrum ent is

payable. “Pay to the order of Liezel Alvarez.” (signed) “Edlyn Santos”; or “Pay to Liezel Alvarez or order.” (signed) “Edlyn Santos”

1] A special indorsement on a bearer instrument does not convert the instrument into an order instrument; the instrument remains to be a bearer instrument. [a] When a bearer instrument is specially indorsed, it may still be negotiated by mere delivery; but the person who indorsed specially will be liable as indorser to only such holders as make title through his indorse ent. [see 40] 2] A special indorsement on an order instrum ent makes the instrument payable only to the indorsee (Liezel Alvarez) named in the indorsement, or to her order. [a] When an order instrument is spec ially indorsed, the indorsement of such indorsee (Liezel Alvarez) is necessary to the further negotiation of the instrument. [see 34] [b] An instrument payable to the order of two or more payees or indorsees who are not partners, must be indorsed by all of them, unless the one indorsing has authority to indorse for the others. [see 41] (2) Conditional Indorsement [33] a] While a condition on which the promise or order to pay is made to depend will render an instrument non-negotiable, a condition on an indorsement will not render the instrument non-negotiable. b] A person to whom an instrument, which has been conditionally indorsed, is negotiated will hold the instrument, or its proceeds, subject to the rights of the person who indorsed conditionally. [see 39] (3) Irregular (i.e., anomalous) indorsement. A person, who is not a party to an instrument but who places his signature in blank before delivery is liable as an indorser. [see 64] (4) Restrictive Indorsement a] A restrictive indorsement is one which “res trains the negotiability of the instrument to a particular person or for a particular purpose.” 1] It may prohibit further negotiation [36(a)] “Pay to Edlyn Santos only” (signed) “Therese Santiago” 2] It may constitute the indorsee as his (ind orser’s) agent [36(b)] “Pay to Edlyn Santos for collection” (signed) “Therese Santiago” 3] It may vest title in the indorsee in trust for or to the use of another person [36(c)] “Pay to Edlyn Santos in trust for Merly David” (signed) “Therese Santiago” N A restrictive indorsement serves notice of the contractual undertaking of the indorsee. (b) Qualified Indorsement. (1) It may be made by adding to the indorser’s signature the words “without recourse” or any words of similar import. (1) It constitutes the indorser a mere assignor of the title to the instrument. (3) It does not impair the negotiability of the instrument. [38]

F. Rights of the Holder A holder of a negotiable instrument may sue thereon in his own name. [511 2. A holder in due course

(a) holds the instrument: (1) free from any defect of title of prior parties, and (2) free from defenses available to prior parties among themselves, and (b) may enforce payment of the instrument’s full amount against all parties liable on it. [see 571 3. A holder in due course is a holder who has taken the instrument under the following conditions: (a) that it is complete and regular upon its face. (b) that he became the holder of the instrument before it was overdue and without notice that it had been previously dishonored, if such was the fact. (c) that he took it in good faith and for value, (d) that at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. [521 4. Only real defenses will defeat the right to collect of a holder in due course, while both real and personal defenses will defeat that right of a mere holder. The disadvantage of an indorsee in not being a holder in due course is that the negotiable instrum ent is subject to defenses as if it were non-negotiable.’6 5. Some of the real defenses: (a) Fraud in the execution [14] (b) Want of delivery of incomplete instrument [151 (c) Forgery [23] (d) Discharge at or after maturity [88, 118, 121, 122]

6. Some of the personal defenses: (a) Unauthorized completion, e.g., insertion of a wrong date. [see 13] (b) Nondelivery (of complete instrument). [16] (c) Absence or failure of consideration [28; see also 26 and 27] (d) Fraud in inducement [55] (e)Acquisition of instrument by unlawful means [55] (f) Acquisition of instrument for an illegal consideration [55] (g) Innocent alteration or spoliation [124, last sentence; 125] 7. Every holder is deemed prima facie to be a holder in due course. (a) One who is not a holder in due course may yet quality as a holder through a holder in due course, and have the rights of a holder in due course. [see 59] G. Liabilities of Parties 1.Parties incur two general types of liabilities on negotiable instruments. These are: (a) Contractual liability (also called Undertaking to Pay) (b) Warranty liability 2. Contractual liability (a) Contractual liability refers to a party’s agreement or undertaking to pay the instrument. (b) Contractual liability of a party is either (a) primary or (b) secondary, depending on the capacity he signed the instrument. [see 192] (1) A party may sign an instrument in either of these capacities: as maker, drawer, indorser or acceptor. a] The nature and extent of a party’s contractual liability are determined by: 1] the stipulations on the instrument itself, e.g., the amount, the maturity date, the interest payable, if any [see 2] and 2] the conditions affixed to his indorsement (insofar as the indorsers). [39] (2) As a general rule, “a person whose signature does not appear on the instrument is not liable

thereon.” [see 18] a] The exceptions to the general rule are: 1] A person who does not affix his (true name) signature, but affixes his assumed or trade name is liable on the instrument. [18].21 A person whose signature is done by his authorized agent [191. His agent signs his principal’s name and also his (agent’s) signature as agent. The principal, and not the agent, is liable on the instrument. 31 A person who forges another’s signature as maker or drawer. [see 23] Although the forger’s (true name) signature does not appear on the instrument he is civilly liable on it. He is also criminally liable for committing a falsification of a commercial document, through the imitation of another’s handwriting or signature.’7 4] A person who, as an indorser, signs on an allonge (i.e., a paper attached to the instrument). [see 31] 5] A person who negotiates a bearer instrument by delivery [see 65] 6] An acceptor whose acceptance is written on a paper other than the bill itself is liable to a person to whom it is shown and who, on the faith thereof, receives the bill for value. [1341 7] A person who makes an unconditional written promise to accept a bill before it is drawn. [135] 8] A drawee who destroys the bill or refuses within 24 hours to return the bill accepted or dishonored. [137]

(c) Primary liability is the preeminent and unconditional undertaking or liability to pay the instrument. The maker is primarily liable on a note, the acceptor on a bill. The maker made an unconditional promise to pay his note in the first instance, while the acceptor agreed to the unconditional order (for him) to pay. They are the parties to whom the instrument must first be presented for payment.

(1) The parties primarily liable are the maker of the note, and the acceptor of a bill. a] The maker engages that he will pay in accordance with the tenor, i.e., stipulations stated on the note. By having made an unconditional promise to pay his note in the first instance, he has primary liability to pay the note according to the terms appearing on the note. [60] 1] The liability of the maker on the negotiable instrument is primary and unconditional.18 bi The acceptor engages to pay the bill according to the tenor of his acceptance. [621 By accepting or giving his consent to the unconditional order (upon him) to pay, he assumes primary liability to pay the bill. 1] Until a bill or a check is accepted or certified, there is no party primarily liable on it. It is only upon acceptance or certification does the drawee become technically a party to the instrument. Until then, he is not liable on the instrument to the holder. [see 1891 2] Drawee becomes a primary party when he accepts the instrument by signing it. The bank, on which a check has been drawn, becomes as a primary party when it certifies the check. [a] Without acceptance or certification of the check, there is no privity of contract between the drawee bank and the payee, or holder of the check.’9 (d) Secondary liability means subsidiary and conditional liability to pay the instrument. The secondary parties are the parties who face liability only on certain conditions.

(1) The parties secondarily liable are the drawer and the general indorsers. a] The drawer is a party secondarily liable bec ause he engages that if the bill is dishonored and necessary proceedings on dishonor are duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. [611 1] The drawer may however insert in the bill an express stipulation negativing or limiting his own liability to the holder. [see 61, last sentence] bi A general indorser2° is a party secondarily liable on the instrument because he undertakes to pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay [see 661, if on presentment, the instrument is not accepted, paid, or both, according to the tenor of the instrument. 1] A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it is dishonored, he will pay the amount thereof to the holder.21 c] A qualified indorser and any person who negotiates by mere delivery do not make the same undertaking a general indorser does. [see 65] They do not incur secondary contractual liability. 1] A qualified indorsement constitutes the indorser as a mere assignor of the title to the instrument. [38, first sentence]d] A person negotiating by delivery also does not make the engagement a general indorser makes. [see 65] 1] However, if a person, instead of negotiating a bearer instrument by mere delivery, places his indorsement on it, he incurs all the liability of an indorser. [67] (2) The conditions of secondary liability are: a] that the party primarily liable on the instrument did not pay it upon proper presentment, b] those conditions set by a party himself (for example, by a condition in an indorser’s indorsement), and c] those conditions imposed by law, which must be complied with before the drawer or indorsers can be held liable on the instrument (e.g., notice of dishonor, notice of protest). [89 et seq., 152 et seq.] (3) “Recourse” means resort to a person who is secondarily liable after the default of the person who is primarily liable.22 The words “without recourse” denote that the qualified indorser is declining any contractual liability on the instrument. a] A holder may therefore have recourse to a general indorser. bi A holder by accepting a qualified indorser’s indorsement which normally states “without recourse,” has no recourse against the latter. 3. Warranty Liability. A warranty is an affirmation, express (by the declarant) or implied (by law), of the existence of specified facts. The warranties, set forth in Act 2031, are implied as they are created by law. (a) Maker’s admissions. The maker admits (i) the existence of the payee and (ii) his capacity then to indorse. [see 60]

The maker cannot refuse to pay the holder on the ground that its payee, Edlyn Santos, is a fictitious person, because by making the note, the maker admits the existence of the payee and is estopped from denying this. (b) Drawer’s admissions. The drawer of a bill admits: (i) the existence of the payee, and (ii) his capacity then to indorse; and engages: (i) that on due presentment, the instrument will be accepted, paid, or both, according to its tenor, and (ii) that if the instrument be dishonored and necessary proceedings on dishonor taken, he will pay the amount of [the bill] to the holder or any subsequent indorser compelled to pay it. (A drawer, however, may insert a stipulation in a bill declining or

limiting his liability to the holder.) [see 61] (c) Acceptor’s admissions. The acceptor of a bill admits: (1) As to the drawer: (i) his existence, (ii) the genuineness of his signature, and (iii) his capacity and authority to draw the instrument. (2) As to the payee: (i) his existence, and (ii) his capaci ty then to indorse.[see 62] Examples: a] An acceptor may not refuse payment on the ground that 1] drawer’s name is fictitious [because accept or has admitted. “his existence” and is estopped to deny it], 2] drawer’s signature is forged [because acceptor has admitted “genuineness of his signature” and is estopped to deny it], 3] drawer was insane [because acceptor has admitted drawer’s “capacity” and is estopped to deny it], or 4] drawer had no authority to draw the draft [because acceptor has admitted drawer’s “capacity” and “authority to draw the instrument” and is estopped to deny it], though all these four statements be true.

b] On a bill drawn in favor of the Regus Corp. as payee, the acceptor may not refuse payment on the ground that 1] there is no such corporation [because acceptor has admitted “its existence”], or 2] the bill was indorsed on behalf of such corporation by an unauthorized person [because acceptor has admitted drawer’s “capacity to indorse”]. The acceptor does not admit the genuineness of the other parts of the bill. He is thus not precluded, upon presentment for payment, to raise the defense of material alteration of parts of the bill.

(d) General indorser’s warranty liability. (1) A general indorser warrants that: a] the instrument is genuine and in all respects what it purports to be bi he has good title to it c] all prior parties had capacity to contract, and dl the instrument is, at the time of his indorsement, valid and subsisting. [661 (2) Thus if a prior indorsee’s signature is forged, a gene ral indorser has breached his warranty and will be liable for such a breach. (3) Thus if the instrument had been issued without a consideration, a general indorser has breached his warranty and will be liable for such a breach.

(e) Qualified indorser’s warranty liability. (1) A qualified indorser warrants that: a] the instrument is genuine and in all respects what it purports to be hi q he has good title to it c] all prior parties had capacity to contract, and

d] he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. [65] (2) He makes the first three warranties as a general indorser does, but instead of stating that the instrument is valid, he merely states that he knows of no fact that would make it invalid.

(3) Thus if a prior indorsee’s signature is forged, a qualified indorser has breached his warranty and will be liable for such a breach. (4) Thus if the instrument had been issued without a consideration, but the qualified indorser did not know such fact, he has not breached his warranty and will not be therefore liable on it.

(f) Warranty Liability of person negotiating by mere delivery.

(1) A person negotiating a bearer instrument by mere delivery makes the same four warranties as a qualified indorser does. (2) His warranties however does not extend to all indorsees of the instrument. His warranties extend only to his immediate transferee. [65, par. 2] a] Thus, if Naldrin Batoon negotiates a bearer instrument by mere delivery to Joaneline Correa and Joaneline specially indorses it to Merly David, who negotiates it by mere delivery to Vincent Escueta, Vincent can hold Merly liable for breach if Naldrin’s indorser’s signature turns out to have been forged. Vincent can also hold Joaneline liable for breach of the warranty, but he cannot hold Naldrin liable. Naldrin’s warranties extended only to Joaneline, Naldrin’s immediate transferee.

H. Presentment for Acceptance, Acceptance and Dishonor by Non-Acceptance (applies to bills only) Presentment for acceptance is the demonstration of the bill to the drawer to secure his consent to pay it.

(a) Presentment is either necessary or optional. (b) Presentment is necessary when the bill (1) is payable after sight, or where it is necessary to fix maturity date, (2) expressly stipulates that presentment is necessary, or (3) is drawn payable elsewhere than drawee’s residence or place of business. [143] (c) Failure to make necessary presentment discharges drawer and indorsers. [144] 2. Acceptance is the signification of drawee of his assent to the order of drawer. [132] (a) Requisites of a valid acceptance (1) It must be in writing and signed by drawee. a] Holder may require that acceptance be written on bill itself. If his request is refused, holder may treat the bill as dishonored. [1331 b] If acceptance is on an allonge, i.e., a paper other than bill itself, it does not bind acceptor except in favor of a person to whom it is shown and who on faith thereof receives bill for value. [1341 (2) It must not express that drawee will perform his promise by any other means than payment of money. (3) It must be given within period allowed by holder, or if none is given, within 24 hours from presentment. [see 137, 136] (b) Drawee’s destruction of bill, when it is presented to him for acceptance is acceptance. [137] (c) Drawee’s refusal to return bill, accepted or not, to holder within period allowed by holder is acceptance. [137] (d) An unconditional written promise to accept before a bill is drawn is deemed an actual acceptance in favor of every person who, upon faith thereof, receives the bill for value. [135] (e) Acceptance may be either general or qualified. [139]

(1) General acceptance assents without qualification to the order of drawer. a] Acceptance to pay at a particular place is a general acceptance, unless it expressly states that bill is to\be paid there only and not elsewhere. [140] (2) Qualified acceptance in express terms varies the effect of the bill as drawn. It may be a] conditional, which makes payment by acceptor dependent on the fulfillment of a stated condition,

bi partial, which is to pay part only of the amount for which bill is drawn, c] local, which is to pay only at a particular place, d] qualified as to time, or el acceptance of some, one or more of the drawees, but not of all. [141] (3) Holder may refuse to take a qualified acceptance. If he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. [1421 (4) If holder takes a qualified acceptance, drawer and indorsers are discharged from liability on bill, unless they have expressly or impliedly authorized holder to take a qualified acceptance or subsequently assent to it. [143] (f) Certification of a check by the drawee bank is equivalent to acceptance. [187] 3. Dishonor by non-acceptance. (a) Dishonor by nonacceptance is the failure of the holder to get the drawee’s consent. It may also occur in either of two ways: (1) Holder, who has required that acceptance be written on bill itself and whose request is refused, may treat the bill as dishonored. [133] (2) Holder who refuses to take a qualified acceptance and does not obtain it, may treat the bill as dishonored by non-acceptance. [142] (b) A “referee in case of need” is a person named by the drawer or any indorser in a bill to whom presentment may be made in case the instrument is dishonored by non-acceptance or nonpayment. The holder may or may not resort to such person, at his option. [131] 4. Notice of dishonor (a) Notice of dishonor must be given to drawer and each indorser when instrument is dishonored by non-acceptance or non-payment. Drawer or any indorser to whom notice is not given is discharged. [89] (b) Notice of dishonor is dispensed with when after exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. [112] (1) Notice to drawer need not be given under certain cases. [see 114] a] Notice of dishonor is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment. In the instant case, all the checks were dishonored for any of the following reasons: “account closed,” “account under garnishment,” “insufficiency of funds,” or “payment stopped.” In the first three instances, the drawers had no right to expect or require the bank to honor the checks, and in the last instance, the drawers had countermanded payment.23 b] Notice to drawer need not be given under cert am cases. [115] (c) Delay in giving notice is excused when delay is caused by circumstances beyond holder’s control and not imputable to his default, misconduct or negligence. When cause abates, notice must be given forthwith. [see 113] (d) Waiver, whether express or implied, of notice may be done before the time of giving notice has arrived or after comission to give due notice. [109] If waiver is in instrument, it binds all parties, but if it is written above an indorser’s signature, it binds only him. [110] 5. Protest is required in the case of foreign bills. [118]

(a) Waiver of protest is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. [111]

I. Presentment for Payment and Dishonor by Non-Payment

1.Presentment for payment is necessary to charge, i.e., to fix liability of, drawer and indorsers. [70 last sentence] (a) Person who should make the presentment: (1) the holder, or (2) a person authorized to receive payment on holder’s behalf. [72(a)] (b) Time presentment should be made (1) Presentment should be done within a reasonable time after its issue, if instrument is payable on demand. a] In case of a bill, presentment may be done within a reasonable time after the last negotiation. b] In case of an instrument payable at a bank, presentment must be made during banking hours. [see 71; 75] (2) Presentment should be done on the day it falls due, if instrument is other than a demand instrument. [71] (3) It must be done at a reasonable hour on a business day. [72(b)] (4) Delay in presentment is excused when delay is caused by circumstance beyond holder’s control and not imputable to his default, misconduct or negligence. When cause of delay ends, presentment must be made with reasonable diligence. [81] (c) Person to whom presentment should be made. [72(d)] (1) the person primarily liable, i.e., the maker or the acceptor a] if he has died, (i) at specified place of payment, or (ii) to his personal representative, if no place is specified. [76] bI if primary parties are liable as partners, (i) at specified place of payment, or (ii) to anyone of them, if no place is specified. [77] c] if primary parties are jointly liable, (i) at specified place of payment, or (ii) to all of them, if no place is specified. [781 (2) any person found at place where presentment is made if maker or acceptor is absent or inaccessible. (d) It must be presented at the “proper place,” as provided in 72(c) and 73 2. Presentment is dispensed with (a) where after exercise of reasonable diligence, presentment cannot be made [82(1)] (b) where drawee is a fictitious person [82(2) (c) when there is waiver of presentment, express or implied. [82(3)] (d) Presentment is not required to charge drawer, if he has no right to expect or require drawee or acceptor to pay bill. [79] (1) If a check is dishonored due to: “account closed,” “account under garnishment,” or “insufficiency of funds,” or “payment stopped,” drawer has no right to expect or require bank to honor it24 (e) Presentment is not required to charge indorser, if instrument was made or accepted for his accommodation and he has no reason to expect that it will be paid if presented [80]. Since he is an

accommodation indorser, he knows that the party who sought his accommodation will not pay it. Even if presentment is not done, because it is not at all necessary; the drawer and the indorsers will nonetheless be charged with liability; [70 last sentence25] 3. Dishonor by non-payment. (a) There is dishonor by non-payment when (1) payment is refused or cannot be obtained, despite due presentment, or (2) instrument is overdue, and presentment is excused. [83] (b) The immediate right of recourse to all parties secondarily liable accrues to holder, when instrument is dishonored by non-payment. [84] (c) “Referee in case of need” is a person, whose name drawer and any indorser have inserted on the bill, and to whom holder may resort in case bill is dishonored by non-acceptance or non-payment. Holder has option to resort to referee or not. [131]

J. Discharge of Negotiable Instruments The instrument is discharged by (a) payment in due course, by or on behalf of principal debtor. (1) There is payment in due course when it is made at or after instrument’s maturity to its holder in good faith and without notice that his title is defective. [88] (b) payment in due course, by party accommodated when instrument is made or accepted for accommodation. (c) holder’s intentional cancellation of instrument. (1) An accidental cancellation or a cancellation under a mistake or without holder’s authority is inoperative [see 123], i.e., does not discharge the parties. (d) any other act which will discharge a simple contract for the payment of money. (e) confusion or merger of rights,26 i.e., when the principal debtor becomes the holder at or after maturity in his own right. (f) holder’s absolute and unconditional renunciation of his rights against the principal debtor made at or after instrument’s maturity. Renunciation must be in writing, unless instrument is delivered up to party primarily liable. Renunciation does not affect the rights of a holder in due course. [122, third sentence, et seq.] [119] 2. A party secondarily liable is discharged by (a) an act which discharges the instrument. (b) the holder’s intentional cancellation of his signature. (c) the discharge of a prior party. (d) a prior party’s tender of payment27 (e) a release of the principal debtor, unless holder’s right of recourse against the party secondarily liable is expressly reserved. (f) any agreement binding upon holder to extend time of payment or to postpone holder’s rights to enforce instrument, unless made with the consent of party secondarily liable, or unless the right of recourse against such party is expressly reserved. [1201 (g) the failure to give notice to such secondarily liable party. [see 89] (h) a delay in notice of dishonor, where notice is required, discharges the drawer to the extent caused by the delay.28 (i) the failure to make necessary presentment for acceptance. [see 144] (j) The holder may expressly renounce his rights against any party to instrument. [see 122 first

sentence] (k) Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. [188] (1) A check must be presented for payment within a reasonable time after its issue, otherwise (1) its drawer will be discharged from liability thereon to the extent of the loss caused by the delay. [186] (2) an indorser will be wholly discharged irrespective of any question of loss or injury caused by delay in presentment. 3. Consequences if a party secondarily liable pays for the instrument: (a) The instrument is not yet discharged. (b) The party, who paid, is remitted to his former rights as regards prior parties. (c) The party, who paid, may strike out his own and all subsequent indorsements and again negotiate instrument, except — (1) where it is payable to order of a third person and has been paid by the drawer, and (2) where it was made or accepted for accommodation and has been paid by the party accommodated [121] 4. A material alteration of instrument without the assent of all parties avoids it, except as against: (a) party who has made, authorized or assented to the alteration, and (b) subsequent indorsers. A holder in due course, not a party to the alteration, of instrument which has been materially altered, may enforce it according to its original tenor [124] (1) Changes in the following constitute material alterat ion: a] date bi sum payable, either for principal or interest ci time or place of payment 1] The addition of a place of payment where no place has been specified d] number or relations of the. parties, or e] medium or currency in which payment is to be made. [125] f] Any change or addition which alters the effect of the instrument in any respect. 1] The alteration of the serial number of a check is an immaterial or innocent one.3° (2) Immaterial alteration and spoliation do not avoid instrument but holder may enforce it only according to its original tenor.

Submitted by : Gian Carla P. Delgado

Bsed ENGLISH 2-a