BUSINESS LAW

LAW ON OBLIGATIONS
1. Sources of obligations
a. Law
b. Contracts
c. Quasi-contracts (Negotiable gestio: Solutio Indebiti)
d. Delict (act or omission punished by law)
e. Quasi-delicts; Tort; Culpa aquiliana
2. Kinds of Obligations
Primary classification of obligations
1. Pure obligation
2. Conditional Obligation
3. Obligation with a period
4. Alternative obligation
5. Facultative obligation
6. Joint obligation
7. Solidary obligation
8. Divisible obligation
9. Indivisible obligation
10. Obligation with the penal clause
Secondary classification of obligations
1. Unilateral and bilateral
2. Real and Personal
3. Determinate and generic
4. Positive and negative
5. Legal, conventional and penal
6. Civil and natural
3. Circumstances affecting obligations
a. Fortuitous event
Fortuitous events are events which cannot be foreseen or which though foreseen are
inevitable.
When the debtor is unable to fulfil his obligation because of fortuitous event of force
majeure, his obligation to comply is extinguished subject to the following exceptions:
a. When stipulated by the parties
b. When the law expressly provide
c. When the nature of the agreement requires the assumption of risk
Conditions must concur in order that the obligor will be exempted from liability:
a. The cause of the breach of obligation must be independent of the will of the debtor
b. The event must be either unforeseeable or unavoidable
c. The event must be such as to render it impossible for the debtor to fulfil his obligation in
a normal manner
d. The debtor must be free from any participation in, or aggravation of, the injury to the
creditor

b. Fraud (Dolo)
Fraud consists in the conscious and intentional proposition to evade the normal fulfilment of
an obligation.
Kinds of Fraud:
a. Fraud in obtaining consent- dolo causanti
b. Fraud in performing a contract- dolo incidenti
c. Negligence (Culpa)
Negligence, fault or culpa of the obligor consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the
persons, of the time abd the place.
If the law contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required.
d. Delay, Default or Mora
Default or mora signifies the idea of delay. It is the non-fulfilment of obligation with respect
to time.
Kinds of delay:
a. Mora solvendi- debtors part
b. Mora accipiende- creditors part
c. Compensatio morae- both parties defaulted
Exceptions:
a. When stipulated by the parties
b. By provision of law
c. When the time is of the essence
d. When demand would be useless
e. Breach of contract (Culpa contractual)
Breach of contract means contravention of the tenor of the obligation
Characteristics of culpa contractual
a. There is pre-existing contractual relation;
b. The negligence of the defendant is merely an incident in the performance of an
obligation;
c. The source of liability id contract;
d. Proof of contract and its breach is sufficient prima facie to warrant recovery
The liability of employers for acts of employees is based upon the principle that the
negligence of the employee is conclusively presumed to be the negligence of the employer.
Proof of diligence in the selection and supervision of the employees is not available as a
defense.
4. Duties of the obligor in obligation to do or not to do
Obligation to do
In case of failure to performan obligation; performance in contravention of the agreement; or
obligation poorly done the creditor may demand specific performance plus damages.

Obligation not to do
In case of violation, the creditor may demand that it be undone at the express of the debtor plus
damages for breach of contract.
5. Extinguishment of obligation
a. Payment of debts in money
All monetary obligations shall be settled in the Philippine currency which is the legal tender
in the Philippines. However, the parties may agree that the obligation or transaction shall be
settled in any other currency at the time of payment.
Legal tender refers to such currency which may be used for the payment of all debts, wheter
public or private.
b. Mercantile documents as a means of payment
Delivery of mercantile documents by the debtor to the creditor does not produce the effect of
payment.
Exceptions:
a. When the mercantile document has been encashed;
b. When through the fault of the creditor, it is impaired.
c. Special forms of payment
Four special forms of payments under civil code:
a. Application of payment
b. Payment by cession
c. Dation in payment
d. Tender of payment and consignation
Strictly, application of payment, by its very nature, is not a special form of payment.
d. Remission or condonatio; confusion or merger; compensation; and novation.

LAW ON CONTRACTS
1. Elements
a. Essential elements ( Consent; object; cause )
b. Natural elements ( Presumed to exist )
c. Accidental elements ( Stipulation )
2. Principle of freedom and Limitation
The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to the law, morals, good customs, public order
or public policy.
Examples of limitations:
a. Pactumcommissorium is null and void.
b. Upset price is not allowed in mortgage contract ( An upset price is a specified price below
which the mortgaged property is not supposed to be sold at the execution sale. )
c. The parties to a contract cannot deprive the court of competent jurisdiction.

3. Consent
Persons capable of giving consent to a contract:
a. Unemancipated minors;
b. Insane or demented persons;
c. Deaf mutes who do not know how to write;
d. Persons who are suffering from civil interdiction;
e. Incompetents under guardianship.
Requisites of consent:
a. Must be given by 2 or more persons;
b. Parties are capacitated to a contract;
c. Consent must be intelligently or freely given;
d. Express manifestation of the will of the contracting parties.
Vices of consent:
a. Mistake or error;
b. Intimidation or threat;
c. Violence or force;
d. Undue influence;
e. Fraud or deceit.
There is violence when in order to wrest consent, serious or irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a reasonable, of an
imminent and grave evil upon his person or property, or upon the person or property of his spouse,
descendants or ascendants to give his consent.
There is undue influence when a person takes improper advantage of his power over the will of
another, depriving the latter of reasonable freedom of choice.
4. Objects of contracts
Object of contract ( thing, rights or services )
a. Must be within the commerce of men
b. Transmissible
c. Licit
d. Possible
e. Determinate
5. Consideration of contracts
In onerous contracts, the cause is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other.
In remuneratory contracts,the cause is the service or benefit remunerated.
In contracts of pure beneficence the ( gratuitous ), the mere liberality of the benefactor.
Cause is the essential and impelling reason why a party assumes an obligation.
In reciprocal contracts, the subject matter for one is the cause for the other.
6. Formalities of contracts

A contract shall be obligatory or binding in whatever form it may have been entered into provided
all the essential requisites ( consent, object and cause; and in certain specified contracts, delivery
or form of for its validity are present.
In the following cases, the form of the contract is essential:
a. When the law require that the contract be in some form to be valid ( for validity );
b. When the law requires that a contract be in some form to be enforceable or proved in a
certain way ( for enforceability ) ;.
c. When the law requires that a contract be in certain form for the convenience of the parties (
for convenience ).
7. Reformation
Reformation is that remedy in equity by means of which a written instrument is made or
constructed so as to express or conform to the real intention of the parties when some error or
mistake has been committed.
Requisites of reformation:
1. Meeting of the minds between the parties;
2. Instrument does not express the true intention of the parties;
3. The failure of intention is due to mistake, fraud, inequitable conduct or accident;
4. There must be clear and convincing proof.
The following instruments are not subject to reformation:
1. Simple donations inter vivos wherein no condition is imposed;
2. Wills;
3. The real agreement is void.
8. Interpretations of contracts
Basic rules in the interpretation of contracts:
1. If the term of the contracts are clear, the literal meaning of its stipulations shall control;
2. The evident intention of the parties shall prevail over the words of the contract;
3. The contemporaneous and subsequent acts of the parties shall be principally considered in
order to ascertain their intention;
4. Obscure words or stipulations in a contract shall not favour the party who caused the
obscurity;
5. Doubts in gratuitous contracts shall be settled in such a way that the least transmission of
rights and interests shall prevail;
6. Doubts in onerous contracts shall be settled in favour of the greatest reciprocity of interests.
9. Defective contracts
a. Rescissible contract;
b. Voidable contract;
c. Unenforceable contract;
d. Void contract.
Rescissible contracts
1. Those made by guardians when their wards suffer lesion by more than of the value of the
things which are the object thereof;
2. Those agreed upon in behalf of absentees if the latter suffer the lesion stated above;
3. Those made in fraud of creditors provided the following requisites are present:
a. There must be credit prior to the contract to be rescinded;

b. Fraud on the part of the debtor;

c. Creditor cannot recover his credit in any other manner.
4. Those which refer to things under litigation made by defendants without the knowledge and
approval of the litigants or of competent judicial authority;
5. All other contracts especially declared by law to be subject to rescission.
Kinds of unenforceable contracts
1. Those executed by one in the name of another without any authority or in excess of such
authority.
2. Those that do not comply with the Statute of Frauds;
3. Those where both parties are incapable of giving consent.
Agreements that must appear in writing to be enforceable
1. Agreement that by its terms is not to be performed within a year from making thereof;
2. Special promise to answer for the debt, default or miscarriage of another;
3. Agreement made in consideration of marriage other mutual promise to marry;
4. Agreement for sale of goods, chattels or things in action at a price not less than 500, unless
there has been partial delivery or payment;
5. Agreement for the leasing for more than 1 year, or for the sale of real property or of an
interest therein, unless it has been partially executed;
6. Representations as to the credit of a third person.

LAW ON SALES
1. Contract of sale
By the contract of sale one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefore a price certain or its
equivalent.
Sale is consensual, bilateral, onerous, commutative, nominate, and principal contract.
2. Sale versus other terms
In dation in payment, the debtor alienates property in favour of the creditor for a satisfaction of
monetary obligation. ( The obligation is money; the payment is property).
In cession in payment, the debtor transfers all the properties not subject to execution in favour of
his creditors so that the latter may sell them and apply the proceeds to their credits.
By the contract of barter or exchange one of the parties binds himself to give one thing in
consideration of the others promise to give another thing.
If the consideration of the contract consists partly in money, and partly in another things, the
transaction shall be characterized by the manifest intention of the parties. If such intention does
not clearly appear, it shall be considered a barter if thing given as a part of the consideration
exceeds the amount of the money or its equivalent; otherwise, it is a sale.
A contract for the delivery at a certain price of an article which the vendor in the ordinary course
of his business manufactures or procures for the general market, whether the same is on hand at
the time or not is a contract of sale , but if the goods are to be manufactured especially for the

customer and upon his special order, and not for the general market, it is a contract for a piece of
work.
3. Earnest money versus Option money
Distinctions between earnest money and option money.
1. Earnest money is a part of purchase price, while option money is the money given as distinct
consideration for an option contract;
2. Earnest money is given only where there is already a sale, while option money applies to a
sale not yet perfected;
3. When earnest money is given, the buyer is bound to pay the balance, while when the wouldbe buyer gives option money, he is not required to buy.
4. Rights / Obligations of Vendor and Vendee
Principal obligations of the vendor
1. To transfer the ownership of the determinate thing;
2. To deliver the thing;
3. To warrant against eviction and against hidden defects;
4. To take care of the thing pending delivery with proper diligence;
5. To pay for the expenses of the deed of sale, unless there is a stipulation to the contrary.
Principal obligations of the vendee
1. Accept delivery;
2. Pay the price of the thing sold.
5. Remedies of unpaid seller
1. A lien in the goods or right to retain them for the price while he is in possession;
2. In case of insolvency of the buyer, a right of stopping the goods in transit after he is parted
with the possession;
3. A right of scale;
4. A right to rescind the sale;
5. A right to enforce payment.
6. Warranties
Implied warranties of seller
1. Warranty against eviction
2. Warranty against hidden defects or unknown encumbrances
3. Warranty as to fitness or merchantability.
Vendors who are not liable of breach of warranty:
1. Sheriff;
2. Auctioneer;
3. Mortgagee;
4. Pledgee.
7. Conventional redemption or Legal redemption
Nature of conventional redemption:
1. It is a purely contractual right because it is created, not by mandate of the law, but by virtue
of an express contract;
2. It is an accidental stipulation and, therefore, its nullity cannot affect the sale itself since the
latter might be entered into without said stipulation;
3. It is a real right because when registered, it binds third person;

4. It is a potestative condition because it depends upon the will of the vendor.

5. It is a resolutory condition because when exercised, the right of ownership acquired by the
vendee is extinguished.
6. It is not an obligation but a power or privilege that the vendor has reserved for himself;
7. It is reserved at the moment of the perfection of the contract for the right to repurchase is
agreed upon afterwards, there is only a promise to sell which produces different rights and
effects.
Instances of legal redemption:
1. Redemption by a co-heir of the share sold by the other heir;
2. Redemption by a co-owner;
3. Redemption by an adjoining owner of a piece of rural land or urban land;
4. Redemption by a debtor in case of sale of right in litigation.
Equitable mortgage and pacto de retro sale
Equitable mortgage is one although lacking inn some formality, form of words, or other requisites
demanded by statutes nevertheless reveals the intention of the parties to charge a real estate as
security for a debt, and contains nothing impossible or contrary to law.
Instances when equitable mortgage is presumed in sale with right to repurchase:
1. When the price of a sale with right to repurchase is unusually inadequate;
2. When the vendor remains in possession as the lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed;
4. When the purchaser retains for himself a part of the purchase price;
5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention of the parties is that
the transaction shall secure the payment of a debt or the performance of any other obligation.
8. Installment sales
Recto Law ( Amendment to Art. 1484 )
Alternative remedies of the vendor in sale of personal property payable in instalments.
1. Elect fulfilment upon the vendees failure to pay;
2. Cancel the sale, if the vendee has failed to pay two or more instalments;
3. Foreclose the chattel mortgage, if one has been constituted, if the vendee shall have failed to
pay two or more instalments.
In the third case, the vendor shall have no further action to recover any unpaid balance of the price (
deficiency ) and any agreement to the contrary shall be void.
Maceda Law (Realty Installment Buyer Protection Act)
1. To pay without additional interest, the unpaid installments due within the total grace period
earned by him fixed at the rate of one (1)-month grace period for every one (1) year of installment
payments made. This right, however, shall be exercised by him only once in every five (5) years
of the life of the contract and its extensions, if any; and
2. If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to 50% of the total payments made and, after five (5) years
of installments, an additional 5% every year but not to exceed 90% of the total payments made.
9. By-bidder

By-bidders or puffers are the persons who, without any intention to buy are employed by the seller to
raise the price by fictitious bids, thereby increasing the competition among the bidders. These bidders
and puffers are not bound by their bids because they are agents of the seller.
Right of seller to employ by-bidder
1. When the right is reserved
The owner should give notice that he would employ third persons to bid.
2. When the right is not reserved
The owner cannot employ by-bidders, otherwise, the sale is fraudulent.

LAW ON AGENCY
1. Contract of agency
Agency is a contract whereby a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.
It is consensual, nominate, bilateral (unilateral, if gratuitous), principal, and preparatory contract.
2. Obligations of an agent and principal
Obligations of the agent
a. To carry out the agency in accordance with its terms; otherwise, he shall be liable for damages.
b. To answer for damages which through his non-performance the principal may suffer;
c. To finish the business already begun on the death of the principal should delay entail any danger.
d. To finish the business already begun on the death of the principal should delay entail any danger.
e. Not to carry out the agency if its execution would manifestly result in loss or damage to the
1. principal.
f. There being a conflict, not to prefer his own interests to those of the principal; otherwise, he shall
be liable for damages.
g. Not to borrow money of the principal who has authorized him to lend although at interest, without
his consent.
h. To render an account of his transactions and to deliver to the principal whatever the may have
received by virtue of the agency through it may not be owing to the principal.
Obligations of the principal
a. To comply with all the obligations which the agent may have contracted within the scope of his
authority and in the name of the principal;
b. To advance to the agent, should the latter so request, the sums necessary for the execution of the
agency;
c. To reimburse the agent for all the advances made by him, provided the agent is free from fault;
d. To indemnify the agent for all the damages which the execution of the agency may have caused
the latter without fault or negligence on his part;
e. To pay the agent the compensation agreed upon, or if no compensation was specified, the
reasonable value of the agents services.
3. Guaranty commission
Del credere commission (guarantee commission) is an additional commission by which the agent (who
also gets his ordinary commission) shall bear the risk of collection and shall pay the principal the
proceeds of the sale on the same terms agreed upon with the purchaser.
4. Modes of extinguishment of agency

a.
b.
c.
d.
e.
f.
2.

By its revocation by the principal;

By the withdrawal of the agent;
By the death, civil interaction, insanity or insolvency of the principal or of the agent;
By the dissolution of the firm or corporation which entrusted or accepted the agency;
By the accomplishment of the object or purpose of the agency; and
By the expiration of the period for which the agency was constituted.
The other models of extinguishment of obligations in general may also apply.

LAW ON PLEDGE, MORTGAGE AND CHATTEL MORTGAGE

1. Pledge
Pledge is a contract by virtue of which the debtor delivers to creditor or to a third person a movable, or
instrument evidencing corporeal rights, for the purpose of securing the fulfilment of a principal
obligation with the understanding that when the obligation is fulfilled the thing delivered shall be
returned with all its fruits and accessions.
It is a real, accessory, and unilateral contract. It is also a subsidiary contract because the obligation
incurred does not arise until the fulfilment of the principal obligation which is secured.
Form and Effectivity to third persons
A contract of pledge can be constituted in whatever from, as all other contracts, and will produce its
natural and legal consequences with respect, to the contracting parties and to their assigns.
To be valid and effective against third persons, it must appear in a public instrument. Mere delivery of
the thing although valid between the parties is not sufficient to affect third persons unless it appears in
a public instrument, where the description of the thing pledged and the date of pledge is set forth.
Rights of the pledge
a. To retain the thing in his possession or in that of a third person to whom it has been delivered,
until debt is paid.
b. To be reimbursed for expenses incurred in its preservation.
c. To compensate (set-off) the fruits, income, dividends or interests earned or produced by the thing
pledged and received with those which are due to him.
d. To bring the actions which pertain to the owner of the thing pledged in order to recover it from, or
defend it against, a third person.
e. To sell the thing pledged at public auction, if without his fault, there is danger of destruction,
impairment or diminution in the value of the thing.
f. To claim a substitute or demand immediate payment, if he is deceived in the substance or quality
of the thing pledged.
g. To sell the thing pledged at public auction if the obligation secured is not paid.
h. To bid at the public sales.
i. To collect the amount that becomes due on a credit pledged before such credit is redeemed.
j. To choose which one of several things pledged shall be sold.
b)
a.
b.
c.
d.
e.
f.

Obligations of the pledge

To take care of the thing pledged with the diligence of a good father of a family.
To answer for its loss or deterioration in the proper case.
Not to deposit the thing pledged with a third person unless authorized.
To be responsible for the acts of his agents or employees with respect to the thing pledged.
Not to use the thing pledged unless authorized or its preservation so requires.
To advise the pledgor, without delay, of any danger to the thing pledged.

g. To promptly advise the pledgor or owner in case of sale at public auction of the result thereof.
Pactum commissorium
Pactum commissorium is a stipulation authorizing the creditor to appropriate the things given by way
of pledge or mortgage or to dispose of them. It is declared null and void by law.
The appropriation must be automatic without need of further act on the part of the debtor. Hence, the
prohibition, does not apply to:
1. Subsequent voluntary act of the debtor of making cession of the property; or
2. A promise to assign or sell said property in payment of the debt.
Causes for the extinguishment of pledge
3. Return of the thing pledged by the pledge or owner, any stipulation to the contrary being void;
4. Renunciation or abandonment executed in writing by the pledge even without return of the thing;
5. Destruction or loss of the thing pledged;
6. Extinction of the principal obligation by payment or sale of the thing pledged; and
7. Other causes of extinguishment of ordinary obligations.
2. Mortgage
Mortgage (otherwise known as real estate mortgage or real mortgage) is a contract whereby the debtor
secures to the creditor the fulfilment of the principal obligation, especially subjecting to such security
immovable, property or real rights over immovable property in case the principal obligation is not
complied with at the time stipulated.
Form and Effectivity to third persons
Contract of mortgage must be in public instrument and registered with the Registry of Deeds in order
to be effective against third persons.
Effects of a mortgage
8. It creates a real right. It directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfilment of the obligation for whose security it was
constituted;
9. The mortgagee (creditor) may, therefore, demand payment from any possessor of the mortgaged
property;
10. He may alienate or assign the mortgage credit (his right as mortgagee) to a third person; and
11. The mortgage does not extinguish the title of the mortgagor (debtor) who does not, therefore, lose
his right to dispose of the mortgaged property. The law considers void any stipulation forbidding
the owner from alienating the property mortgaged.
3. Chattel mortgage
Chattel mortgage is a contract by virtue of which personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation.
It is an accessory, unilateral, and formal contract.
Property that may be the subject of chattel mortgage
1. An interest in a business.
2. Ungathered products, such as sugar cane.
3. Vessels
4. Shares of a corporation may be hypothecated by placing a chattel mortgage on the certificate
representing such shares.
5. Machinery placed by a person as tenant in a plant belonging to another.

6. A house belonging to a person which stands on a rented land belonging to another person may be
mortgaged as a personal property if so stipulated in the document of mortgage.
7. Certificate of public convenience.
Requisites to form contract of chattel mortgage
1. It must be signed by the mortgagor.
2. It must be signed by 2 witnesses.
3. It must contain an affidavit of good faith.
4. It must contain a certificate of oath.
5. It must substantially comply with Sec. 5, Act No. 1508.
Binding effect on third persons
In order to bind third persons, the chattel mortgage must be registered with the Chattel Mortgage
Register.
Laws that principally govern chattel mortgage
1. Chattel mortgage law (Act No. 1508)
2. New Civil Code
3. Administrative Code
4. Revised Penal Code

LAW ON PARTNERSHIP
1. Definition of Partnership
By the contract of partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of a profession.
2. Form of partnership contract
a. If the contribution is money or personal property
The contract may be oral or written, express or implied.
The law requires that if the capital of the partnership P3, 000.00 or more in money or property
(other than immovable), the contract of partnership must be in public instrument and registered
with the SEC. Such requirement is only directory, not mandatory. Non-compliance thereof does
not affect the validity of the contract of partnership.
b. If immovable property or real rights are contributed.
The partnership contract must appeal in public instrument together with an inventory of the
immovables or real rights contributed, signed by the parties and attached to the public instrument,
otherwise, the contract is void.
3. Rules of management
The partner who has been appointed manager in the articles of partnership may execute all acts of
administration despite the opposition of his partners, unless he should act in bad faith; and his power is
irrevocable without just or lawful cause. The vote of the partners representing the controlling interest
shall be necessary for such revocation of power.
A power granted after the partnership has been constituted may be revoked at any time.
If two or more partners have been entrusted with the management of the partnership without
specification of their respective duties, or without a stipulation that one of them shall not act without

the consent of all the others, each one may separately execute all acts of administration, but if any of
them should oppose the acts of the others, the decision of the majority shall prevail. In case of a tie, the
matter shall be decided by the partners owning controlling interest.
In case it should have been stipulated that none of the managing partners shall act without the consent
of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or
disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable
injury to the partnership.
When the manner of management has not been agreed upon, the following rules shall be observed:
a. All the partners shall be considered agents and whatever any one of them may do alone shall bind
the partnership.
b. None of the partners may, without the consent of the others, make any important alteration in the
immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of
the consent by the other partners is manifestly prejudicial to the interest of the partnership, the courts
intervention may be sought.
4. Application of payments made to a managing partner
If a partner-manager received money from a third person who owes the partnership and the managing
partner, the amount received as payment must be applied to both obligations in proportion to the
credits, if the receipt is in the name of the managing partner.
However, if the receipt is in the name of the partnership, the payment must be applied to the
partnership credit.
Exceptions to the rule that payment must be in proportion, if receipt is in the name of the managing
partner:
a. If the debt of the partnership is not yet due on the date of payment
b. If the debt to the managing partner is more onerous
5. Distribution of profits and losses
I. Distribution of profits
a. According to stipulation
b. No stipulation, according to capital contribution
II. Distribution of losses
a. According to stipulation
b. No stipulation, according to the profit sharing stipulation
c. Absence of a and b, according to capital contribution
Industrial partners profit: the share of the industrial partner in the profits if there is no agreement is
that which is just and equitable. (net profit)
Industrial partners losses: while he may be held liable by the third persons, still he can recover what
he paid from the capitalist partners because he is exempted from losses.
III. The designation of profit and loss sharing may be entrusted to a third person. The designation
made by the third person is binding upon the partners unless such is manifestly inequitable.
(Designation cannot be entrusted to one of the partners.)
6. Liabilities of partners to third persons
The partners, including industrial partners, are liable pro-rate after exhausting the partnership property.
7. Liability of newly admitted partner for obligations of the partnership

I. Obligations incurred before admission- a newly admitted partner is liable for obligations of the
partnership incurred before his admission to the firm. Such liability is limited to his capital
contribution, unless otherwise agreed.
II. Obligations incurred after admission- all partners, the original and the new partner shall be liable to
the extent of their separate property in satisfying, such obligation of the partnership.
8. Modes of dissolution of partnership
Causes of automatic dissolution
a. Without violation of the agreement
i. By termination of the term or particular undertaking.
ii. By express will of any partner, acting in good faith, when no definite term or particular
undertaking is specified.
iii. By express will of all the partners.
iv. By expulsion of any partners.
b. In violation of partnership agreement
c. If the business becomes unlawful to be carried on or for the members to carri it on in partnership.
5.
6.
7.
8.
9.

Loss of a specific thing contributed to the partnership

Death of any partner
Insolvency
Civil interdiction of any partner
By decree of court under Article 1831

d.
e.
f.
g.
h.

Causes for judicial dissolution (Article 1831)

Insanity of the partner
Incapacity of a partner
Partner has been guilty of such conduct as tends to affect prejudicially the carrying on the business.
Willful violation of agreement
Business can be carried on only at loss

9. Limited partner liable as general partner

a. Non-compliance with formal requisites (substantial)
b. When the word limited or ltd is omitted in the firm name
c. When the surname of a limited partner appears in the partnership name
Requisites referred to in letter a:
1. The certificate of limited partnership must be signed and sworn to by all partners.
2. The certificate must be registered with the SEC.
Exceptions to letter c:
1. When the surname of the limited partner is the same as the surname of a general partner.
2. When before the limited partner became as such, the business had been carried on under a name in
which his surname appeared.
3. When the person extended credit to the partnership with the knowledge that he is a limited partner.
10. Limited partners contribution
The contributions of a limited partner may be cash or other property, but not services.

11. Partnership vs. Corporation

DISTINGUISHING FACTOR

PARTNERSHIP

HOW CREATED

VOLUNTARY agreement of
parties

HOW LONG IT EXISTS

No time limit except agreement

of parties

TRANSFERABILITY OF
INTEREST

Even if a partner transfers his

interest to another, the transferee
does not become a partner unless
all other partners consent. (This
is due to the principle of mutual
trust and confidence-the
delectus personarum)
Generally, partners acting on
behalf of the partnership are
agents thereof: consequently they
can bind both the firm and the
partners.
A partner can sue a partner who
mismanages.

ABILITY TO BIND THE

FIRM

MISMANAGEMENT

NATIONALITY

A partnership is a national of the

country it was created.

CORPORATION
Created by the state in the form
of a special chapter or by a
general law (The Corporation
Code)
Not more than 50 years may be
reduced, but never extended
A transfer of interest makes the
transferee a stockholder, even
without the consent of the others.

Generally, the stockholders

cannot bind the corporation since
they are not agent thereof.

A stockholder cannot sue a

member of the board of directors
who mismanages: the action
must be in the name of the
corporation. (Derivative Suit)
A corporation is a national of the
country under whose laws it was
incorporated.

CORPORATION LAW
1. Corporation
A corporation is an artificial being created by operation of law having the right of succession and
the powers, attributes and properties expressly authorized by law or incident to its existence.
2. What are some advantages of a corporation?
1. Death of a stockholder will not dissolve the corporation because of its power of succession.
2. Its management is centralized on the board of directors.
3. Shareholders have limited liability.
4. The shareholders are not general agents of the business.
5. The shares of stock can be transferred without the consent of the other stockholders.

3. What are some disadvantages of a corporation?

1. A corporation is complicated in formation and management.
2. The stockholders have little voice in the conduct of the business.
3. Its credit is weakened by the limited liability of the stockholders.
4. It entails a high cost of formation and operation.

4. Requisites of a de facto corporation

1. There must be a valid law under which a corporation might be incorporated.
2. There is an attempt in good faith to incorporate or organize a corporation under such law.
3. Actual exercise of corporate powers.
4. Issuance of certificate of incorporation despite non-compliance with some legal requirements.
A de facto corporation possesses all the powers of a de jure corporation except that it is open to
direct attack by the state in a quo warranto proceeding.
5. Powers of corporation
1. Express written powers. (ex. Corporation code, by-laws, Article of Incorporation)
2. Incidental not written
Powers which a corporation can exercise by the mere fact of its being a corporation (power of
succession; power to sue)
3. Implied
Powers which are reasonably necessary to execute the express powers granted to a
corporation (acts in the usual course of business; acts to protect debts owing the corporation)
6. Qualification of directors and trustees (Minimum Qualifications)
a. Stock corporation
1. Must own at least 1 share
2. Must be recorded in the books of the corporation
3. Must continuously own at least one share
4. Majority must be residents of the Philippines
b. Non- stock corporation
1. Must be members thereof
2. Majority must be residents of the Philippines
7. Officers and their qualification
1. President must be a director
2. Treasurer may or may not be a director
3. Secretary may or may not be a director but must be a resident and citizen of the Philippines
Any two or more positions may be held concurrently by the same person, except that no one shall
act as president and secretary or as president and treasurer of the same time.
8. Classes of shares of stock:
a. Common stock entitling the owner to pro-rata dividends, without any priority or preference
over any other shareholder or class of shareholders but equally with all other stockholders
except preferred stockholders.
b. Preferred stocks entitled to certain preferences over common stock
c. Par value stock
d. No par value stock
e. Voting stock
f. Non voting stock
g. Treasury stock stock lawfully issued by the corporation and subsequently reacquired by it
but not cancelled.
h. Watered stock stock which has been issued by the corporation as fully paid up when in fact
it is not, because it has been issued as bonus or otherwise, without any consideration at all or
for less than par value.
i. Founders stock
j. Redeemable stock
Non voting shares may be voted in the following instances:
1. Amendment of articles of incorporation

2. Adoption and amendment of by-laws

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property
4. Incurring, creating or increasing bonded indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation
7. Investment of corporate funds in another corporation or business
8. Dissolution of the corporation
9. Actions by stockholders or members
Derivative suit
A derivative suit is one brought by one or more stockholders or members in the name and on
behalf of the corporation to redress wrongs committed against it or to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued
or hold control of the corporation. In such action, the suing stockholder is regarded as a nominal
party with the corporation as the real party in interest.
Individual suit
When a wrong is directly inflicted against a shareholder, the latter can maintain an individual or
direct suit in his own name against the corporation. Stockholders individual suit is an action
brought by a stockholder against the corporation for direct violation of his contractual rights as
such individual stockholder, such as the right to vote, the right to share in the declared dividends,
the right to inspect corporate books and records. Any recovery by the stockholder belongs to him.
Representative suit
A group of stockholders may bring direct suits against a corporation in the form of a
representative suit or class action.
When a wrong is committed against a group of stockholders, a stockholder may bring a suit in
behalf of himself and all other stockholders who are similarly situated.
10. Books and records
Every corporation shall, at its principal office, keep and carefully preserve a record of all business
transactions, and minutes of all meetings of stockholders or members, or of the board of directors
or trustees.
Books required to be kept by the corporation
1. Books that record all business transaction;
2. Minute book for meeting of stockholders or members;
3. Minute book for meetings of the board;
4. Stock and transfer book
The record of all business transaction of the corporation and the minutes of any meeting shall be
open to the inspection of any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
the said records or minutes, at his expense.
Right to financial statement
Within 10 days from receipt of a written request of any stockholder or member, the corporation
shall furnish to him its most recent financial statements, which shall include the balance sheet and
profit and loss statement.
Liability for denial of right to inspect and copy
Any officer or agent of the corporation who will shall refuse to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its records or

minutes shall be liable to such director, trustee, stockholder or member for damages and addition,
shall be guilty of an offensive which shall be punishable under the Corporation Code.
11. Foreign corporation
A foreign corporation is one formed, organized or existing under any laws other than those of the
Philippines, and whose laws allow Filipino citizens and corporation to do business in its own
country or state.
An application for licence shall be under oath and shall specifically contain the name and address
of its resident agent authorized to accept summons and processes in all legal proceedings.
It shall have the right to transact business in the Philippines after it shall have obtained a license
to transact business in this country.
Laws applicable to foreign corporations
A foreign corporation doing business in the Philippines is subject to all laws, rules and
regulations applicable to domestic corporation of the same class except with regard to the
creation, formation, organization or dissolution of corporations and the relations, liabilities,
responsibilities, or duties of stockholders, members or offices of corporation to each other or to
the corporation.
Unlicensed foreign corporation doing business
A foreign corporation transacting business in the Philippines without a license shall not be
allowed to maintain or intervene in any suit, action or proceeding in any court or administrative
agency of the Philippines. Such corporation may be sued before the Philippine courts.
Unlicensed foreign corporation may maintain an action under the following instances:
a. Isolated business transaction in the Philippines;
b. Protection of its intellectual property in the Philippines;
c. Non-business transaction in the Philippines.
A foreign corporation planning to do business in the Philippines, must secure a license from the
SEC, before it can go to the SEC, such foreign corporation must secure a certificate of authority
from the Board of Investments.
Doing business covers:
a. Soliciting orders;
b. Serving contracts;
c. Opening offices whether liaison offices or branches;
d. Appointing representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling 180 days or more;
e. Participating in the management, supervision, or control of any business or corporation in the
Philippines;
f. Any other act that imply continuity or commercial dealings.
The following do not constitute doing business:
a. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered
to do business and/ or the exercise of rights as such investor;
b. Having a nominee director or officer to represents its interest in such corporation;
c. Appointing a representative or distributor domiciled in the Philippines which transact
business in its own name and for its own account.

Requirements for issuance of licence of a foreign corporation:

a. Appoint a resident agent;
b. Must prove that the foreign corporations country grants reciprocal rights to Filipinos and
Philippine corporation;
c. Establish an office in the Philippines;
d. Bring in its assets;
e. In the event of insolvency, an undertaking that Filipino creditors will be preferred;
f. Notice of six months should it desire to terminate operations;
g. Franchise and patents must remain the Philippines, if possible;
h. Must file a bond of P100, 000.
Ground for revocation of license:
a. Failure to file annual reports required by law;
b. Failure to appoint or maintain a resident agent;
c. Failure to inform the SEC of change of resident agent or the latters change of address;
d. Failure to submit copies of amended articles or by-laws;
e. Misrepresentation in material matters in reports;
f. Failure to pay taxes;
g. Engaged in business not authorized by the SEC;
h. Acting as dummy of a foreign corporation not licensed to do business in the Philippines.
If a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for
withdrawal, and must meet the following requirements:
a. All claims accrued in the Philippines must be settled;
b. All taxes must be paid;
c. Petition must be published once a week for three consecutive weeks.
12. Dissolution
a. Methods and causes of dissolution
1. Voluntary dissolution
I.
Voluntary dissolution where no creditors are affected.
II.
Voluntary dissolution where creditors are affected.
III.
Amending the articles of incorporation to shorten the corporate term.
IV.
In the case of corporation sole, by submitting to the SEC, a verified declaration
of dissolution.
2. Involuntary dissolution
I.
By expiration of the period for which it was lawfully formed.
II.
By legislative enactment.
III.
By judicial decree of forfeiture.
IV.
By failure to organize formally and commence the transaction of its business
within 2 years from the date of its incorporation.
V.
By the order of SEC.

NEGOTIABLE INSTRUMENTS LAW

1. Functions and importance of negotiable instruments:

1. Used as substitute for money

2. Media if exchange for most commercial transactions
3. Serve as a medium of credit transactions
2. Elements of negotiable instrument
An instrument to be negotiable must conform to the following requirements:
a. It must be in writing and signed by the maker or drawer;
b. Must contain an unconditional promise or order to pay a sum certain in money;
c. Must be payable on demand, or at a fixed determinable future time;
d. Must be payable to order or to bearer;
e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
3. Accommodation party
Accommodation party is one who has signed the instrument as maker, drawer, acceptor, or
endorser, without value therefore, and for the purpose of lending his name to same other persons.
Liability of accommodation party liable of the instrument to the holder for value,
notwithstandingsuch holder at the time of taking the instrument knew him to be only
accommodation party.
4. Construction or Interpretation where the instrument is ambiguous
The following rules of construction or interpretation apply:
a. Where the sum payable is expressed I words and also in figures and there is discrepancy
between the two, the sum denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to fix the amount;
b. Where the instrument provides for the payment of interest, without specifying the date from
which interest is to run, the interest runs from the date of the instrument and if the instrument
is undated from the issue thereof;
c. Where the instrument is not dated it will be dated as of the time it was issued;
d. Where there is a conflict between the written and printed provisions of the instrument, the
written provision prevail;
e. Where the instrument is so ambiguous that there is doubt whether it is a hill or note, the
holder may treat as either at his election;
f. Where a signature is so placed upon the instrument that it is not clear in what capacity the
person making the same intended to sign, he is to deemed an indorser;
g. Where an instrument containing the word I promise to pay is signed by two or more
persons, they are deeded to be jointly and severally liable thereon.
5. A holder in due in courseis a holder who has taken the instrument under the folloeing conditions:
a. He took the instrument and regular upon its face;
b. He becomes the holder before it was overdue, and without notice that it had been previously
dishonored, it such was the fact;
c. He took it in good faith and for value;
d. That at the time it was negotiated to him, he had no notice of an infirmity in the instrument or
defect in the title of the person negotiating it.
6. Kinds of defenses
a. Real, absolute or legal ( incapacity of the party; illegal contract; forgery; fraud in factum;
fraudulent alteration; incomplete and undelivered instrument)
b. Personal or equitable (absence or failure of consideration; fraud in inducement; filling up of
blanks not in accordance with authority given; want of delivery of complete instrument;

innocent alteration or spoliation; acquisition of the signature in the instrument by force or

fear)
Although an instrument subject to real defense cannot be enforced, this refers only against the
person to whom the legal defense is available. This can be enforced against those to whom such a
defense is not available.
Fraud in factum distinguished from fraud in inducement in fraud in factum, the issuer no
intention to issue the instrument; while in fraud inducement, the issuer has the intention to issue
the instrument voluntarily, only to be deceived as to the character, quality or cause of the
instrument.
7. General indorser vs. Qualified indorser
A general indorser warrants that the instrument that he is indorsing is valid and subsisting
regardless of whether he is ignorant of that fact or not, while a qualified indorser or person
negonating by delivery warrants that he is ignorant of any fact that will render the instrument
valueless or impair its validity.
8. Where a signature is gorged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefore, or to enforce payment thereof against any party thereto, can be
acquiredthrough or under such signature unless the party against whom it is sought to enforce
right is preclude from setting up the forgery or want or authority.
9. Alteration
Where a negotiable instrument is materially altered without the assent of all parties liable thereon,
it is avoided, except as against a party who has himself made, authorized or assented to the
alteration or subsequent indorsers. (But when an instrument has been materially altered and is in
the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof
according to the original tenor.)
10. Discharge of negotiable instrument
a. By payment in due course by or behalf of the principal debtor.
b. By payment in due course by the party accommodated, when the instrument is made or
accepted for accommodation.
c. By the intentional cancellation thereof by the holder.
d. By any other act which will discharge a simple contract for the payment of money.
e. When the principal debtor becomes the holder of the instrument at or after maturity in his
own right.
11. Discharge of person secondary liable
a. By any act which discharges the instrument
b. By the intentional cancellation of his signature by the holder
c. By discharge or prior party
d. By a valid tender of payment made by prior party
e. By release of principal debtor unless the holders right of recourse against the party
secondarily liable is expressly reserved
f. By any agreement binding upon the holder to extend the time of payment, unless made with
the consent of the party secondarily liable or the right is expressly reserved

MISCELLANEOUS TOPICS
1. Guaranty
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarity with the principal debtor, the contract is called a
surety ship.
The parties thereto are the guarantor and the creditor. Strictly speaking the contract
between the debtor and the guarantor is called the contract of indemnity.
2. Commission Agent vs. Broker
A commission agent is one engaged in the purchase and sale for a principal or personal
property, which for this purpose, has to be placed in his possession at his disposal.
A broker maintains no relation with the thing which he purchases or sells. He is supposed
to be merely a go-between, an intermediary between the sellers and the buyer.
3. Aleatory contract
By an aleatory contract one of the parties or both reciprocally bind themselves to give or
to do something in consideration of what the other shall give or do upon the happening of
an event which is uncertain, or which is to occur at an indeterminate time. (The element
of risk is present.) Examples: Sale of sweepstakes ticket; insurance.
4. Aleatory contract vs. Contract with surpensive condition
In aleatory contracts whether or not the event happens the contract remains only the
effects and extent of profit and losses are determined.
In contracts with suspensivecondition, if the condition does not happen, the obligation
never becomes effective.
5. Loan (Mutuum and Commodatum)
Mutuum (Simple Loan) the object loan is money or other consumable thing upon the
condition that the same amount or the same kind and quality shall be paid.
Commodatumthe object loaned is not consumable, the borrower may use the same for a
certain time and return it.
Commodatum is essentially gratuitous.
Mutuum may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned; while in matuum,
ownership passes to the borrower.
6. Law on Business Organizations and Law on Business Transactions
Law on Business Organizations:
1. Law on Partnership (Civil Code)
2. Corporation Code
Law on Business Transactions:
1.
2.
3.
4.
5.

Law on Obligations and Contracts (Civil Code)

Law on Sales (Civil Code)
Law on Agency (Civil Code)
Law on Pledge and Mortgage (Civil Code)
Chattel Mortgage Law

Date of effectivity:
1.
2.
3.
4.

Civil Code, RA 386, August 30, 1950;

Corporation Code, BP 68, May 1, 1980;
Negotiable Instruments Law, Act No. 2031, June 2, 1911;
Chattel Mortgage Law. Act No. 1508, August 1, 1906.