ABCs of Mercantile Law

Updated: Feb 19

Barrista Solutions lists key concepts in Mercantile Law. This is a great study tool for Philippine Bar Examinees who want to memorize important terms and concepts in the subject.

Key Concepts in Philippine Mercantile Law.
ABCs of Mercantile Law


Appraisal right- right of a stockholder who dissents from a fundamental or extraordinary corporate action, to demand payment of the fair value of his shares. It is the right of a stockholder to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in the corporate structure.


Bank deposits- funds obtained by a bank from the public which are re-lent by such bank to its own borrowers.





Barratry- willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owner and to the prejudice of the interest of the owner.


Bill of Exchange- an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.


Bill of Lading – a written acknowledgment of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person name there or his order


Cancelled check- one marked or stamped “paid” and/or “cancelled” by or on behalf of a drawee bank to indicate payment.


Cash bond- a security in the form of cash established by a guarantor or surety to secure the obligation of another.


Check – a bill of exchange drawn on a bank payable on demand.


Co – insurance- the percentage in the value of the insured property which the insured himself assumes or undertakes to act as insured to the extent of the deficiency in the insurance of the insured property. In case of loss or damage, the insurer will be liable only for such proportion of the loss or damage as the amount of insurance bears to the designated percentage of the full value of the property insured.





Cooperative bank- organized under the Cooperative Code to provide financial and credit services to cooperatives. It may perform any or all of the services offered by a rural bank, including the operation of a Foreign Currency Deposit Unit subject to certain conditions.


Commercial bank- a bank that can accept (1) accept drafts; (2) issue letters of credit; (3) discount and negotiate promissory notes, drafts, bills of exchange and other evidence of debt; (4) accept or create demand deposits; (5) receive other types of deposits as well as deposit substitutes; (6) buy and sell foreign exchange as well as gold or silver bullion; (7) acquire marketable bonds and other debt securities and (8) extend credit, subject to such rules promulgated by the Monetary Board.


Common Carrier- a person, corporation, firm or association engaged in the business of carrying or transporting passengers or goods or both, by land, water or air for compensation, offering its services to the public.


Conservator- appointed to reorganize the management of a bank, collect all monies and debts due said bank and exercise all the powers necessary to restore the bank’s viability, with the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-banks.


Corporation by Estoppel – exists when persons assume to act as a corporation knowing it to be without authority to do so. In this case, those persons will be liable as general partners for all debts, liabilities and damages incurred or arising as a result of their actions.


Crossed check- a check with 2 parallel lines, written diagonally on the upper right corner. It is a warning to the drawee bank that payment must be made to the right party, otherwise, the bank has no authority to use the drawer’s funds deposited with the bank. To be assured that it will avoid any mistake in paying the wrong party, banks adopted the policy that crossed checks must be deposited in the payee’s account. When withdrawal is made, the banks can be sure that they are paying to the right party.





Corporation sole- one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church. It is formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church


Corporate Opportunity- if the director acquired for himself a business opportunity that should belong to the corporation, he must account to the corporation for all profits he obtained unless his act was ratified by at least 2/3 of the corporation.


De Facto Corporation- one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State.


Denicola Test- states that if design elements of an article reflect a merger of aesthetic and functional considerations, the artistic aspects of the work cannot be conceptually separable from the utilitarian aspects; thus, the article cannot be copyrighted


Deposit substitutes- alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorsement or acceptance of debt instruments for the own account of the borrower, for the purpose of re-lending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements.


Double insurance- occurs when the same person is insured by two or more insurers separately with respect to the same subject matter and interest.


Equality in Equity- states that as all creditors ought to stand on equal footing, not anyone of them should be paid ahead of others.


Exempt Transactions – those that do not require registration either because the law itself exempts them or the SEC finds that the enforcement of the registration requirement is not necessary in the public interest and for the protection of investors by reason of the amount involved or the limited character of the public offering.


General averages- include all damages and expenses which are deliberately caused to save the vessel, its cargo or both at the same time, from a real and known risk.





General indorser- regular party to the instrument like a maker, drawer or acceptor and he signs upon delivery of the instrument. A regular indorser signs for a valuable consideration.


Government deregulation- the relaxation or removal of regulatory constraints on firms or individuals, with a view to promoting competition and market oriented approaches toward pricing, output, entry, and other related economic decisions.


Howey Test- requires a transaction, contract or scheme whereby a person makes an investment of money in a common enterprise with the expectation of profits to be derived solely, not primarily from the efforts of others.


Investment contract- a contract, transaction or scheme (1) involving an investment of money, (2) in a common enterprise (3) with expectation of profits (4) primarily from the efforts of others.


Independence principle- posits that the obligations of the parties to a letter of credit are independent of the obligations of the parties to the underlying transaction.


Intra-corporate controversy- a dispute between a stockholder and the corporation of which he is a stockholder or between a stockholder and another stockholder of the same corporation where the subject of the dispute or controversy arose out of such relationship.





Inscrutable Fault– where fault is established but it cannot be determined which of the two vessels were at fault, both shall be deemed to have been at fault.


Irregular indorser- not a party to the instrument who places his signature on the instrument for accommodation.


Joint account – a transaction of merchants where other merchants agree to contribute the amount of capital agreed upon and participating in the favorable or unfavorable results in the proportion they may determine.


Kabit system- arrangement where a person who has been granted a certificate of public convenience allows another who owns a motor vehicle to operate under his certificate, for a fee or a percentage of the earnings.


Limited Liability – the exclusively real and hypothecary nature of maritime law operates to limit the liability of the shipowner to the value of the vessel, earned freightage and proceeds of the insurance. However, such doctrine does not apply if the shipowner and the captain are guilty of negligence.


Margin Trading Rule- no registered broker or dealer or member of an exchange shall extend credit on any security an amount greater than whichever is higher of

a. 65% of the current market price of the security;

b. 100% of the lowest market price of the security during the preceding 36 calendar months, but not more than 75% of the current market price.


Maritime Protest- a sworn statement made within 24 hours after collision in which the circumstances are declared or made know before a competent authority at the point of accident or the first port of arrival if in the Philippines or the Philippine consul in a foreign country.


Mutual insurance company- a cooperative enterprise where the members are both the insurer and the insured. In it, the members all contribute by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid and where the profits are divided among themselves in proportion of their interest.


No- fault Indemnity Clause – any claim for death or injury of any passenger or third party shall be paid without the necessity of proving fault or negligence of any kind.





Owner Pro Hac Vice – the charterer of a vessel in the case of bareboat or demise charter.


Over the Counter Markets – markets made or created for the purchase and sale of securities other than on a security exchange.


Particular averages- include all expenses and damages caused to the vessel or to the cargo which did not inure to the common benefit and profit of all persons interested in the vessel and the cargo.


Private corporation- formed for some private purpose, benefit or end.


Privatization of an industry- transfer of ownership and control by the government of assets, firms and operations in an industry to private investors


Public corporation- formed for the government of a portion of the State for the general good or welfare. It is created by special legislation or act of Congress.


Promissory Note – an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or bearer.


Re-insurance- insurer procures a third party, called re-insurer, to insure him against liability by reason of such original insurance. Basically, a re-insurance is an insurance against liability which the original insurer may incur in favor of the original insured.


Rural bank- established to provide credit facilities to farmers and merchants or their cooperatives and in general, to the people of the rural communities.


Receiver- representative from the PDIC who is appointed to: (a) immediately gather and take charge of all assets and liabilities of the institution, administer the same for the benefit of its creditors and (b) determine as soon as possible, but not later than 90 days from take-over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors, creditors and the general public, which determination is subject to the prior approval of the Monetary Board.





Shelter Rule- provides that in the hands of a holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. This principle is extended to a holder who is not himself a holder in due course but derives his title from a holder in due course, provided he himself is not a party to any fraud or illegality affecting the instrument.


Stock and Transfer Book- a book which records all stocks in the name of the stockholders alphabetically arranged; the installments paid or unpaid on all stocks for which subscription has been made and the date of payment of any installment, a statement of every alienation, sale or transfer of stock made, the date and by and to whom made; and such other entries as the by-laws may prescribe.


Suspension of Payment – legal scheme where a debtor who has sufficient assets but who may be unable to meet his obligations as and when they fall due, may petition for more time within which to settle such obligations


Securities – stocks, bonds, notes, convertible debentures, warrants or other documents that represent a share in a company or a debt owed by a company or government entity.


Short Swing Transaction – a transaction where a person buys securities and sells or disposes of the same within a period of six (6) months.


Surety bond- issued by a surety or insurance company in favor of a designated beneficiary, pursuant to which such company acts as a surety to the debtor or obligor of such beneficiary.


Tender offer- a publicly announced intention by a person (acting alone or in concert with other persons) to acquire shares of a public company. A tender offer is meant to protect minority stockholders against any scheme that dilutes the share value of their investments. It gives them the chance to exit the company under the same terms offered to the majority stockholders.


Test of Dominancy – requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result, infringement takes place.


Thrift bank- one established as a savings and mortgage bank, a stock savings and loan association or a private development bank for the purpose of (1) accumulating the savings of depositors and investing them in outlets determined by the Monetary Board as necessary in the furtherance of national economic objectives; (2) providing short-term working capital, medium and long term financing to businesses engaged in agriculture, services, industry and housing and (3) providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals.






Trust Receipt- is a written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of the

Trust Receipts Law, where the bank as entruster releases the goods to the entrustee but retains ownership while the entrustee may sell the goods and apply the proceeds for the full payment of his liability to the bank


Trust Fund Doctrine- means that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of the corporate creditors.

Universal bank- a commercial bank with two additional powers: (1) power of an investment house and (2) power to invest in non-allied enterprises.


Watered shares – those sold by the corporation for less than the par/book value.


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