TOPIC 01: LABOR STANDARD

By: Atty. Eunice Mae Ann T. Serneo

Section 9, Article II of the 1973
Sets out the minimum terms, conditions, and Constitution
benefits of employment that employers must
comply with
SEC. 9. The State shall afford protection to
labor, promote full employment and equality
Minimum requirements by law and regulations
relating to wages, hours of work, COLA (Cost
in employment, ensure equal work
of Living Allowance), and other monetary welfare opportunities regardless of sex, race, or
benefits including occupational safety creed, and regulate the relations between
and health standards workers and employers. The State shall
assure the rights of workers to
self-organization, collective bargaining,
Has 4 books: security of tenure, and just and humane
1. Pre-employment conditions of work. The State may provide for
2. Human Resources Development Program compulsory arbitration.
3. Conditions of Employment
4. Health, Safety & Social Welfare Benefits
The primordial reason for the passage of
labor laws is social justice. Both under the
Constitution and Article 3, the State is
FUNDAMENTALS OF LABOR LAW
duty-bound to provide and guarantee the
following.
● Its ultimate purpose is to place
employees at an equal footing with 1. Full protection to labor;
their employers. 2. Promotion of full employment;
● It's all about minimum standards and 3. Promotion of equal work opportunities
basic requirements. regardless of sex, race or creed;
● In case of doubt, it's to be interpreted 4. Regulation of the relations between
in favor of employees (Article 4, Labor workers and employers;
Code). 5. Protection of the rights of workers to:
a. Self-organization;
Article 3 of the Labor Code, Declaration b. collective bargaining;
of Basic Policy c. security of tenure; and
d. just and humane conditions of
The State shall afford protection to work.
labor, promote full employment, ensure equal
work opportunities regardless of sex, race or POLICE POWER OF THE STATE
creed and regulate the relations between
The right to work, just like the right of every
workers and employers. The State shall
person to pursue a business, occupation or
assure the rights of workers to
profession, is subject to the paramount right
self-organization, collective bargaining,
of the government, pursuant to its police
security of tenure, and just and humane
power, to impose such regulations and
conditions of work.
restrictions as the protection of the public
may require. They are necessary for the
Article 3 is a substantial reiteration of Section
orderly conduct of society. For as long as
9, Article II of the 1973 Constitution under
such regulations and restrictions are
whose regime the Labor Code was enacted.
implemented and enforced in accordance
with appropriate limitations, their validity
should be upheld at all times.
 Service Incentive Leave) covering retail
and service establishments regularly
SOURCES OF LABOR LAW employing less than ten (10) workers.

● The State (i.e. Labor Code and other A similar exemption of retail and service
statutes, rules & regulations, establishments is also provided for under the
jurisprudence, etc.). Labor Code's IRR on night shift differential
● The Parties (ie. contracts, company pay but the number of regular employees
policies, CBAs, compromise, required for exemption is "not more than
quitclaims, etc.) five (5) workers.
● Principles of Equity (e.g. good faith,
reasonableness, proportionality, BASIC PAY
non-diminution of benefits, unjust
enrichment, etc.) COMPENSABLE HOURS WORKED

CONDITIONS OF EMPLOYMENT The following shall be considered as

compensable hours worked:
1. EMPLOYEES COVERED 1. All time during which an employee is
required to be on duty or to be at the
As a general rule, the provisions of Title I employer’s premises or to be at the
[Working Conditions and Rest Periods), Book prescribed workplace; and
III Conditions of Employment) and the 2. All time during which an employee is
corresponding provisions in the Rules to suffered or permitted to work
Implement the Labor Code, are applicable to 3. Rest periods (less than 20 mins) of
all employees in all establishments and short duration during working hours.
undertakings whether operated for profit or (Philippine Airlines v. NLRC, G.R. No.
not. 132805, 1999).

2. EMPLOYEES NOT COVERED

Article 82 of the Labor Code and its SOME PRINCIPLES IN DETERMINING

Implementing Rules expressly exclude the HOURS WORKED
following persons or employees from the
coverage of Title I, Book III thereof, to wit The following general principles shall govern
in determining whether the time spent by an
1. Government employees; employee is considered hours worked:
2. Managerial employees;
3. Other officers or members of a a. All hours are hours worked which the
managerial staff; employee is required to give to his
4. Domestic servants (now employer, regardless of whether or not
Kasambahays); such hours are spent in productive
5. Persons in the personal service of labor or involve physical or mental
another; exertion; (Normal Working Hours)
6. Workers paid by results;
7. Field personnel; and b. An employee need not leave the
8. Members of the family of the employer. premises of the workplace in order that
his rest period shall not be counted, it
Notably, in addition to the foregoing Article 82 being enough that he stops working,
exemptions, a 9th exemption is provided rests completely and leaves his
under the Labor Code's Article 94 (Right to workplace to go elsewhere, whether
Holiday Pay) and Article 95 (Right to
 within or outside the premises of his the eight-hour period deserves to be
workplace; paid an additional compensation for
the overtime work rendered.
c. If the work performed was necessary
or it benefited the employer or the WORK DAY, HOW RECKONED
employee could not abandon his work
at the end of his normal working hours The term “work day” means the twenty-four
because he had no replacement, all consecutive-hour period which commences
time spent for such work shall be from the time the employee regularly starts to
considered as hours worked if the work.
work was with the knowledge of his
employer or immediate supervisor, Hence, the 24-hour period, in the case of
employees working from 8:00 a.m. to 5:00
d. The time during which an employee is p.m., is from 8 am to 8 am of the following
inactive by reason of interruptions in day and the period from 8 am to 5 pm is
his work beyond his control shall be called the “regular working hours” or shift.
considered working time either if the
imminence of the resumption of work WORK WEEK, HOW RECKONED
requires the employee's presence at
the place of work or if the interval is A “work week” is a week consisting of 168
too brief to be utilized effectively and consecutive hours or seven (7)
gainfully in the employee's own consecutive 24-hour work days, beginning
interest. at the same hour and on the same calendar
Examples of interruptions: brownout, day each calendar week.
nawalan internet
HOURS OF WORK OF PART-TIME
WORKERS
Note, however:
Wages and allowances of part-time
The employer retains the management's
workers shall not be less than the
prerogative to change the working hours of
compensable time that they actually
its employees.
rendered work.

"no work, no pay"

Following the principle of “no work, no
pay, no allowance,” the workers are not
"fair day's wage for a fair day's labor"
entitled to said benefits for the four-hour
NORMAL HOURS OF WORK: HOURS
period that they did not render work. It is
WORKED
important to stress, however, that the
1. Normal hours of work of employees employees should have entered into an
agreement with the employer that they will
❖ Article 83 of the Labor Code be employed as part-time workers.
enunciates the general rule that the
total number of working hours of a
worker or employee shall not exceed BROKEN HOURS
eight (8) hours.
The normal eight (8) working hours
❖ This eight (8) hour period is called the
mandated by law do not always mean
normal hours of work.
continuous and uninterrupted eight (8)
❖ Any work in excess of 8 hours is
hours of work.
considered overtime work.
❖ Consequently, the employee who is
permitted or required to work beyond
As may be required by peculiar (OR 60 MINUTES) TIME-OFF FOR
circumstances of employment, it may mean REGULAR MEALS.
broken hours of, say, four hours in the
morning and four hours in the evening or a Being time-off, it is not compensable hours
variation thereof, provided the total of eight worked. In this case, the employee is free to
(8) hours is accomplished within the do anything he wants, except to work. If he is
“work day” as this term is understood in law. required, however, to work while eating, he
should be compensated therefore.
Hence, the 4-hour work done in the evening
as in the example above, should not be Exceptions:
considered overtime work since the
eight-hour period has not yet been exceeded. 1. Where the lunch period or meal time is
predominantly spent for the
REDUCTION OF EIGHT-HOUR WORKING employer’s benefit
DAY 2. Meal periods of 1 hour are deemed
compensable when the employee is on
The employer, in the lawful exercise of its continuous shift (National Dev’t
prerogative, is not prohibited from reducing Corp. v. CIR, G.R. No. 15422, 1962)
the 8-hour normal working time per day 3. Shortened meal period of less than 1
provided that no corresponding reduction hour must be compensable (IRR
is made on the employee's wage or salary Labore Code, Book III, Rule 1, Sec 7)
equivalent to an eight-hour work day.

WORK IN DIFFERENT SHIFTS SHORTENING OF MEAL TIME TO NOT

In establishments where work is in different LESS THAN 20 MINUTES, WHEN
shifts, work done by the employee beyond his COMPENSABLE
eight-hour shift is considered overtime work
which should be compensated accordingly. In the following cases, a meal period of not
less than twenty (20) minutes may be given
For example: by the employer provided that such shorter
meal period is credited as compensable
If there are three (3) eight-hour shifts in a hours worked by the employee:
"work day." say, the first shift is from 6:00
a.m. to 2:00 p.m; the second shift from 2:00 ● Where the work is non-manual work
p.m. to 10:00 p.m; and the third shift from in nature or does not involve
10:00 p.m. to 6:00 a.m. of the following day, strenuous physical exertion:
the employee whose regular eight-hour work ● Where the establishment regularly
is in the first shift (6:00 am. to 2:00 p.m), once operates for not less than sixteen
required to work in the second or third shift, (16) hours a day
should be given additional compensation for ● In cases of actual or impending
such work done beyond his regular working emergencies or when there is urgent
hours which legally is considered overtime work to be performed on machineries,
work. equipment, or installations to avoid
serious losses which the employer
MEAL PERIODS (20 TO 60 MINS) would otherwise suffer, and
● Where the work is necessary to
GENERAL RULE ON MEAL PERIOD prevent serious loss of perishable
goods.
EVERY EMPLOYER IS REQUIRED
TO GIVE HIS EMPLOYEES, REGARDLESS
OF SEX, NOT LESS THAN ONE (1) HOUR
The law allows a situation where the
employees themselves request for the SHORTENING OF MEAL TIME TO LESS
shortening of meal period to not less than THAN 20 MINUTES, EFFECT.
twenty (20) minutes (say, thirty minutes, or
from 12:00 to 12:30 p.m. instead of 12:00 to ● The law does not allow that meal
1:00 p.m.) for the purpose of allowing them to time be shortened to less than
leave work earlier than the lapse of the eight twenty (20) minutes.
(8) hours required by law (say, 4:30 p.m.
instead of 5:00 p.m.). ● If so reduced, the same shall no longer
be considered as meal time but merely
This shortened period, however, shall be as rest period or coffee break and,
considered compensable working time therefore, become compensable
provided the following conditions are working time.
complied with:
COFFEE BREAKS AND REST PERIODS
● The employees voluntarily agree in OF SHORT DURATION
writing to a shortened meal period of
thirty (30) minutes and are willing to ● Rest periods or short duration during
waive the overtime pay for such working hours are considered and
shortened meal period; counted as hours worked.

● There should be no diminution in the ● Rest periods or coffee breaks running

benefits of the employees which they from five (5) to twenty (20) minutes are
receive prior to the effectivity of the considered compensable working
shortened meal period; time.

● The work of the employees does not CHANGING FROM 30-MINUTE PAID "ON
involve strenuous physical exertion CALL: LUNCH BREAK TO ONE (1) HOUR
and they are provided with adequate MEAL TIME WITHOUT PAY EFFECT
coffee breaks in the morning and
afternoon; Sime Darby Pilipinas, Inc. v. NLRC

● The value of the benefits delivered by ● Prior to the present controversy, all
the employees from the proposed work company factory workers in Markina
arrangement is equal to or including members of private
commensurate with the compensation respondent union worked from 7:45
due them for the shortened meal a.m. to 3:45 p.m. with a 30-minute paid
period as well as the overtime pay for "on call" lunch break. Petitioner, by
30 minutes as determined by the way of a memorandum, changed the
employees concerned. meal time schedule from 30 minutes to
one (1) hour without pay.
● The overtime pay of the employees
will become due and demandable if ● Since private respondent union felt
ever they are permitted or made to affected adversely by the change in
work beyond 4:30 p.m.; and the work schedule and discontinuance
of the 30-minute paid "on-call" lunch
● The effectivity of the proposed working break, it filed on behalf of its members
time arrangement shall be for a a complaint with the Labor Arbiter for
temporary duration as determined by unfair labor practice, discrimination
the DOLE Secretary. and evasion-of liability.
 breaks being included as compensable
● In declaring the change in the work working time.
schedule as valid the Supreme Court
held: The idle that an employee may spend for
(The petitioner) rationalizes that while resting wherein he may leave the work
the old work schedule included a area should not be counted as working
30-minute paid lunch break, the time only when the work is not
employees could be called upon to do continuous.
jobs during the period as they were (on
call). Even if denominated as a *if CONTINUOUS ang work (consecutive
lunch break, this period could very shifts) = super tiring = little to no rest ang
much well be considered as employee = therefore, meal break is
working time because the factory COMPENSABLE
employees were required to work if
necessary and were paid COMPRESSED WORK WEEK (CWW) →
accordingly for working. but still satisfies the 48 working hours per
week
Sime Darby Pilipinas, Inc. v. NLRC
● On the other hand, the normal number
In declaring the change in the work schedule of workdays per week shall be six (6)
as valid the Supreme Court held: days, or a total of forty-eight (48)
hours based on the normal workday of
(The petitioner) rationalizes that while the old eight (8) hours.
work schedule included a 30-minute paid ● This is without prejudice to firms
lunch break, the employees could be called whose normal workweek is five (5)
upon to do jobs during that period as they days, or a total of forty (40) hours
were (on call). Even if dominated as lunch based on the normal workday of 8
breaks, this period could very well be hours.
considered as working time because the ● Thus, under this scheme, the
factory employees were required to work generally observed workweek of six
it necessary and were paid accordingly for (6) days is shortened to five (5) days
working. but prolonging the working hours
from Monday to Friday without the
● Coffee break/rest period - less than employer being obliged for pay
20 mins overtime premium compensation
● Compressed work week - 48 hours for work performed in excess of
per week eight (8) hours on weekdays, in
exchange for the benefits
MEAL TIME INVOLVING SEVERAL SHIFTS above-cited that will accrue to the
employee.
In a company where work is continuous for
several shifts, mealtime breaks should be **dapat 48 hours talaga ang normal working
counted as working time for purposes of hours per week (6 days x 8 hrs)
overtime compensation. **however, pwede na mas shorter sa 6 days
ang pag allocate ng 48 hours
Consequently, the workers who are required Granted na:
to work in two (2) successive shifts would be - Sa isang workday, ang kanyang
paid for sixteen (16) hours and not fourteen trabaho will NOT exceed 12
(14), the two hours for rest or mealtime hours. Otherwise, it will be
considered overtime!
“Flexible work arrangements” BROKEN-TIME SCHEDULE
refers to one where the work schedule is
Refer to alternative arrangements or not continuous but the work-hours within
schedules other than the traditional or the day or week remain.
standard work hours, workdays, and
workweek. FLEXI-HOLIDAYS SCHEDULE

The effectivity and implementation of any refers to one where the employees agree to
of the flexible work arrangements should avail of the holidays on some other days
be temporary in nature. provided there is no diminution of existing
benefits as a result of such arrangement."
The Solo Parents’ Welfare Act of 2000
REST PERIOD
Under R.A. No. 8972, otherwise known as
“The Solo Parents’ Welfare Act of 2000,” solo Weekly Rest Periods - applies to all
parents are allowed work on a schedule, employers whether operating for profit or not,
thus: including public utilities operated by private
persons.
Sec. 6. Flexible Work Schedule. - The
employer shall provide for a flexible It is the duty of every employer to provide
working schedule for solo parents: each of his employees a rest period of not
Provided, that the same shall not affect less than 24 consecutive hours for every 6
individual and company productivity: normal work days. (Labor Code, Art. 91)
Provided, further, that any employer may
request exemption from the DOLE on Who Determines Weekly Rest Days
certain meritorious grounds.
The employer determines and schedules the
Other forms of flexible work arrangements weekly rest period subject to the following:

Other than the CWW, the following are CER

flexible work arrangements which may be 1. Collective Bargaining Agreement
considered, among others: (CBA);
2. Rules and regulations issued by the
Reduction of Workdays Secretary of Labor; and
Refers to one where the normal workdays per 3. Employee's preference based on
week are reduced but should not last for religious grounds
more than six (6) months.
Employer May Require Work on Rest Day
Rotation of Workers
Refers to one where the employees are General Rule: The employer may not
rotated or alternately provided work within require the employees to work on a rest day:
the workweek. Exceptions:

FORCED LEAVE 1. In case of Urgent work to be

performed on machineries, equipment
refers to one where the employees are or installations to avoid serious loss
required to go on leave for several days or which the employer would otherwise
weeks utilizing their leave credits, if there suffer,
are any.
 2. In case of Actual or impending ● 13th-month pay
emergencies caused by serious ● Leaves
accident, fire, flood, typhoon, ● Service incentive leave
earthquake, epidemic or other disaster ● Maternity leave
or calamity, to prevent loss of life or ● Paternity leave
property, or in cases of force majeure ● Parental leave for solo parent
or imminent danger to public safety.
3. In the event of Abnormal pressure of Remuneration of employee working on a
work due to special circumstances, rest day (130%)
where the employer cannot ordinarily
be expected to resort to other Premium pay is additional 30% of the basic
measures; pay.
4. To prevent serious loss of Perishable
goods REST DAY= regular wage/day(100%) +
5. Where the Nature of the work is such premium pay (additional sum of at least 30%
that the employees have to work of the rw/d)
continuously for 7 days in a week or
more, as in the case of the crew Rest day = rw/d +30% of rw/d
members of a vessel to complete a
voyage and in other similar cases (IRR e.g: Regular wage/ day = Php800.00
Labor Code, Sec. 6, Rule III, Book II);
6. Under other Analogous or similar Rest day = 800 x 130%
circumstances; and Rest day= Php1,040.00 if worked during
7. Where nature of work requires rest day
continuous operations and the
stoppage of work may result in Synthesis of the Rules on Rest Days
irreparable injury or loss to the
employer (Labor Code, Art. 92) 1. Rest day of not less than 24
consecutive hours after 6 consecutive
Remember: days of work.
2. No work, no pay principle applies
- Other than the above circumstances, 3. If an employee works on his
no employee shall be required designated rest day, he is entitled to a
against his will to work on his premium pay.
scheduled rest day. 4. Premium pay is additional 30% of the
- When an employee volunteers to work basic pay.
on his rest day under other 5. Employer selects the rest day of his
circumstances, he shall express employees
such desire in writing, subject to 6. However, employer must consider the
payment of additional religious reasons for the choice of a
compensation. rest day.
An employee shall be entitled additional 7. When the choice of the employee as to
compensation for work performed on a his rest day based on religious
Sunday only when it is his established grounds will inevitably result in serious
rest day. prejudice or obstruction to the
operations and the employer cannot
● Rest period normally be expected to resort to other
● Night shift differential measures, the employer may so
● Overtime premium schedule the weekly rest day of his
● Holiday premium choice for at least two days in a month.
 (IRR Labor Code, Sec. 4, Book III, 2. Maundy Thursday
Rule III) 3. Good Friday
Night Shift Differential (10pm-6am) 4. Eidul Fitr
5. Eidul Adha
Night Worker 6. Araw ng Kagitingan
- Any employed person whose work 7. Labor Day
requires performance of a substantial 8. Independence Day
number of hours of night work 9. Heroes Day
which exceed a specified limit 10. Bonifacio Day
11. Christmas
Every employee shall be paid a night shift 12. Rizal Day
differential (NSD) of not less than 10% of B. Nationwide Special Holidays →
his regular wage for each hour of work FLANEC
performed between ten o’clock in the 1. Feast of Immaculate
evening (10pm) and six o’clock in the Conception of Mary
morning (6 am). 2. Last Day of the Year
(Labor Code, Art. 86) 3. All Saint’s Day
4. Ninoy Aquino Day
Conditions to be entitled to OT pay 5. EDSA Revolution Anniversary
● Actual rendition of OT work 6. Chinese New Year
● Submission of sufficient proof that said
work was actually performed REGULAR SPECIAL DAY
(Cagampan v. NLRC, G.R No. HOLIDAY
85122-24)
● OT work is with the knowledge and NO WORK, WITH NO WORK, NO PAY
consent of the employer (Azucena, PAY
254) WITH WORK, WITH WORK,
DOUBLE PAY EXTRA PAY (30%
NOTE: On rest days and holidays, written premium)
authority after office hours is required for
entitlement to compensation. (Global
Incorporated v. Atienza) MUSLIM HOLIDAYS
GENERAL RULE: Muslim holidays are
Overtime Pay Rates observed only in specified areas;
1. Amun Jadid
SCENARIO RATE 2. Maulid un-Nabi
3. Lailatul Isra Wai Miraj
OT on a Regular Regular Wage + at
Holiday least 25% thereof
Service Incentive Leaves
OT on a Rest day or Special Every employee who has rendered at least 1
Holiday/Special Holiday Day wage year of service shall be entitled to a yearly
Day/ Rest Day rate (130%) + 30% service incentive leave of 5 days with pay.
thereof (Labor Code Art. 95)
OT on a holiday Rest day & holiday
which falls on a rest wage rate (150%) + 13th Month Pay
day 30% thereof Under the guidelines, the minimum amount of
13th-month pay shall not be less than
LIST OF HOLIDAYS one-twelfth (1/12) of the total basic salary
A. Regular Holidays earned by an employee within a calendar
1. New Year year.
provided that they have worked for at least
one month during the calendar year
must be paid on or before Dec. 24.

SOLUTIONS SAMPLE
 TOPIC 02: INSURANCE CODE OF THE ● P.D. 612 instituted “The Insurance Code”
PHILIPPINES in 1974. P.D. 1460 consolidated all
insurance laws into a single code known
as “The Insurance Code of 1978”
THE CONCEPT OF INSURANCE ● R.A. 10607 made many substantial
amendments to the Insurance Code
MUTUAL INSURANCE AS OLD AS SOCIETY
ITSELF Governing Laws

● Based upon the principle of aiding another from a ● P.D. No. 612, as amended by R.A. No.
loss caused by an unfortunate event. 10607 (hereinafter Insurance Code);
● Existed among the Egyptians, Chinese, Hindus, ● Special Laws, such as R.A. No. 1161
Romans and are known to have been established (Social Security Act); and the
among the Greeks as early as the third century ● Civil Code, for matters not expressly
before Christ. provided for in no. 1 and no. 2
● Origin of present-day insurance attributed to
merchants of Italian cities who sought to distribute RA 10607: The Insurance Code
the loss falling upon anyone by reason of the
AN ACT STRENGTHENING THE INSURANCE
perils of navigation.
INDUSTRY, FURTHER AMENDING
● From Italy the practice of insuring commercial PRESIDENTIAL DECREE NO. 612,
ventures against disaster spread to other OTHERWISE KNOWN AS "THE INSURANCE
maritime States of Europe such as England. CODE", AS AMENDED BY PRESIDENTIAL
● Lombards founded trading houses in London in DECREE NOS. 1141, 1280, 1455, 1460, 1814
the 12th Century. All questions of insurance were AND 1981, AND BATAS PAMBANSA BLG. 874,
AND FOR OTHER PURPOSES
decided based on the customs of merchants and
merchant courts CONTRACT OF INSURANCE
● Middle 18th Century – Common law courts of
England began to take adequate cognizance of An agreement whereby one
insurance cases undertakes, for a consideration, to indemnify
● Lord Mansfield was the “Father of English another against loss, damage or liability
Commercial Law” and the same law was used to arising from an unknown or contingent event.
determine questions in insurance (Insurance Code, Sec. 2[a]

DEVELOPMENT IN THE PHILIPPINES Ø A contract of insurance is an

agreement by which one party for a
1. Insurance in the Philippines is rather a consideration paid by the other party,
nascent institution. It did not exist prior to promises to pay money or its
the 19th Century. equivalent or to do some act valuable
2. It started with the practice of giving to the latter, upon the happening of a
“abuloy” to the relatives of the dead. And loss, damage, liability, or disability
rendering financial aid when family arising from an unknown or contingent
members suffered any sort of misfortune. event.
3. Eventually mutual benefit societies and
fraternal organizations were organized for A contingent event is one that is not certain to
the purpose of rendering assistance. take place.

SOURCES OF INSURANCE LAW IN THE An unknown past event is one which had
PHILIPPINES already happened, but one is unaware if it
happened or not.
● Spanish Period – Old Civil Code of 1889
and the Code of Commerce A past event may be a designated event only in
● Insurance Code expressly repealed the cases where it has happened already but the
provisions on insurance in the Code of parties do not know about it, e.g., prior loss of a
Commerce ship at sea (applicable only to marine insurance).
● Civil Code of The Philippines (De Leon, The Insurance Code of the Philippines
Annotated [2014])
“Assurance” is also used instead of the provisions of this Code. (Insurance
“insurance.” Code, Sec. 2[b])

But strictly: ELEMENTS OF AN INSURANCE CONTRACT

● Assurance – refers to an event like death, Requisites of Ordinary Contracts: COC

which is certain to happen
● Insurance – refers to a contingent event 1. Consent
which may or may not happen 2. Subject-matter/ Object
3. Cause
Under the Code, however, the term “insurance”
covers “assurance” Additional Requisites for Insurance Contract:
(IRADP)
• In general, an insurance contract is a
promise by one person to pay another ● The insured must possess an interest of
upon the happening of a fortuitous some kind susceptible of pecuniary
event beyond the effective control of estimation, known as insurable interest;
either party in which the promise has ● The insured is subject to a risk of loss
an interest apart from the contract. A through the destruction or impairment of
written insurance contract is called a that interest by the happening of
policy. designated perils;
● The insurer assumes the risk of loss;
● Such assumption is part of a general
scheme to distribute actual losses among
Consideration Required in Insurance a large group of persons bearing
somewhat similar risks;
An insurance business consists in undertaking, ● As consideration for the insurer’s promise,
for a consideration, to indemnify another against the insured makes a ratable contribution
loss, damage or liability arising from an unknown called premium, to a general insurance
or contingent event. fund.
The fact that no profit is derived from the making The presence of these five elements are what
of insurance contracts, agreements or separates Insurance from other contracts, and
transactions or that no separate or direct which makes Insurance a “risk-distributing device”
consideration is received therefor, shall NOT be (De Leon, The Insurance Code Annotated, 2014)
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business. (Insurance
Code, Sec. 2[b]) RISK-DISTRIBUTING DEVICE

Doing or Transacting an Insurance Business A contract of insurance is primarily a

risk-distributing device, a mechanism by which all
1. Making or proposing to make, as insurer members of a group exposed to a particular risk
any insurance contract; Making, or contribute premiums to an insurer. These
proposing to make, as surety, any contributory funds are used to pay whatever
contract of suretyship as a vocation losses occur due to exposure to the peril insured
and not as merely incidental to any other against.
legitimate business or activity of the
surety; Note: Insurance serves to distribute the risk of
2. Doing any kind of business including a economic loss among as many as possible of
reinsurance business, specifically those who are subject to the same kind of loss.
recognized as constituting the doing of an
insurance business within the meaning of For example, there are 10 people, including me,
this Code; who entered into an agreement with an insurance
3. Doing or proposing to do any business in company to insure ourselves from accidents. Let’s
substance equivalent to any of the assume that all are responsible with paying of
foregoing in a manner designed to evade premium of 50k anually. So far, the insurer has
500k worth of premium this year. It is highly Ø A contract by which a corporation, in
unlikely that all of them will suffer the designated consideration of a stipulated amount,
event stipulated to be covered by the insurer. But agrees at its own expense to defend a
when 1 gets into an accident, his loss is 150k physician against all suits for damages
covered by the insurer who will get the money for malpractice is one of insurance,
from the contributed premiums of the 9 other and the corporation will be deemed as
people. The 100k loss is distributed to others engaged in the business of insurance
since insurance premiums are not refundable. since the purpose of the contract is to
indemnify against loss and damage.

PARTIES TO AN INSURANCE CONTRACT

Test to Determine Whether a Contract is an (Insurer and insured)
Insurance Contract
a. INSURER - The party who assumes or
It depends on the nature of the promise, the act accepts the risk of loss and undertakes
required to be performed, and the exact nature of for a consideration to indemnify the
the agreement in the light of the occurrence, insured or to pay him a certain sum on
contingency or circumstances under which the the happening of a specified
performance becomes requisite. (White Gold contingency or event;
Marine Services v. Pioneer Insurance, G.R. No.
154514, 2005) An insurer may be:

1. Nature of the Promise 1. A foreign or domestic company or

2. Act required to be performed corporation; or
3. Exact nature of the agreement in the light 2. A partnership or an association
of the occurrence, contingency or
circumstances under which the Note: No private individuals because insurance
performance becomes requisite. corporations are required to have a minimum
capital of 900 million pesos as of 2019 and will
increase further to P1.3 billion by the end-2022.
They Can’t declare bankruptcy. Remedy of
Principal Objects and Purpose Test bankruptcy: merge or consolidate with another
insurance company.
Whether the assumption of risk and
indemnification of loss (which are elements of an b) INSURED – The person in whose favor the
insurance business) are the principal object and contract is operative and who is indemnified
purpose of the organization or whether they are against or is to receive a sum upon the
merely incidental to its business. happening of a specified event.

If these are the principal objectives, the Life Insurance Contracts: Beneficiary may be
business is that of insurance. But if they are included as a separate party (still not really a
merely incidental and service is the principal party)
purpose, then the business is NOT insurance.
(Philippine Health Care Providers v. CIR, G.R. Ex. A = paying, has the insurable interest of B
No. 167330, 2009)
B = insured or life is the subject of the contract
Contracts for Personal Service Distinguished
from Contracts of Insurance C = Beneficiary, receiving the life proceeds

Ø Contracts a law firm enters into with REQUISITES IN ORDER THAT A PERSON MAY
clients whereby in consideration of BE INSURED UNDER A CONTRACT OF
periodical payments, the law firm INSURANCE (CIP) (Insurance Code, Sec. 3)
promises to represent such clients in
all suits for or against them are not 1. He must be competent to enter into a
insurance contracts but are contracts contract;
for personal services;
 People who can’t give liability against the person insured
consent/competent (Insurance Code, Sec. 3)

a. Unemancipated Minors Insurance Contract vs. Gambling Contract

b. Insane or Demented
Persons
c. Deaf-mutes who do not Insurance Contract Gambling Contract
know how to read or write
d. People suffering from civil
interdiction The parties seek to The parties
e. Incompetents under distribute possible contemplate gain
guardianship loss by reason of through mere chance.
mischance
2. He must possess an insurable interest in
the subject of the insurance; and
The insurer seeks to The gambler courts
3. He must not be a public enemy (citizen or
avoid misfortune. fortune.
subject of a country with whom the
Philippines is at war) (Insurance Code,
Sec. 7) The contract tends to The contract tends to
equalize fortune increase the
CIP = Competent, Insurable Interest, Not inequality of fortune
Public Enemy

Rule on Married Persons What one insures Whatever one person

against is not at the wins from a wager is
● The consent of the spouse is NOT expense of another lost by the other
necessary for the validity of an insurance insured person wagering party.
policy taken out by a married person on
his or her life or that of his or her children
(Insurance Code, Sec. 3,2) or that of her The purchase of As soon as a party
husband (Insurance Code, Sec. 10) insurance does not makes a wager, he
● A married woman may also take out create a new, and creates a risk of loss
insurance on her paraphernal or separate therefore, non-existing to himself where no
property, or on property given to her by risk of loss to the such risk existed
her husband (Harding v. Commercial purchaser. The previously.
Union Assurance, G.R. No. L-12707, purchaser faces an
1918) already existing risk of
○ Example: Anything not conjugal economic loss
property (“insurable interest”).
■ Inherited
■ Personal property before In both cases, one party promises to pay a
marriage given sum to the other upon the occurrence of a
■ Donated in your name given future event, the promise being conditioned
■ Anything exclusively under upon the payment of, or agreement to pay, a
her name stipulated amount by the other party to the
contract. In either case, one party may receive
SUBJECT MATTER more, or much more, than he paid or agreed to
pay.
Risks or Perils That May be Insured

a. Any contingent or unknown event,

whether past or future, which may damnify CHARACTERISTICS AND NATURE OF
(cause damage to) a person having an INSURANCE CONTRACTS (CVAUPC)
insurable interest; or
b. Any contingent or unknown event, CONSENSUAL
whether past or future, which may create a
 Perfected by the meeting of the minds of
the parties (Civil Code, Art. 1315) (considered from the person’s economic
background; life expectancy; salary; etc. the
VOLUNTARY younger the more you receive)

It is not compulsory and the parties may

incorporate such terms and conditions as they
may deem convenient which will be binding. Uberrimae Fides Contract
Provided: They are not contrary to law, morals,
good customs, public order, or public policy. The contract of insurance is one of perfect
good faith not for the insured alone,
ALEATORY but equally so for the insurer (Qua
bet* gambling contract Chee Gan v. Law Union Rock, G.R.
It is an aleatory but not a wagering No. L-4611, 1955).
contract. By an aleatory contract, one of the
parties or both reciprocally bind themselves to Construction of Insurance Contract
give or to do something in consideration of what
the other shall give or do upon the happening of Contract of Adhesion - Insurance contracts are
an event which is uncertain, or which is to contracts of adhesion the terms of which must be
occur at an indeterminate time. The insurer’s interpreted and enforced stringently against
liability depends upon the happening of an the insurer which prepared the contract
uncertain event which is to occur at an
indeterminate time. ● Limitations of liability on the part of the
insurer or health care provider must be
UNILATERAL construed in such a way as to preclude it
from evading its obligations. Accordingly,
A contract of insurance is executed as to they should be scrutinized by the
the insured after the payment of the premium. courts with extreme jealousy and care
and with a jaundiced eye. (Blue Cross
It is executory as to the insurer since it is
Health Care v. Olivares, G.R. No. 169737,
not executed until payment for a loss.
2008)
● The terms in an insurance policy which
PERSONAL
are ambiguous, equivocal, or uncertain
Each party to it, in entering into the are to be construed strictly and most
insurance contract, takes into account the strongly against the insurer, and liberally in
character, credit, and conduct of the other. favor of the insured so as to affect the
dominant purpose of indemnity or
CONDITIONAL payment to the insured (Calanoc v. CA,
G.R. No. L-8218, 1955)
The insurer’s liability is based on the
happening of the event insured against. CLASSES OF INSURANCE

1. Marine (Insurance Code, Secs. 101-168)

● An agreement to indemnify against
CONTRACT OF INDEMNITY injury to a ship, cargo, or profits
involved in a certain voyage or for
General Rule: Indemnity is the basis of all a specific vessel during a fixed
property insurance. The insured who has period. However, the Insurance
insurable interest over a property is only entitled Code does not limit marine
to recover the amount of actual loss sustained insurance to risks of navigation.
and the burden is upon him to establish the (Insurance Code, Sec. 101)
amount of such loss.
2. Fire (Insurance Code, Secs. 169-175)
Exception: life and accident insurance where
● Insurance against loss by fire,
the measure of indemnity is the amount fixed in
lightning, windstorm, tornado or
the policy
earthquake and other allied risks,
 when such risks are covered by -if debtor cant pay, surety pays instead on
extension to fire insurance policies his behalf
or under separate policies
(Insurance Code, Sec. 169) no need to wait for insolvency to pay
creditor
2 types
Normally the subject is the debt; parties:
a. Friendly Fire Surety and principal/obligor; obligee
i. Nasa container/
vessel (ex. lamp) Doctrine of Subrogation - It is a process
b. Hostile Fire of legal substitution where the insurer
steps into the shoes of the insured and he
Man-made and Natural Fire avails of the latter’s rights against the
wrongdoer at the time of loss.
3. Casualty (Insurance Code, Sec. 176)
● Insurance covering loss or liability When the insured already suffered loss or
arising from accident or mishap, liability
excluding certain types of loss
which by law or custom are
considered as falling exclusively
within the scope of other types of Change roles of insurer and insured
insurance such as fire or marine. It
includes but is not limited to, As if the insurance company is now the
employer’s liability insurance, debtor
motor vehicle liability insurance,
plate glass insurance, burglary and
5. Life (Insurance Code, Secs. 50, 181-186,
theft insurance, personal accident
233-237)
and health insurance as written by
● Insurance on human lives and
non-life insurance companies, and
insurance appertaining thereto or
other substantially similar kinds of
connected therewith (Insurance
insurance (Insurance Code, Sec.
Code, Sec. 181)
176)
6. Microinsurance
● Microinsurance is a financial
- MAIN CAUSE → accident or
product or service that meets
mishaps
the risk protection needs of the
- all not included in other classes of
poor where:
insurance
a. The amount of
contributions, premiums,
fees or charges, computed
4. Suretyship (Insurance Code, Secs. 177- on a daily basis, does not
180) exceed 7.5% of the current
● Agreement whereby a party called daily minimum wage rate
the surety guarantees the for nonagricultural workers
performance by another party in Metro Manila;
called the principal or obligor of b. The maximum sum of
an obligation or undertaking in guaranteed benefits is not
favor of a third party called the more than 1,000 times of
obligee. It includes official the current daily minimum
recognizances, stipulations, bonds, wage rate for
or undertakings issued by any nonagricultural workers in
company by virtue of and under Metro Manila
the provisions of Act No. 536, as ● help to low-income earners
amended by Act No. 2206 7. Compulsory Motor Vehicle Liability
(Insurance Code, Sec. 177) Insurance (CMVLI) (Insurance Code,
Secs. 386-402)
 ●Contract of insurance against not necessarily be of pecuniary
passenger and third-party liability nature
for death or bodily injuries and
damage to property arising from INSURABLE INTEREST IN LIFE/HEALTH
motor vehicle accidents (Insurance INSURANCE (Insurance Code, Sec. 10)
Code, Sec. 386 [f]
8. Compulsory Insurance Coverage For 1) Himself, of his spouse and of his
Agency-Hired Workers children; If a person will insure the life of
● Each migrant worker deployed by another payable to himself, he must have
a recruitment/manning agency an insurable interest in the life of the
shall be covered by a compulsory person whose life he is insuring.
insurance policy which shall be 2) Any person on whom he depends
secured at no cost to the said wholly or in part for education or
worker. (Migrant Workers and support, or in whom he has a pecuniary
Overseas Filipinos Act of 1995, as interest;
Amended)
Note: Persons obliged to support
● Compulsory insurance coverage
each other: See Family Code, Art.
for agency-hired Filipino workers
195
under R.A 10022 shall be without
cost to the worker. This will cover 3) Any person under a legal obligation to
accidental death, natural death, him for the payment of money, or
compassionate visit, medical respecting property or services, of which
evacuation, medical repatriation, death or illness might delay or prevent the
and repatriation of mortal remains performance;
Note: A creditor may insure his debtor’s
9. VARIABLE CONTRACTS
life for the purpose of protecting his debt,
● Any policy or contract on either a but only to the extent of the amount of the
group or individual basis issued by debt and the cost of carrying the
an insurance company providing insurance on the debtor’s life.
for benefits or other contractual 4) Any person upon whose life any estate
payments or values thereunder to or interest vested in him depends.
vary to reflect investment results of
Note: There are only two parties to a contract of
any segregated portfolio of
insurance, the insured and the insurer. The
investment.
beneficiary is NOT a party to the contract unless
INSURABLE INTEREST he is the party to be insured.

● Interest which the law requires the owner DESIGNATION OF BENEFICIARY IS

of an insurance policy to have in the thing REVOCABLE UNLESS THERE’S EXPRESSED
or person insured. STIPULATION IN CONTRACT
● General Rule: It is pecuniary in nature.
BENEFICIARY
● A person is deemed to have an insurable
interest in the subject matter insured Person who is named or designated in a contract
where he has a relation or connection of life, health, or accident insurance as the one
with or concern in it that he will derive who is to receive the benefits which become
pecuniary benefit or advantage from its payable, according to the terms of the contract,
preservation and will suffer pecuniary upon the death of the insured (44 Am. Jur. 2d.
loss or damage from its destruction, 639 cited in de Leon, 2010, p. 96).
termination or injury by the happening
of the event insured against. (Lalican v. Natural person or other legal entity who
Insular Life Insurance Co, G.R. No. receives money or other benefits from a
183526, 2009) benefactor. For example, the beneficiary of a life
● Exception: Life Insurance insurance policy is the person who receives the
○ The expectation of benefit from the payment of the amount of insurance after the
continued life of that person need death of the insured.
Designation of Beneficiary expressly provided for in such special laws, by
the Civil Code.
General rule:
Hence, insofar as the restriction on the
When one insures his own life, he may designate designation of the beneficiary in a life insurance
any person as the beneficiary, whether or not the policy is concerned, Article 2012 of the Civil Code
beneficiary has an insurable interest in the life of is controlling, to wit:
the insured.
'Art. 2012. Any person who is forbidden from
Exceptions: receiving any donation under Article 739 cannot
be named beneficiary of a life insurance policy by
Persons specified in Article 739 of the Civil Code the person who cannot make any donation to him,
cannot be designated according to said article."
Life Insurance VS Civil Donation Under Article 739 of the Civil Code, the
following individuals cannot be named
LIFE INSURANCE CIVIL DONATION beneficiaries of a life insurance policy:

This is also founded An act of liberality Art. 739. The following donations shall be void.
on liberality, as the whereby a person
beneficiary will receive disposes gratuitously
1. Those made b/w persons who were guilty
the proceeds of the a thing or right in favor
said insurance. of another who of adultery or concubinage at the time of
accepts it. the donation;
2. Those made b/w persons found guilty of
As a consequence, the proscription in Civil Code, the same criminal offense, in
Art. 739 should equally operate in life insurance consideration thereof;
contracts (Insular Life v. Ebrado, G.R. No. 3. Those made to a public officer or his
L44059, 1977) wife, descendants and ascendants, by
reason of his office. (unless family)

1. The first kind—those made between persons

Also Note: LGBTQ+ members have the right to who were guilty of adultery or concubinage at the
designate their domestic partners as time of the donation
beneficiaries. a. The adultery or concubinage need not
be proved in a criminal action. The guilt may be
An individual who has secured a life proved by preponderance of evidence.
insurance policy on his or her own life may b. If the donation was made after the
designate any person as beneficiary provided that adultery or concubinage, then it is valid except if
such designation does not fall under the the consideration thereof is the commission of the
enumerations provided in exceptions provided in act
Article 2012 in relation to Article 739 of the c. If the perpetrators are merely
Civil Code. (Insurance Commission, Legal sweethearts but don’t have any sexual
Opinion No. 2020-02, dated March 04, 2020) intercourse with one another, then this
prohibition is not applicable. Remember the
In the case referred to in No. 1, the action for elements of adultery and concubinage.
declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of the 2. The second kind—those made between
donor and donee may be proved by persons found guilty of the same criminal offense,
preponderance of evidence in the same action. in consideration thereof
(n) a. There must be a criminal
conviction—mere preponderance of evidence
showing guilt is not sufficient
b. It doesn’t matter whether the donation
Meanwhile, Article 2011 of the Civil Code
was made before or after the commission of
provides that the contract of insurance is
the offense
governed by special laws and, for matters not
 ➢ If the beneficiary is other than the
insured’s estate, the source of
● Adultery, as defined under Article 3233 of premiums (either from paraphernal
the RPC, is committed by a married or conjugal funds) would not be
woman and her paramour who knows of relevant (BPI v. Posadas, G.R. No.
her marital status, when they engage in L-34583, 1931).
sexual intercourse. Thus, the law only
requires proof of an offending wife’s Forfeiture by Beneficiary of Interest in
sexual relations with another man during Insurance Policy
the marriage so that she may be convicted
of the crime. The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is
Note: If w/w then not adultery, same with the principal, accomplice, or accessory in
m/m not concubinage willfully bringing about the death of the insured; in
which event, the share forfeited shall be paid as
● On the other hand, concubinage, as follows:
defined under Article 334 of the RPC, is
committed by a married husband by 1. To the other beneficiaries if not
a. keeping a mistress in the conjugal disqualified;
dwelling; (personal house) 2. If no other beneficiaries, in accordance
b. having sexual intercourse under with the policy contract; (e.g. to the
scandalous circumstances with a contingent or substitute of beneficiaries)
woman who is not his wife; 3. If the policy contract is silent, to the estate
c. cohabiting with her in any other of the insured. (Insurance Code, Sec. 12)
place.
● Unlike adultery, proof of extra-marital sex INSURABLE INTEREST IN PROPERTY
alone is not sufficient to convict an
offending husband of concubinage since Coverage of Insurable Interest in Property
the law requires that any of the three (Insurance Code, Sec. 13)
circumstances must be shown.
● Property itself; = title/deed
When is the estate entitled to the proceeds of ● Any relation thereto; or
the insurance? ● Liability in respect thereof. It may consist
of:
1. Where the insured has not designated any ➢ An existing interest;
beneficiary; or ➢ An inchoate interest founded on an
2. When the designated beneficiary is existing interest; or
disqualified by law to receive the proceeds ➢ An expectancy, coupled with an
(Heirs of Maramag v. Maramag, G.R. No. existing interest in that out of which
181132, 2009) the expectancy arises

Measure of Insurable Interest in Property

❖ The designation of beneficiary is The extent to which the insured might be

revocable unless the right to revoke is damnified by loss or injury thereof.
expressly waived in the policy.
❖ If the insured or beneficiary is a minor, and In general, a person has an insurable interest in
the amount involved does not exceed the property, if he derives pecuniary benefit or
P50,000.00, the father, or in his absence advantage from its preservation or would
or incapacity, the mother may exercise the suffer pecuniary loss, damage or prejudice by
minor’s rights under the policy, without the its destruction whether he has or has no title
need of a court authority or a bond. in, or lien upon, or possession of the property
❖ If the premiums are paid out of the
conjugal funds, the proceeds are
considered conjugal. Insurable Interest Life vs. Property
 LIFE PROPERTY 24 A transfer of interest by one of several
partners, joint owners, or owners in
BASIS common, who are jointly insured, to the
others
May be based on Based on pecuniary
pecuniary interest, interest
affinity, or 57 When a policy is so framed that it will
consanguinity. inure to the benefit of whomsoever,
during the continuance of the risk, may
WHEN INTEREST MUST EXIST become the owner of the interest
insured
In life insurance (save Must exist when the
that effected by insurance takes effect
Note: When there is an express prohibition
creditor on life of and when the loss
debtor), it is enough occurs, but need not against alienation in the policy, in case of
that insurable interest exist in the meantime alienation, the contract of insurance is not merely
exists at the time the suspended but is avoided. (Civil Code, Art. 1306)
policy takes effect and
need not exist at the DOUBLE INSURANCE AND OVER
time of the loss INSURANCE
AMOUNT OF INSURABLE INTEREST Double insurance exists where the same person
General Rule: NO Limited to the actual is insured by several insurers separately in
LIMIT value of respect to the same subject and interest.
Exception: If insurable damage/injury/loss
interest is based on a Note: It is not prohibited by law. But it may be
creditor-debtor contractually prohibited by a provision in an
relationship, only to insurance policy.
the extent of the credit
or debt

Over insurance exists when the amount of the

insurance is beyond the value of the insured’s
CHANGE IN INTEREST OF THING insurable interest.

General rule: A change in interest in the thing When there is double insurance and over
insured without a change in insurance does not insurance results, the insured can claim in case of
transfer the policy but suspends it until the loss only up to the agreed valuation or up to
interest in the thing and the interest in the the full insurable value from any, some or all
insurance are vested in the same person insurers, without prejudice to the insurers
ratably apportioning the payments. Insured can
Exceptions also recover before or after the loss, from both
insurers the excess premium he has paid.
SE EXCEPTION
C Requisites of Double Insurance:

20 Life, health, and accident insurance 1. The person insured is the same;
2. There are two or more insurers insuring
21 A change of interest in the thing separately;
insured after the occurrence of an 3. The subject matter is the same;
injury which results in a loss 4. The interest insured is also the same;
5. The risk or peril insured against is likewise
22 A change of interest in one or more of the same.
several things, separately insured by
one policy Reinsurance

23 A change of interest by will or One by which an insurer procures a third person

succession on the death of the insured to insure him against loss or liability by reason of
such original insurance. In every reinsurance
contract, the original contract of insurance and a. Delay in acceptance
the contract of reinsurance are separate and
distinct and covered by separate policies. A contract of insurance, like other contracts, must
be assented to by the parties either in person, or
PERFECTION OF THE CONTRACT OF by their agents. Under the law, assent or
INSURANCE consent is manifested by the meeting of the
offer and the acceptance upon the thing and
a. Offer and acceptance/consensuality the cause which are to constitute the contract.
b. Delay in acceptance If an application has not been either accepted or
c. Delivery of policy rejected, there is no contract yet as it is merely an
d. Premium payment offer or proposal (Insurance, de Leon, p.176).
e. Non-default options in life insurance
f. Reinstatement of a lapsed policy of life Note: Written acceptance or in letter - Art. 1319.
insurance Consent is manifested by the meeting of the offer
g. Refund of premiums and the acceptance upon the thing and the cause
which are to constitute the contract. The offer
Consensual Nature of Contract must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
A contract of insurance must be assented to by
both parties, either in person or through their Acceptance made by letter or telegram does
agents and so long as an application for not bind the offerer except from the time it
insurance has not been either accepted or came to his knowledge. The contract, in such
rejected, it is merely a proposal or an offer to a case, is presumed to have been entered into
make a contract. (Perez v. CA, G.R. No. 112329, in the place where the offer was made.
2000)
b. Delivery of the policy
Also, according to Enriquez v. Sun Life Assurance
(G.R. No. L-15895, 1920): The delivery of a policy is NOT, however, a
prerequisite to a valid contract of insurance. The
1. Submission of application, even with contract may be completed prior to delivery of the
premium payment is a mere offer on the policy or even without delivery of the policy
part of the applicant, and does not bind depending on the intention of the parties
the insurer; (Insurance, de Leon, p.180)
2. An insurance contract is also not perfected
where the applicant dies before the
approval of his application or it does
not appear that the acceptance of the PREMIUM PAYMENT
application ever came to the knowledge
of the applicant; Premium is the consideration paid to an insurer
3. An acceptance made by letter shall not for undertaking to indemnify the insured against a
bind the person making the offer except specified peril.
from the time it came to his knowledge.
An insurer is entitled to payment of the premium
Note: Insured doesn’t necessarily need to receive as soon as the thing insured is exposed to the
the physical letter. Knowledge of approval is peril insured against.
enough.
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Mere meeting of the minds is not enough to
perfect the insurance contract. Options to a Policy-holder
The options available to a policyholder in case of
Approval must come to the knowledge of the non-payment of premium after three full
insured annual premiums have been paid are:
Dream, it is calculated; higher probability
1. Importance
2. Calculability a. Received the cash surrender value
3. Definiteness of Lossb. Apply such value as the premium for an
4. No Catastrophic Loss
OFFER AND ACCEPTANCE 5. Accidental
/ Nature extended insurance
CONSENSUALITY
(De Leon, Title 6 - Policy, pp. 198-199
 c. Apply such value as the premium for a This provision protects against the
paid-up insurance unintentional lapse of the contract by
d. Secure from such value an automatic advancing, in the form of policy loan, the
premium loan before the expiration of the unpaid amount of a premium due.
grace period
The automatic premium loan is
Cash Surrender Value - an amount to be paid to advantageous to the policy owner
the insured upon surrender of the policy contract. because it helps to continue the contract
and all its features in full force and effect.
To calculate your Cash surrender value,
you must; add total payments made to an Conditions:
insurance policy and subtract of fees charged by
the agency. 1. In the event of default in premium
payment, the Premium Loan
Alternatives to Cash Surrender Value provision shall only apply if
requested in writing by the
a. Extended Insurance/Term Insurance policyholder either in the
application or at any time before
Where insurance is "extended," the the expiration of the grace period.
insured is given the right, upon default,
after the payment of at least three full 2. The moment there is default in
annual premiums (see Sec. 227[f].), to premium payment and no option
have the policy continued in force from has been elected either in the
the date of default for a time either application or within the time
stated or equal to the amount as the specified in the policy, one of the
net value of the policy taken as a single paid-up options specified therein
premium, will purchase. In case of the shall automatically take effect. (De
death of the insured within the extended Leon, The Insurance Code of the
term, he may recover the face value of the Philippines Annotated [2014])
policy. Extended insurance is sometimes
called "term insurance," "temporary
insurance," or "paid-up extended
insurance." (De Leon, The Insurance REINSTATEMENT OF A LAPSED POLICY OF
Code of the Philippines Annotated [2014]) LIFE INSURANCE

b. Paid-up Insurance A provision that the policyholder shall be entitled

to have the policy reinstated at any time within
three years from the date of default of
premium payment unless the cash surrender
Where insurance is "paid-up," the
value has been duly paid, or the extension period
insured is given the right, upon default,
has expired, upon production of evidence of
after the payment of at least three annual
insurability satisfactory to the company and upon
premiums (Ibid.) to have the policy
payment of all overdue premiums and any
continued in force from the date of default
indebtedness to the company upon said
for the whole period of the insurance
policy, with interest rate not exceeding that
without further payment of premiums. In
which would have been applicable to said
case of death of the insured, he may
premiums and indebtedness in the policy
recover only the "paid-up" value of the
years prior to reinstatement
policy, usually less than the "paid-up"
premiums, under the same conditions as
the original policy. Technically, the term Only applicable after 3 yrs of consecutive
"paid-up" insurance is often referred to as payments for life insurance lng
"reduced paidup" insurance. (De Leon,
The Insurance Code of the Philippines Requisites for Reinstatement of Lapsed Life
Annotated [2014]) Insurance Policy

c. Automatic Premium Loan

 A. Application shall be made within three nonfulfilment renders the policy
years from the date of lapse; voidable by the insurer.
B. There should be a production of evidence d. Conditions
of the good health of the insured: e. Exeptions
C. If the rate of premium depends upon the ● Stipulations excluding certain
age of the Beneficiary, there should specified risks that otherwise
likewise be a production of evidence of his would be included under the
or her good health; general language describing the
D. There should be presented such other risks assumed.
evidence of insurability at the date of
application for reinstatement;
E. There should be no change which has
taken place in such good health and CONCEALMENT
insurability subsequent to the date of such
A neglect to communicate that which a party
application and before the policy is
knows and ought to communicate (Insurance
reinstated; and
Code, Sec. 26)
F. All overdue premiums and other
indebtedness in respect of the policy, Note:
together with interest at six per cent, 3 aspects:
compounded annually, should first be
paid. ● There is a NEGLECT on the part of the
person to communicate a fact
● He KNOWS the fact
● He is DUTY BOUND/ OUGHT to
RESCISSION OF INSURANCE CONTRACTS
communicate this fact to the other party
Primary Concerns of the Insurer Only applies to MATERIAL FACTS
Passive concept
a. Correct estimation of risk which enables Should happen before or upon the issuance of
insurer to determine if he will approve the the contract
policy application and if so, at what
premium rate;
b. Delimitation of the risk; Requisites of Concealment (KDNA)
c. Control of risk to guard against increase in
a. A party knows the fact which he neglects
risk;
to communicate or disclose to the other;
d. Determine if loss occurs and if so, the
b. Such party concealing is duty bound to
amount thereof.
disclose such fact to the other;
a. Such party concealing makes no
warranty of the fact concealed; and
Devices of Insurer in Ascertaining and b. The other party has no means of
Controlling Risks ascertaining the fact concealed

a. Concealment Note: No means of ascertaining = no other means

b. Representations of knowing this fact happened
c. Warranties
● Statements or promises by the Proof of Fraud in Concealment
insured, whether expressed,
General Rule: Fraud need not be proven in order
implied, affirmative or promissory,
to prove concealment.
set forth in the policy itself or
incorporated in it by proper ● Good faith is not a defense.
reference, the untruth or
non-fulfilment of which in any Notes:
respect, and without reference to Deliberately made and with malice
whether the insurer was in fact By deception, they will suffer loss
prejudiced by such untruth or Why? Concealment is already considered as a
FRAUD. It is inherently wrong and you have a Instances When Concealment Made by an
fraudulent intention. Agent Procuring Insurance Binds Principal

A. Where it was the duty of the agent to

acquire and communicate information of
● Proof of fraudulent intent is unnecessary
the facts in question;
for the rescission of an insurance contract
B. Where it was possible for the agent, in the
on account of concealment.
exercise of reasonable diligence, to have
● It is because in insurance contracts,
made the communication before the
concealing material facts is inherently
making of the insurance contract. Failure
fraudulent:
on the part of the insured to disclose such
○ "if a material fact is actually known
facts known to his agent, or wholly due to
to the [insured], its concealment
the fault of the agent, will avoid the policy,
must of itself necessarily be a
despite the good faith of the insured.
fraud."
○ When one knows a material fact
and conceals it, "it is difficult to see
how the inference of a fraudulent Rules on Disclosure of Information
intent or intentional concealment
can be avoided.” Items to disclose to the other, in good faith,
○ Thus, concealment, regardless of even without inquiry:
actual intent to defraud, "is
equivalent to a false 1. Party concealing must have knowledge of
representation." (Insular Life vs the facts concealed;
Heirs of Alvarez, G.R. No. 207526) 2. Facts concealed must be material to
the risk;
3. Party is duty bound to disclose such fact
to the other;
Exception: When the concealment is made by the 4. Party concealing makes no warranty as to
insured in relation to the falsity of a warranty, the facts concealed;
the non-disclosure must be intentional and 5. Other party has no other means of
fraudulent in order that the contract may be ascertaining the facts concealed
rescinded. (Insurance Code, Sec. 29)
General Rule: Neither party is bound to
Effect of Concealment communicate information on the following matters
except in answer to the inquiries of the other:
General Rule:
a. Those of which the other knows;
Concealment, whether intentional or not, entitles b. That which, in the exercise of ordinary
the injured party to rescind a contract of care, the other ought to know and of which
insurance, (Insurance Code, Sec. 27) even if the the former has no reason to suppose his
death or loss is due to a cause not related to the ignorance, i.e. political situation, general
concealed matter. usages of trade;
c. Those of which the other waives
Exceptions:
communication*;
d. Those which prove or tend to prove the
a. Incontestability Clause (Insurance Code,
existence of the risk excluded by a
Secs. 48 and 233[b])
warranty and which are not otherwise
b. Concealment made AFTER the contract
material; and
has become effective;
e. Those which relate to a risk excepted from
c. Waiver or estoppel;
the policy and which are not
d. In marine insurance, in situations where
concealment does not vitiate the entire
*Waiver of Disclosure of Material Facts
contract, but merely exonerates the
insurer from a loss resulting from the risk 1. By the terms of the insurance (express
concealed (Insurance Code, Sec. 112) waiver); or
 2. By the neglect to make inquiry as to such Coast Life, G.R. No. L-24899, 1928)
facts, where they are distinctly implied in
other facts which information is ● It is sufficient that his non-disclosure
communicated (implied waiver). (Sec. 33, misled the insurer in forming his
Insurance Code) estimates of the risks of the proposed
insurance policy or in making inquiries
Disclosure of Insurable Interest (Sunlife Assurance Company v. CA, G.R.
No. 105135, 1995).
General rule: The insured is not required to
communicate the nature (or kind) or the amount ● The materiality of the existence of other
of his insurable interest in the life or property insurance contracts against fire upon the
insured to the insurer. same property insured, when its
disclosure is one of the conditions
Exceptions:
specified in the fire insurance policy, is not
a. When the insurer makes inquiry from the open to doubt (Union Mfg. v. Phil.
insured of the nature or amount of the Guaranty, G.R. No. L-27932, October 30,
latter’s insurable interest, whether in life or 1972)
property insurance;
Notes: Example of concealment. The medical info
b. Insurance policy must specify the interest
of the insured = if life insurance = cancer is a
of the insured in the property insured, if he
material fact
is not the absolute owner thereof.
non life = the condition of the thing insured ex.
No duty to disclose opinions
Seaworthiness of the vessel in a marine
Neither party is bound to communicate his mere insurance
opinion, speculation, intention or expectation
Exception: is in precise description
even upon inquiry, because such opinion would
add nothing to the appraisal of the application. Materiality in Medical Examinations
(Insurance Code, Sec. 35)
General rule: Non-disclosure is concealment
Note: Only matters if professional or expert that
has extensive knowledge about the subject ● In non-medical insurance (which does
away with the usual medical examination
before the policy is issued), the waiver by
said insurance company makes the
MATERIALITY
previous health conditions of the insured
Materiality is to be determined not by the event, more material. (Saturnino v. Phil.
but solely by the probable and reasonable American Life Ins., G.R. No. L-16163,
influence of the facts upon the party to whom the 1963)
communication is due: ● Where the applicant concealed the fact
that he had pneumonia, diabetes or
a. In forming his estimate of the syphilis, the policy is avoided although
disadvantages of the proposed contract; the cause of the death (e.g., plane
or crash) be totally unconnected with the
b. In making his inquiries. (Insurance Code, material fact concealed or
Sec. 31) misrepresented.
● The withholding by the applicant, father of
Test of Materiality one year-old insured, of the fact that his
daughter was typically a mongoloid child,
● Was the insurer misled or deceived into of which he was fully aware, as such a
entering a contract obligation or in fixing congenital physical defect could never be
the premium of insurance by the ensconced nor disguised, in supplying
withholding of material information or facts essential data for the insurance
within the assured’s knowledge or application form which fact is material to
presumed knowledge? (Argente v. West the contract, constitutes fraudulent
 concealment. (Great Pacific v. CA, G.R. insurance is effected, but not afterwards.
No. L-31845, 1979) (Insurance Code, Sec. 41)

Exception: Imprecise description of information Note: Written = letter/email/ any form

is NOT concealment.
Implied warranty if misrepresentation is found in
Where the insured lacked sufficient medical the policy itself (part of the insurance contract
knowledge as to enable him to distinguish itself)
between “peptic ulcer” and “tumor” the insured
cannot claim that he was deceived into entering Misrepresentation as Affirmative Defense
into the contract.
● Misrepresentation is an affirmative
In the absence of evidence that the insured had defense.
sufficient medical knowledge as to enable him to - To avoid liability, the insurer has
distinguish between "peptic ulcer" and a "tumor," the duty to establish such a
his statement that said tumor was "associated defense by satisfactory and
with peptic ulcer of the stomach" should be convincing evidence. (Ng Gan
construed as an expression made in good faith Zee v. Asian Crusader, G.R. No.
of his belief as to the nature of his ailment and L-30685, 1983)
operation. Such statement must be presumed to ● The fraudulent intent on the part of the
have been made by him without knowledge of its insured must be established to entitle
incorrectness and without any deliberate intent on the insurer to rescind the contract.
his part to mislead the insurer. (Ng Zee v. Asian Misrepresentation as a defense of the
Crusader, G.R. No. L-30685, 1983) insurer to avoid liability is an affirmative
defense and the duty to establish such
defense by satisfactory and convincing
evidence rests upon the insurer. (Manulife
MISREPRESENTATION / OMISSIONS Philippines v. Ybanez, G.R. No. 204736,
2016
Definition:

● It is a factual statement made by the

insured at the time of, or prior to, the Requisites for Misrepresentations (UWiM)
issuance of the policy, to give information
to the insurer and otherwise induce him 1. The insured stated a fact which is
to enter into the insurance contract. untrue;
● A misrepresentation cannot qualify an 2. Such fact was stated with
express provision in a contract of knowledge that it is untrue and
insurance but it may qualify an implied with intent to deceive or which he
warranty. (Insurance Code, Sec. 40) states positively as true without
knowing it to be true and which
Note: Para ma-approve ang contract; has a tendency to mislead;
Need proof of FRAUD 3. Such fact in either case is material
to the risk.
More of you said something wrong instead
of not saying it. Ex. Claiming you are 20 Note: Required proof of fraud/malicious
yrs old but rly not ; claiming thing is brand intent to deceive
new but second hand lng pala
E.g. ego boost just to impress → not fraud
Form: Oral or written. (Insurance Code, Sec. 36)
Kinds of Representation:
When made:
● Affirmative - an affirmation of a fact
It may be made at the time of, or before, existing when the contracts begins; or
the issuance of the policy. (Insurance Code, Sec.
37) It may be altered or withdrawn before the Ex: Are you not a chain-smoker? Yes =
affirmative misrepresentation
 ● Promissory - a statement by the insured
In cases of rescission In cases of rescission
concerning what is to happen during the due to concealment, due to
term of the insurance. proof of fraudulent misrepresentation,
intent is not proof of fraudulent
necessary intent is necessary

Effect of Expressions of Opinion or

Expectation on Insurance Policy
BREACH OF WARRANTIES
A representation of the expectation, intention,
belief, opinion or judgment of the insured, Warranty
although false, WILL NOT AVOID a policy of
insurance if there is no actual fraud in inducing ● A statement or promise set forth in the
the acceptance of the risk, or its acceptance at a policy or by reference incorporated
lower rate of premium (Philam Health Systems v. therein, the untruth or nonfulfillment of
CA, G.R. No. 125678, 2002); which in any respect, and without
reference to whether insurer was in fact
Note: However, in a marine insurance, prejudiced by such untruth or
information of the belief or expectation of a third non-fulfillment, renders the policy
person, in reference to a material fact, is material. VOIDABLE by the insurer.
(Insurance Code, Sec. 110)
KINDS OF WARRANTIES
The injured party can rescind the contract
when: 1. EXPRESS – An agreement contained in
the policy or clearly incorporated therein
1. The representation fails to correspond with as part thereof whereby the insured
the facts (Insurance Code, Sec. 44); and stipulates that certain facts relating to the
2. It is false in a material point (Insurance risk are or shall be true or certain acts
Code, Sec. 45) relating to the same subjects have been or
shall be done.
Note: The materiality of a representation is 2. IMPLIED – Warranties that are deemed
determined by the same rules as the included in the contract, although not
materiality of concealment. (Insurance Code, expressly mentioned. They are found
Sec. 46) usually in marine insurance. (e.g
Seaworthiness)
The Insurance Code dispenses with proof of
3. AFFIRMATIVE – Asserts the existence of
fraudulent intent in cases of rescission due to
a fact or condition at the time it is made;
concealment, but not so in cases of rescission
4. PROMISSORY – The insured stipulates
due to false representations. Concealment of
that certain facts or conditions shall exist
material facts is fraudulent in and of itself. (The
or thin shall be done or omitted.
Insular Life Assurance Co., Ltd. v. Heirs of
Alvarez, G.R. Nos. 207526 & 210156, 2018)
WARRANTY MISREPRESENTATI
ON
CONCEALMENT MISREPRESENTATI
ON Part of the contract Collateral inducement
The insured The insured makes Written on the policy Need not be written
withholds information erroneous statements or in a valid rider or
of material facts from of facts with the intent attachment (except for
the insurer. of Inducing the insurer implied warranties)
to enter into the
insurance contract. Generally, Should be established
conclusively to be material
Passive form of act Active form of act presumed to be
material
Usually occurs prior Maybe made at the
to making of the time of the insurance Falsity or Falsity renders the
insurance contract. of the contract. non-fulfillment policy voidable or
 that the insurer knew about the violation of the
operates as a breach rescissible on the
of contract ground of fraud clause (General Insurance and Surety Corp. v. Ng
Hua, G.R. No 14373, 1960).
Facts warranted must Requires only to be
be strictly complied substantially true EXERCISE OF THE RIGHT TO RESCIND
with
Time to Exercise the Right to Rescind
Where express warranty must be contained
a. Non-Life Policy – Prior to the
a. The policy itself; or commencement of an action on the
b. In another instrument signed by the contract.
insured and referred to in the policy as b. Life Policy – Before the incontestability
making a part of it. clause sets in.

Effect of Breach of Warranty **When action for subrogation takes place.

General Rule: The violation of a material Requisites of Incontestability Clause

warranty or other material provision of the policy
gives the insurer the right to rescind the 1. The insurance is a life insurance policy.
insurance policy (Insurance Code, Sec. 74) 2. It is payable on the death of the
insured.
Note: A policy may declare that a violation of 3. It has been in force during the lifetime of
specified provisions thereof shall avoid it. the insured for at least 2 years from its
Otherwise, the breach of an immaterial provision date of issue or of its last
does not avoid the policy. (Insurance Code, Sec. reinstatement.
75)
Note: The period of 2 years may be shortened
Exception: The below instances of warranties but it cannot be extended by stipulation. Aka MAX
relating to the future = 2 YRS

a. Loss occurs before the time of When incontestability clause sets in

performance of the warranty;
b. The performance becomes unlawful; Whichever is earlier, between:
c. Performance becomes impossible.
a. Within 2 years from the date of issuance
(Insurance Code, Sec. 73)
or its last reinstatement; or
Note: Waiver or estoppel may also prevent the b. Upon the insurer’s death (Sun Life v.
insurer from being discharged from liability Sibya, G.R. No. 211212, 2016)
(Pioneer v. Yap, G.R. No. L-36232, 1974)
After the two-year period lapses, or when the
Other Insurance Clause insured dies within the period, the insurer
must make good on the policy, even though
This is a clause in the policy that provides that the policy was obtained by fraud,
the policy shall be void if the insured procures concealment, or misrepresentation (Sun Life v.
additional insurance without the consent of Sibya, G.R. No. 211212, 2016).
the insurer.
Exception: when the insured dies due to suicide
The purpose is to prevent over-insurance and within the 2 year period
thus to avert the possibility of a perpetration of
fraud. It is a warranty that entitles the insurer
to rescind in case of breach.
CLAIMS SETTLEMENT AND SUBROGATION
The “other insurance clause” may be subject to When Insurer is Liable for Loss
waiver but the waiver must either be express or if
1. Unless otherwise provided by the policy,
it is to be implied from conduct mainly, said
an insurer is liable for a loss of which a
conduct must be clearly indicative of a clear intent
peril insured against was the proximate
to waive such right. There must be clear showing
cause, although a peril not contemplated
 by the contract may have been a remote ● A requirement of the policy that notice of
cause of the loss (Insurance Code, Sec. loss be given immediately or forthwith
86) requires the giving of notice within a
2. The thing insured is rescued from a peril reasonable time. (Bachrach v. Britain Am.
insured against that would otherwise have Assur. Co., G.R. No. L-5715, 1910)
caused a loss, if, in the course of such
rescue, the thing is exposed to a peril not SUBROGATION
insured against, which permanently
deprives the insured of its possession, in Legal Basis of Subrogation
whole or in part; or where a loss is caused
If the plaintiff's property has been insured, and he
by efforts to rescue the thing insured from
has received indemnity from the insurance
a peril insured against (Insurance Code,
company for the injury or loss arising out of the
Sec. 87)
wrong or breach of contract complained of, the
3. The proximate cause of which is the peril
insurance company shall be subrogated to the
insured against a. Immediate cause of
rights of the insured against the wrongdoer or
which is the peril insured against except
the person who has violated the contract. If
where proximate cause is an excepted
the amount paid by the insurance company does
peril; b. Loss through the negligence of
not fully cover the injury or loss, the aggrieved
insured except where there was gross
party shall be entitled to recover the deficiency
negligence amount to willful act; and
from the person causing the loss or injury (Civil
4. Loss caused by efforts to rescue the thing
Code, Art. 2207)
from peril insured against – if during the
course of rescue, the thing is exposed to a Definition:
peril not insured against, which
permanently deprives the insured of its Substitution of one person in place of another
possession, in whole or in part. with reference to a lawful claim or right, so that he
who is substituted succeeds to the rights of the
When Insurer is Not Liable for Loss other in relation to a debt or claim, including its
remedies and securities (LSC v. Chubb, G.R. No.
1. Loss of which the peril insured against
147724, 2004)
was only a remote cause. (Insurance
Code, Sec. 86)
2. Loss caused by the willful act or through
the connivance of the insured; but he is The right of subrogation has its roots in equity. It
not exonerated by the negligence of the is designed to promote and to accomplish justice
insured, or of the insurance agents or and is the mode which equity adopts to compel
others (Insurance Code, Sec. 89) the ultimate payment of a debt by one who in
3. Loss by insured’s willful act or gross justice and good conscience ought to pay.
negligence; (Delsan Transport v. CA, G.R. No. 127897, 2001)
4. Loss due to connivance of the insured;
5. Loss where the excepted peril is the Subrogation only applies to property
proximate cause. insurance

Mandatory Requirement of Notice of Loss and Note: Subrogation also applies in reinsurance.
Proof of Loss
A reinsurer, on payment of a loss, acquires the
The requirement of the notice of loss and same rights by subrogation as in similar cases
obligation to file a proof of loss are conditions with where the original insurer pays a loss. (Pioneer
which the insured MUST comply before there is Insurance Co v. CA, G.R. Nos. 84197 & 84157,
any liability on the part of the insurer. 1989)

When to Give Notice of Loss: “If the plaintiff’s property is insured… (Civil
Code, Art. 2207) ”
● Without unnecessary delay or within a
reasonable time.
When subrogation occurs a) consent or meeting of the minds, that is,
consent to transfer ownership in exchange
1. If the plaintiff's property has been insured, for the price;
and
2. He has received indemnity from the b) determinate subject matter; and
insurance company for the injury or loss
arising out of the wrong or breach of c) price certain in money or its equivalent.
contract complained of (Civil Code, Art.
2207) The absence of any of the essential elements
shall negate the existence of a perfected
It is not dependent upon, nor does it grow out of, contract of sale.
any privity of contract or upon written assignment
of claim. It accrues simply upon payment by the The stages of a contract of sale are:
insurance company of the insurance claim. offer & counter offer
1. Negotiation
(Delsan Transport v. CA, G.R. No. 127897, 2001)
It covers the period from the time
Latin: utmost good faith the prospective contracting parties
*Incontestability Clause* = LIFE INSURANCE = indicate interest in the contract to the
only applicable to concealment and time the contract is perfected.
misrepresentation consent, offer and
2. Perfection acceptance
- Within 2 year period / Death within 2 years It takes place upon the
unless suicide or death from his action or concurrence of the essential elements of
negligence the sale, which is the meeting of the minds
- Even if all 4 devices are present , not of the parties as to the object of the
applicable ang rescission ?? contract and upon the price

SALES (Personal Notes) 3. Consummation

It begins when the parties perform
Of the New Civil Code their respective undertakings under the
Art. 1458. By the contract of sale one of the
contract of sale, culminating in the
contracting parties obligates himself to transfer
extinguishment thereof.
the ownership and to deliver a determinate thing,
and the other to pay therefor a price certain in SALE IS A TITLE
money or its equivalent.
The perfection of a contract of sale should not,
A contract of sale may be absolute or conditional. however, be confused with its consummation. In
By nature it is a BILATERAL and RECIPROCAL obligation. relation to the acquisition and transfer of
What is a contract of sale?
ownership, it should be noted that sale is not a
By the contract of sale, one of the contracting mode, but merely a title. A mode is the legal
parties obligates himself to transfer the ownership means by which dominion or ownership is
of, and to deliver, a determinate thing, and the created, transferred or destroyed, but title is only
other to pay therefor a price certain in money or the legal basis by which to affect dominion or
its equivalent. A contract of sale is a consensual ownership. Under Article 712 of the Civil Code,
contract and, thus, is perfected by mere consent "ownership and other real rights over property are
which is manifested by the meeting of the offer acquired and transmitted by law, by donation, by
and the acceptance upon the thing and the cause testate and intestate succession, and in
which are to constitute the contract. consequence of certain contracts, by tradition."
Contracts only constitute titles or rights to the
Until the contract of sale is perfected, it cannot, as transfer or acquisition of ownership, while delivery
an independent source of obligation, serve as a or tradition is the mode of accomplishing the
binding juridical relation between the parties. The same. Therefore, sale by itself does not
essential elements of a contract of sale are: transfer or affect ownership; the most that
sale does is to create the obligation to transfer
ownership. It is tradition or delivery, as a
consequence of sale, that actually transfers c. c) Price certain in money or its
ownership. equivalent.

2 kinds of a contract of sale Contract to sell not a contract of sale

1. Absolute - There are NO conditions A Contract to Sell may not be considered a

attached to the contract. Contract of Sale because the first essential
2. Conditional - There are certain conditions element is lacking. In a contract to sell, the
attached to the contract. prospective seller explicitly reserves the transfer
of title to the prospective buyer, meaning, the
prospective seller does not as yet agree or
consent to transfer ownership of the property
A contract of sale may be absolute or subject of the contract to sell until the happening
conditional. of an event, which for present purposes we shall
take as the full payment of the purchase price.
Under Article 1458 of the New Civil Code,
What the seller agrees or obliges himself to do is
in a contract of sale, whether absolute or
to fulfill his promise to sell the subject property
conditional, one of the contracting parties
when the entire amount of the purchase price is
obliges himself to transfer the ownership of and
delivered to him. In other words, the full payment
deliver a determinate thing, and the other to pay
of the purchase price partakes of a suspensive
therefor a price certain in money or its equivalent.
condition, the non-fulfillment of which prevents
A contract of sale is perfected at the moment
the obligation to sell from arising and thus,
there is a meeting of the minds upon the thing
ownership is retained by the prospective seller
which is the object of the contract and the
without further remedies by the prospective buyer
price. From the averment of perfection, the
parties are bound, not only to the fulfillment of I. CONSENT
what has been expressly stipulated, but also to all
the consequences which, according to their Consent is manifested by the meeting of the offer
nature, may be in keeping with good faith, usage and the acceptance upon the thing and the cause
and law. On the other hand, when the contract of which are to constitute the agreement.
sale or to sell is not perfected, it cannot, as an
independent source of obligation, serve as a Acceptance
bindis juridical relation between the parties.
As to the matter of acceptance, the same may be
Note: evidenced by some acts, or conduct,
A deed of sale is considered absolute in nature communicated to the offeror, either in a formal or
where there is neither a stipulation in the deed an informal manner, that clearly manifest the
that title to the property sold is reserved in the intention or determination to accept the offer to
seller until the full payment of the price, nor one buy or sell.
giving the vendor the right to unilaterally resolve
the contract the moment the buyer fails to pay Example:
within a fixed period.
In one case, acceptance on the part of the
vendee was manifested through a plethora of
acts, such as payment of the purchase price,
Essential elements of a contract of sale declaration of the property for taxation purposes,
and payment of real estate taxes thereon, and
Sale, by its very nature, is a consensual contract similar acts showing vendee's assent to the
because it is perfected by mere consent. The contract.
essential elements of a contract of sale are the
following:

a. Consent or meeting of the minds, that is, II. OBJECT

consent to transfer ownership in exchange
for the price; The object of every contract must be determinate
b. b) Determinate subject matter; and as to its kind. The fact that the quantity is not
determinate shall not be an obstacle to the
existence of the contract, provided it is possible to redeem and thus recover any loss he claims to
determine the same, without the need of a new have suffered by reason of the price obtained at
contract between the parties. A thing is the execution sale. Thus, respondent stood to
determinate when it is particularly designated gain rather than be harmed by the low sale value
and/or physically segregated from all others of the of the auctioned properties because it possesses
same class. the right of redemption.

In general, the cause is the why of the contract or Note:

the essential reason which moves the contracting Consideration and consent are essential
parties to enter into the contract. For the cause to elements in a contract of sale. Where a party's
be valid, it must be lawful such that it is not consent to a contract of sale is vitiated or where
contrary to law, morais, good customs, public there is lack of consideration due to a simulated
order or public policy. price, the contract is null and void ab initio.

III. PRICE Characteristics of a contract of sale:

A definite agreement as to the price is an 1. Consensual

essential element of a binding agreement to sell The contract is perfected by mere
personal or real property because it seriously consent.
affects the rights and obligations of the parties. 2. Bilateral
Price is an essential element in the formation of a The seller and the buyer are bound by
binding and enforceable contract of sale. The obligations dependent upon each other.
fixing of the price can never be left to the decision 3. Onerous
of one of the contracting parties. But a price fixed It imposes a valuable consideration, which
by one of the contracting parties, if accepted by is a price certain in money or its
the other, gives rise to a perfected sale. equivalent.
4. Commutative
It is not enough for the parties to agree on the The thing of value is exchanged for equal
price of the property. The parties must also value.
agree on the manner of payment of the price 5. Nominate
of the property to give rise to a binding and The Civil Code refers to it by a special
enforceable contract of sale or contract to name, "contract of sale."
sell. This is so because the agreement as to the 6. Principal
manner of payment goes into the price, such that It can stand on its own and does not
a disagreement on the manner of payment is depend on another contract for its validity.
tantamount to a failure to agree on the price.

Gross inadequacy of price, its effect

In Hulst v. PR Builders, Inc., we further
elaborated on this principle:

Gross inadequacy of price does not

nullify an execution sale. In an ordinary sale, for
reason of equity, a transaction may be invalidated
on the ground of inadequacy of price, or when
such inadequacy shocks one's conscience as to
justify the courts to interfere; such does not follow
when the law gives the owner the right to redeem
as when a sale is made at public auction, upon
the theory that the lesser the price, the easier it is
for the owner to effect redemption. When there is
a right to redeem, inadequacy of price should not
be material because the judgment debtor may
re-acquire the property or else sell his right to