MERCANTILE LAW CHARTS

1.

Corporation Law
Partnership
Created by mere agreement of the parties

Corporation
Created by law or by operation of law

Number of
incorporators

May be organized by at least two persons

Requires at least five incorporators (except

a corporation sole)

Commencement of
juridical personality

Acquires juridical personality from the

moment of execution of the contract of
partnership

Acquires juridical personality from the

date of issuance of the certificate of
incorporation by the Securities and
Exchange Commission

Powers

Partnership
may exercise any power authorized by the
partners (provided it is not contrary to
law, morals, good customs, public order,
public policy)

Corporation can exercise only the powers

expressly granted by law or implied from
those granted or incident to its existence

Management

When management is not agreed upon,

every partner is an agent of the
partnership

The power to do business and manage its

affairs is vested in the board of directors
or trustees

Effects of
Mismanagement

A partner as such can sue a co-partner

who mismanages

The suit against a member of the board of

directors or trustees who mismanages
must be in the name of the corporation

Rights of Succession

Partnership has no right of succession

Corporation has right of succession

Extent of liability to
third persons

Partners are liable personally and

subsidiarily (sometimes solidarily) for
partnership debts to third persons

Stockholders are liable only to the extent

of the shares subscribed by them

Transferability of
interest

Partner cannot transfer his interest in the

partnership so as to make the transferee a
partner without the unanimous consent of
all the existing partners because the
partnership is based on the principle of
delectus personarum

Stockholder has generally the right to

transfer his shares without prior consent
of the other stockholders because
corporation is not based on this principle

Term of existence

Partnership may be established for any

period of time stipulated by the partners

Firm Name

Limited partnership is required by law to

add the word Ltd to its name

Corporation may not be formed for a term

in excess of 50 years extendible to not
more than 50 years in any one instance
Corporation may adopt any name
provided it is not the same as or similar to
any registered firm name

Dissolution

May be dissolved at any time by any or all

of the partners
Governed by the Civil Code

Creation

Governing Law

Can only be dissolved with the consent of

the State
Governed by the Corporation Code

Advantages of Corporation
has a legal capacity to act and contract as a
distinct unit in its own name
continuity of existence
its credit is strengthened by its continuity of
existence
centralized management in the board of directors.
its creation, management, organization and
dissolution are standardized as they are governed
under one general incorporation law.
limited liability
shareholders are not the general agents of the
business
transferability of shares

Disadvantages of Corporation
complicated in formation and management
high cost of formation and operations
its credit is weakened by the limited liability
feature
lack of personal element.
greater degree of governmental supervision
management and control are separated from
ownership.
Stockholders have little voice in the conduct of
the business.

Primary Franchise
Refers to the franchise of being or existing as a
corporation

Secondary Franchise
Refers to the exercise of rights. Example: right of
eminent domain

Vested in the individuals who compose the

corporation

Vested in the corporation after its incorporation and

not upon the individuals who compose the
corporation.

Cannot be sold or transferred because it is inseparable

from the corporation itself.

May be sold or transferred; subject to sale on

execution, subject to levy.

Classes of Corporation
As to
Kinds
Organizers
public by State only; and
private by private persons alone or with the State.
Functions

public government of a portion of the territory; and

private usually for profit-making

Governing Law

public Special Laws; and

private Law on Private Corporations

Legal Status

De jure corporation organized in accordance with the requirements of law.

De facto corporation organized with a colorable compliance with the requirements of a
valid law. Its existence cannot be inquired collaterally. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
Corporation by estoppel group of persons that assumes to act as a corporation knowing
it to be without authority to do so, and enters into a transaction with a third person on
the strength of such appearance. It cannot be permitted to deny its existence in an action
under said transaction. (Sec. 21) It is neither de jure nor de facto.
Corporation by prescription one which has exercised corporate powers for an indefinite
period without interference on the part of the sovereign power, e.g. Roman Catholic

Church.
Existence of
Shares of Stock

Stock corporation a corporation (1) whose capital stock is divided into shares and (2)
which is authorized to distribute to shareholders dividends or allotments of the surplus
profits on the basis of the shares held. (Sec. 3)
Non-stock corporation does not issue stocks nor distribute dividends to their members.

Relationship of
Management and
Control

Holding Corporation - it is one which controls another as a subsidiary by the power to

elect management. It is one that holds stocks in other companies for purposes of control
rather than for mere investment.
Subsidiary Corporation - one which is so related to another corporation that the majority
of its directors can be elected directly or indirectly by such other corporation.
Affiliates - company which is subject to common control of a mother holding company
and operated as part of the system.
Parent and Subsidiary Corporation - separate entities with power to contract with each
other. The board of directors of the parent company determines its representatives to
attend and vote in the stockholders meeting of its subsidiary. The stockholders of the
parent company demand representation in the

Place of
Incorporation

Domestic corporation- a corporation formed, organized, or existing under Philippine laws.

Foreign corporation a corporation formed, organized, or existing under any laws other
than those of the Philippines. (Sec. 123)

Incorporators
signatory to the Articles of Incorporation
fait accompli; accomplished fact (the Articles of
Incorporation cannot be amended to replace them)
number is limited to 5-15
must have contractual capacity
Classification of Shares
Share
Common

Preferred Share
Redeemable Share
Treasury Share
Founders Share
Voting Share
Non-Voting share

Corporators
stockholder (stock corporation) or member (non-stock
corporation)
they may cease to be such if they subsequently lose
their qualifications
no restriction as to number
may be such through a guardian

Description
The basic class of stock ordinarily and usually issued without extraordinary rights and
privileges, and the owners thereof are entitled to a pro rata share in the profits of the
corporation and in its assets upon dissolution and, likewise, in the management of its
affairs without preference or advantage whatsoever.
Those issued with par value, and preferences either with respect to (a) assets after
dissolution, (b) distribution of dividends, or both, and other preferences.
Those which permit the issuing corporation to redeem or purchase its own shares.
Shares that have been earlier issued as fully paid and have thereafter been acquired by
the corporation by purchase, donation, and redemption or through some lawful means.
Shares issued to organizers and promoters of a corporation in consideration of some
supposed right or property.
Shares with a right to vote.
Shares without right to vote. The law only authorizes the denial of voting rights in the

case of redeemable shares and preferred shares, provided that there shall always be a
class or series of shares which have complete voting rights.
Escrow Stock

Deposited with a third person to be delivered to a stockholder or his assign after

complying with certain conditions, usually payment of full subscription price.

Over-issued Stock

Stock issued in excess of the authorized capital stock. It is also known as spurious stock.
Its issuance is considered null and void.
A stock issued not in exchange for its equivalent either in cash, property, share, stock
dividends, or services.
Shares with a value fixed in the certificates of stock and the articles of incorporation.
Shares having no par value but have issued value stated in the certificate or articles of
incorporation.
A stock certificate endorsed by the registered holder in blank and transferee can
command its transfer to his name from the issuing corporation
A share that is changeable by the stockholder from one class to another at a certain
price and within a certain period.
A share with a value of less than one full share.

Watered Stock
Par Value Share
No Par Value Share
Street Certificate
Convertible Share
Fractional Share

Filipino Citizenship Requirement

Citizenship
Coverage
Requirement
No foreign equity
1. Mass Media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential
Memorandum dated 04 May 1994)
2. Practice of all professions
Engineering
Medicine and Allied Professions
Accountancy
Architecture
Criminology
Chemistry
Customs Brokerage
Environmental Planning
Forestry
Geology
Interior Design
Landscape Architecture
Law
Librarianship
Marine Deck Officers
Marine Engine Officers
Master Plumbing
Sugar Technology
Social Work
Teaching
Agriculture
Fisheries
Retail trade enterprises with paid-up capital of less than US$2,500,000(Sec. 5 of RA
8762)
Cooperatives (Ch. III, Art. 26 of RA 6938)
Private Security Agencies (Sec. 4 of RA 5487)

Small-scale Mining (Sec. 3 of RA 7076)

Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive
economic zone as well as small-scale utilization of natural resources in rivers, lakes,
bays, and lagoons (Art. XII, Sec. 2 of the Constitution)
Ownership, operation and management of cockpits (Sec. 5 of PD 449)
Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8
of the Constitution)
Manufacture, repair, stockpiling and/or distribution of biological, chemical and
radiological weapons and anti-personnel mines (Various treaties to which the
Philippines is a signatory and conventions supported by the Philippines)
Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183)

Up to 20% Foreign
Equity
Up to 24% Foreign
Equity

Up to 30% Foreign
Equity
Up to 40% Foreign
Equity

Private radio communications network (RA 3846)

Private recruitment, whether for local or overseas employment (Art. 27 of PD 442)
Contracts for the construction and repair of locally-funded public works (Sec. 1 of CA
541, LOI 630) except:
a) infrastructure/development projects covered in RA 7718; and
b) projects which are foreign funded or assisted and required to undergo
international competitive bidding (Sec. 2a of RA 7718)
Contracts for the construction of defenseAdvertising (Art. XVI, Sec. 11 of the Constitution)
Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the
Constitution)
Ownership of private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141;
Sec. 4 of RA 9182)
Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec.
16 of CA 146)
Ownership/establishment and administration of educational institutions (Art. XIV, Sec.
4 of the Constitution)
Culture, production, milling, processing, trading excepting retailing, of rice and corn
and acquiring, by barter, purchase or otherwise, rice and corn and the by-products
thereof (Sec. 5 of PD 194;Sec. 15 of RA 8762
Contracts for the supply of materials, goods and commodities to government-owned or
controlled corporation, company, agency or municipal corporation (Sec. 1 of RA 5183)
Project Proponent and Facility Operator of a BOT project requiring a public utilities

Up to 60% Foreign
Equity

franchise (Art. XII, Sec. 11 of the Constitution; Sec. 2a of RA 7718)

Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550)
Adjustment Companies (Sec. 323 of PD 612 as amended by PD 1814)
Ownership of condominium units where the common areas in the condominium
project are co-owned by the owners of the separate units or owned by a corporation
(Sec. 5 of RA 4726)
Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the
Constitution)
Ownership of private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141;
Sec. 4 of RA 9182)
Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec.
16 of CA 146)
Ownership/establishment and administration of educational institutions (Art. XIV, Sec.
4 of the Constitution)
Culture, production, milling, processing, trading excepting retailing, of rice and corn
and acquiring, by barter, purchase or otherwise, rice and corn and the by-products
thereof (Sec. 5 of PD 194;Sec. 15 of RA 8762
Contracts for the supply of materials, goods and commodities to government-owned or
controlled corporation, company, agency or municipal corporation (Sec. 1 of RA 5183)
Project Proponent and Facility Operator of a BOT project requiring a public utilities
franchise (Art. XII, Sec. 11 of the Constitution; Sec. 2a of RA 7718)
Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550)
Adjustment Companies (Sec. 323 of PD 612 as amended by PD 1814)
Ownership of condominium units where the common areas in the condominium
project are co-owned by the owners of the separate units or owned by a corporation
(Sec. 5 of RA 4726)

Corporate Officer
Position is provided for in the by-laws or
under the Corporation Code

Corporate Employee
Employed by the action of the managing officer of the corporation

RTC has jurisdiction in case of labor

dispute

NLRC has jurisdiction in case of labor disputes

Doctrine of Limited Liability

Shields the corporators from corporate liability
beyond their agreed contribution to the capital or
shareholding in the corporation.

Doctrine of Immunity
Protects a person acting for and in behalf of the
corporation from being himself personally liable for his
authorized actions

Bonded Indebtedness
Secured by a mortgage on corporate property

Debenture
Serial obligations or notes issued on the basis of the
general credit of the corporation. Hence, they are not
bonded indebtedness

Cash Dividends
1. Involves a disbursement to the stockholders of
accumulated earnings
2. When declared and paid becomes the absolute
property of the stockholder and cannot be reached by

Stock Dividends
1. Does not involve any disbursement
2. Since it is still part of corporate property, may be
reached by corporate creditors

creditors of the corporation in the absence of fraud

3. Declared only by the board of directors at its
discretion
4. Does not increase the corporate capital
5. Its declaration creates a debt from the corporation
to each of its stockholders

3. Declared by the board with the concurrence of the

stockholders representing at least 2/3 of the
outstanding capital stock at a regular/special meeting
4. Corporate capital is increased
5. No debt is created by its declaration

Executive Committee
1. Its creation must be provided for in the by-laws
2. A governing body which functions as the board
itself.

Management Contract
1. Express power of a corporation
2. Management company must always be subject to
the superior power of the board to give specific
directions from time to time or to recall the delegation
of managerial power.

Ultra Vires Acts

Not necessarily unlawful, but outside the powers of
the corporation
Can be ratified
Can bind the parties if wholly or partly executed

Illegal Acts
Unlawful; against law, morals, public policy, and public
order
Cannot be ratified
Cannot bind the parties

Articles of Incorporation
Condition precedent in the acquisition of corporate
existence;
Essentially a contract between the corporation and
the stockholders/ members; between the
stockholders/ member inter se, and between the
corporation and the State;

By-Laws
Condition subsequent; its absence merely furnishes a
ground for the revocation of the franchise
For the internal government of the corporation but
has the force of a contract between the corporation
and the stockholders/ members, and between the
stockholders and members;

Executed before incorporation

May be executed after incorporation. Sec. 46 allows

the filing of the by-laws simultaneously with the
Articles of Incorporation
May be amended by a majority vote of the BOD and
majority vote of outstanding capital stock or a
majority of the member in non-stock corporation

Amended by a majority of the directors/ trustees and

stockholders representing 2/3 of the outstanding
capital stock, or 2/3 of the members in case of nonstock corporations
Power to amend/repeal articles cannot be delegated
by the stockholders/ members to the board of
directors/ trustees

Voting Trusts
The trustee votes as owner rather than as mere agent
The trust may vote in person or by proxy unless the
agreement provides otherwise
Trustee acquires legal title to the shares of the
transferring stockholder
The agreement must be notarized

Power to amend or repeal by-laws or adopt new bylaws may be delegated by the 2/3 of the outstanding
capital stock or 2/3 of the members in the case of nonstock corporation
Proxy
The proxy holder votes as agent
The proxy must vote in person
Proxy has no legal title to the shares of the principal
Proxy need not be notarized

The agreement is irrevocable

Trustee is not limited to act at any particular meeting
A trustee can vote and exercise all the rights of the
stockholder even when the latter is present
An agreement must not exceed 5 years at any one
time except when the same is made a condition of a
loan.
The voting right is divorced from the ownership of
stocks

Revocable anytime except one with interest

Proxy can only act at a specified stockholders meeting
(if not continuing)
A proxy can only vote in the absence of the owners of
the stock
A proxy is usually of shorter duration although under
Sec. 58 it cannot exceed 5 years at any one time
The right to vote is inherent in or inseparable from the
right to ownership of stock

Underwriting Agreement
The signers obligate themselves to take the shares of
stock which cannot be sold.

Stock Subscription Agreement

The obligation of the signer to the purchasers and to
the public is absolute.

Underwriters are given commission.

The signer can refuse to become a stockholder/
member of the company.

There is no commission.
He becomes a stockholder of the company and is
liable to pay the amount due on the stock.

Capital Stock
Amount paid in or secured to be paid in by the
stockholders upon which the corporation is to conduct
its operation. It is the property of the corporation
itself (monetary value).

Shares of Stock
Interest or right which the stockholder has in the
management of the corporation, and its surplus
profits, and upon a dissolution, in all of its assets
remaining after payment of corporate debts.

Shares of Stock
Unit of interest in a corporation

Certificate of Stock
Evidence of the holders ownership of the stock and of
his right as a shareholder

Incorporeal or intangible property

May be issued by the corporation even if the
subscription is not fully paid.

Concrete and tangible

May be issued only if the subscription is fully paid.

Pre-Emptive Rights
May be exercised even when there is no express
provision of law

Right of First Refusal

Arises only by virtue of contractual stipulations but is
also granted under the provisions on Close
Corporation
Exercisable against another stockholder of the
corporation of his shares of stock

Pertains to unsubscribed portion of the authorized

capital stock. A right that may be claimed against the
corporation
Merger
A union whereby one or more existing corporations
are absorbed by another corporation which survives
and continues the combined business.

Consolidation
The union of two or more existing corporations to
form a new corporation called the consolidated
corporation.

Merger and Consolidation

1. Sale of assets is always involved

Sale of Assets
1.merger/consolidation is not always involved

2. There is automatic assumption of liabilities

2. Purchasing corporation is not generally liable for the

debts and liabilities of the selling corporation

3. There is continuance of the enterprise and of the

stockholders

3. The selling corporation ordinarily contemplates a

liquidation of the enterprise

4. Title to the assets are transferred by operation of

law
5. The constituent corporations are automatically
dissolved

4. Transfer of title is by virtue of contract

Stock
Has capital stock divided into shares and with
authority to distribute dividends to its stockholders
Stockholders may transfer their shares

5. The selling corporation is not dissolved by the mere

transfer of all its property

Cumulative voting is available in the election of

directors

Non-Stock
Does not have shares and may not distribute profits to
its members
Members cannot transfer their membership unless
allowed by the articles or by-laws
Cumulative voting not available unless otherwise
provided in the articles or by-laws

Directors cannot exceed 15 in number

Trustees may exceed 15 in number

The term of a director is 1 year

The term of a trustee is 3 years; 1/3 of the Board shall

be elected annually
Members may be deprived of the right to vote by
proxy in the articles or by-laws
Officers may be directly elected by the members
unless otherwise provided in the articles or by-laws

Stockholders may vote by proxy

Officers are elected by the Board of Directors
Stockholders and directors must act in a meeting,
except where a mere written assent is sufficient or a
formal meeting unnecessary

Members may be allowed by the by-laws to vote by

mail or other similar means

Ordinary Stock Corporation

Its articles of incorporation need only contain the
general matters enumerated in Sec. 14 of the Code.

The corporate officers and employees are elected by a

majority vote of all the members of the board of
directors.

Close Corporation
Its articles must contain the special matters prescribed
by Sec. 97, aside from the general matters in Sec. 14.
Failure to do so precludes a de jure close corporation
status.
2/3 of its voting stock or voting rights must not be
owned or controlled by another corporation which is
not a close corporation.
Its articles may classify its directors.
Business of the corporation may be managed by the
stockholders if the articles so provide, but they are
liable as directors.
Its articles may provide that any or all of the corporate
officers or employees may be elected or appointed by
the stockholders.

The pre-emptive right is subject to the exceptions

found in Sec. 39.
The appraisal right may be exercised by a stockholder
only in the cases provided in Secs. 81 and 42 of the
Code.

The pre-emptive right is subject to no exceptions

unless denied in the articles
The appraisal right may be exercised and compelled
against the corporation by a stockholder for any
reason.

Its status as an ordinary stock corporation is not

affected by the ownership of its voting stock or voting
rights.
Its articles cannot classify its directors.
Business of the corporation is managed by the board
of directors.

Except as regards redeemable shares, the purchase by

the corporation of its own stock must always be made
from the unrestricted retained earnings.

Arbitration of intra-corporate deadlock by the SEC is

not a remedy in case the directors or stockholders are
so divided respecting the management of the
corporation.

Non-Stock Educational Corporation

A non-stock corporation
Governed by the provisions on non-stock
corporations and suppletorily by the provisions on
stock corporations
The number of board of trustees may be more
than 15
The term of office of the board of trustees shall be
3 years

In case of an arbitration of an intra-corporate deadlock

by the SEC, the corporation may be ordered to
purchase its own shares from the stockholders
regardless of the availability of unrestricted retained
earnings.
Arbitration of intra-corporate deadlock by the SEC is
an available remedy in case the directors or
stockholders are so divided respecting the
management of the corporation.

Educational Corporation
A special corporation which may a stock or nonstock
Governed by special laws and by the general
provisions of the Corporation Code
The number of the board of trustees should not
be less than 5 but not more than 15.
The term of office of the board of trustees shall be
5 years

Liquidation
Connotes a winding up or settling with creditors and
debtors

Rehabilitation
Connotes a reopening or reorganization

Winding up process so that assets may be distributed

to those entitled

Contemplates a continuance of corporate life in an

effort to restore the corporation to its former
successful operation

2.

Negotiable Instruments Law (Act No. 2031)

Negotiable Instruments

Non-Negotiable Instruments

Only NI is governed by the NIL (must meet the

requirement of Section 1)

Application of the NIL is only by analogy

(requirements of Section 1 not met)

Transferable by negotiation or by assignment.

A transferee can be a HDC if all the
requirements are complied with

Transferable by assignment
A transferee remains to be an assignee and
can never be a HDC

A holder in due course takes the NI free from

personal defenses and has better rights than
transferor

All defenses available to prior parties may be

raised against the last transferee (steps into
the shoes of the transferor)

Requires clean title, one that is free from any

infirmities in the instrument and defects of
title of prior transferors.
(Aquino)

Transferee acquires a derivative title only.

(Aquino)

Solvency of debtor is in the sense guaranteed

by the indorsers because they engage that the
instrument will be accepted, paid or both and
that they will pay if the instrument is
dishonored. (Aquino)

Solvency of debtor is not guaranteed under

Art. 1628 of the NCC unless expressly
stipulated. (Aquino)

Transferee has right of recourse against

intermediate parties

Transferee has no right of recourse

Promissory Note
Unconditional promise

Bills of Exchange
Unconditional order

Involves 2 parties (maker and payee)

Involves 3 parties (drawer, payee and

drawee)

Maker is primarily liable

Drawer is only secondarily liable

Only one presentment: for payment

Two presentments: for acceptance and for

payment

Promissory Note

Bills of Exchange

Unconditional promise

Unconditional order

Involves 2 parties (maker and payee)

Involves 3 parties (drawer, payee and

drawee)
Drawer is only secondarily liable

Maker is primarily liable

Only one presentment: for payment

Two presentments: for acceptance and for

payment

Negotiable Instrument
Subject is money
Is itself the property with value

Negotiable Instrument of Title

Subject is goods
The document is a mere evidence of title the
things of value being the goods mentioned in
the document

Has all the requisites of Sec. 1 of NIL

Does not have these requisites

A holder of NI may run after the secondary

parties for payment if dishonored by the party
primarily liable.

Intermediate parties are not secondarily liable

if the document is dishonored.

HDC may acquire rights over the instrument

better than his predecessors.

Holder/transferee merely acquires the rights of

the transferor

Bills of Exchange

Check

May or may not be drawn against a bank

Always drawn upon a bank or banker

May be payable on demand or at a fixed or

determinable future time

Always payable on demand

Necessary that it be presented for acceptance

Not necessary that it be presented for

acceptance

Not drawn on a deposit

Drawn on a deposit

The death of the drawer of the ordinary B/E

does not revoke the authority of the banker to
pay

The death of the drawer of a check, with

knowledge by the banks, revokes the authority
of the banker to pay

May be presented for payment within a

reasonable time after its last negotiation

Must be presented for payment within a

reasonable time after its issue (6 months)

Negotiable Instrument
If originally payable to bearer, it will always
remain so payable regardless of manner of
indorsement.

Negotiable Warehouse Receipt

If payable to bearer, it will be converted
into a receipt deliverable to order, if
indorsed specially.

A holder in due course may obtain title

better than that of the one who negotiated
the instrument to him.
Governed by NIL

The indorsee, even if holder in due course,

obtains only such title as the person who
caused the deposit had over the goods.
Governed by Warehouse Receipts Law

Negotiable Instrument

Negotiable Warehouse Receipt

If originally payable to bearer, it will

always remain so payable regardless of
manner of indorsement.

If payable to bearer, it will be converted

into a receipt deliverable to order, if
indorsed specially.

A holder in due course may obtain title

better than that of the one who
negotiated the instrument to him.
Governed by NIL

The indorsee, even if holder in due

course, obtains only such title as the
person who caused the deposit had over
the goods.
Governed by Warehouse Receipts Law

Negotiable Instrument
If originally payable to bearer, it will
always remain so payable regardless of
manner of indorsement.

Negotiable Warehouse Receipt

If payable to bearer, it will be converted
into a receipt deliverable to order, if
indorsed specially.

A holder in due course may obtain title

better than that of the one who
negotiated the instrument to him.

The indorsee, even if holder in due

course, obtains only such title as the
person who caused the deposit had over

the goods.
Governed by Warehouse Receipts Law

Governed by NIL
Fund for Reimbursement
Drawee pays the payee from his own
funds; afterwards, the drawee pays
himself from the particular fund
indicated.
Particular fund indicated is NOT the direct
source of payment but only the source of
reimbursement.

Particular Fund for Payment

There is only one act- the drawee pays
directly from the particular fund
indicated. Payment is subject to the
condition that the fund is sufficient.
Particular fund indicated is the direct
source of payment.

Acceleration Clause
A clause that renders whole
debt due and demandable upon
failure of obligor to comply with
certain conditions.

Insecurity Clause
Provisions in the contract which
allows the holder to accelerate
payment if he deems himself
insecure.

Instrument is still negotiable

Instrument is rendered nonnegotiable

because
the
holders whim and caprice
prevail without the fault and
control of the maker

Extension Clause
Clauses in the face of the
instrument that extend the
maturity dates;
a. At the option of the holder;
b. Extension to a further
definite time at the option of
the maker or acceptor
c. Automatically upon or after a
specified act or event.
Instrument is still negotiable
(Notes and Cases on Banks,
Negotiable Instruments and
other Commercial Documents,
Timoteo B. Aquino)

Extension Clause
Stated on the face of the instrument

Extension Clause under Section 120 (f)

Agreement binding the holder;
a. To extend the time of payment or
b. Postpone the holders right to enforce the
instrument

Parties are bound because they took the

instrument knowing that there is an extension
clause

Binds the person secondarily liable (and

therefore cannot be discharged from liabilities
if:
a. He consents or
b. Right of recourse is expressly reserved.
(Aquino)

Extension Clause
Stated on the face of the instrument

Parties are bound because they took the

instrument knowing that there is an
extension clause

Extension Clause under Section 120 (f)

Agreement binding the holder;
a. To extend the time of payment or
b. Postpone the holders right to enforce
the instrument
Binds the person secondarily liable (and
therefore cannot be discharged from
liabilities if:
a. He consents or
b. Right of recourse is expressly reserved.

(Aquino)
Omissions & Provisions that
do not affect Negotiability
(Section 6)
a. It is not dated;
b. It does not specify the
value given or that any value
has been given;
c. It does not specify the
place where it is drawn or
where it is payable;
d. It bears a seal;
e. It designates a particular
kind of current money in which
payment is to be made. (Sec.
6)

Additional Provisions not affecting negotiability

(Section 5)
GENERAL RULE: If some other act is required other than or
in addition to payment of money, the instrument is not
negotiable. (Sec. 5)
EXCEPTIONS:
a. Authorizes the sale of collateral securities on default;
b. Authorizes confession of judgment on default;
c. Waives the benefit of law intended to protect the
debtor; or
d. Allows the creditor the option to require something in
lieu of money.
Note: If the choice is with the debtor, the instrument is
rendered non-negotiable

Assignment
Pertains to contracts in general
Assignee takes the instrument subject
to the defenses obtaining amount the
original parties
Assignee steps into the shoes of the
assignor
and
merely
acquires
whatever rights the assignor may have
Governed by the Civil Code

Special
Blank

Absolute

Conditional
Restrictive

Negotiation
Pertains to NI
Holder in due course takes it free from
personal defenses available amount
parties
Holder in due course may acquire a
better right
Governed by the NIL

Kinds of Endorsement
Specifies the person to whom or to whose order, the instrument is to be payable (Sec. 34)
Specifies no indorsee: Instrument becomes payable to bearer and may be negotiated by
delivery (Sec. 34). May be converted to special indorsement by writing over the signature of
indorser in blank any contract consistent with character of indorsement (Sec. 35)
One by which indorser binds himself to pay:
a. Upon no other condition than failure of prior parties to do so;
b. Upon due notice to him of such failure.
Right of the indorsee is made to depend on the happening of a contingent event. Party required
to pay may disregard the conditions. (Sec. 39)
An indorsement is restrictive, when it either:
a. Prohibits further negotiation of the instrument; or
b. Constitutes the indorsee the agent of the indorser; or
c. Vests the title in the indorsee in trust for or to the use of some other
persons. But mere absence of words implying power to negotiate
does not make an indorsement restrictive. (Sec. 36)
Effect of Restrictive Indorsement
Confers upon the indorsee the right to:
a. receive payment of the instrument

b. bring any action thereon that the indorser could bring

c. transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.
Qualified

Constitutes the indorser a mere assignor of the title to the instrument. (Sec.
38)It is made by adding to the indoser's signature words like "sans recourse,
without recourse", "indorser not holder", "at the indorser's own risk", etc.
II. It has been held that the oral testimony is not admissible to establish that a
unqualified indorsement is in fact qualified (Velasco vs. Tan Liuan & CO.,
March 17, 1922)
I.

Effects of Qualified Indorsement

a. A qualified indorser has limited liability, he is liable for breach of warranty if the
instrument is dishonoured by non-acceptance or non-payment due to:
i. forgery
ii. lack of good title to the part of the indorser
iii. lack of capacity to indorse on the part of prior parties
iv. the fact that at the time of the endorsement, the instrument was valueless
or not valid, and he knew
of the fact.
b. A qualified indorsement does not impair the negotiable character of the
instrument
Joint

Indorsement payable to 2 or more persons (Sec. 41)

I. General Rule where the instrument is payable to two or more payees all must
indorse in order that the instrument may be validly negotiated
II. Exception:
i. Where the payees or indorsees indorsing has authority to indorse
for the others
ii. Where the payees or indorsees are partners

Irregular

A person who, not otherwise a party to an instrument, places thereon his signature in blank
before delivery (Sec. 64)

Successive
Facultative
Absence of Consideration
It is the total lack of any valid
consideration
Embraces
transactions
where
consideration was intends to pass

Who

1.

2.
3.

no

Failure of Consideration
It is the neglect/failure of one of the
parties to give, to do or to perform the
consideration agreed upon
Implies that the giving of valuable
consideration was contemplated but that
it failed to pass

Holder in Due Course (HDC)

Instrument is complete and regular upon its face;
a. Instrument is incomplete if there are omission
b. If omission is not an important particular, such omission is of no moment
Became a holder before it was overdue and without notice that it had been previously
dishonored;
For value and in good faith; and

Rights

4.

At the time he took it, he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it. (Sec. 52)

1.
2.
3.

May sue on the instrument in his own name;

May receive payment and if payment is in due course, the instrument is discharged;
Holds the instrument free from any defect of title of prior parties and free from
defenses available to parties among themselves; and
May enforce payment of the instrument for the full amount thereof against all parties
liable thereon. (Secs. 51 and 57
Exception:
a. When the holder is a holder for value only to the extent of his lien
HDC only to that extent
b. When the holder acquired notice of any infirmity in the instrument or
defect in the title of the person negotiating the same before he has
paid the full amount agreed to be paid therefor HDC only to the
extent of the amount paid
c. In case of alteration as to the amount HDC may enforce payment only
according to its original tenor

4.

Accommodation Party
Signs instrument without receiving value
thereof
Sings instrument for the purpose of
lending his name or credit to some other
person
May always show by parol evidence that
he is only such a party
Cannot avail of the defense of absence
or failure of consideration against a
holder not in due course
After
payment,
to
sue
for
reimbursement
from
the
accommodated party
Primary and Secondary Liabilities of
Parties
Makes the parties liable to pay the
sum certain in money stated in the
instrument.

Conditioned on presentment and

notice of dishonor (Campos and
Lopez-Campos,
Negotiable
Instruments Law, 1994 ed.)
Action cannot be brought until
maturity of instrument

Regular Party
Sings instruments for value
Does not sign for that purpose in which
the accommodation party did
Cannot disclaim or limit his personal
liability as appearing on the instrument
by parol evidence
Can avail the said defense against a
person not a holder in due course
May not sue any subsequent part for
reimbursement

Warranties of Parties
Impose no direct obligation to pay in the
absence of breach thereof. In case of breach,
the person who breached the same may
either be liable or barred from asserting a
particular defense.
Does not require presentment and notice of
dishonor. (Campos and Lopez-Campos,
Negotiable Instruments Law, 1994 ed.)
May be brought at any time; the breach may
even occur at the time of transfer

Maker (Sec. 60)

A. Engages to pay according
to the tenor of the
instrument; and
B. Admits the existence of
the payee and his capacity
to indorse.
Maker
Estopped
from
raising defense:
1. payee is fictitious
2. payee has no capacity
(insane, minor, ultra vires
act, etc.)

Drawer (Sec. 61)

A. Admits the existence
of the payee and his
capacity to indorse;
B. Engages that the
instrument will be
accepted or paid by
the party primarily
liable; and
C. Only liable when:
(1) dishonored and
(2) proper proceedings is
Taken
D. Liable to:
(a) holder and
(b) if any of the
indorsers
intervening between
the holder and the
drawer is compelled
to pay by the holder
E. Limit Liability: he can limit
liability by adding:
(1) without recourse
(2) not liable in case of
non-payment or acceptance

Primary liability
Acceptor (Sec. 62)
A. Engages to pay according to the tenor of his
acceptance;
B. Admits the existence of the drawer, the
genuineness of his signature and his capacity and
authority to draw the instrument; and
C. Admits the existence of the payee and his
capacity to indorse.
Acceptor pays according to the tenor of his
acceptance not the tenor of the note, if the note is
altered, he will be required to pay only on the
tenor of his acceptance (the altered value), even
to a HDC (Agbayani)

A bill of itself does not operate as an assignment

of funds in the hands of the drawee available for
the payment thereof and the drawee is not liable
unless and until he accepts the same (Sec.127)
Secondary Liable
General Indorser (Sec. 66)
Irregular Indorser (Sec.
64)
A. Warrants all subsequent HDC :
A
person,
not
otherwise a party to an
i. That the instrument is genuine and in
instrument, places his
all respect what it purports to be
signature thereon in
ii. He has good title to it;
blank before delivery.
iii. All prior parties had capacity to
(Sec. 64)
contract
iv. The instrument is, at the time of
A.
If
instrument
endorsement, valid and subsisting.
payable to the order of
rd
B. Engages that the instrument will be accepted a 3 person, he is liable
or paid, or both, as the case may be, according to the payee and
subsequent parties.
to its tenor; and
C. If the instrument is dishonored and necessary
proceedings on dishonor be duly taken, he will
pay to the party entitled to be paid.
Warranties Extend to:
1. Subsequent HDC
2. Person who derive their title from HDC
3. Immediate transferee, even though not HDC
Warranty does not extend to drawers signature
to the drawee who pays it since drawee is not a
HDC

B.
If
instrument
payable to order of
maker or drawer or to
bearer, he is liable to
all parties subsequent
to the maker or
drawer.
C. If he signs for
accommo-dation of the
payee, he is liable to all
parties subsequent to
the payee.

Limited Liability
Qualified Indorser
Every person negotiating instrument by delivery or by a qualified
endorsement warrants that:

Person Negotiating by delivery (Sec. 65)

A. Warranties same as those of qualified
indorsers; and

A. Instrument is genuine and in all respects what it purports to be;

B. He has good title to it;
C. All prior parties had capacity to contract;
D. He has no knowledge of any fact which would impair the validity
of the instrument or render it valueless.
Person Negotiating by mere
delivery or by qualified
indorsement
A. Warranties same as those of
qualified indorser
B. Warranties extend
immediate transferee only.

Real Defenses/Absolute Defenses

Those that attach to the instrument
itself and are available against all
holders, whether in due course or not,
but only by the parties entitled to raise
them.
1. Material Alteration;
2. Want of delivery of incomplete
instrument;
3. Duress amounting to forgery;
4. Fraud in factum or fraud in esse
contractus;
5. Minority (available to the minor
only);
6. Marriage in the case of a wife;
7. Insanity where the insane person
has a guardian appointed by the court;
8. Ultra vires acts of a corporation
9. Want of authority of agent;
10. Execution of instrument between
public enemies;
11. Illegality if declared void for any
purpose
12. Forgery.

to

B. Warranties extend to immediate

transferee only.

General Indorser

There is secondary liability, and warranties

Warrants that the instrument is, at the time of his
indorsement, valid and subsisting

Personal Defenses/Equitable Defenses

Those which are available only against a person not a holder in due
course or a subsequent holder who stands in privity with him.

1. Absence or failure of consideration, partial or total;

2. Want of delivery of complete instrument;
3. Insertion of wrong date in an instrument;
4. Filling up of blank contrary to authority given or not within
reasonable time;
5. Fraud in inducement;
6. Acquisition of instrument by force, duress, or fear;
7. Acquisition of the instrument by unlawful means;
8. Acquisition of the instrument for an illegal consideration;
9. Negotiation in breach of faith;
10. Negotiation under circumstances that amount to fraud;
11. Mistake;
12. Intoxication (according to better authority);
13. Ultra vires acts of corporations where the corporation has the
power to issue negotiable paper but the issuance was not authorized
for the particular purpose for which it was issued;
14. Want of authority of agent where he has apparent authority;
15. Insanity where there is no notice of insanity on the part of the
one contracting with the insane person; and
16. Illegality of contract where the form or consideration is illegal.

Fraud in Inducement

Fraud in Esses Contractus or Fraud in

Factum or Fraud in Execution

The person who signs the instrument

intends to sign the same as a NI but was
induced by fraud

The person is induced to sign an

instrument not knowing its character as a
bill or note

Rules on Forgery
Promissory Note
Order Instrument

Bearer Instrument

Makers
signature
forged

a. Maker is not liable because he never

became a party to the instrument.
b. Indorsers subsequent to forgery are liable
because of their warranties.
c. Party who the made the forgery is liable.

a. Maker is not liable.

b. Party who made the forgery is liable.

Payees
signature
forged

a. Maker and payee not liable.

b. Indorsers subsequent to forgery are liable.
c. Party who made the forgery is liable.

Indorsers
signature
forged

a. Maker, payee and indorser whose signature

was forged is not liable.
b. Indorsers subsequent to forgery are liable.
(Because of their warranties)
c. Party who made the forgery is liable.

a. Maker is liable. (Indorsement is not

necessary to title and the maker engages to
pay holder)
b. Party who made the forgery is liable
a. Maker is liable. (indorsement is not
necessary to title and the maker engages to
pay the holder)

Drawers
signature
forged

Payees
signature
forged

c. Indorsers may be made liable to those

persons who obtain title through their
indorsements.

b. Indorser whose signature was forged not

liable to one who is not a HDC provided the
instrument is mechanically complete before
the forgery.
c. Party who made the forgery is liable.

Bills of Exchange
Order Instrument
a. Drawer is not liable because he was never a party
to the instrument.
b. Drawee is liable if it paid (no recourse to drawer)
because he admitted the genuiness of the drawers
signature. Drawee cannot recover from the
collecting bank because there is no privity between
the collecting bank and the drawer. The latter does
not give any warranty regarding the signature of the
drawer. (Associated Bank vs. CA)
c. Indorsers subsequent to forgery liable (such as
collecting bank or last endorser)
d. Party who made the forgery is liable
a. Drawer, drawee and payee not liable.
b. Indorsers subsequent to forgery are liable. (such
as collecting bank)
c. Party who made the forgery is liable

Bearer Instrument
a. Drawer is not liable.
b. Drawee is liable if it paid. Drawee cannot
recover from the collecting bank.
c. Party who made the forgery is liable.

a. Drawer is liable
b. Drawee is liable
c. Payee is not liable
d. Collecting bank is liable because of
warranty

Indorsers
signature
forged

a. Drawer, payee and indorser whose signature was

forged not liable.
b. Drawee is liable if it paid.
c. Indorsers subsequent to forgery are liable. (such
as collecting bank)
d. Party who made the forgery is liable.

e. Party who made the forgery is liable

a. Drawer is liable. (indorsement not
necessary to title)
b. Drawee is liable.
c. Indorser whose signature was forged is
liable because indorsement is not necessary
to title.
d. Party who made the forgery is liable.

Enforcement of Judgment
Primary Liability

As to the maker The unconditional promise attaches the

moment the maker makes the instrument while the acceptors
assent to the unconditional order attaches the moment he
accepts the instrument. No further act is necessary in order for
the liability to accrue. Presentment for payment is all that is
necessary. (Aquino)

Secondary
Liability

1. Indorser
2. Drawer
Their liability cannot be immediately enforced. There are
necessary steps which should be taken in order to charge these
persons. Unless the holder is excused from taking any of the
steps, the persons secondarily liable are discharged.

Steps to charge the parties liable

Promissory Note
(indorsers)
Bills of Exchange

1.
2.

Presentment for payment to the maker.

Notice of dishonor should be given, if dishonored by non-payment.

Presentment for acceptance in the following instances:

1. Where the bill is payable after sight, or when it is necessary in order to fix the maturity
of the instrument;
2. Where the bill expressly stipulates that it shall be presented for acceptance;
3. Where the bill is drawn payable elsewhere than at the residence or place of business of
the drawee. (Sec. 143)
Note: In all the above cases, the holder must either present the bill for acceptance or
negotiate it within a reasonable time; otherwise, the drawer and all indorsers are
discharged. (Sec. 144)
b. If dishonored by non-acceptance;
1. Notice of dishonor given to drawer and indorsers.
2. Protest in case of a foreign bill.
c. If bill is accepted:
1. Presentment for payment to the acceptor.
2. If dishonored upon presentment for payment
(i) Notice of dishonor to persons secondarily liable.
(ii) Protest for dishonor by non-payment in case of foreign
bill.

When notice of Dishonor is not required to be give to:

Drawer
Indorser
Drawer and drawee are the same
Drawee is a fictitious person or does
not have the capacity to contract, and
indorser was aware of that fact at the
time he indorsed the instrument
Drawee is a fictitious person or not Indorser is the person to whom the
having the capacity to contract
instrument is presented for payment
Drawer is the person to whom the
instrument is presented for payment

Instrument was made or accepted for

his accommodation

The drawer has no right to expect or

require that the drawee or acceptor
will honor the instrument
Where the drawer has countermanded
payment
Presentment for Acceptance
When Required
1.
2.
3.

How Made

1.
2.
3.

When Excused

1.
2.
3.

Acceptance
What

Kinds

Where the bill is payable after sight, or when it is necessary in order to fix the
maturity of the instrument;
Where the bill expressly stipulates that it shall be presented for acceptance;
Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee. (Sec. 143)
Where a bill is addressed to 2 or more drawees who are not partners,
presentment must be made to all
Where drawee is dead, presentment may be made to his personal representative
Where the drawee is adjudged a bankrupt, insolvent or made an assignment to
his creditors, presentment may be made to him or his trustee or assignee
Where the drawee is dead, or has absconded, or is a fictitious person or a person
not having capacity to contract by bill;
After exercise of reasonable diligence, presentment cannot be made;
Although presentment has been irregular, acceptance has been refused on some
other ground. (Sec. 148

1.
2.

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

1.
2.
3.

Must be in writing and

signed by the drawee and
must not express that the drawee will perform his promise by any other means than the
payment of money. (Sec. 132)
must be made by or on behalf of the holder
at a reasonable hour on a business day
before the bill is overdue
to the drawee or some person authorized to accept or refuse

4.
5.
6.
7.

The holder of the bill presenting the same for acceptance may require that the acceptance be written
on the bill, and if such request is refused, may treat the bill as dishonored. (Sec. 133)
Form

General - assents without qualification to the order of the drawer.

Qualified - which in express terms varies the effect of the bill as drawn.
a. Conditional - makes payment by the acceptor dependent on the fulfillment of a condition
therein stated.
b. Partial - an acceptance to pay part only of the amount for which the bill is drawn.
c. Local - an acceptance to pay only at a particular place.
d. Qualified as to time
e. The acceptance of some one or more of the drawees but not of all. (Sec. 141)
Implied Acceptance
If after 24 hours, the drawee fails to return the instrument. He is also deemed to have accepted the
instrument when he destroys the same.

Notice of Dishonor
Requisite

1.
2.
3.
4.

When Dispensed
with

1.
2.
3.

Given by holder or his agent, or by any party who may be compelled by the holder
to pay (Sec. 90);
Given to secondary party or his agent (Sec. 97);
Given within the periods provided by law (Sec. 102); and
Given at the proper place (Secs. 103 and 104)
When party to be notified knows about the dishonor, actually or constructively
(Secs. 114-117);
If waived(Sec. 109); and
When after due diligence, it cannot be given (Sec. 112).

How given

1.
2.

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

To whom given

1.

Non-acceptance (bill) to persons secondarily liable, namely, the drawer and

indorsers as the case may be.
Non-payment (both bill and note) indorsers.

2.

Note: Notice must be given to persons secondarily liable. Otherwise, such parties are
discharged. Notice may be given to the party himself or to his agent.
Who should give

1.
2.
3.

The holder
Another on behalf of the holder
Any party to the instrument who may be compelled to pay it to the holder, and
who would have a right of reimbursement from the party to whom notice is given.
(Sec. 90)

When notice of Dishonor is not required to be give to:

Drawer
Indorser
Drawer and drawee are the same
Drawee is a fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument
Drawee is a fictitious person or not having the Indorser is the person to whom the instrument
capacity to contract
is presented for payment
Drawer is the person to whom the instrument is
presented for payment

Instrument was made or accepted for his

accommodation

The drawer has no right to expect or require

that the drawee or acceptor will honor the
instrument
Where the drawer has countermanded payment
Inland B/E

Foreign B/E

A bill which or on its face purports to

be both drawn and payable within the
Philippines.

One which is or on its face purports to

be drawn or payable outside the
Philippines.

Notice of Dishonor

Protest

Required in inland bill

Required in foreign bill

May be oral or written

Always written

May be made by a party or agent

Made by a notary public or a respectable

resident in the presence of witness

Made in residence of parties

Made in the place of dishonor

Ordinary Acceptance
No previous protest is required

Acceptance for Honor

Previous protest is required

Consent of holder is implied

Consent of holder is required

Drawee is acceptor

Acceptor must be stranger to the bill

Acceptor is primarily liable

Acceptor is secondarily liable

No acceptor in the alternative or in

succession

There may be several acceptors for honor for different

parties in the bill

Instrument is discharged upon payment

by the acceptor

Bill is not discharged upon payment by accepted for

honor

Benefit the holder and all prior parties

Benefits parties subsequent to party for whose honor

the bill is accepted

Acceptance for Honor

Previously protested for non-acceptance
or for better security
Bill must be overdue
Made by a stranger or party not liable on
the bill
Consent of the holder is necessary
Acceptor is secondarily liable
Notarial act of honor not necessary
Effects (Section 164, 165)

Payment for Honor

Previously protested for non-payment
Bill may be overdue
Made by any person whether a party or
stranger to the bill
Consent of the holder is not necessary
Acceptor is primarily liable
Notarial act of honor necessary
Effects (Section 175, 177)