BUSINESS LAW

CPA BOARD EXAM LECTURE NOTES

LAW
-

a)
b)
c)
d)

limits mans actions & words

chained to
o hands
o feet
o mouth
reasonable rule of conduct & action
just & obligatory
promulgated by competent authority Philippine Congress
for common observance & benefit

I. OBLIGATIONS (CO, NO)

1) Kinds of Obligation
a) Civil (1156-1304)
- a JURIDICAL NECESSITY TO GIVE, TO DO or NOT TO DO
- creditor has right of action to enforce performance
- creditor has right to file a case in court/to sue
b) Natural (1423-1430)- no right of action/file a case in court
- voluntary fulfillment/performance
benefited person has right of retention what has been paid or
delivered
- NOT based on POSITIVE LAW
- based on EQUITY & NATURAL LAW
2) 4 Elements of Obligation (AS, PS, P, JT)
a) active subject
- creditor/obligor
b) passive subject - debtor/obligee
c) prestation
- the conduct to be observed in the performance of the obligation
to give
real (thing)
to do
Personal(act - positive
not to do - negative
or service)
d) juridical tie/vinculum juris - reason why obligation exists
3) Sources of Obligation (L, C, QC, D, QD)
a) Law
- cannot be presumed, always w/basis
- non-performance or erroneous/wrong performance of an obligation
prescribed by law (taxes, licenses)
b) Contract
- with meeting of the minds
- have the force of law b/w contracting parties
- should be complied w/ in good faith
c) Quasi-contract - no pre-existing contract (SI, NG)
- he who is benefited by the act of another MUST PAY
to prevent unjust enrichment
Solutio indebeti
- return what is not due to you
- sense of gratitude
Negotiorum Gestio
- voluntary management of abandoned property
- officious manager has right to reimbursement
d) Delict/crime
- criminal liability (vs. people of the Philippines) source of civil liability
- imprisonment
- civil liabilities: (R, R, I)
Restitution
- return the thing
Reparation
- pay the value of the thing
Indemnification - pay damages
e) Quasi-delict
- cause damage without intention
- without contract
- damage done not intentional but due to NEGLIGENCE
- pay damages
- ex: CULPA AQUILIANA
4) Prestations (OBLIGATIONS) (TG, TD, NTD)
a) To Give (Real Obligation) (S,G)
i.
Specific or Determinate Thing
only one
ONLY SPECIFIC THING CAN BE LOST
Creditor may compel debtor to deliver
Debtor must take care of the thing before delivery. HOW?


Stipulation

Law

Deligence of a good father of the family

Includes delivery of accessions & accessories unless stipulated
Excludes fruits that arise before maturity
Rights of person who paid:

Before Delivery
- Personal
- to demand delivery
- extra judicial (out of court)
(On or after maturity)
- judicial (inside court)

After Delivery - Real

- ownership
ii.
Generic or Indeterminate Thing
Many of the same kind
Belongs to a group or class
Cannot be lost
Rights of person who paid:

Ask another person to deliver at the expense of the debtor

File a case in court

b) To Do (Positive Personal)
Debtor must do it properly in accordance w/ agreement
May be sued for damages
What is poorly done should be undone at the debtors expense
If debtor refuses to do, creditor cannot compel debtor to do nor
file in court

Reason
- the law does not allow involuntary servitude
- law against slavery

Remedy
- ask another person to perform, pay the person
& demand payment from debtor including
damages
- if debtor still refuses to pay - SUE
c) Not To Do (Negative Personal)
Anything done shall be undone at the debtors expense
Debtor cannot be sued for doing what should have not been
done
While still doing what should have not been done can be sued
5) Sources of liability for damages(F, N, D)
a) Fraud (DOLO) (DC, DI)
i. Dolo causante (causal fraud)
- to induce another to enter into
Contract
- voidable contract
Remedy - ANNULMENT
ii. Dolo incidente
- fraud in the performance
Remedy - demand for DAMAGES
ANY WAIVER OF AN ACTION FOR FUTURE FRAUD IS VOID
b) Negligence (CULPA) - omission of diligence required by the (CA, CC)
NATURE OF THE OBLIGATION
- corresponds w/ the circumstances of the
Person
Time
Place
i. Culpa aquilliana
- no contract
- quasi-delict
ii. Culpa contractual - arise in the performance of a contract
FORTUITOUS EVENT
NO LIABILITY FOR FORTUITOUS EVENT, EXCEPT: (SLN)
i. Stipulation
ii. Law
iii. Nature of obligation
EVEN IF THE DEBTOR HAS NO FAULT/DUE TO FORTUITOUS EVENT, DEBTOR
IS LIABLE WHEN:
i. He is already in delay
ii. Me made several promises to several persons
iii. The thing lost is a proceed of a crime
IF ALREADY DELIVERED BUT CREDITOR REFUSES TO ACCEPT AND LOST DUE TO
FORTUITOUS EVENT, OBLIGATION IS EXTINGUISHED
ONLY SPECIFIC THING CAN BE LOST
c) Delay/Default (MORA) (MS, MA, CM)

i. Mora solvendi
- delay of debtor
MS ex re
- to give
MS ex persona - to do
ii. Mora accipiendi
- delay of creditor
iii. Compensatio morae
- delay in both debtor and creditor
NO DEMAND, NO DELAY, EXCEPT: (RTOLD)
a. Reciprocal obligation - performance of one is dependent
the performance by the other
- both are ready, NO DELAY
- when one is ready & the other is
- not, DELAY BEGINS
b. Time is the essential motive in the establishment of the obligation
- ex: wedding
c. Obligation so provides - stipulated
d. Law declares
- ex: tax
e. Demand would be useless
NO DELAY in obligation NOT TO DO
d) Contravention of the tenor of the obligation

upon

6) KINDS OF OBLIGATIONS (PCPAFJSDIP)

a) Pure
- not subject to a condition
- demandable at once
Also DEMANDABLE AT ONCE if SUBJECT TO A RESOLUTORY CONDITION OR
PERIOD
b) Conditional
- subject to a FUTURE and UNCERTAIN EVENT or
PAST EVENT unknown to both parties
KINDS OF CONDITIONS (S, R, P, C, M, I)
i. Suspensive
- demandability of obligation is DEPENDENT upon
The FULFILLMENT of the condition
- ex: I WILL PAY you if you pass the CPA board
exam in May 2007
OBLIGATION TO GIVE
- RETRO effect
- Fruits and interests DEEMED COMPENSATED
ii. Resolutory
- DEMANDABLE AT ONCE
- upon FULFILLMENT of the condition, obligation
is EXTINGUISHED
- ex: I WILL NOT PAY you if you pass the CPA
board exam in May 2007
iii. Potestative
- dependent upon the SOLE WILL OF THE DEBTOR
- condition makes the OBLIGATION VOID
- ex: I will pay you if I jump in Pasig River
iv. Causal
- dependent upon CHANCE
v. Mixed
- dependent upon CHANCE and WILL of THIRD
PERSONS
vi. Impossible
- physical - to fly to the moon
- legal
- to kill somebody
- OBLIGATION is VOID
condition NOT TO DO AN IMPOSSIBLE THING - disregarded
- OBLIGATION becomes PURE and DEMANDABLE
AT ONCE
c) With a period
- depends upon the arrival of the term
Definite
Indefinite
o Statutory
- taxes
o Potestative
- when his means permits him to do so
- dependent upon the capacity of the debtor
- VALID, UNLIKE in POTESTATIVE CONDITION
PERIOD
GENERALLY for the benefit of both CREDITOR & DEBTOR
BEFORE MATURITY
- debtor cannot compel acceptance
- creditor cannot demand payment
Debtor shall lose right to the period if: (IGIVA)
a) Debtor is insolvent
b) Debtor failed to furnish the promised guaranty
c) Guaranty is impaired
Due to his fault
Even due to fortuitous even, unless he furnishes a new 1
d) Debtor violates any undertaking agreed upon

e) Debtor attempts to abscond

May be for the benefit of the DEBTOR - on or before
Court shall fix the period if:
a) Not fixed by the parties
b) Depends upon the sole will of the debtor
c) Debtor binds to pay when his means permits him to do so
PERIOD
CONDITION
Certain
Uncertain
Future
May be past
Potestative period obligation is valid
Potestative condition obligation
is void
d) Alternative
- prestations are connected by OR
several prestations
complete performance of one is sufficient
generally, right of choice belongs to the debtor
o loss of alternative objects at debtors fault:
one or some are lost
debtor may choose from the remaining plus damages
all are lost
basis - value of last thing lost or last service w/c became
impossible of performance plus damages
right of choice may also be expressly granted to the creditor
one or some are lost
creditor may choose from the remaining plus damages
demand for the value of any of the lost things plus damages also
applicable when all are lost due to debtors fault
if only one is left, debtor loses the right of choice
e) Facultative
Only one prestation has been agreed upon
Debtor is given right to render another in substitution
Only debtor has the right of choice
Right cannot be transferred to creditor
In ALTERNATIVE & FACULTATIVE obligation, CHOICE becomes EFFECTIVE only when
COMMUNICATED
After it has been communicated, obligation becomes SIMPLE
ALTERNATIVE
FACULTATIVE
Several prestations
Only one prestation
Complete performance of one is ok
Debtor may render another in substitution
Right of choice debtor or creditor
Right of choice debtor only
Right of choice may be transferred to Right of choice cannot be transferred
creditor

Effectivity of choice upon communication

When choice has been communicated no longer A/F but SIMPLE
f) Joint & solidary refer to the PARTIES involved
Several debtors and/or creditors
One and the same obligation
Generally joint
o To each his own
Solidary only if SLN
o Act, benefit, misfortune of one is act, benefit, misfortune of all
o I promise to pay signed by several persons
o jointly & severally
o any one solidary debtor can be compelled performance of the obligation
o If one is not ready and incurred delay and became liable for damages, the debtor
in default will be liable for damages to the other debtors.
o if already for delivery but due to fault of one solidary debtor, the thing is lost,
solidary debtor in fault carries the burden with respect to the other solidary debtors
o requires trust and confidence
o solidary debtor cannot transfer his share without the knowledge of the
other solidary debtors
o ex: partners & partnership solidarily liable in quasi-delict
Division of claim and/or liability is always based on the # of joint parties, whether
debtor or creditor
g) Divisible & indivisible refer to the OBJECT or SUBJECT MATTER

- capable of partial performance

- services, as a general rule is divisible
Indivisible
- not capable of partial performance
Even though divisible, may be indivisible if S/L
h) With a penal clause
- debtor assumes accessory liability in case of nonperformance of the principal obligation
Purposes of penal clause (ESP)
Ensure performance of the obligation
Substitute as indemnity for damages or interest
Penalize debtor in case of non-performance
If PENAL CLAUSE is VOID, PRINCIPAL OBLIGATION remains VALID
If PRINCIPAL OBLIGATION is VOID, PENAL CLAUSE is also VOID
Court shall reduce penalty agreed upon if:
Penalty is excessive or unconscionable
Principal obligation partly or irregularly complied with
Proof of actual damages not necessary to enforce penalty

Divisible

7) Extinguishment of Obligation (PLCCCN) or (NoCoMeRePaLo) + others

a) Payment - refers not only to payment of money
Who should pay (D, SII, AP, IP, TP)
i. Debtor
ii. Successors in interest

Heirs - cannot be compelled to pay more than the value of

inheritance
- rights & obligations are inherited unless:
Prohibited by law
Rights & obligations are purely personal
assigns
iii. Authorized person - agent
iv. Interested person
v. Third person, provided accepted by creditor has right to demand reimbursement
Change in debtor
Delegacion
- With knowledge & consent of the debtor
- right to reimbursement in full
Expromission
- W/o knowledge & consent of the debtor
- right to reimbursement only up to the
amount beneficial to the debtor
- no subrogation
- all guarantees & securities are
extinguished
Payment by incapacitated person is not valid

To
i.
ii.
iii.
iv.

whom should the payment be made (C, SII, AP, TP)

Creditor
Successors in interest heirs & assigns
Authorized person - agent
Third person valid only if:
Inured to the benefit of the creditor
Ratified by the creditor
Third person acquired the right
Change in creditor- subrogation
Payment to incapacitated persons - NOT VALID(VOIDABLE)
Valid only if:
He kept the thing paid
He is benefited by it
What should be paid - what has been agreed upon
- creditor cannot be compelled to accept a different thing
even though it is more valuable
- if object is indeterminate & the quality has not been
stipulated, purpose & circumstances of the obligation
shall be considered
- average quality depends on P & C
Where should the payment be made
Place agreed upon
No place agreed upon if the object is:
Indeterminate - debtors domicile

- place where the thing is at time of constitution of

the contract
- when debtor is prevented by fortuitous event, deliver to
a place nearest the agreed place
Who should shoulder the expenses
- general rule: debtor
How should you pay - completely
- if incomplete or irregular but creditor accepted w/o
protest valid & obligation is paid & extinguished
Payment by incapacitated person is not valid
SPECIAL FORMS OF PAYMENT: (Aop, Pbc, Dep Top)
i. Application of payment
several debts to one creditor are due & demandable
if no application specified, apply to most onerous debt
one debtor incomplete payment to one creditor debtor has right of
application
if one/two (but not all) creditors are paid, unpaid creditor can demand for
cancellation of payment & compel application to all creditors proportionately
usually, partial only
ii. Payment by cession
Debtor is insolvent
Several creditors
Transfers all properties
Debtor is released only up to the proceeds of the properties sold
iii. Dation in payment
Debt is money paid with property
Released only if accepted by the creditor
iv. Tender of payment & consignation
Deposit of payment in proper court
Always preceded by tender of payment EXCEPT when TRIAL:
Two or persons are claiming the same debt
Receipt creditor refuses to issue
Incapacitated creditor
Absent/unknown/missing creditor
Lost title of obligation is lost
Condonation or Remission
Gratuitous abandonment of creditors right to collect
ESSENTIALLY gratuitous essentially means NO EXEMPTION
May be express or implied; total or partial
Requires debtors consent
Examples:
i. Implied
Cancellation of promissory note
Return of negotiable instrument w/o collecting
i. Express
Legacy of 10,000 given by creditor to debtor who owes him the same amount
Confusion or Merger of Rights
- one person becomes the debtor & creditor of one
& the same obligation
Compensation quits
Two persons in their own rights are debtors & creditors of each other
May be legal or voluntary, total or partial
Requisites of legal compensation (Pb, Skq, Dad, Nc)
i. Each obligors are principally bound
ii. Both debts are in money or same kind and quality of thing (if stated)
iii. Both debts are due & demandable
iv. No controversy over the debts commenced by third persons
There can be no compensation in: (S, D, C, Cd)
i. Support
ii. Deposit
iii. Commodatum (hiram)
iv. Civil liability arising from crime or delict
Novation
Change of obligation by a new one resulting in its (old) extinguishment
Kinds of Novation (R, P)
i. Real
- change of object or principal condition
ii. Personal
- change of parties (see payment)
Creditor
- subrogation
Debtor
- substitution

b)

c)
d)

e)

Determinate

 Expromission - without knowledge or consent of debtor

Delegacion
- with knowledge or consent of debtor
Partial payment
- partially paid creditor preferred in case debtor becomes
insolvent
If new obligation is VOID, original obligation SUBSISTS
If original obligation is VOID, new obligation is also VOID
If old obligation is subject to a CONDITION or PERIOD, new obligation shall be
subject to the SAME CONDITION or PRERIOD, unless otherwise stipulated
f) Loss of Thing Due
Only SPECIFIC thing can be LOST
If SPECIFIC thing LOST W/O debtors fault or due to FORTUITOUS event,
obligation is EXTINGUISHED, except SLN
Thing is considered lost if:
i. It perishes
ii. Goes out of commerce
iii. Disappears, existence unknown or can no longer be recovered
g) Other causes of extinguishments (P A R Frc)
Prescription
Annulment
Recission
Fulfillment of resolutory condition
II. CONTRACTS
NOT ALL AGREEMENTS are CONTRACTS
ALL CONTRACTS are AGREEMENTS
1) DEFINITION
Meeting of the minds b/w 2 or more persons whereby binds himself with respect of the
other(s) to give something or to deliver some service
2) ELEMENTS (N, E, A)
a) Natural
- inherent in some contracts (ex: warranty against eviction &
against hidden defects contract of sale)
b) Essential
- must be present in order that there will be a valid contract (C,
O, C)
Consent
Meeting of the offer and acceptance upon the thing and the cause
OFFER
may be made thru an agent
Advertisements are not definite offers but mere invitation to make an
offer
May be withdrawn before perfection of the contract
If offeree is given option period, offeror cannot withdraw if offeree gives an
option money

Option period period of time

given to the oferree within which to decide whether to accept the offer or
not

Option money given for the

exercise of the option period

Earnest money given to show the

buyers interest in the contract of sale
ACCEPTANCE
thru letter, telegram or correspondence perfects contract only upon
acceptance reaches knowledge of the offerer
VICES THAT MAKE CONSENT DEFECTIVE (IMVIFU) - VOIDABLE
Incapacity
o Deaf mute who do not know how to write
o Minors
o Insane
o Drunk
Incapacitated persons cannot validly give consent except if the objects
involved are necessaries such as food, clothing, shelter, medicine
and education according to economic standing of the family
Capacitated persons disqualified to enter into contract:
o Contract of sale or donation b/w husband and wife

Contract of sale b/w guardian and ward involving property of the

ward
Consent given in the state of drunkenness or under hypnotic spell is also
defective - VOIDABLE
Mistake
Violence
Intimidation
Fraud
Undue influence
Consent of one of the parties defective, contract is voidable; remedy,
annulment
Object (T R S)
May be
Things
Rights
Services
Future things may be the object of a contract but NOT FUTURE
INHERITANCE
Future things
o Emptio rei esperati
future things
o Emptio spei
- hope or expectancy
Cannot be the object of a contract
Things or services outside the commerce of men
Future inheritance
Things & services contrary to LAW, MORALS, GOOD CUSTOMS, PUBLIC
ORDER & PUBLIC POLICY
Impossible service physical or illegal
Intransmissible rights
Cause or consideration
Essential or impelling reason why the parties enter into a contract
Prestation to be performed by one in favor of the other
Thing/service already delivered or rendered, or the liberality of the benefactor
Distinctions b/w motive & cause:
CAUSE
MOTIVE
Essential reason why parties enter
Indirect and remote reason why a
into a contract
party gives consent
Always known
Not always known
Essential element of a contract
Not an essential element of a
contract
Affects the validity of a contract
Does not affect the validity of a
contract
o

c) Accidental
contract of loan.

- matters stipulated by the parties such as payment of interest in a

3) IMPORTANT DISTINCTIONS B/W OBLIGATION & CONTRACT

OBLIGATION
CONTRACT
Effect of the contract
Cause/juridical tie of an obligation
There can be an obligation w/o a
There can be no contract w/o an
contract
obligation
4) BASIC PRINCIPLES OF CONTRACT (F, OF, PC, M, R)
a) Freedom or liberty to contract
Not absolute
Subject to limitations on law, morals, good customs, public order & public policy
b) Obligatory force & compliance in good faith
c) Perfection by mere consent
General rule consensual contract
Contracts perfected by delivery real contracts
Pledge
Commodatum hiram (for free)
Deposit
Loan
d) Mutuality of contract
Both parties are mutually bound by what they have agreed upon
e) Relativity of contract
Binding b/w the parties, their heirs & assigns

In some cases, even third persons are bound such as:

Stipulation pour atrui
agreement b/w 2 persons whereby a favor is given to a third person & third
persons accepted it
if the third person accepted & debtor fails to fulfill, third person has right to
demand payment for the principal obligation
creditor is defrauded by the debtor
third person who induced to violate the contract
third persons who acquired rights over immovable properties must respect
existing contracts involving such immovable property

5) CHARACTERISTICS OF CONTRACT
a) Consensual or real
i. Consensual - perfected by mere consent
ii. Real
- perfected by delivery
b) Principal, accessory or preparatory
i. Principal
- not dependent to any other contract
ii. Accessory
- dependent to a principal contract
iii. Preparatory - other contracts will follow (agency & partnership)
c) Nominate or innominate
i. Nominate
- with a name in the law
ii. Innominate
- no particular designation under the law (memorandum)
d) Commutative or aleatory
i. Commutative - demandable, not dependent on chance
ii. Aleatory
- performance depends on chance
e) Onerous, gratuitous or remuneratory
i. Onerous
- there is exchange of compensation
ii. Gratuitous
- for free
iii. Remuneratory- payment for services rendered
f) Unilateral or bilateral
i. Unilateral
- only one party has obligation
ii. Bilateral
- both parties have obligation for each other
g) Oral or written
i. Oral
- perfected orally
ii. Written
- formality is required to be perfected
6) KINDS OF DEFECTIVE CONTRACTS
a) Rescissible contracts
No defects in the essential elements
Damage or injury is suffered by another person such as:
B/w guardian & ward lesion of >1/4
B/w administrator & absentee lesion of >
Debtor who defrauds creditor
Defendant sells property w/c is the subject of a case to the disadvantage of the
plaintiff
Subsidiary remedy RECISSION
Cancellation of contract as if no contract has occurred
Can be done only if there is no other available remedy
Requires restoration of properties
Cannot be allowed if
Party seeking recission can no longer return what must be returned
Property is already in the possession of a third person who acted in good faith
b) Voidable contracts (IMVIFU)
Consent of one of the parties is defective because of:
i. Incapacity
ii. Mistake
iii. Violence
iv. Intimidation
v. Fraud CAUSAL (dolo causante)
vi. Undue influence youngest daughter who knows that her father cannot refuse
whatever she asks for, threatens her father that she will elope if her father doesnt
sign a contract giving all his properties to her as inheritance.
Remedy RATIFICATION or ANNULMENT
Once ratified - cleansed of all its defects & becomes VALID
Only the injured party can ask for annulment w/in FOUR (4) YEARS except when
there is mutual mistake
c) Unenforceable contracts (A,SF,BPI)
Cannot file a case in court

1. Entered into w/o authority or in excess of authority

2. Violates statute of fraud agreements which MUST BE IN WRITING
i.
Agreement NOT TO BE PERFORMED w/in one year
ii.
Guaranty or special promise to answer for the debt or miscarriage of another
iii.
Agreement made in consideration of marriage other than mutual promise to marry
iv.
Agreement for the sale of goods, chattels or things in action at a price = or > P500
v.
Lease for > one year
vi.
Sale of real property or an interest therein
vii.
Representation as to the credit of a third person
Refer to PURELY EXECUTORY contracts
PARTIALLY PERFORMED obligations NOT COVERED BY STATUTES OF FRAUD
3. Both parties are incapable of giving consent
May be ratified & once ratified, is cleansed of all defects & becomes valid
d) Void contracts (or INEXISTENT CONTRACTS)
1. OBJECT or CAUSE is DEFECTIVE
2. ONE or SOME or ALL of the ESSENTIAL ELEMENTS of a contract is MISSING
Cannot be assailed by third persons can be brought to court only by directly affected
parties
Cannot be ratified
No prescriptive period
Right to defense cannot be waived
PARI DELICTO BOTH GUILTY
Cannot file a case in court against each other because both will be persecuted
Land acquired thru CARP cannot be sold
Illegal but not criminal
Sale is VOID
7) SIMULATION
a) Absolutely Simulated
Purely fictitious
Parties do not intend to be bound by the agreement
Cannot be reformed
b) Relatively Simulated
Parties hide/conceal the true agreement
Contract is valid as to the true agreement
May be caused by
Fraud
Accident
Mistake
Inequitable conduct
REMEDY - REFORMATION
The process of changing the instrument when what is embodied therein is different
from the intention of the parties
Allowed only before the contract has been enforced by the party who has
the right to ask for reformation
Contracts that cannot be reformed:
Wills
Simple donation inter vivos when no condition is imposed
Void contracts
III. SALES
1) DEFINITION
2) CHARACTERISTICS
a) Consensual - perfected by mere consent
b) Bilateral - both parties have obligations to perform
c) Cummutative - values exchanged are generally equivalent to each other
d) Principal - existence does not depend upon another contract
e) Onerous requires an exchange of valuable consideration
f) Nominate has a name provided in the civil code
g) Generally reciprocal the performance of the obligation by one party is dependent
upon the performance of the others obligation
3) STAGES OF A CONTRACT OF SALE (same w/ contract)
a) Conception or birth
b) Perfection
c) Consummation or death

10

4) OBJECT OF SALE never services

a) Things
Things with potential existence - VALID
Future things emptio rei esperati
Hope emptio spei
Sale of VAIN HOPE OR EXPECTANCY - VOID
b) Rights
5) CONTRACT OF SALE REQUIRED TO BE WRITTEN
a) Real property notarized (public document)
b) Sale to be performed beyond one year
c) => P500 must be in writing to be enforceable
6) IMPORTANT DISTINCTIONS
Sale
Dation in
Contract for a
Payment
Piece of Work
No pre-existing
credit
Cause price
Obligations are
created
Greater freedom
in determining
the price
Goods
manufactured for
sale to the
general market
Consideration is
money
C>O
C=O

Barter

Sale or
Return

Sale on
Trial,
Approval or
Satisfaction

W/ pre-existing
credit
Extinguishment
of existing
obligation
Obligation is
extinguished
Lesser freedom
in determining
the price
Goods
manufactured
especially for
the customer &
upon his
special order
Consideration
is another thing
C<O
Ownership is
transferred
upon delivery
but w/ option
to return
Subject to
resolutory
condition

Ownership
is retained
by the seller
even though
delivered
Subject to
suspensive
condition

7) PACTO DE RETRO SALE

Upon sale, buyer becomes unconditional owner
If seller does not repurchase, buyer becomes absolute owner
Sale with right of redemption
With prohibitive period redemption period begins after the prohibitive period
No agreed period period to redeem is within 4 YEARS from date of contract
In either case, redemption period MUST NOT EXCEED 10 YEARS FROM DATE OF
CONTRACT
Agreement to repurchase as soon as the seller has the money to redeem is one
with a period (indefinite)
Distinctions b/w Mortgage
PACTO DE RETRO SALE
MORTGAGE
No foreclosure
With foreclosure if obligation is not paid
No pre-existing contract
With pre-existing contract
Principal contract
Accessory contract
What MUST BE RETURNED to the buyer in case of redemption in pacto de retro sale
a) Price of the sale
b) Expenses of the contract
c) Other legitimate expenses made by reason of the sale
d) Necessary & useful expenses made on the thing sold

11

What MUST NOT BE RETURNED to the buyer in case of redemption in pacto de retro
sale
INTEREST
Reason: DEEMED MUTUALLY COMPENSATED
Seller by the use of the price paid by the buyer
Buyer by the use of the thing sold by the seller

8) OFFER TO SELL
May be withdrawn before acceptance even if there is period given to buyer to decide
EXCEPT:
e) When there is OPTION MONEY
Distinctions b/w OPTION MONEY & EARNEST MONEY
OPTION MONEY
EARNEST MONEY
Given for the exercise of period
Given to show buyers interest in the
contract of sale
Given before perfection of the contract Given after the perfection of the
of sale
contract of sale
Separate & distinct from the purchase
Part of the purchase price down
price
payment
9) OBLIGATIONS OF THE SELLER
a) Deliver the thing sold
b) Transfer ownership CANNOT BE WAIVED BY THE BUYER, all others can be waived
c) Warrant the thing sold against
f) Eviction seller warrants that he is the legal owner of the thing sold
In case of eviction, recoverable value is the value at the time of eviction
Legal owner of the thing can get back the thing from the buyer even without
compensation except when buyer acquired it from:
1. The public market
2. Public auction
g) Hidden defects
Must be substantial
Even though the seller is not aware of the defect
In case of hidden defects, remedy of buyer:
1. Cancel the contract of sale
2. Proportionate reduction of price
d) Take care of the thing pending delivery
10)
OBLIGATIONS OF THE BUYER
a) Accept the thing
b) Pay the price a sum certain in money
11)
KINDS OF DELIVERY OR TRADITION
a) Actual or real
h) Thing is placed in the possession & control of the buyer
b) Constructive
1. Execution of a public document (legal formalities) in sale of RP
2. Symbolic delivery or traditio symbolica (delivery of the key) sale of a car
3. Traditio longa manu (mere pointing at the object) new owner bears the loss
4. Traditio brevi manu (buyer is already in possession, no need to deliver)
5. Traditio constitutum possessorium (no delivery because seller will continue in
possession
c) Quasi-delivery
i) Object is intangible or incorporeal
Placing of title of ownership in the name of the buyer
Allowing the buyer to exercise right
12)

TRANSFER OF OWNERSHIP
OWNERSHIP IS TRANSFERRED ONLY UPON DELIVERY

13)
RIGHTS OF UNPAID SELLER
a) Right of possessory lien seller retains the goods until payment of the price
j) Once delivered, seller has no more right to possessory lien
b) Right of stoppage in transitu stop delivery while in transit when buyer becomes
insolvent
c) Right of resale
k) When stipulated
l) When perishable in nature
m) When debtor is in default for an UNREASONABLE LENGTH OF TIME

12

 If resold at HIGHER PRICE, SELLER RETAINS EXCESS

If resold at LOWER PRICE, BUYER MUST PAY DEFICIENCY
d) Right to rescind or cancel contract of sale
n) If buyer is already in possession of the thing sold, rescission may only be done thru
court or judicial proceedings
e) Right to demand payment of the price specific performance
o) Judicial
p) Extra judicial
14)
RIGHT OF BUYER
a) Buyer may suspend payment of the price when there is valid ground that he will be
deprived of his right on the property by a third person
b) Before payment of the price
i. Inspect
ii. Examine
c) In COD sale buyer has no right under (b)
15)

RECTO LAW
Applicable to PERSONAL PROPERTY sold
INSTALLMENT BASIS
Property is mortgaged to the seller to secure payment of the price
Applicable upon failure of buyer to pay one or more installments
Analogous to Lease w/ Option to Buy
Remedy of seller:
a) 1 or more unpaid installments
i. Demand specific performance
b) 2 or more unpaid installments
i. Demand specific performance
ii. Rescind the contract
iii. Foreclose property
c) If immediately foreclosed & proceeds are less than the outstanding obligation, buyer
has no more obligation on the balance or deficiency & seller has no right to demand
for the balance or deficiency
d) Any stipulation to the contrary is VOID

16)

MACEDA LAW
Applicable to PARCEL OF LAND or REAL PROPERTY sold
INSTALLMENT BASIS
a) @ Least 2 installments paid
30-day grace period to pay for every year without interest
b) @ Least 5 years paid
If rescinded CASH SURRENDER VALUE=
50% (of all payments) refund + 5% for every year in excess of 5 years
not to exceed 90% of all payments
If rescission is stipulated & rescinded:
a) Notice of rescission MUST BE NOTARIZED, to be valid
b) If not notarized, buyer CAN COMPEL SELLER TO ACCEPT PAYMENT even after
maturity date

17)

18)

PD 957 CONDOMINIUM LAW

RULES WHEN SELLER/DEVELOPER DOES NOT FOLLOW WHAT HAS BEEN
STIPULATED IN THE DEVELOPMENT OF THE PROJECT
a) Buyer may suspend payment when what has been stipulated is not followed by the
seller
b) Developer/seller cannot rescind contract for such non-payment
c) Buyer may withdraw all payments + interest
In case of non-payment of the buyer w/o fault on the seller, follow MACEDA LAW
SALE OF REAL PROPERTY THRU AGENT
Must be in writing to be valid
If AUTHORITY is ORAL sale executed by the agent is VOID
Under the STATUTES OF FRAUD
SALE of LAND or REAL PROPPERTY must be in writing to be VALID &
ENFORCEABLE (even not thru agent)

19)
DEFECTIVE CONTRACTS OF SALE
a) Rescissible
b) Voidable
c) Unenforceable

13

d) Void
20)
DOUBLE OR MULTIPLE SALES OWNERSHIP BELONGS TO:
a) REAL PROPERTY
1. First registered in good faith
2. First possessed in good faith, if there is no registration
3. Buyer who possesses OLDEST TITLE, if there is no registration or possession
b) PERSONAL PROPERTY
1. First possessed in good faith, if there is no registration
2. Buyer who possesses OLDEST TITLE, if there is no registration or possession
21)
LEGAL REDEMPTION OF PROPERTIES SOLD TO OTHER PERSONS
a) CO-OWNERS
Redemption proportionate to the share of co-ownership
Within 30 days from WRITTEN NOTICE from seller
Seller cannot hide the sale because the REGISTRY of DEED requires the written notice
to co-owners before registration
REASON: to discourage co-ownership
b) ADJACENT OWNERS
1. Rural Land < 1 hectare
Priority redemption to adjacent owner with SMALLEST AREA
Reason: to foster agricultural development
2. Urban Land no practical use
Priority redemption to adjacent owner with the most justified or most important use
Reason: to discourage impractical use of urban land
22)
ANTICHRESIS
Antichresis, in civil law, is a contract whereby a person borrowing money of another, hands over his property to the
creditor, allowing the use and occupation thereof, for the interest on the money lent.
IV. AGENCY
1) PARTIES TO A CONTRACT OF AGENCY
a) Principal
b) Agent
2) CAPACITY OF THE PARTIES
a) Principal must be capacitated
b) Agent may or may not be capacitated as long as the principal is capacitated
3) KINDS OF AGENCY
a. Express
Oral general rule, except when immovables or real property is involved
Written
b. Implied
i. Acts of the principal
ii. Principals silence
iii. Principals lack of action
iv. Principals failure to repudiate agency
4) HOW CREATED
a. By CONTRACT
b. By OPERTATION OF LAW
Son temporarily taking over the agency after death of father
c. By ESTOPPEL
Thru acts of the agent
Estoppe barring from denying what you have said w/c others have relied upon
d. By RATIFICATION
Validation by principal
5) INTERPRETATION OF THE AGENTS POWER
a. POWER TO SELL for CASH ONLY unless stipulated or subsequently ratified
If not authorized to sell on installment:

Agent may be required to pay the principal on cash basis but agent is entitled
to the benefits of the contract

14


Principal may ratify the sale on credit
If authorized to sell on installment

Agent must inform principal of the sale w/ the statement of the names of
the buyers & amount due from them

Otherwise, principal may demand payment in cash

b. POWER TO SELL does not include power to barter, mortgage or pledge
c. POWER TO MORTGAGE does not include power to sell or secure a second mortgage
d. POWER TO COMPROMISE does not authorize submission for arbitration

6) DIFFERENCES B/W AUTHORITY & INSTRUCTIONS

AUTHORITY
INSTRUCTIONS
Affects third persons
Does not affect third persons
Must be verified by third persons
Need not be verified
Violations make acts of the agent not
Does not affect validity of the contract of
valid (unenforceable)
agency but agent is liable to the principal
for damages
a. General all business of the principal
b. Specific particular business only
7) APPOINTMENT OF AGENT THRU LETTER/TELEGRAM
Agents silence is not considered an implied acceptance, EXCEPT:
a.
When he acknowledged receipt of the letter/telegram
b.
Letter/telegram entrusting to him power with respect to a business he is
habitually engaged
8) APPOINTMENT OF A SUBSTITUTE OR SUB-AGENT
All substitutes APPOINTED AGAINST THE PROHIBITION OF THE PRINCIPAL - VOID
Agent may appoint a substitute unless EXPRESSLY PROHIBITED
Agent is liable for the acts of the substitute if:
a. He is not given the power to appoint
b. Though given, the substitute is not designated & he appointed a notoriously
incompetent & insolvent person
If appointed by the principal, no liability on the part of the agent
9) LIABILITIES OF SEVERAL AGENTS/PRINCIPALS
Several Agents JOINTLY LIABLE, unless SOLIDARITY has been STIPULATED
Several Principals JOINT, except when agent is appointed for a common
transaction
10)

ADVANCES MADE BY THE AGENT

General rule: all advances made by agent for the execution of the agency must be
REIMBURSED + INTEREST from the day on w/c advances were made EVEN IF THE
BUSINESS IS UNSUCCESSFUL provided AGENT is FREE from FRAUD or FAULT
Exceptions: Principal is not liable for expenses incurred by agent if:
a. Agent violated the instructions of the principal unless the principal wants to
avail of the benefits derived from the contract
b. Expenses were due to the agents fault
c. Agent incurred them with knowledge that unfavorable result would ensue
d. Stipulated that the agent would bear the expenses

11)
MODES OF EXTINGUISHMENT OF THE CONTRACT OF AGENCY
a) Expiration of the contract
b) Death of one of the parties
c) Withdrawal by the AGENT
May withdraw anytime
Must notify principal
Must give the principal reasonable opportunity to take necessary steps to meet the
situation
Agent shall be liable if the principal shall suffer damages by reason of agents
withdrawal unless it is impossible to continue agency w/o detriment to agent
FILING A CASE AGAINST THE PRINCIPAL FOR MONETARY CLAIM is
EQUIVALENT TO WITHDRAWAL
d) Accomplishment of the purpose of agency
e) Revocation by the PRINCIPAL
REQUISITES OF VALID REVOCATION

Must be done in good faith

Must be brought to the attention of specified third persons

WHEN AGENCY IS IRREVOCABLE

15


Coupled with interest

A bilateral contract depends on the agency

It is a means of fulfilling an obligation already contracted

f) Dissolution of the firm (if one of the parties is a firm)
12)

DEL CREDERE AGENT

Commission agent with guarantee commission to collect when due
Even if not collected, agent is obliged to remit what is due

V. PLEDGE & MORTGAGE

1) COMMON CHARACTERISTICS
PLEDGE

CHATTEL
MORTGAGE

a) Accessory contract as security

b) Pledgor must be absolute owner
c) Plegor must be authorized or has free

Same
Same
Same

REAL
ESTATE
MORTGAGE
Same
Same
Same

Same

Same

No delivery

No delivery

disposal of the thing pledged

d) Thing pledged may be alienated, if debtor

e)

cannot pay
Thing pledged must be delivered to the
creditor
2) DISTINCTIONS
PLEDGE

a) Object
b) Right to sell

c) Effect to third
persons

d) Effect of sale

Personal or movable
property
Can be sold even w/o
pledgees consent. To
transfer ownership to
buyer requires
consent, written or
oral
Description of thing
pledged must appear
in a public document

Proceeds > debt

creditor is entitled
to excess UNLESS
otherwise
STIPULATED
Proceeds < debt
creditor cannot
recover the
deficiency EVEN IF
there is
STIPULATION

CHATTEL
MORTGAGE
Personal or movable
property
Cannot be sold w/o
consent of creditor.
Must be in writing &
annotated on the
instrument
There must be an
affidavit of good faith
& must be recorded
in CHATTEL
MORTGAGE
REGISTRY
Proceeds > debt
creditor not
entitled to excess
Proceeds > debt
creditor can
recover deficiency

REAL ESTATE
MORTGAGE
Real or immovable
property
Can sell even w/o the
consent of the
mortgagee. (any
prohibition not to sell
is VOID pactum
commissorium)
Must be recorded in
the OFFICE OF THE
REGISTRY OF
DEEDS
Proceeds > debt
creditor not
entitled to excess
Proceeds > debt
creditor can recover
deficiency

3) PLEDGE
Real contract if thing pledged is NOT DELIVERED - VOID
Subject matter
a) Movable property
b) Within the commerce of man
c) Capable of possession
Extinguishment of pledge (does not include extinguishments of debt)
a) Payment
b) Destruction of thing pledged
c) Return of thing pledged
d) Renunciation of the thing pledged
e) Other forms of extinguishments of obligation
4) MORTGAGE
In case of auction, mortagor can participate. If same w/ highest bidder, preferred

16

By-bidder or puffer bids for & on behalf of the seller; public must be notified
TIPO OR UPSET PRICE- FIXED AMOUNT agreed upon for w/c the property mortgaged
shall be sold - VOID

a) CHATTEL MORTGAGE
b) REAL MORTGAGE
Involves real property (binds the property & third persons if registered)
Real right (can be sold or assigned)
Accessory contract
A limitation on ownership (a lien but does not transfer ownership)
Inseparable from the property
Indivisible (cannot be partially extinguished by partial payment)
5) PACTUM COMMISSORIUM VOID
A stipulation for the automatic ownership of the property by the creditor-mortgagee in
case of non-payment of the obligation.
An agreement prohibiting the debtor-mortgagor to sell the property while the obligation
remains unpaid
VI. PARTNERSHIP
1) DEFINITION
By the contract of partnership, two or more persons binds themselves to contribute
money, property or industry with the intention of dividing the profit among themselves
2) CHARACTERISTICS
a) Consensual
b) Nominate
c) Onerous
d) Bilateral
e) Principal
f) Preparatory
3) ESSENTIAL REQUISITES

4) DISTINGUISHED FROM CORPORATION

PARTNERSHIP
Creation
By contract
Existence
Indefinite
Management
Managed by all partners if there is
no managing partner
Liability of partners
General partners liability extends
/stockholders
to separate properties
Right against
Partners may bind the partnership
partnership or
corporation
Dissolution
Death of a general partner may
dissolve the partnership (if there
are no other general partners)

CORPORATION
By operation of law
Not more than 50 years
Managed by BOD
Stockholders liability does not
extend to separate properties
Stockholders cannot bind the
corporation
Death of a stockholder does not
dissolve the partnership

5) DISTINGUISHED FROM OTHER FORMS OF ORGANIZATION

a. Co-ownership
b. Conjugal partnership of gains
c. Joint accounts
d. Joint venture
e. Voluntary association
f. Business trust

17

g. Syndicate
h. Tenancy
Partnership HAS A SEPARATE JURIDICAL PERSONALITY, all of the above do not have
6) KINDS OF PARTNERSHIP
A.
As to object
a) UNIVERSAL PARTNERSHIP
i. Universal partnership of ALL PRESENT PROPERTY
ALL PROPERTIES belonging to the partners at the time of constitution of the
partnership become COMMON PROPERTY including ALL PROFITS w/c they may
acquire therewith
Properties subsequently acquired by inheritance, legacy or donation, not
included, FRUITS from SUCH PROPERTIES ARE ALSO INCLUDED
ii. Universal partnership of ALL PROFITS
Comprises what the partners may acquire thru industry or work
Properties are not contributed
Only the usufructs of such properties are contributed
If the nature of universal partnership is not specified, considered of ALL
PROFITS
b)
B. As
a)
b)

C. As
a.
b.
D. As
a.
b.
E. As
a.
b.
F. As
a.
b.

PARTICULAR PARTNERSHIP
to liability of partners
General - With one or more general partners
Limited
With one or more limited partners & one or more general partners
Cannot be oral
Must be written & registered with SEC
Must always be written as limited, otherwise considered as general (under the
statutes of fraud)
to duration
Partnership at will
Partnership with a fixed term
to representation to others
Ordinary
Partnership by estoppel
to legality of existence
De jure complied with all the requirements
De facto failed to comply with all requirements
to publicity
Secret
Open

7) PERSONS PROHIBITED TO ENTER INTO A UNIVERSAL PARTNERSHIP

a) Husband & wife during their marriage
b) Persons guilty of adultery or concubinage at the time of donation
c) Person found guilty of the same criminal offense in consideration thereof
d) Public officer or his wife with another person by reason of his office
8) KINDS OF PARTNER
A.
As to contributions
a) Capitalist money or property
b) Industrial - industry
B.
As to liability
a) General liability to third persons extends to separate property
b) Limited - liability to third persons extends only to his contribution, as if an outsider to
the partnership
C.
As to management
a) Managing manages & actively participates in the business of the partnership
b) Silent partner does not actively participate in the management of the partnership
D.
Other classifications
a) Partner by estoppel
b) Nominal partner specified in the articles of partnership
c) Secret partner NOT KNOWN to third persons as a partner
d) Dormant partner SILENT + SECRET
e) General/limited partner
General in all respects
Limited only as to return of capital
f) Substituted limited partner assigned w/ the interest of a deceased limited partner
g) Liquidating partner in charge of liquidation, winding up & termination

18

h) Sub-partner no right to interfere in the business of the partnership, has right against
the partner only
9) PARTNERSHIP/PARTNER BY ESTOPPEL
One which is not really a partner or a partnership but because of representation which had
been relied upon by others
Considered a partnership/partner for the protection of third persons
10)
CONTRIBUTIONS OF PARTNERS
a) Capitalist partner money or property
Cannot engage in business similar to the partnerships business
b) Capitalist industrial partner money or property & industry
c) Industrial partner industry
Cannot engage in any other business
d) Limited partner money or property only
11)
LIABILITIES OF PARTNERS
a) General partner
Separate properties are liable for partnership liabilities in case properties have already
been exhausted
Liability to third persons prorata (interpreted as equal-only as to third persons)
b) Industrial partner
Also liable to partnership creditors
Since not liable for losses, CAN DEMAND REIMBURSEMENT from the other partners
Cannot engage in any kind of business if he does so, he can be (alternative
remedies)
Excluded from the partnership OR
He may be compelled to turn over his income to the partnership with damages in
either case
c) Capitalist partner
Liability to third persons prorata (interpreted as equal-only as to third persons)
Cannot engage in the same line of business w/o the consent of the other
partners
If he does so, he must bring to the partnership the profits gained from such
business
If he suffers losses, he must suffer alone
d) Limited partner
Who takes active part in the management of the partnership business shall be liable as
a general partner
e) Newly admitted partner
Liable for the partnership liabilities incurred before his admission ONLY UP TO
THE EXTENT OF HIS CONTRIBUTION
12)

13)

14)

NON-REGISTRATION OF GENERAL PARTNERSHIP

Valid even though
Capital > P3,000, not in writing & not registered with SEC
When immovables are contributed
Must be in wriring
Must have inventory of the immovables attached to the document
Otherwise, VOID
SHARE IN THE PROFITS & LOSSES
Based on agreement
In the absence of agreement proportionate to capital contribution
When only share in profits has been agreed upon - share in losses shall be the same
proportion with share in profits
INDUSTRIAL PARTNER
Entitled to a just & reasonable share in the PROFITS if his share has not been agreed
upon
Not liable for losses of the partnership
If he pays a creditor, HAS RIGHT TO REIMBURSEMENT
MANAGEMENT OF THE PARTNERSIP
No managing partner
All partners are agents of the partnership
With managing partner
Appointed in the articles of partnership
Can execute all acts of administration despite opposition of other partners

19

Power is irrevocable without just cause

Revocation requires the consent of the partner with controlling interest
Appointed after establishment of the partnership
May be removed any time with or without cause
MANAGING PARTNER COLLECTS FROM HIS DEBTOR WHO IS A DEBTOR OF THE
PARTNERSHIP AT THE SAME TIME
If issued a receipt in the name of the partnership must apply payment to partnership
credit
If issued receipt applying payment to his own account, must divide payment
proportionately b/w the managing partner & partnership
If debt to managing partner is more onerous, apply to debt to managing partner
If managing partner applied payment to his own account, & debtor becomes insolvent,
must remit to the partnership what he has collected

15)

ORDER OR PREFERENCE OF DISTRIBUTION OF PARTNERSHIP ASSETS

Out of partnership assets partnership creditors
Out of separate assets separate creditors
GENERAL PARTNERSHIP
LIMITED PARTNERSHIP
Outside creditors
Outside creditors
Partners as creditors
Limited partners profits
Partners capital
Limited partners capital
Partners profit
General partner as creditors
General partners profits
General partners capital

16)
CAUSES OF DISSOLUTION
a) Voluntary
i. Express will of a partner or all of the partners or expulsion of a partner
ii. Termination of the term of a particular undertaking
b) Involuntary
i. Business becomes unlawful
ii. Specific thing to be contributed perished before delivery
iii. Death of any partner, insolvency or civil interdiction of any partner
iv. Insolvency of the partnership
v. By decree of court
17)
DEATH OF PARTNERS
a) General partner may dissolve the partnership
b) Limited partner does not dissolve the partnership

VII. CORPORATION
1) DEFINITION
Artificial being created by operation of law, having the RIGHT OF SUCCESSION & the
POWERS, ATTRIBUTES & PROPERTIES EXPRESSLY AUTHORIZED BY LAW or INCIDENT TO ITS
EXISTENCE
Existence begins from the issuance of CERTIFICATE OF INCORPORATION by the SEC
2) CREATION OF PRIVATE CORPOTATION
By operation of law
3) DOCTRINE OF SEPARATE ENTITY

4) PIERCING THE VEIL OF CORPORATE ENTITY

5) TRUST FUND DOCTRINE

6) CORPORATE FORMATION
a) STAGES OF FORMATION
i. Promotion
ii. Incorporation
iii. Commencement of business

20

Commenced
If commenced within TWO YEARS, but STOPPED OPERATIONS &
REMAINED IDLE for at least FIVE YEARS, GROUND FOR DISSOLUTION

Not commenced
If not commenced within TWO YEARS, DISSOLVED
INCORPORATORS MUST BE
Natural persons
Capacitated
Majority are residents of the Philippines
Subscriber of at least one share
REGISTRATION WITH SEC
If not registered cannot even be considered a DE FACTO corporation
CAPITAL STOCK
25% of authorized must be subscribed
25% of subscribed must be paid
Minimum paid up should not be less than P5,000
BY LAWS
Generally simultaneous with ARTICLES OF INCORPORATION
May be filed before incorporation or within 30 days from issuance of
certificate of incorporation

b)

c)
d)

e)

7) DISADVANTAGES OF CORPORATION COMPARED TO PARTHERSHIP

Subvervience of the minority stockholders to the wisher of the controlling interest
8) TEST OF NATIONALITY OF A CORPORATION
a) Control test
Nationality of controlling stockholders
b) Incorporation test
Laws of the country under which it is incorporated
c) Domicile test
Place where it is conducting business
Where principal office is located
9) KINDS OF CORPORATION

10)

MANAGEMENT OF A CORPORATION
Managed by BOD

11)
SHARES OF STOCKS
a) Promotion stocks
Issued to persons who rendered services for the promotion of the corporation
b) Watered stocks
Illegal but contract is not void
Subscriber may be compelled to pay the balance
Directors consenting to such are SOLIDARILY LIABLE with the subscriber
c) Treasury shares
Not part of the outstanding capital stock
No voting right
Not entitled to dividends
Cannot be issued as stock dividend
Can be issued as property dividend only
Can be sold for less than par or issued value
d) Unpaid shares
Entitled to all the rights unless declared delinquent
When declared delinquent

Failure to pay on the due date based on contract or call

Declared delinquent

30 day grace period to pay in full

Subscription amount + interest

21

e) Delinquent shares
All rights are suspended EXCEPT RIGHT TO DIVIDENDS
If cash dividends are issued, shall be applied to the balance
If stock dividends are issued, withheld until fully paid
If offered at public auction, shall be sold to the HIGHEST BIDDER
HIGHEST BIDDER he who offers the FULL AMOUNT for the LEAST NUMBER OF
SHARES
Remedy on delinquent shares

File in court based on contract of subscription

Sell to public highest bidder

If no highest bidder, reacquire

12)

13)

SUBSCRIPTION
Contract for the acquisition of unissued shares from an existing corporation or an
corporation still to be formed

DIVIDENDS
Issued out of SURPLUS PROFIT OR UNRESTRICTED RETAINED EARNINGS
Corporation is compelled to pay dividends once UNRESTRICTED RETAINED
EARNINGS EXCEEDS 100% of its PAID UP CAPITAL
Kinds of dividends

Cash declared only by the BOD

Stock require approval of SH do not increase authorized capital of

the corporation nor the controlling interest of the stockholders

14)
POWERS OF THE CORPORATION
a) Express

Expressly stated in the articles of incorporation

b) Implied

Implied in the purpose expressed in the articles

c) Intra vires

Within the powers of the corporation

d) Ultra vires

Not within the powers of the corporation

Voidable if not illegal per se

Can be ratified by the approval of ALL stockholders or members

expressly or impliedly
15)

RULES ON VOTING REQUIREMENTS

BOD

ALWAYS MAJORITY of those present constituting a quorum

STOCKHOLDERS

2/3 of outstanding shares OR

Majority votes of the outstanding shares

MAJORITY = 50% + 1
GENERALLY majority = quorum
Any action decided w/o a quorum = VOID
VOTING REQUIREMENTS
a) Majority of the BOD constituting a quorum
1. Resolution of the Board
b) Majority of the votes of the outstanding capital stock
1. Adoption, amendment or repeal of BY-LAWS
2. Revocation of power delegated to BOD to adopt, amend or repeal by-laws
3. Election of directors (cumulative voting)
Cumulative voting may be done by
a. Lump sum
b. Straight
c. Distribution
4. Grant of compensation to directors
5. Approval of management contract with another corporation
c) 2/3 of the outstanding shares of stocks MAS MABIGAT NA DECISION
1. Adoption, amendment or repeal of ARTICLES
2. Authorizing the board to amend, revise or adopt by-laws
3. OTHERS

16)

VACANCY IN THE BOARD

22

May be filled up by REMAINING DIRECTORS constituting a QUORUM, EXCEPT the ff

w/c can ONLY BE FILLED UP BY STOCKHOLDERS
a) Vacancy caused by removal
b) Vacancy caused by expiration of term
c) Vacancy the filling up of w/c is referred to by the BOD to the stockholders
d) Vacancy caused by the increase in number of directors which means an amendment of
the articles
DIRECTOR representing MINORITY INTEREST CANNOT BE REMOVED WITHOUT JUST CAUSE

17)
a)

b)

c)
d)

18)

19)

OFFICERS OF THE CORPORATION

President
Must be a director, therefore must also be a stockholder
Cannot be secretary or treasurer at the same time
Secretary
Need not be a stockholder
Must be a resident
Treasurer
Director
Must be a stockholder
Must have not been convicted of a crime with imprisonment of > 6 years
PRE-EMPTIVE RIGHT

APPRAISAL RIGHT
Right of a dissenting stockholder to DEMAND FOR THE FMV of his shares
May be exercised only in the following cases:
a) Amendment of articles
b) Disposition of all or substantially all of the corporate assets
c) Merger or consolidation
d) Investment of corporate funds in another corporation or business
All rights of the share are suspend except the right to appraisal
Dissenting stockholder must:
a) Make a written demand within 30 days
b) Present shares within 10 days from date of demand
c) Such shares are stamped as dissenting shares
d) Failure of the corporation to pay within 30 days revives all the rights of the
dissenting rights
If right is sold to another buyer, can no longer exercise the appraisal right of the seller

20)

LEGAL EFFECTS OF MERGER OR CONSOLIDATION

All properties, rights, powers & liabilities of the constituent corporations are transferred to
the surviving corporation

21)

PROXY
Power
Person
Document
Authority
For a particular power, date & meeting only
Revocable any time

22)

VOTING TRUST AGREEMENT

Exercises not only voting right but all rights of the shares
Not limited to a particular meeting, date or power
Should not exceed 5 years unless provided in the agreement
A means of disposing of the shares yet retaining interest

23)

FOREIGN CORPORATION
Incorporated under laws other than the that of the Philippines
The law of that country allows Filipinos to form a corporation in their country
License to do business in the Philippines
Bond of P100,000
Business in the Philippines is a continuous activity
Appoint resident agent

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VIII. NEGOTIABLE INSTRUMENTS

1) FUNCTIONS & IMPORTANCE
a) Substitute for money
b) Media of exchange for most commercial transactions
c) Media of credit transactions
d) Increases purchasing power
Negotiable instruments are NOT LEGAL TENDER
Delivery of a negotiable instrument DOES NOT EXTINGUISH an obligation
2) CHARACTERISTICS
a) Negotiability
Quality or attribute whereby a NI passes or may pass from hand to hand similar to
money as to give the holder in due course the right to hold the instrument & collect
the sum payable for himself free from defenses.
NEGOTIABILITY is TERMINATED when:
Restrictively indorsed
Discharged
b) Accumulation of secondary contracts
It makes as many secondary contracts as the number of times negotiated
3) REQUISITES (DEFINITION)
a) In writing & signed by maker or drawer
PN
- maker
BOE
- drawer
b) Unconditional promise or order to pay a sum certain in money
PN
- unconditional promise
BOE
- unconditional order
If not payable in money negotiable document
May indicate particular fund out of which reimbursement is to be made or
particular account to be debited
If payable out of a particular fund NOT NEGOTIABLE becomes conditional
Sum is certain even if w/ interest, w/ fixed or current exchange rate or payable by
stated installments
Payable in four equal installments NOT STATED INSTATALLMENT NOT
NEGOTIABLE
Must state beginning or exact dates of installments
A promise to do an act other than payment of money is not negotiable
except if it is the HOLDERS OPTION alternative w/ the use of OR
c) Payable on demand or at fixed or determinable future time
On demand
When so expressed
No time for payment is expressed
Instrument is issued, accepted or indorsed when overdue as regards the
person so issuing, accepting or indorsing it
At a fixed time
After date of NI
After sight after presentment if this is the basis of maturity, count from date of
presentment & not on date accepted
Payable on or before Christmas - not determinable NOT NEGOATIABLE - must indicate
year
On or after the occurrence of a specified event which is certain to happen even
though the time of happening is uncertain
5 days after you pass the CPA board examination
Before the occurrence of a specified event which is certain to happen even though the
time of happening is uncertain NOT NEGOTIABLE
5 days before you pass the CPA board examination
d) Payable to order or bearer Instruments payable to a specified person is not
negotiable
Pay to Juan dela Cruz
Payable to ORDER(ORDER INSTRUMENT)
Payable to the order of a specified person
Payee who is not maker, drawer or drawee
Pay to the order of P
Pay to P or order
Drawer or maker
I promise to pay to the order of myself

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Drawee
Pay to the order of yourself
Two or more payees jointly
Pay to the order of P & A
One or more of several payees
Pay to the order of P, A or B
Pay to the order of P, A or B or any one of them
Pay to the order of P, A or B or any two of them
Holder of an office of the time being
Pay to the president of the Philippines
If indorsed in blank, becomes a bearer instrument
Payable to BEARER (BEARER INSTRUMENT)
When expressed to be so payable
Pay to bearer
Pay to bearer, P NOT NEGOTIABLE
Payable to a person named therein or bearer
Pay to P or bearer
Payable to the order of a fictitious person & such fact is known to the person
making it so payable
Pay to the order of Tarzan
Payee does not purport to be the name of a person
Pay to blackboard or order
Only or last indorsement is blank
Pay to P or order, signed M, indorsed as follows
Pay to A

(Sgd) P

Pay to B
(Sgd) A
Pay to C

(Sgd) B
(Sgd) C

indorsed
e) Drawee must be named or indicated with reasonable certainty

Remains a bearer
instrument no
matter how

4) COMMON TYPES OF NEGOTIABLE INSTRUMENTS

a) Promissory notes
Unconditional promise to pay
If drawn to the makers own name, INCOMPLETE UNTIL INDORSED BY HIM
I promise to pay myself or order
Mere acknowledgement of debt NOT PROMISE TO PAY
Examples:
Certificate of deposit
Bond
Bank note
Due bill
b) Bills of exchange
Unconditional order to pay
Example(s):
Certificate of deposit
c) Checks
Always payable on demand
Bank may refuse payment if:
a. Bank becomes insolvent
b. Drawer has insufficient funds or no account
c. Drawer dies or becomes insolvent & notice is received by the bank
d. Drawer has countermanded payment drawer orders bank not to pay
e. Holder refuses to identify himself
f. Check is believed to be a forgery
g. Check is staled or postdated
5) ORIGINAL PARTIES TO A NEGOTIABLE INSTRUMENT
a) PROMISSORY NOTE
1. Maker person who makes the promise & signs the instrument

25

2. Payee (order instrument) or bearer (bearer instrument) the party to whom the
promise is made or the instrument is payable
b) BILL OF EXCHANGE
1. Drawer person who draws the bill
2. Drawee party upon whom bill is drawn, becomes the acceptor upon acceptance
(usually a bank)
3. Payee party in whose favor the bill is drawn or is payable
6) LIABILITIES OF THE PARTIES
a) PRIMARILY LIABLE
1. Maker
2. Acceptor (drawee)
3. Certifier of a check
b) SECONDARILY LIABLE
1. Drawer
2. Indorsers
c) NOT LIABLE
1. Drawee, until he accepts
7) INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT
a) Preparation
Writing of the instrument
b) Issue
First delivery of an instrument, complete in form to a person who takes it as
holder
Delivery transfer of possession, actual or constructive from one person to another
c) Negotiation
Methods of Transfer of a Negotiable Instrument
1. By assignment
2. By operation of law
3. By negotiation
Transfer of a negotiable instrument from one person to another in such a manner as
to constitute the transferee the HOLDER thereof.
KINDS OF HOLDER
1. Holder
Whoever holds, in general
2. Holder for value
Holds & gave a valuable consideration in exchange

3. Holder in due course

One who has taken the instrument under the ff conditions
a) It is complete & regular upon its face
b) He became the holder of it before it was overdue, & w/o notice that it
had been dishonored if such was the fact
c) He took it in good faith & for value
d) 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
DEFENSES
1. Personal or equitable
Available against parties who are NOT HOLDERS IN DUE COURSE
a) Filling of wrong date
b) Filling up of blanks not in accordance with authority given & within
reasonable time
c) Want of delivery of a complete instrument
d) Absence or failure of consideration
e) Simple fraud
f) Acquisition of instrument (not signature) by duress, or force & fear
g) Acquisition of instrument by unlawful means
h) Acquisition of instrument for an illegal consideration
i) Negotiation in breach of faith
j) Negotiation under circumstances that amount to fraud
k) Innocent alteration or spoliation
Spoliation alteration made by a stranger to an instrument
l) Set-off between immediate parties
m) Discharge of party secondarily liable by discharge of prior party
n) Discharge by payment or renunciation or release before maturity

26

o) Usury, because the contract of loan itself is not void but only the agreed
interest
p) Want of authority but agent has apparent authority
2. Real or Absolute
Available against ALL parties
a) Incapacity
b) Insolvency
c) Illegality of contract when declared by law
d) Material alteration
e) Want of delivery of incomplete instrument
f) Forgery
g) Want of authority, apparent & real
h) Duress amounting to forgery as where one takes the hands of another &
forces him to sign his name
i) Fraud in factum or fraud in esse contractus
j) Fraudulent alteration by holder
k) Prescription
l) Other infirmities appearing on the face of the instrument
m) Discharge at or after maturity
How Negotiated
1. BEARER instrument
By mere delivery
2. ORDER instrument
By indorsement plus delivery
Kinds of Indorsement
2. Restrictive
Prohibits further negotiation
Negotiable character of an instrument is terminated
a) Pay to H only
b) Pay to H for collection only
c) Pay to H in trust for M
3. Qualified
Transfers the right without guaranteeing payment
Indorser does not guarantee payment in case maker becomes insolvent
a) Sans recourse
b) Without recourse
4. Facultative
Waives any right
a) Right to notice
b) Right to presentment
5. Anomalous or irregular
Indorsement in blank by a person who is not the payee before delivery
Liable to the payee & all subsequent persons
6. Conditional
Payer may:
a) Honor the condition
The person paid holds the money subject to the condition
If condition is not fulfilled, must return the money
b) Disregard the condition
Assignment is NOT negotiation & transferee does not become a holder
Indorsement must be for the entire amount unless partially paid
An NI cannot be indorsed severally,
Indorsement cannot be in the alternative or in succession
Signature by Procuration (Per Procuration, P.P., pp, Per Proc)
Operates as notice that the agent has but limited authority to sign
Principal is bound only when agent acted within the limits of his authority
d) Presentment for acceptance
Not necessary before presentment for payment
Necessary only when:
Bill is payable after sight or presentment is necessary to fix maturity
o Reason: to give advance notice that such instrument is to be paid at a
fixed/determinable future time
Expressly stipulated
Payable elsewhere than the residence or place of business of drawee
Requisites of proper presentment
Must be made by or on behalf of the holder
Must be made at a reasonable hour

27

 Must be made on a business day

Must be made before the bill is overdue & within a reasonable time
Must be made to the drawee or some person authorized to accept or refuse
acceptance on his behalf
Dishonor by non-acceptance
When duly presented for acceptance & acceptance is refused or cannot be
obtained
When presentment for acceptance is excused & the bill is not accepted
o Duty of holder
Treat as dishonored or he looses the right of recourse against drawer &
indorsers
o Right of holder
Give notice of dishonor & protest when required
Immediately proceed against the drawer & indorsers w/o waiting for the
date of maturity
o Reason: payment cannot be expected after acceptance is refused.
Hence, presentment for payment is not necessary unless the bill is
subsequently accepted
e) Acceptance
Drawee has 24 hours to decide w/in w/c to accept the bill or not
Deemed accepted when drawee:
Destroys it
Refuses to return it w/in the required period
If accepted, the drawee-acceptor is primarily liable according to the tenor of his
acceptance
f) Presentment for payment
PN payable on demand must be within a reasonable time from DATE OF ISSUE
BOE payable on demand must be within reasonable time from DATE OF LAST
NEGOTIATION
PN or BOE not presented within the time provided by law discharges the
parties secondarily liable
Delay in the presentment for payment does not discharge the drawer but holder shall
suffer the loss caused by the delay
Payment in due course discharges the instrument
Payment by accommodation party does not discharge the accommodated
party
Accommodation party lends his name without consideration
Accommodated party not discharged in case of payment by accommodation
party because the accommodation party can demand reimbursement from him
g) Dishonor by non-payment
When drawee refuses to pay
h) Notice of dishonor
When NOT NECESSARY
Er & ee are the same person
Ee is fictitious or incapacitated person
Er is the person to whom it is presented
Er has no right to expect that ee will honor the instrument
Er has countermanded payment
Notice to prior parties benefits subsequent parties
i)

Protest in certain cases

Necessary only in case of dishonored foreign bills
May be for non-acceptance or non-payment
Must be in writing & notarized
Must be done on the day instrument was dishonored
Must be done @ the place of dishonor
Acceptance for honor
REQUISITES
a) Bill must have been protested for non-acceptance or non-payment
b) Acceptor for honor must be a stranger to the bill
c) Bill must not be overdue at the time of acceptance
d) Must be with the consent of the holder
Acceptor for honor is secondarily liable on the instrument
If not specified for whose honor he is accepting, must be for honor of the drawer

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j)

Payment for honor

Any person whether party to the bill or not
Not secondarily liable on the instrument
Does not require consent of the holder
Refusal to accept payment for honor discharges the party for whose honor
payment was offered & subsequent parties
When TWO OR MORE PERSONS offered payment for honor for different parties, the
person whose payment will discharge most parties will be given preference

Discharge
Negotiable instrument may be discharged by:
Payment in due course by or on behalf of the principal debtor
IN DUE COURSE - @ or after maturity in good faith
Payment in due course by accommodated party
Intentional cancellation by the holder
Any act which may discharge a contract for the payment of money
(NOCOMEREPALO)
When principal debtor becomes holder at or after maturity
When holder intentionally cancels the signature of an indroser, such indorse is
discharged
Subsequent parties are discharged when prior parties are discharged
Refusal to accept a valid tender of payment made by a prior party also discharges
subsequent parties

29