up 2008 commercial law (negotiable instruments law)

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NEGOTIABLE INSTRUMENTS LAW COMMERCIAL LAW

Negotiable Instruments Law

(Act No. 2031)

Chapter I.

INTRODUCTION

1. The Negotiable Instrument

Written contract for the payment of money, byits form intended as substitute for money andintended to pass from hand to hand to give theHDC the right to hold the same and collect thesum due.

Instruments are negotiable when they conformto all the requirements prescribed by the NIL(Act 2031, 03 February 1911).

Although considered as medium for payment ofobligations, negotiable instruments are notlegal tender (Sec. 60, New Central Bank Act,R.A. 7653);

Negotiable instruments shall produce the effectof payment only when they have beenencashed or when through the fault of thecreditor they have been impaired. (Art. 1249,CC) BUT a CHECK which has been cleared andcredited to the account of the creditor shall beequivalent to a delivery to the creditor of cash.

Negotiable Non-negotiable

Contains all therequisites of Sec. 1of the NIL

Does not contain allthe requisites of Sec.1 of the NIL

Transferred bynegotiation

Transferred byassignment

HDC may havebetter rights thantransferor

Transferee acquiresrights only of histransferor

Prior partieswarrant payment

Prior parties merelywarrant legality oftitle

Transferee hasright of recourseagainstintermediateparties

Transferee has noright of recourse

2. Negotiable Instruments Law

o The NIL applies only to instruments whichconform with the requisites laid down by Sec1of the law. Should any of said requisites beabsent, the instrument would not be negotiableand would therefore not be governed by theNIL but by the general law on contracts.

o TIP: It is advised that one memorizes the twomost important provisions of the NIL : Sec. 1(Forms of negotiable instruments) and Sec. 52(What constitutes a holder in due course)

MICHAEL A. OSMEÑA v. CITIBANK (2004)

The Negotiable Instruments Law was enacted forthe purpose of facilitating, not hindering orhampering transactions in commercial paper.Thus, the said statute should not be tampered with

haphazardly or lightly. Nor should it be brushedaside in order to meet the necessities in a singlecase

3. Life of a Negotiable Instrument

1. issue2. negotiation3. presentment for acceptance in certain bills4. acceptance5. dishonor by or acceptance6. presentment for payment7. dishonor by nonpayment8. notice of dishonor9. protest in certain cases10. discharge

4. Kinds of Negotiable Instruments

4.1. Promissory note - a promise to pay money 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 certainin money to order or to bearer

where a note is drawn to the maker’s ownorder, not complete until indorsed by him(Sec. 184, NIL).

4.2. Bill of exchange - an order made by oneperson to another to pay money to a third person.

unconditional order in writing addressed byone person to another signed by theperson giving it

requiring the person to whom it isaddressed to pay on demand or at a fixedor determinable future time a sum certainin money to order or to bearer (Sec. 126,NIL). Check: bill of exchange drawn on a

bank payable on demand.

Promissory Note Bill of Exchange

Unconditionalpromise

Unconditional order

Involves 2 parties Involves 3 parties

Maker primarilyliable

Drawer onlysecondarily liable

Only 1 presentment- for payment

Generally 2presentments - foracceptance and forpayment

5. Parties

5.1. As regards promissory note:1. Promissor/maker2. Payee - person to whom the promise to pay

is made.

5.2. As regards bill of exchange:1. Drawer - person who gives the order to

pay.2. Drawee - addressee of the order.3. Payee - person to whom the payment is to

be made.

Indorser - the payee of an instrument whotransfers it to another by signing it at the backthereof



Indorsee - person to whom the indorsernegotiates the instrument, who, by suchnegotiation, becomes the holder of theinstrument.

Chapter II.

NEGOTIABILITY

1 Requisites of Negotiability4

1.1. Must be in Writing and Signed by theMaker

1. No person liable on the instrument whosesignature does not appear thereon.

2. One who signs in a trade or assumedname liable to same extent as if he hadsigned in his own name. (Sec. 18, NIL)

3. Signature of party may be made by dulyauthorized agent; no particular form ofappointment necessary. (Sec. 19, NIL)

4. "In writing" - includes print; written ortyped

5. Signature, binding so long it is intended oradopted as the signature of the signer ormade with his authority.

1.2. Must contain an Unconditional Order orPromise to Pay

1. “ORDER OR PROMISE TO PAY”a. PROMISSORY NOTE:

i. PROMISE TO PAY: should beexpress on the face of theinstrument

ii. Word "promise" is not absolutelynecessary. Any expressionequivalent to a promise issufficient.

iii. Mere acknowledgment of a debtinsufficient

b. BILLS OF EXCHANGE:i. Order - command or imperative

direction; the instrument, by itsnature, demanding a right.

ii. Words which are equivalent to anorder are sufficient.

iii. A mere request or authority topay does not constitute an order.

iv. Although the mere use of politewords like "please" does not ofitself deprive the instrument of itscharacteristics as an order, itslanguage must clearly indicate ademand upon the drawee to pay.

2. “UNCONDITIONAL”a. The promise or order to pay, to be

unconditional, must be unqualified.b. Sec. 3, NIL: “An unqualified order or

promise to pay is unconditional…thoughcoupled with:“An indication of a particular fund out

of which reimbursement is to bemade, or a particular account to bedebited with the amount UNCONDITIONAL: Mere

indication of the particular fund

4Suggested Mnemonics: UP MaSCoT’S PaWN:

Unconditional order and Promise, payable in Money,Signed by maker, Certainty as to Time, Sum andParties, in Writing, include words of Negotiability.

out of which reimbursement isto be made, or an indication ofa particular account to bedebited with the amount

“A statement of the transaction whichgives rise to the instrument. UNCONDITIONAL: Mere

recital of the transaction orconsideration for which theinstrument was issued

However, the fact that thecondition appearing on theinstrument has been fulfilledwill not convert it into anegotiable one.

But an order or promise to pay out of aparticular fund is not unconditional CONDITIONAL: when

reference to the fund clearlyindicates an intention that suchfund alone should be the sourceof payment

METROPOLITAN BANK v. CA (1991)

The treasury warrants in question are not NIs.They are payable from a particular fund, to wit,Fund 501. The indication of Fund 501 as the sourceof the payment to be made on the treasurywarrants makes the order or promise to pay "notunconditional" and the warrants themselves non-negotiable.

1.3. Sum Payable must be Certain1. Sec. 2, NIL: The sum payable is a sum

certain, even if:a. With interest;b. By stated installments;c. By stated installments with acceleration

clause;d. With exchange, whether at a fixed rate

or at the current rate; ore. With costs of collection or attorney's

fee.2. A sum is certain if from the face of the

instrument it can be mathematicallycomputed.

3. A stipulation to pay a higher rate of interestif the note is not paid or a lower rate if it ispaid on or before maturity does not renderthe instrument non-negotiable.

1.4. Must be Payable in Money1. Capable of being transformed into money.2. NON NEGOTIABLE: an instrument which

contains an order or promise to do an actin addition to the payment of money

3. BUT If the order or promise gives theholder an election to require something tobe done in lieu of payment of money, aninstrument otherwise negotiable would notbe affected thereby. (Sec. 5, NIL) But if the option is with the maker

or person primarily liable,instrument is NOT negotiable.

4. Kind of current money does not affectnegotiability. Since the value of the notecan by a simple mathematical computationbe expressed in the value of the lawfulmoney of the latter country (Incitti vFerrante, 1933, US Jur)

5. Obligations in foreign currency may bedischarged in Philippine currency based on



the prevailing rate at the time of payment,pursuant to RA 8183 (Asia WorldRecruitment v NLRC, 1999).

1.5. Time of Payment must be Certain Purpose: Informing the holder of the

instrument of the date when he mayenforce payment thereof.

An instrument may be payable:

1. on demand (Sec. 7. NIL)1.) Expressed to be payable on demand, or

at sight, or on presentation;2.) No time for payment is expressed;3.) Where an instrument is issued,

accepted, or indorsed when overdue, itis, as regards the person so issuing,accepting, or indorsing it, payable ondemand.

Demand instruments: Holder may callfor payment any time; maker has an optionto pay at any time, and the refusal of theholder to accept payment will terminate therunning of interest, if any, but theobligation to pay the note remains.

2. at a fixed timeo Only on the stipulated date, and not

before, may the holder demand itspayment.

o Should he fail to demand payment, theinstrument becomes overdue butremains valid and negotiable. It ismerely converted to a demandinstrument.

3. at a determinable future time

o Determinable future time, ifexpressed to be payable (Sec. 4, NIL):

1.) At a fixed period after date of sight;2.) On or before a fixed or

determinable future time specifiedtherein;

3.) On or at a fixed period after theoccurrence of a specified eventwhich is certain to happen, thoughthe time of happening be uncertain.

o If payable upon a contingency, bothnegotiable, and the happening of theevent does not cure the defect.

4. Effect of acceleration provisionso If option (absolute or conditional) to

accelerate maturity is on the maker,still NEGOTIABLE. Maker may pay earlier than the

date fixed but this option, ifexercised, would be a payment inadvance of a legal liability to pay.It is still payable on the date fixed,and holder has no right toenforce payment against themaker before such date.

o If option to accelerate is on theholder: If option can be exercised only

after the happening of a specifiedevent/act over which he has no

control (conditional), stillNEGOTIABLE.

If option is unconditional, time ofpayment is rendered uncertain,NOT negotiable.

o Other instances where instrument stillNEGOTIABLE: When option given to the holder to

accelerate the maturity of aninstallment note upon failure of themaker to pay any installment whendue.

Acceleration, automatic upondefault.

Acceleration by operation of law.

5. Provisions extending time of paymento General rule: Negotiability not

affected. Effect is similar with that of anacceleration clause at the option of themaker. Negotiability not affected, even if

the holder is given the option toextend time of payment by mereinaction or indulgence for anindefinite time depending on hiswill, because with or without thisprovision, the holder may alwayschoose to be indulgent.

o Exception: Where a note with a fixedmaturity provides that the maker hasthe option to extend time of paymentuntil the happening of contingency,instrument NOT negotiable. The timefor payment may never come at all.

1.6. Must be Payable to Order or to Bearer/Must contain Words of Negotiability

words of negotiability - serve as anexpression of consent that theinstrument may be transferred.o But the instrument need not follow

the language of the law; any termwhich clearly indicates an intentionto conform with the legalrequirements is sufficient.

CALTEX V. CA (1992)

The negotiability or non-negotiability of aninstrument is determined from the face of theinstrument itself. The duty of the court in such caseis to ascertain, not what the parties may havesecretly intended but what is the meaning of thewords they have used.

TRADERS ROYAL BANK V. CA (1997)The language of negotiability which characterize anegotiable paper as a credit instrument is itsfreedom to circulate as a substitute for money.Hence, freedom of negotiability is the touchtonerelating to the protection of holders in due course,and the freedom of negotiability is the foundationfor the protection which the law throws around aholder in due course.

Postal money order, not negotiable,because it does not contain words ofnegotiability.

Where words "or bearer" printed on acheck are cancelled by the drawer,instrument not negotiable.



Bearer instrument may be negotiated bymere delivery.o When instrument is payable to bearer

(Sec. 9, NIL):a. Expressed to be so payable - ex: "I

promise to pay the bearer thesum…."

b. Payable to a person named thereinor bearer – ex. "Pay to A orbearer."

c. Payable to the order of a fictitiousperson or non-existing person, andsuch fact was known to the personmaking it so payable - ex: "Pay toJohn Doe or order."

d. Name of payee does not purport tobe the name of any person - ex:"Pay to cash;" "Pay to sundries."

e. Only or last indorsement is anindorsement in blank.

ANG TEK LIAN v. CA (1950)

A check drawn payable to the order of cash isa check payable to bearer, and the bank maypay it to the person presenting it for paymentwithout the drawer's indorsement.

A check payable to bearer is authority forpayment to the holder. Where the check is inthe ordinary form and is payable to bearer,so that no indorsement is required, a bank,to which it is presented for payment, neednot have the holder identified, and is notnegligent in failing to do so.

Order Instrument, negotiation requiresdelivery and indorsement of the transferor.o When instrument is payable to order:

Drawn payable to the order of aspecified person or to him or his order(Sec. 8, NIL).

o Without the words "to order" or "to theorder of," the instrument is payableonly to the person designated thereinand is therefore non-negotiable.(Campos, as cited in ConsolidatedPlywood Industries v IFC Leasing,1987)

1.7. Parties must be designated with Certaintya. Maker and drawer

Sign the instrument at the lowerright-hand corner.

b. Payee When negotiating, sign at the back;

same with indorsers.a. Drawee

Name usually at the lower left-handcorner, or across the top.

If instrument addressed to drawee,he must be named or indicated withreasonable certainty.

If it is not clear in what capacity the personsigned, said person is considered anindorser

2 Provisions Not Affecting Negotiability,(Sec. 5)5

1. Authorizes sale of collateral securities;

2. Authorizes confession of judgment if instrumentnot paid at maturity;

3. Waives the benefit of any law intended for theadvantage or protection of the obligor; or

4. Gives holder election to require something tobe done in lieu of payment of money. (if inaddition to money – not NI) Negotiability affected, when instrument

contains a promise or order to do anyact in addition to the payment ofmoney.

PNB v. MANILA OIL REFINING (1922)

In this case, the note contains a provision that incase that it would not be paid at maturity, the"maker authorizes any attorney to appear andconfess judgment thereon."

The Court ruled that said judgment note is illegaland inoperative as such is against public policy. Itnoted that it is in derogation of the constitutionalsafeguards (a day in court). Such judgment notecan only be valid if given express legislativesanction.

In common law, two kinds of judgment byconfession: Judgment by cognovit actionem Confession relicta verificatione

3. Omissions Not Affecting Negotiability(Sec. 6)

A. Non-dating of the instrumentB. Non-specification of value given, or that any

value had been givenC. Non-specification of place where it is drawn or

place where it is payableD. Bears a sealE. Designation of particular kind of currency in

which payment is to be made

4. Rules of Construction (Sec.17)

A. Sum expressed in words takes precedence oversum in numbers; BUT where words are soambiguous or uncertain, reference to thefigures should be made

B. Where interest is stipulated, withoutspecification of the starting date, the interestruns from the date of the instrument, and ifundated, from the issue thereof

C. An undated instrument is considered dated asof time issued.

D. Written provisions prevail over printedprovisions

E. Where the instrument is ambiguous as towhether it is a note or a bill, the holder maytreat it as either at his election

F. When the capacity of signatory is not clear, heis to be deemed an indorser

5Suggested Mnemonic: WEJy S: Waives, gives

holder Election, confession of Judgment, Sale ofSecurities



G. “I promise to pay” when signed by two or morepersons is deemed to be jointly and severallysigned

EVANGELISTA V. MERCATOR FINANCE (2003)

Where two promissory notes, both employing theterms “I promise to pay”, were each signed by twoor more persons, a solidary (joint and several)liability on each note is created on the part of thesignors.

Chapter III.

TRANSFER

1. Delivery and Issuance

A. Delivery means transfer of possession ofinstrument by the maker or drawer, withintent to transfer title to the payee andrecognize him as holder thereof. (de laVictoria v. Burgos)

B. NI incomplete and revocable until delivery forthe purpose of giving effect thereto asbetween (Sec. 16, NIL):1. immediate parties2. a remote party other than holder in due

courseC. delivery, to be effectual, must be made by or

under the authority of the party making /drawing / accepting/indorsing

D. delivery may be shown to have beenconditional, or for a special purpose only, andnot for the purpose of transferring the propertyin the instrument

E. PRESUMPTION OF DELIVERY1. Where the instrument is no longer in the

possession of a party whose signatureappears thereon, a valid and intentionaldelivery by him is presumed until thecontrary is proved

2. if it is in the hands of a HDC, thepresumption is conclusive

3. Camposes: Should an undeliveredinstrument come into the hands of a holderin due course, the maker is liable to himregardless of any proof of the lack of validdelivery.

F. PRESUMPTION AS TO DATE1. Date is not an essential element of

negotiability2. An undated instrument is considered to be

dated as of the time it was issued

GEMPESAW v CA (1993)

Every contract on a negotiable instrument isincomplete and revocable until delivery of theinstrument to the payee for the purpose of givingeffect thereto. The first delivery of the instrument,complete in form, to the payee who takes it as aholder, is called issuance of the instrument.Without the initial delivery of the instrument fromthe drawer of the check to the payee, there can beno valid and binding contract and no liability on theinstrument.

2. Negotiation

When an instrument is transferred from oneperson to another as to constitute thetransferee the holder thereof.

If payable to BEARER, negotiated by delivery; ifpayable to ORDER, negotiated by indorsementof holder + delivery (Sec.30, NIL)

SESBREÑO v. CA (1993)

A NI may, instead of being negotiated, ALSO beassigned or transferred. A non-NI may not benegotiated; but it may be assigned ortransferred, absent an express prohibitionagainst assignment or transfer written in the faceof the instrument.

3. Indorsement

The indorsement must be written on theinstrument itself or on a paper attached thereto(allonge). The signature of the indorser,without additional words, is sufficientindorsement. (Sec.31, NIL)

Indorser generally enters into two contracts(Implied contracts by Indorser):1. sale or transfer of instrument2. to pay instrument in case of default of

maker

Indorsement must be of entire instrument(can’t be indorsement of only part of amountpayable, nor can it be to two or more indorseesseverally. But okay to indorse residue ofpartially paid instrument) (Sec. 32, NIL)

3.1. Kinds of Indorsements (Sec. 33)

1. as to manner of future method ofnegotiation(Sec. 35, NIL):

a. special – specifies the person to whom/towhose order the instrument is to bepayable; indorsement of such indorsee isnecessary to further negotiation. A special indorser is liable to all

subsequent holders, unless theinstrument is an originally bearerinstrument, in which case he is liableonly to those who take title through hisindorsement (Sec 40, NIL)

b. blank – specifies no indorsee, instrumentso indorsed is payable to bearer, and maybe negotiated by delivery

a person who negotiates by meredelivery is liable only to his immediatetransferee.

the holder may convert a blankindorsement into a special indorsementby writing over the signature of theindorser in blank any contractconsistent with the character of theindorsement

An order instrument may be converted intoa bearer instrument by means of a blankindorsement.

But a bearer instrument remains as suchwhether it has been indorsed specially or inblank. It is the liability of the indorserwhich is affected.



2. as to kind of title transferred:

a. restrictive – such indorsement either:1) prohibits further negotiation of

instrument,o In this kind of restrictive

indorsement, the prohibition totransfer or negotiate must bewritten in express words at theback of the instrument, so that anysubsequent party may be forewarnedthat ceases to be negotiable.However, the restrictive indorseeacquires the right to receive paymentand bring any action thereon as anyindorser, but he can no longertransfer his rights as such indorseewhere the form of the indorsementdoes not authorize him to do so.(Gempesaw v CA 1993)

2) constitutes indorsee as agent ofindorser, or

3) vests title in indorsee in trust foranothero rights of indorsee in restrictive

ind.:a) receive payment of inst.b) Bring any action thereon

that indorser could bringc) Transfer his rights as such

indorsee, but allsubsequent indorseesacquire only title of firstindorsee under restrictiveindorsement

b. non-restrictive

3. as to kind of liability assumed by indorsera. qualified

constitutes indorser as mere assignorof title (eg. “without recourse”) (Sec.38, NIL).

But this does not mean that thetransferee only has the rights of anassignee. Transfer remains anegotiation and transferee can still be aholder capable of acquiring a title freefrom defenses of prior parties.

It relieves the qualified indorser of hisliability to pay the instrument shouldthe maker be unable to pay atmaturity.

b. unqualified

4. as to presence/absence of express limitationsput by indorser upon primary obligor’sprivileges of paying the holder:

a. conditional – additional condition annexedto indorser’s liability. (Sec. 39, NIL)

o Where an indorsement is conditional, aparty required to pay the instrumentmay disregard the condition, and makepayment to the indorsee or histransferee, whether condition has beenfulfilled or not

o Any person to whom an instrument soindorsed is negotiated will hold thesame/proceeds subject to rights ofperson indorsing conditionally

b. unconditional

5. other classifications:

a. Absolute – One by which the indorser bindshimself to pay, upon no other conditionthan the failure of prior parties to do so,and of due notice to him of such failure

b. Joint - Where instrument payable to theorder of two or more payees or indorseesnot partners, all must indorse, unless theone indorsing has authority to endorse forthe others (Sec. 41, NIL)

c. Irregular - Where a person, not otherwise aparty to the instrument, places thereon hissignature in blank before delivery, he isliable as indorser

3.2. Other Rules on Indorsement

1. Indorsement by Collecting Bank - holderdeposits check with a bank other than thedrawee, would in effect be negotiating thecheck to such bank, since he would have toindorse the check before the bank will accept itfor deposit. In most cases, the bank is actingas a mere collecting agent.

2. Negotiation by Joint or Alternative Payeesor Indorsees - all must indorse, unless theone indorsing has authority to endorse for theothers

3. Unindorsed instruments – Sec 49, NILWhere holder of instrument transfers for valuewithout indorsing, transfer vests in transferee:

a. such title as transferor had therein, subjectto defenses and equities available to priorpartieso ex: transferee can sue the transferor,

though he does not therebyautomatically become a HDC (Furbeev. Furbee, 1936)

b. right to have indorsement of transferor,after which, he becomes a holder orpossibly a HDCo For purposes of determining whether or

not the transferee becomes a HDC aftersecuring the transferor’s indorsement,note that Sec. 52 must be met at thetime of the negotiation, i.e., whenindorsement is actually made.

BPI vs CA (2007)

The transaction [in Sec. 49, NIL] is an equitableassignment and the transferee acquires theinstrument subject to defenses and equitiesavailable among prior parties. Thus, if thetransferor had legal title, the transferee acquiressuch title and, in addition, the right to have theindorsement of the transferor and also the right, asholder of the legal title, to maintain legal actionagainst the maker or acceptor or other party liableto the transferor. The underlying premise of this



provision, however, is that a valid transfer ofownership of the negotiable instrument in questionhas taken place.Transferees in this situation do not enjoy thepresumption of ownership in favor of holders sincethey are neither payees nor indorsees of suchinstruments… Thus, something more than merepossession by persons who are not payees orindorsers of the instrument is necessary toauthorize payment to them in the absence of anyother facts from which the authority to receivepayment may be inferred.

4. Cancellation of Indorsements - Holder maystrike out indorsements not necessary to histitle. The endorser whose endorsement wasstruck out, and all endorsers subsequent tohim, are relieved from liability on theinstrument (Sec. 48, NIL)

5. Indorsement by Agent - agent should makeit plain that he is signing in behalf of a principalotherwise he may be made personally liable(Sec 20, NIL)

o The Negotiable Instruments Law providesthat where any person is under obligationto indorse in a representative capacity, hemay indorse in such terms as to negativepersonal liability. An agent, when sosigning, should indicate that he is merelysigning in behalf of the principal and mustdisclose the name of his principal;otherwise he shall be held personally liable.(FRANCISCO v CA, 1990)

6. Presumption as to Indorsemento Time (Sec.45, NIL) - Every negotiation

deemed prima facie effected beforeinstrument was overdue, except whereindorsement bears date after maturity ofthe instrument.

o Place (Sec.46, NIL) - Every indorsement ispresumed prima facie made at place whereinstrument is dated

o Where instrument drawn or indorsed toperson as cashier (Sec.42, NIL) - deemedprima facie to be payable to the bank orcorporation of which he is such officer; maybe negotiated by either the indorsement(1) of the bank or corporation or (2) of theofficer.

7. Continuation of Negotiable Character - AnNI, although overdue, retains its negotiabilityunless it has been paid or restrictively indorsedto prevent further negotiation (Sec. 47, NIL)

8. Indorsement of bearer inst.o Where an instrument payable to bearer is

indorsed specially, it may nevertheless befurther negotiated by delivery

o Person indorsing specially liable as indorserto only such holders as make title throughhis indorsement

Chapter IV.

HOLDER IN DUE COURSE

1. Holder (Sec. 191)

Definition: Payee or indorsee of a bill ornote who is in possession of it, or thebearer thereof.

RIGHTS OF HOLDER (Sec. 51, NIL)1.sue thereon in his own name2.payment to him in due course discharges

instrument

2. Three Kinds of DUE COURSE Holding

a. HDC under Sec 52b. HDC under Sec 58 : A holder who derives

title to the instrument through a HDC hasall the rights of the latter even though hehimself satisfies none of the requirementsof due course holding (Campos & Campos)

c. HDC under Sec 59 (presumption): everyholder is deemed prima facie to be a holderin due course

3. Requisites to become a holder in duecourse (Sec.52)6

SALAS v. CA (1990)

The indorsee was a HDC, having taken theinstrument under the following conditions: (1) it iscomplete and regular upon its face; (2) it becamethe holder thereof before it was overdue; (3) ittook the same in good faith and for value; and (4)when it was negotiated to the indorsee, the latterhad no notice of any infirmity in the instrument ordefect in the title of the previous indorser.

HDC is one who has taken the instrument underthe following conditions:

3.1. That it is complete and regular upon itsface

1. COMPLETEo An instrument is complete if it contains

all the requisites for making it anegotiable one, even if it may haveblanks as to non-essentials.

o It is incomplete when it is wanting inany material particular or particularproper to be inserted in a NI withoutw/c the same will not be complete.

2. Material Particularso What are material particulars? A

change in the ff. is considered amaterial alteration (Sec. 125, NIL):i. The date;

6suggested mnemonics: GROIN: Good faith and

value, complete and Regular, not Overdue, no noticeof Infirmity at time of Negotiation; or GROCI: Goodfaith and value, Regular, not Overdue, Complete, noInfirmity,



ii. The sum payable, either forprincipal or interest;

iii. The time or place of payment;iv. The number or the relations of the

parties;v. The medium or currency in which

payment is to be made;vi. Or which adds a place of payment

where no place of payment isspecified,

3. Rights of HDC of instrument that has beenmaterially alteredo enforce payment thereof according to

its original tenor IF not a party to thealteration. (Sec. 124, NIL)

3.2. That he became the holder of it before itwas overdue and without notice that it hadbeen previously dishonored, if such was thefact

1. “OVERDUE”a. The ff. cannot be HDCs: (Sec. 53,

NIL)i. A holder who became such after

the date of maturity of theinstrument (instrument isoverdue);

ii. In case of demand instruments, aholder who negotiates it after anunreasonable length of time afterits issue

b. Instruments with fixed maturity butsubject to acceleration: ultimate date ofmaturity is the date of maturity for thepurpose of determining whether apurchaser is a HDC

c. Undated instruments: Prima faciepresumption that it was negotiatedbefore it was overdue (Sec 45)

d. NOTE: An overdue instrument is stillnegotiable, but it is subject to thedefense existing at the time of thetransfer.

2. DISHONORa. Non-acceptance

i. Occurs when drawee refuses toaccept the order of the drawer asstated in the bill

ii. Applicable only to bills of exchangeiii. May occur before the date of

maturity of the billb. Non-payment

i. Occurs when the party primarilyliable fails to pay at the date ofmaturity

ii. Date of Maturity1) “payable after sight”—date of

presentment2) Payable on the occurrence of a

specified event—date is fixedby happening of event

3. An instrument is not invalid for the reasononly that it is ANTE-DATED OR POST-DATED provided not done for an illegal orfraudulent purpose. The person to whom aninstrument so dated is delivered acquiresthe title thereto as of the date of delivery.(Sec.12, NIL)

3.3. That he took it in good faith AND forvalue:

1. HOLDER FOR VALUE - (a) Where valuehas at any time been given for theinstrument, the holder is deemed a HFV inrespect to all parties who become suchprior to that time (Sec.26, NIL) and (b)Where the holder has a lien on theinstrument, he is deemed a HFV to theextent of his lien (Sec.27, NIL).a. PRESUMPTION – Every NI is deemed

prima facie issued for valuableconsideration; and every person whosesignature appears thereon to havebecome a party thereto for value (Sec.24, NIL)i. In actions based upon a negotiable

instrument, it is unnecessary toaver or prove consideration, forconsideration is imported andpresumed from the fact that it is anegotiable instrument. Thepresumption exists whether thewords "value received" appear onthe instrument or not (Ong vPeople, 2000)

BAYANI VS. PEOPLE (2004)

Under Section 28 of the Negotiable InstrumentsLaw (NIL), absence or failure of consideration is amatter of defense only as against any person not aholder in due course.

Moreover, Section 24 of the NIL provides thepresumption of consideration. Such presumptioncannot be overcome by the petitioner’s bare denialof receipt of the [consideration].

1) Only evidence of the clearestand most convincing kind willsuffice for that purpose.(Travel-On Inc v CA, 1992)

b. VALUE - any consideration sufficient tosupport a simple contract. Anantecedent or pre-existing debtconstitutes value, whether theinstrument is payable on demand or ata future time. (Sec.25, NIL)

MERCHANTS’ NATIONAL BANK OF ST. PAUL v.STA. MARIA SUGAR CO. (1914)

The mere discounting of the note and placing theamount of said discount to the credit of the HFVwould not then have constituted a transfer forvalue. But if the sum had subsequently beenchecked out, then value would have passed. Thegeneral rule as to the application of payments,there being no special facts to interfere, is that thefirst payments apply to the oldest debts. The firstdebits are to be charged against the first credits. Itfollows therefore, upon the facts as found, that thebank was a bona fide HFV without notice, and, inaccordance with the stipulation, judgment shouldbe entered for the plaintiff upon the note.Judgment reversed.

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1 0 0 % U P L A W U P B A R O P S 2 0 0 8 6 of 351


Bank credit as value - When the holder of a checkdeposits it with his bank (assuming it is not thedrawee bank) and the bank credits it to hisaccount, is the bank at this stage a HFV?

o Majority View first money inis presumed to be the firstmoney paid out

o Minority View as long asthe balance in the depositor’saccount equals or exceeds theamount of the instrumentdeposited, the latter cannot beconsidered as withdrawn for thepurpose of treating the bank asa HFV.

o (So far, there has been nodecision by the SC on thisissue.)

2. GOOD FAITHa. Holder must have taken the instrument

in good faith and that at the time it wasnegotiated to him he had no notice ofany infirmity in the instrument ordefect in the title of the personnegotiating it.

b. NOT a Holder in GOOD FAITHi. Holder acted in bad faithii. Holder had NOTICE OF DEFECT

1) ACTUAL KNOWLEDGE SEC 56. WHAT

CONSTITUTES NOTICEOF DEFECT—Toconstitute notice of aninfirmity in theinstrument or defect inthe title of the personnegotiating the same,the person to whom itis negotiated must havehad actual knowledgeof the infirmity ordefect, or knowledge ofsuch facts that hisaction in taking theinstrument amountedto bad faith.

It is therefore sufficientthat the buyer of a notehad notice orknowledge that thenote was in some waytainted with fraud. It isnot necessary that heshould know theparticulars of the fraud.

2) SUSPICIOUSCIRCUMSTANCESa. BAD FAITH - does not

require actualknowledge of the exactfraud that waspracticed; knowledgethat there wassomething wrong aboutthe assignor’sacquisition of title issufficient.

b. The burden is upon thedefendant to show thatnotwithstanding theSUSPICIOUSCIRCUMSTANCES, itacquired the check inactual good faith. (De

Ocampo & Co. v.Gatchalian)

o Purchase of aninstrument at aDISCOUNT does not,of itself, constitute badfaith. However, if theinstrument is pruchasedat a heavy discount,this fact together withother facts, may betaken into account indeciding the issue ofpurchase in good faith.(Ham v. Meritt)

VICENTE R. DE OCAMPO & CO. v.GATCHALIAN, ET. AL. (1961)

In order to show that the defendant had knowledgeof such facts that his action in taking theinstrument amounted to bad faith, it is notnecessary to prove that the defendant knew theexact fraud that was practiced upon the plaintiff bythe defendant’s assignor, it being sufficient toshow that the defendant had notice that therewas something wrong about the assignor’sacquisition of title, although he did not havenotice of the particular wrong that was committed.…The fact is that it acquired possession of theinstrument under circumstances that should haveput it to inquiry as to the title of the holder whonegotiated the check to it. The burden was,therefore, placed upon it to show thatnotwithstanding the suspicious circumstances, itacquired the check in actual good faith.One line of cases had adopted the test of thereasonably prudent man and the other that ofactual good faith. It would seem that it was theintent of the Negotiable Instruments Act toharmonize this disagreement by adopting the lattertest. Negligence on the part of the plaintiff, orsuspicious circumstances sufficient to put a prudentman on inquiry, will not of themselves prevent arecovery, but are to be considered merely asevidence bearing on the question of bad faith.

STATE INVESTMENT HOUSE v. IAC (1989)

A check with 2 parallel lines in the upper left handcorner means that it could only be deposited andmay not be converted to cash. Consequently, suchcircumstance should put the payee on inquiry andupon him devolves the duty to ascertain theholders’ title to the check or the nature of hispossession. Failing in this respect, the payee isdeclared guilty of gross negligence amounting tolegal absence of good faith and as such theconsensus of authority is to the effect that theholder of the check is not a holder in good faith.

YANG v. CA (2003)

Where Mr. A obtained by fraud from Mr. B crossedchecks payable to Mr. C, which Mr. C innocentlyreceives from Mr. A for value, Mr. C is still a holderin good faith despite the fact that the checks werecrossed. The crossing of a check does not impairthe negotiability of an instrument nor necessarilypreclude its holder from being a holder in duecourse. The crossing of a check only means that itcould only be deposited and may not be converted



into cash. Thus, such should put the holder oninquiry and upon him devolves the duty toascertain the holder’s title to the check or nature ofhis possession.

The effects are that:1. The check may not be encashed but onlydeposited in the bank.2. The check may be negotiated only once – to onewho has an account with a bank.3. The act of crossing serves as a warning to theholder that the check was issued for a definitepurpose so that he must inquire if he has receivedthe check pursuant to that purpose. Otherwise, hewould not be a holder in due course.

Where the holder Mr. C, as in this case, did nothave knowledge of Mr. A’s fraudulent actions onMr. B, and the fact that he was the payee in saidcheck, he was legally warranted to deposit theinstrument in his account with the drawee bank.Mr. C was a holder in good faith.

iii. FINANCING COMPANY

In installment sales, the buyer usually issues anote payable to the seller to cover the purchaseprice.

Many times, pursuant to a previous arrangementwith the seller, a finance company pays the fullprice of the property sold and the note is indorsedto it by the seller, subrogating it to the right tocollect the price from the buyer.

RULE In such cases, the tendency of the courtsis to protect the buyer against the finance companyin the event that the goods sold turn out to bedefective. The finance company will be subject tothe defense of failure of consideration and cannotrecover the purchase price from the buyer.

CONSOLIDATED PLYWOOD v. IFC (1987)

A FINANCING COMPANY that is the indorsee of anote issued by a buyer payable to the seller ofgoods is NOT a holder in good faith as to thebuyer. In case the goods sold turn out to bedefective, it cannot recover the purchase price ofthe goods from the buyer. The TEST OF PROXIMITYto the transaction was applied in this case. Wherethe financing company was privy to the initialtransaction, it was bound with notice of thewarranties attaching to the transaction. ItACTIVELY PARTICIPATED in the transaction, thus itcannot be a holder in good faith. This is the“protective doctrine” – favoring the interests ofindividual dealers over those of financingcompanies.

NOTE: The instrument in this case was non-negotiable, so the “active participation” discussionwas merely obiter.

SALAS v. Court of Appeals (1990)

Salas defaulted in payments for motor vehicle, thepurchase of which was financed by Filinvest. Ondemand, his defense was that the purchase wasinvested with fraud on the seller’s part. Filinvest(the financing company) was held to be a holder ingood faith, despite privity to the allegedlyfraudulent sale. Salas’ defenses were good onlyagainst the seller-indorser, and where the note wasnegotiable and validly negotiated to Filinvest, thelatter was a holder in good faith, and may recoverfrom Salas.

Note: This is the “less protective” doctrine – not somuch favorable to dealers but as compared toConsolidated, the rule here was actually in the ratiodecidendi and not mere obiter.

3.4. That at time it was negotiated to him, hehad no notice of :

o any infirmity in instrumento any defect in title of person

negotiating;1. title DEFECTIVE when (Sec. 55, NIL):

a. instrument / signature obtained byfraud, duress, force or fear or otherunlawful means OR for an illegalconsideration; or

b. instrument is negotiated in breach offaith, or fraudulent circumstances

2. NOTICE of infirmity or defect –a. actual knowledge of the infirmity or

defect OR knowledge of such facts thathis action in taking the instrumentamounted to bad faith (Sec.56, NIL)

b. Notice to an AGENT is chargeableagainst the principal.

c. INSUFFICIENT NOTICEi. CONSTRUCTIVE NOTICE (ex.

notice of defenses disclosed bypublic records, doctrine of lispendens) is insufficient to charge apurchaser of a NI with notice.

Just as a purchaser of anegotiable instrument is notput on inquiry, neither is hecharged with notice ofdefenses or equitiesdisclosed by public records,nor is he affected by thedoctrine of lis pendens.However, notice to anagent is chargeable againstthe principal.

ii. Notice of an ACCOMODATIONPARTY is not notice of a defect.

Thus, an accomodationparty (one who has signedthe instrument as maker,drawer, acceptor orendorser, withoutreceiveing value therefor,and for the purpose oflending his name to someother person) is liable onthe instrument,notwithstanding the factthat the holder knew him tobe an accomodation party.



d. RIGHT of a transferee who receivesNOTICE of any infirmity or defectBEFORE he has PAID THE FULLamount for the instrument

i. He will be deemed a HDC only tothe extent of the amount thereforepaid by him (Sec.54, NIL)

4. Effect of Qualified, Conditional andRestrictive Indorsements

A. The status of a holder as a HDC is notaffected by his taking under a qualifiedindorsement.

B. A conditional indorsement does notdeprive the conditional indorsee orsubsequent holder of the rights of a HDC.If he fulfills all the requisites in Sec. 52then he is immune from all the personaldefense.

C. A restrictive indorsement which prohibitsfurther negotiation will not prevent theindorsee from being a HDC. BUT, if hefurther indorses the instrument, then thesubsequent indorsee will not be a duecourse holder.

5. Who is Deemed HDC (burden of proof)(Sec.59)

A. General Rule: Prima facie presumption infavor of holder

B. Exception: Burden is reversed (burden onholder to prove that he or some personunder whom he claims acquired title asHDC) when it is shown that the title of anyperson who has negotiated instrument wasdefective

C. Exception to exception: There will be noreversal if the party being made liablebecame bound prior to the acquisition ofsuch defective title (i.e., where defense isnot his own) – presumption in favor ofholder

6. Rights of Holder in Due Course

6.1. Under the NIL7

1. to sue on the instrument in his ownname (Sec. 51, NIL)

2. to receive payment on the instrument– discharges the instrument (Sec. 51,NIL)

3. holds instrument free of any defect oftitle of prior parties (Sec. 57, NIL)

4. free from defenses available to priorparties among themselves (Sec.57,NIL)

5. may enforce payment of instrumentfor full amount, against all parties liable(Sec.57, NIL)

6.2. JUR: BPI v. ALFRED BERWIN & CO.Only a HDC may enforce payment on thePN. In CAB, it is not clear whether A (the

7Suggested Mnemonics: REFS: Receive and

Enforce payment, Free from any defect of title anddefenses, Sue

payee) is still the HDC since D (the maker)believed that A may have negotiated it. Thus,to compel D to pay would expose him to pay asecond time to the HDC (in case A was nolonger one). In short, the drawee may becompelled to pay only to a HOLDER of theinstrument.

6.3. DISADVANTAGE of being a NON HDC:

o The Negotiable Instruments Law doesnot provide that a holder not in duecourse can not recover on theinstrument. The disadvantage of … notbeing a holder in due course is that thenegotiable instrument is subject todefenses as if it were non-negotiable.One such defense is absence or failureof consideration. (Atrium Mgt v deLeon, 2001)

7. Rights of Purchaser from Holder in DueCourse (Sec.58)

7.1. General Rule: In the hands of any holderother than a HDC, NI is subject to samedefenses as if it were non-negotiable.

7.2. Exception: A holder who derives titlethrough a HDC and who is NOT himself APARTY TO ANY FRAUD or illegality has all rightsof such former holder in respect to all partiesprior to the latter EVEN though he himself doesnot satisfy Sec.52

8. Presumption in Favor of Due CourseHolding

A. Every holder is deemed prima facie to be aholder in due course;1. BURDEN SHIFTS when it is shown that

the title of any person who hasnegotiated the instrument wasdefective. Holder MUST PROVE that heor some person under whom he claimsacquired the title as a holder in duecourse.

2. But the last mentioned rule does notapply in favor of a party who becamebound on the instrument prior to theacquisition of such defective title.(Sec.59., NIL)

B. However, this presumption arises only infavor of a person who is a holder as definedin Section 191 of the NegotiableInstruments Law, meaning a “payee orindorsee of a bill or note, who is inpossession of it, or the bearer thereof.”(Yang v CA, 2003)



Chapter V.

DEFENSES & EQUITIES

1. Defenses in General

1.1. REAL defense – attaches to instrumenton the principle that there was no contract atall; available against ALL holders includingholders in due course. They are those whichattach to the instrument itself and generally,disclose an absence of one of the essentialelements of a contract.

1.2. PERSONAL defense – grows out of theagreement or conduct of a particular person inregard to the instrument which renders itinequitable FOR HIM, though holding the legaltitle, to enforce it against the party sought tobe made liable; not available against aHDC.can be raised only against holders not ondue course. Here, the true contract appears ,but for some reason , the defendant is excusedfrom the obligation to perform.

1.3. Equities or Claims of Ownership are of2 Kinds

1. Legal – one who has legal title to theinstrument may recover possessionthereof even from holder in due course

2. Equitable – may only recover from aholder not in due course

2. Real Defenses

2.1. Incapacity: REAL defense but availableonly to the incapacitated party (ex. minor orcorporation); the indorsement or assignmentof the instrument by a corp. or by an infantpasses the property therein, notwithstandingthat from want of capacity, the corp. or infantmay incur no liability thereon. (Sec.22, NIL)

2.2. Incomplete, Undelivered Instrument

1. Instrument will not, if completed andnegotiated without authority, be a validcontract in the hands of ANY holder, asagainst any person whose signaturewas placed thereon before delivery.(Sec. 15, NIL)

2. Who may be estopped from raising thereal defense under Sec 15? A draweebank whose negligent custody of thechecks, after partial execution,contributed to its escape

3. Personal Defenses

3.1. Complete, Undelivered Instrument

a. CONCLUSIVE presumption of a validdelivery – where the instrument is in thehands of a HDC

b. PRIMA FACIE presumption of a validdelivery – where the instrument is nolonger in the possession of a party whosesig appears thereon (Sec. 16, NIL)

3.2. Incomplete, Delivered (sec.14)

1. This is a personal defense only becauseprovision states that if any instrumentso completed is negotiated to a holderin due course, it is valid and effectualfor all purposes

2. 2 Kinds of Writings:i. Where instrument is wanting in

any material particular: personin possession has prima facieauthority to complete it by filing upblanks therein

ii. Signature on blank paperdelivered by person making thesignature IN ORDER that the papermay be CONVERTED into a NI operates as prima facie authority tofill up as such for any amount

3. The authority to fill up is limited by thefollowing:a. When completed, it may be

enforced upon the parties theretoonly if it was filled strictly inaccordance with the authority given

b. The filling up must be within areasonable time

NOTE: If the signature on a paper isgiven only for autograph purposesand the same is converted into a NI,this will amount to forgery,constituting thus a valid defense evenagainst a HDC

4. This provision contemplates deliveredinstruments, so the person in possesioncannot be a thief or a finder but aperson in lawful possession- one towhom the instrument has beendelivered.

5. In order that any such instrument,when completed, may be enforcedagainst any person who became a partythereto prior to its completion:a. must be filled up strictly in

accordance w/ AUTHORITY givenb. within a REASONABLE TIME – in

determining what is reasonabletime, regard is to be had to the (1)nature of the instrument, (2) usageof trade or business (if any) withrespect to such instruments, and 3)the facts of the particular case

6. BUT if negotiated to HDC, may enforceit as if it had been filled up properly

7. What details may be filled up?a. Amount, as to a signed blank paperb. Date (Sec 13 “… The insertion of a

wrong date does not void theinstrument in the hands of asubsequent holder in duecourse…”)

c. Place of paymentd. Name of payee

3.3. Lack of Consideration(Sec. 28)

1. ABSENCE or failure of consideration is amatter of defense as against any personnot a HDC.2. PARTIAL FAILURE of consideration is adefense pro tanto whether the failure is anascertained and liquidated amount orotherwise .



3.4. Illegality

1. In general, a PERSONAL defense even ifCC1409 provides that a contract with anillegal cause is void.

2. REAL when the law expressly providesfor illegality as a real defense (Statutorydeclaration of illegality

RODRIGUEZ v MARTINEZ (1905)

Maker cannot be relieved from the obligation ofpaying the holder the amount of the note allegedto have been executed for an unlawfulconsideration. (Illegality is personal, so defenseonly against a holder not in due course)

The holder paid the value of the note to itsformer holder. He did so without being aware ofthe fact that the note had an unlawful origin. Heaccepted note in good faith, believing the notewas valid and absolutely good. The maker evenassured the holder before the purchase that thenote was good and that he would pay it at adiscount .

3.5. Duress

1. In general, PERSONAL defense.

2. REAL if duress so serious as to giverise to a real defense for lack ofcontractual intent

3. CAMPOS: There may be cases wherethe duress employed is so serious thatit will give rise to a real defensebecause of the lack of contractualintent . Although the signer may knowwhat he is signing, there may bewanting the intent or willingness to bebound. Then it becomes a real defense.

4. Sometimes Real, Sometimes Personal

4.1. Forgery (Sec. 23): made withoutauthority of person whose signature it purportsto be

1. In general, a REAL defense: …Effect

a. signature is wholly inoperativeb. no right to retain instrument, or

give discharge, or enforce paymentagainst any party thereto, can beacquired through or under suchsignature (unless forged signatureunnecessary to holder’s title)

c. No subsequent party can acquirethe right against any party thereto(prior to the forgery) to:i. Retain the instrumentii. Give a discharge there foriii. Enforce payment thereof

2. PERSONAL if the party against whom itis sought to enforce such right is

PRECLUDED from setting upforgery/want of authority;

a. Who are PRECLUDED?i. parties who make certain

warranties, like a generalindorser or acceptor afterforgery (Sec. 62, NIL)

ii. estopped / negligent partiesiii. parties who ratify (BUT there

are conflicting views whether“precluded” includesratification)

b. One view holds that a forgedsignature cannot be ratifiedbecause ratification involves therelation of agency and a forgerdoes not assume to act for another.

3. ACCEPTANCE AND PAYMENT of a forgedinstrumentWhen there is acceptance and paymentof a forged instrument, the rights andliabilities of the parties depend onwhether the forgery pertains to thedrawer/maker’s signature or merelyof an indorsement.a. Drawer/Maker’s signature

i. PRICE v NEAL, The drawee whohad paid an accepted bill aswell as a non-accepted bill,each of which was forged, couldNOT recover the money paidout on the bill. The neglect wason the part of the drawee.

PNB v QUIMPO (1988)

A bank is bound to know the signatures of itsdepositors. If bank pays a forged check it mustbe considered as making the payment out of itsown funds and cannot charge the account of thedepositor whose signature was forged.

SAMSUNG CONSTRUCTION CO., INC. VS. FAREAST BANK AND TRUST CO. AND CA (2004)

Consequently, if a bank pays a forged check, itmust be considered as paying out of its funds andcannot charge the amount so paid to the accountof the depositor. A bank is liable, irrespective ofits good faith, in paying a forged check.

ii. Extensions Of The Price v NealDoctrine: The bar to recovery(Price v Neal doctrine) isextended to overdrafts and stoppayment orders

1) Overdraft occurs when acheck is issued for anamount more than what thedrawer has in deposit withthe drawee bank. RULE:The drawee who pays theholder of the bill cannotrecover from the holderwhat he paid under mistake

2) Stop Payment Order isone issued by the drawer of



a check countermanding hisfirst order to the draweebank to pay the check.RULE: The drawee bank isbound to follow the order,provided it is received priorto its certification orpayment of the check

3) SOME EXCEPTIONS:o If the payment to holder is

a legitimate debt of thedrawer which the holder indue course could haverecovered from the draweranyway.

o If the stop order comesafter the bank has certifiedor accepted the check, thebank is under the legal dutyto pay the holder and willnot be liable to the drawerfor doing so.

iii. Effect Of Negligence OfDepositor - If proximate causeof loss, the bank (drawee) isnot liable

1) It is the duty of thedepositor/drawer tocarefully examine bank’sstatements, cancelledchecks, his check stubs,and other pertinent recordswithin a reasonable timeand to report any errorswithout unreasonabledelay.

2) If a drawer/depositor’snegligence and delayshould cause a bank tohonor a forged check,drawer cannot latercomplain should bankrefuse to recredit hisaccount.

ILUSORIO vs CA (2002)

True, it is a rule that when a signature is forgedor made without the authority of the personwhose signature it purports to be, the check iswholly inoperative.However, the rule does provide for an exception,namely: “unless the party against whom it issought to enforce such right is precludedfrom setting up the forgery or want ofauthority.” In the instant case, it is theexception that applies. Petitioner is precludedfrom setting up the forgery, assuming there isforgery, due to his own negligence in entrustingto his secretary his credit cards and checkbookincluding the verification of his statements ofaccount.

SAMSUNG CONSTRUCTION CO., INC. VS. FAREAST BANK AND TRUST CO. AND CA (2004)

The general rule remains that the drawee whohas paid upon the forged signature bears theloss.The exception to this rule arises only whennegligence can be traced on the part of the

drawer whose signature was forged, and theneed arises to weigh the comparative negligencebetween the drawer and the drawee to determinewho should bear the burden of loss.Still, even if the bank performed with utmostdiligence, the drawer whose signature was forgedmay still recover from the bank as long as he orshe is not precluded from setting up the defenseof forgery. After all, Section 23 of the NegotiableInstruments Law plainly states that no right toenforce the payment of a check can arise out of aforged signature. Since the drawer, SamsungConstruction, is not precluded by negligence fromsetting up the forgery, the general rule shouldapply.

b. Indorsement:i. When it is the signature of

the indorser that is forged,the drawee and drawer CANrecover vs holder1) The drawee can recover the

amount paid by him incases where only anindorsement has beenforged . This is becausedrawee makes no warrantyas to the genuineness ofany indorsement.

2) Generally, the drawee mayonly recover from theholder. Should he fail to doso(for instance due toinsolvency) he cannotrecoup his loss by chargingit to the drawer’s account

3) Although adepositor/drawer owes aduty to his drawee bank toexamine his cancelledchecks, he has no similarduty as to forgedindorsements.

4) The drawer, as soon as hecomes to know of the aforged indorsement shouldpromptly notify the draweebank

REPUBLIC v EBRADA

Drawee can recover. It is not supposed to be theduty of the drawee to ascertain whether thesignatures of the payee or indorsers are genuineor not.

ii. When drawee may recoverfrom DRAWER

1) Where the instrument isoriginally a bearerinstrument, because theindorsement can bedisregarded as beingunnecessary to the holder’stitle

2) Indorsement forged by anemployee or agent of thedrawer

3) If due to the drawer’snegligence/delay, theforgery is not discovered



until it is too late for thebank to recover from theholder or the forger

GEMPESAW v CA, PBC

While there is no duty resting on the drawer to lookfor forged indorsements on his cancelled checks, adepositor is under a duty to set up anaccounting system and business procedure asare reasonably calculated to prevent or renderthe forgery of indorsements difficult,particularly by the depositor’s own employees.As a rule the drawee bank who has paid the checkwith forged indorsement, cannot charge thedrawer’s account for the amount of the said check.An exception to this rule is where the drawer isguilty of such negligence which causes the bank tohonor the check.

iii. When drawee may notrecover from holder

1) Where the instrument isoriginally a bearerinstrument , because theindorsement can bedisregarded as beingunnecessary to the holder’stitle

2) If drawee fails to actpromptly , if he delays ininforming the holder whomhe paid

iv. Between Drawee Bank andCollecting Bank1) Collecting bank only liable

for forged indorsementsand not forgeries of thedrawer or maker’ssignature. (PNB v CA,1968)

2) The collecting bank or lastindorser generally suffersthe loss because it has theduty to ascertain thegenuineness of all priorindorsements consideringthat the act of presentingthe check for payment tothe drawee is an assertionthat the party making thepresentment had done itsduty to ascertain thegenuineness of theindorsements. (BPI v CA,1992)

3) In presenting the checks forclearing the collectingagent, made an expressguarantee on the validity of“all the priorendorsements”. ( BDO vEquitable bank)

4) The drawee bank is notsimilarly situated as thecollecting bank because theformer makes no warrantyas to the genuineness ofany indorsement. Thedrawee bank’s duty is but

to verify the genuineness ofthe drawer’s signature andnot of the indorsementbecause the drawer is itsclient.

5) Where the negligence ofthe drawee bank is theproximate cause of thecollecting bank’s paymentof a check with a forgedindorsement, the draweebank may be held liable tothe collecting bank .

6) When both are guilty ofnegligence, the degree ofnegligence of each will beweighed in considering theamount of loss which eachshould bear. (refer to BPI vCA, 1992)

GREAT EASTERN LIFE v HONGKONG &SHANGHAI BANK (1922)

“Where a check is drawn payable to the order ofone person and is presented to a bank by anotherand purports upon its face to have been dulyindorsed by the payee of the check , it is the dutyof the bank to know that the check was dulyindorsed by the original payee and where the bankpays the amount of the check to a 3rd person , whohas forged the signature of the payee , the lossfalls upon the bank who cashed the check , and itsremedy is against the person to whom it paid themoney.”

BPI v CA (1992)

Section 23 of the NIL has 2 parts. The first partstates the general rule that a forged signature iswholly inoperative and payment made through orunder such signature is ineffectual. The second partadmits of exception. In this jurisdiction, thenegligence of the party invoking the forgery is anexception to the general rule.Both drawee and collecting bank werenegligent in the selection and supervision of theiremployees resulting in the encashment of thechecks by the impostor. Both banks were not ableto overcome the presumption of negligence in theselection and supervision of their employeesConsidering the comparative negligence of theparties, the demands of substantive justice aresatisfied by allocating the loss and the costs on a60-40 ratio.

ASSOCIATED BANK v CA (1996)

By reason of the statutory warranty of a generalindorser in Section 66 of the NegotiableInstruments Law, a collecting bank which indorsesa check bearing a forged indorsement and presentsit to the drawee bank guarantees all priorindorsements, including the forged indorsement. Itwarrants that the instrument is genuine, and that itis valid and subsisting at the time of hisindorsement. Because the indorsement is a forgery,the collecting bank commits a breach of thiswarranty and will be accountable to the draweebank. This liability scheme operates without regardto fault on the part of the collecting/presentingbank. Even if the latter bank was not negligent, it



would still be liable to the drawee bank because ofits indorsement.

PCIB v. CA (2001)

… A bank which cashes a check drawn uponanother bank, without requiring proof as to theidentity of persons presenting it, or makinginquiries with regard to them, cannot hold theproceeds against the drawee when the proceeds ofthe checks were afterwards diverted to the handsof a third party. In such cases the drawee bankhas a right to believe that the cashing bank (or thecollecting bank) had, by the usual properinvestigation, satisfied itself of the authenticity ofthe negotiation of the checks.Thus, one who encashed a check which had beenforged or diverted and in turn received paymentthereon from the drawee, is guilty of negligencewhich proximately contributed to the success of thefraud practiced on the drawee bank.

4.2. Material Alteration (Sec.124)

1. As a DEFENSE:a. PERSONAL defense when used to

deny liability according to the tenorof the instrument

b. REAL defense when relied on todeny liability according to thealtered terms.

2. What constitutes material alteration?a. Statutory: Review Sec.125, NIL

i. change dateii. sum payable, either for

principal or interestiii. time or place of paymentiv. number/relations of partiesv. medium/currency of payment,vi. adds place of payment where

none specified,vii. other change/addition altering

effect ofviii. instrument in any respect

b. Jurispridencei. An alteration is said to be

material if it changes the effectof the instrument. It meansthat an unauthorized change inan instrument that purports tomodify in any respect theobligation of a party or anunauthorized addition of wordsor numbers or other change toan incomplete instrumentrelating to the obligation of aparty. (PNB v CA, 1996)

ii. A material alteration is onewhich changes the items whichare required to be stated underSection 1 of the NegotiableInstruments Law. (Metrobank vCabilzo, 2006)

3. IMMATERIAL ALTERATIONa. Campos: Any other alteration

would be non-material and wouldnot affect the liability of any priorparty . Note that #7 is a catch-all

provision such that sec 125 maystill have broad applicability.

b. Alterations of the serial numbers donot constitute material alterationson the checks... [It] is not anessential requisite for negotiabilityunder Section 1 of the NegotiableInstruments Law. Theaforementioned alteration did notchange the relations between theparties. The name of the drawerand the drawee were not altered.The intended payee was the same.The sum of money due to thepayee remained the same. (PNB vCA, 1996; Int’l Corporate Bank vCA, 2006)

c. EFFECT: an innocent alteration(generally, changes on items otherthan those required to be statedunder Sec. 1, N. I. L.) andspoliation (alterations done by astranger) will not avoid theinstrument, but the holder mayenforce it only according to itsoriginal tenor. (PNB v CA, citing J.Vitug)

4. EFFECT OF MATERIAL ALTERATION

a. General Rule: Where NI materiallyaltered w/o the assent of all partiesliable thereon it is AVOIDED,except as against:i. party who has himself made,

authorized or assented toalteration

ii. subsequent indorser becauseby indorsement he warrantsthat the instrument is in allrespects what it purports to beand that it was valid andsubsisting at the time of hisindorsement (Secs. 65 and66, NIL)

b. As to a HOLDER in DUE COURSEi. When an instrument that has

been materially altered is in thehands of a HDC not a party tothe alteration, HDC mayenforce payment thereofaccording to orig. tenor

ii. Alteration must NOT beapparent on the face of theinstrument for the holder thenwould not be a holder in duecourse

iii. Where the interest rate isaltered , the holder in duecourse can recover the principalsum with the original rate ofinterest

c. When alteration is of the amount orthe interest rate is altered, theholder can recover the ORIGINALAMOUNT/interest rate.

5. DRAWER’S NEGLIGENCEa. The general rule is that the drawee

cannot charge against the drawer’saccount the amount of an alteredcheck.

b. BUT, the drawer’s negligence,before or after the alteration, may



estop him from setting upalteration as a defense.

c. However, the drawer is not boundto so prepare the check thatnobody else can successfullytamper with it (ex. a drawer cannotbe expected to foresee that hisclerk will use acid to alter hischecks, Critten v. Chemical NatlBank)

d. Where the negligence of the drawerconsists in failing to discoveralterations previously made whichhe could have discovered by acomparison of the cancelled checksand check stubs or by diligentobservation of his records andcould thus have prevented thedrawee bank from subsequentlycashing other altered checks , thedrawee can charge the subsequentcheck against the negligentdrawer’s account.

6. EFFECT OF DRAWEE’S ACCEPTANCE OFALTERED CHECKSa. Where the interest rate is altered,

the HDC can recover the principalsum with the original rate ofinterest.i. EXCEPT: A subsequent

indorser, because by theindorsement he warrants thatthe instrument is in allrespects what it purports tobe and that it was valid andsubsisting at the time of hisindorsement (Sec 65 and 66)

b. RECOVERY after acceptance orpayment by the drawee banki. FROM HOLDER

1) Prevailing view - Yes, bec.of (1) payment undermistake, (2) Sec. 124 and(3) Sec.62 in relation toSec. 132

2) Minority view – No, bec. of(1) estoppel, (2) stability oftransactions and (3) bank isin a better position toshoulder the loss.

3) SC:a. adopted the

minority view buton a differentbasis—the CentralBank Circularregulating clearingof checks andlimiting the periodwithin which adrawee bank mayreturn a spuriouscheck

b. but if holder isguilty of negligencewhich proximatelycontributed to theerroneous paymentby drawee, holderliable (PCIB v CA,2001)

MONTINOLA v PNB (1951)

The insertion of the words “Agent PhilippineNational Bank” converted the bank from a meredrawee to a drawer and therefore changes itsliability, constitutes material alteration of theinstrument without consent of the parties liablethereon and so discharges the instrument.Drawee bank is not liable.

HONGKONG & SHANGHAI BANK v PEOPLESBANK (1970)8

The failure of the drawee bank to call theattention of the collecting bank as to suchalteration until after the lapse of 27 days wouldnegate whatever right it might have had. Theremedy of the drawee bank is against the partyresponsible for the forgery or alteration.

REPUBLIC BANK v CA (1991)

The collecting bank is protected by the24-hourclearing house rule from the liability to refund theamount paid by the drawee bank. [Note: Amuch recent Circular changed the point ofreckoning for the return of the altered check fromwithin 24 hours from the clearing to within 24hours from the discovery of the alteration]

ASSOCIATED BANK v CA (1996)The rule mandates that the checks be returnedwithin twenty-four hours after discovery of theforgery but in no event beyond the period fixedby law for filing a legal action. The rationale ofthe rule is to give the collecting bank (whichindorsed the check) adequate opportunity toproceed against the forger. If prompt notice isnot given, the collecting bankmaybe prejudicedand lose the opportunity to go after its depositor.

ii. FROM DRAWER: drawee has noright to seek reimbursementfrom drawer for its erroneouspayment

METROBANK v CABILZO (2006)

In addition, the bank on which the check is drawn,known as the drawee bank, is under strict liabilityto pay to the order of the payee in accordance withthe drawer’s instructions as reflected on the faceand by the terms of the check. Payment madeunder materially altered instrument is not paymentdone in accordance with the instruction of thedrawer.When the drawee bank pays a materially alteredcheck, it violates the terms of the check, as well asits duty to charge its client’s account only for bonafide disbursements he had made. Since thedrawee bank, in the instant case, did not payaccording to the original tenor of the instrument, asdirected by the drawer, then it has no right to claimreimbursement from the drawer, much less, theright to deduct the erroneous payment it madefrom the drawer’s account which it was expected totreat with utmost fidelity.

BPI v BUENAVENTURA (2005)

8 Affirmed the minority view that drawee cannot recover



…It [the bank] should be able to detect alterations,erasures, superimpositions or intercalationsthereon, for these instruments are prepared,printed and issued by itself, it has control of thedrawer's account, and it is supposed to be familiarwith the drawer's signature. It should possessappropriate detecting devices for uncoveringforgeries and/or alterations on theseinstruments…There is nothing inequitable in such a rule for if inthe regular course of business the check comes tothe drawee bank which, having the opportunity toascertain its character, pronounces it to be validand pays it, as in this case, it is not only a questionof payment under mistake, but payment in neglectof duty which the commercial law places upon it,and the result of its negligence must rest upon it.

c. REMEDY: Unless a forgery oralteration is attributable to the faultor negligence of the drawerhimself, the remedy of the draweebank that negligently clears aforged and/or altered check forpayment is against the partyresponsible for the forgery oralteration, otherwise, it bears theloss. (BPI v Buenaventura, 2005)

4.3. Fraud

1. REAL DEFENSEa. fraud in execution / fraud in

factum: did not know that paperwas a NI when it was signed

b. not liable to ANY holder2. PERSONAL DEFENSE

a. Fraud in inducement: knows it is NIbut deceived as to value/termsi. Available as a defense against

non-HDCb. Fraud in factum accompanied by

NEGLIGENCE of maker or signeri. Where the signor does not

know the nature of theinstrument he signs, but where,by the exercise of ordinarycare, he could have discoveredit.

ii. Three factors are typically usedin determining the existence ofnegligence:1) legal character of the

instrument which the signerthinks he is signing

2) the physical condition ofthe signer and his ability toread

3) whether the signer had theopportunity at the time ofsigning, to ascertain thelegal nature of the paper heis executing

Chapter VI.

LIABILITY OF PARTIES

1. In General

1.1. Parties primarily liable:

1. person who by the terms of the instrumentis absolutely required to pay the same.a. Maker of promissory noteb. Acceptor of bill of exchange

2. unconditionally liable; duty bound to paythe holder at date of maturity, WON holderdemands payment from him, and he is notrelieved from liability even if the instrumentshould become overdue due to failure ofholder to make such demand.

1.2. Parties secondarily liable:

1. SECONDARY PARTIES:

a. Indorsers, both note and billb. Drawer of bill

2. Conditionally liable; not bound to pay unlessthe following has been fulfilled

a. Due presentment or demand fromprimary party for payment or acceptance;

b. Dishonor by such party; and

c. Taking of proceedings required by lawafter dishonor.

2. Primary Parties

2.1. PAYMENT: Presentment and Tender1. Presentment for payment not necessary

to charge primary party2. if the instrument is, by its terms, payable

at a special place, and he is able and willingto pay it there at maturity, such ability andwillingness are equivalent to a tender ofpayment upon his part. (Sec. 70, NIL)

2.2. Liability of MAKER1. Promises to pay it according to its tenor

2. Admits existence of payee and his thencapacity to indorse.

a. Therefore, PRECLUDED from setting upthe following defenses:i. the payee is a fictitious personii. the payee was insane, a minor, or a

corporation acting ultra vires

2.3. DRAWEE and ACCEPTOR1. Drawee

a. A person on whom a bill ofexchange or check is drawn andwho is ordered to pay itb. Liability of DRAWEE to:

2. Holder1) Not liable on the instrument

until he accepts it and even aholder in due course cannot suehim on the instrument beforehis acceptance

2) A bill/check of itself does notoperate as an assignment ofthe funds in the hands of thedrawee/bank (Sec 189, NIL),and the drawee/bank is NOT



LIABLE on the bill unless andUNTIL he/it ACCEPTS (orcertifies) the same. (Sec. 127,NIL)

3. Drawer1) Payment despite Stop PaymentOrder

a) Before payment orcertification by the bank,the drawer maycountermand the order,and payment thereafter tothe payee by the bank iswrongful.

b) Since a check is not anassignment of the drawer’sfund, the bank is liable forpaying it in disregard of thecountermand.

c) Moreover, drawee can nolonger recover what itvoluntarily paid to theholder of the uncertifiedand unaccepted instrument.

2) Refusal to Accepta) Under some circumstances,the drawee who refuses toaccept may be made liable forbreach of contract or fordamages based on a tort eitherto the drawer (refer to Aranetav. Bank of America) or to theholder (refer to HSBC v.Catalan)

ARANETA V. BANK OF AMERICA(1971)

This was an action by a depositor against a bankfor damages resulting from the wrongful dishonorof the depositor's checks. HELD: Araneta's claim fortemperate damages is legally justified because ofthe adverse reflection on the financial credit of abusinessman, a prized and valuable asset, w/cconstitutes material loss.

HSBC VS. CATALAN (2004)

HSBC is not being sued on the value of the checkitself but for how it acted in relation to Catalan’sclaim for payment despite the repeated directivesof the drawer Thomson to recognize the check thelatter issued.

Her allegations in the complaint that the grossinaction of HSBC on Thomson’s instructions, as wellas its evident failure to inform Catalan of thereason for its continued inaction and non-paymentof the checks, smack of insouciance on its part, aresufficient statements of clear abuse of right forwhich it may be held liable under Article 19 of theCivil Code for any damages she incurred resultingtherefrom.

HSBANK’s actions, or lack thereof, preventedCatalan from seeking further redress with Thomsonfor the recovery of her claim while the latter wasalive.

3. Acceptor: Liability

a. (Sec.62, NIL) Drawee is not liableunless he accepts the bill and in doingso, he engages to pay the bill accordingto the tenor of his acceptance, andadmits the following:i. existence of drawerii. genuineness of his signatureiii. his capacity and authority to draw

the instrumentiv. existence of payee and his then

capacity to endorseb. Meaning of "according to the tenor

of his acceptance"i. Majority and prevailing view:

Where alteration consists in raisingthe amount payable, acceptor liableto HDC only as to its originalamount; if the alteration of payee'sname, paying banks cannot chargedrawer's account with the amountof the check because its duty is topay only “according to the order ofthe drawer.”

ii. Common law rule: Acceptor ofaltered check not liable to innocentholder except for the originalamount

2.4. Acceptance

1. IN GENERAL:a. Definition:

i. "Acceptance" means an acceptancecompleted by delivery or notification(Sec. 19, NIL)ii. The signification by the drawee of hisassent to the order of the drawer (Sec132, NIL)

b. REQUISITES for a valid acceptance(Sec 132, NIL)

i. It must be in writing and signed bythe drawee;

1) Thus there is no valid orimplied acceptance except asprovided by Sec. 137 relatingto constructive acceptance

ii. It must not express that the draweewill perform his promise by any othermeans than the payment of money.iii. does not change the implied

promise of acceptor to pay only inmoney

c. MANNER of acceptancei. Campos: Usually made by writing

the word “accepted” and signingimmediately below1) BUT, drawee’s signature alone

is sufficient (Campos citingLawless v. Temple)

ii. Sec 133, NIL: The holder of a billpresenting the same for acceptancemay require that the acceptance bewritten on the bill and if suchrequest is denied, may treat the billas dishonored1) Effect: holder may go against

the party’s secondarily liable—the drawer and the indorsers

iii. Acceptance of an INCOMPLETE bill(Sec 138, NIL)1) A bill may be accepted:

a) before it has been signedby the drawer, or



b) while otherwise incomplete,or

c) when it is overdue, ord) after it has been dishonored

by a previous refusal toaccept, or by non payment

2) But when a bill payable aftersight is dishonored by non-acceptance and draweesubsequently accepts it, theholder, in the absence of diffagreement, is entitled to havebill accepted as of date of the1st presentment.a) Sec. 138, NIL allows

acceptance to be madewhile the bill isincomplete.

b) The bill may be acceptedeven after it is overdue ordishonored, since aninstrument DOES NOTLOSE ITS NEGOTIABILITYby the mere fact that itsmaturity date has passed orthe drawee’s refusal toaccept or pay it.

d. PERIOD within which to accepti. The drawee is allowed 24 hours

after presentment to decide WONhe will accept the bill; theacceptance, if given, dates as ofthe day of presentation. (Sec. 136,NIL)

ii. Effect of non-acceptance within theprescribed period1) Where bill is duly presented

and is not accepted withinprescribed time, the personpresenting it must treat the billas dishonored by non-acceptance or he loses right ofrecourse against the drawerand indorsers. (Sec. 150, NIL)

2. CONSTRUCTIVE ACCEPTANCE: occurs inthe following circumstances

a. SEC 137, NIL: Where the drawee

i. destroys the bill, or

ii. refuses within 24hrs or such otherperiod as the holder may allow, toreturn the bill accepted or non-accepted to the holder

b. Under the clearing house rules, thedrawee bank’s failure to return within theprescribed time will be deemed payment oracceptance of the check.

c. If there is not demand for the return ofthe bill and the drawee keeps it until afterthe expiration of said period withoutexpressly accepting or refusing it; twoviews:

i. Constitutes constructive notice

ii. Constitutes dishonor becauseSec.137, NIL uses the word "refuses"

d. Acceptance, if given, will retroact to dateof presentation.

SUMCAD v. PROVINCE OF SAMAR (1956)

There was implied acceptance in view of thecircumstances of the case (furnishing ofphotostatic copies, presentment forcertification) by voluntary assuming theobligation of holding so much deposit as wouldbe sufficient to cover the amount of the check.

3. ACCEPTANCE ON A SEPARATEINSTRUMENT

e. Extrinsic acceptance - acceptance iswritten on a paper other than the billitself; doesn’t bind the acceptor exceptin favor of a person to whom it isshown and who, on the faith thereof,receives the bill for value. (Sec. 134,NIL); acceptance of an existing bill

f. Virtual acceptance - unconditionalpromise in writing to accept a billbefore it is drawn; deemed an actualacceptance in favor of every personwho, upon the faith thereof, receivesthe bill for value. (Sec. 135, NIL);acceptance of future bill

g. In both cases, the acceptance mustclearly and unequivocally identifythe bill to which the acceptance refers.

4. KINDS OF ACCEPTANCE: Anacceptance is either (1) general or (2)qualified.a. GENERAL - assents without

qualification to the order of the drawer.(Sec.139, NIL); Includes acceptanceto pay at a particular place; unlessexpressly states that bill is to be paidthere only and not elsewhere. (Sec.140, NIL)

b. QUALIFIED - in express terms variesthe effect of the bill as drawn. (Sec.139, NIL)i. Conditional; payment by the

acceptor dependent on thefulfillment of a condition thereinstated;

ii. Partial; to pay part only of theamount for which the bill is drawn;

iii. Local; to pay only at a particularplace;

iv. Qualified as to time;v. The acceptance of some, one or

more of the drawees but not of all.(Sec. 141, NIL)1) The holder may refuse to take

a qualified acceptance; maytreat the bill as dishonored bynon-acceptance.

2) Where a qualified acceptance istaken, the drawer and indorsersare discharged from liabilityon the bill unless they haveauthorized the holder to takea qualified acceptance, orsubsequently assent thereto.

3) When the drawer or an indorserreceives notice of a qualifiedacceptance, he must, within areasonable time, express hisdissent to the holder or he willbe deemed to have assentedthereto. (Sec. 142, NIL)



c. TRADE - a draft or bill of exchangewith a definite maturity, drawn by aseller on a buyer for the purchase priceof goods, bearing across its face theacceptance of the buyer; always statesupon its face the transaction fromwhich it arose.

d. BANKER'S acceptance - a negotiabletime draft or bill of exchange drawn onand accepted by a commercial bank.

2.5. CHECKS : acceptance and certification1. Definition: A check is an instrument in theform and nature of a BE, but an unlike anordinary bill, always payable on demand andalways drawn on a bank.2. Kinds:

a. Cashier's or manager's - drawn by abank on itself and its issuance has theeffect of acceptance; since the drawer anddrawee are the same, the holder may treatit is either a BE or PN.b. Memorandum check - where the word"memorandum" or "memo" is writtenacross its face, signifying that the drawerwill pay the holder absolutely, without needof presentment.c. Traveler's check - upon which theholder's signature must appear twice --first when it is issued, and again when it iscashed.d. Crossed – when the name of aparticular banker or a company is writtenbetween the parallel lines drawn.

STATE INVESTMENT HOUSE V. IAC

Crossed check should put the payee on inquiry toascertain the holders’ title to the check or thenature of his possession. Failing this, the payee isdeclared guilty of gross negligence to the effectthat the holder of the check is not a holder in goodfaith. Effects of a crossed check:

(a) the check may not be encashed but onlydeposited in the bank;

(b) the check may be negotiated only once – toone who has an account with the bank; and

(c) the act serves as a warning to the holderthat the check has been issued for adefinite purpose so that he must inquire ifhe has received the check pursuant to thatpurpose, otherwise, he is not a HDC.

BATAAN CIGAR & CIGARETTE FACTORY, INC.v. CA

The negotiability of a check is not affected by itsbeing crossed, whether specially or generally. Itmay legally be negotiated as long as the one whoencashes the check with the drawee bank isanother bank, or if it is especially crossed, by thebank mentioned between the parallel lines.

RP v. PNB (1961)

Demand drafts have not been presented eitherfor acceptance or for payment, thus the bank neverhad any chance of accepting or rejecting them; assuch, these cannot be subject of escheat.

Cashier's check is the substantial equivalent of acertified check and is thus subject to escheat.

Telegraphic transfers are likewise subject toescheat because upon making payment completethe transaction insofar as he is concerned, thoughinsofar as the remitting bank is concerned, thecontract is executory until the credit is established.

PAL V. CA (1990)

A check, whether a manager's check or ordinarycheck, and an offer of a check in payment of a debtis not a valid tender of payment and may berefused receipt by the obligee or creditor.

The issuance of the check to a person authorized toreceive it operates to release the judgment debtorfrom any further obligations on the judgment.

INTERNATIONAL CORPORATE BANK v GUECO(2001)

A manager’s check is one drawn by the bank’smanager upon the bank itself. It is similar to acashier’s check both as to effect and use. Acashier’s check is a check of the bank’s cashier onhis own or another check. In effect, it is a bill ofexchange drawn by the cashier of a bank upon thebank itself, and accepted in advance by the act ofits issuance. It is really the bank’s own check andmay be treated as a promissory note with the bankas a maker. The check becomes the primaryobligation of the bank which issues it andconstitutes its written promise to pay upondemand. The mere issuance of it is consideredan acceptance thereof. If treated as promissorynote, the drawer would be the maker and in whichcase the holder need not prove presentment forpayment or present the bill to the drawee foracceptance

EPCIB v ONG (2006)

A manager’s check is an order of the bank to pay,drawn upon itself, committing in effect its totalresources, integrity and honor behind its issuance.By its peculiar character and general use incommerce, a manager’s check is regardedsubstantially to be as good as the money itrepresents.

3. Clearinga. Clearing - check collection processb. Clearing house - where

representatives of different banks meetevery afternoon of every business day toreceive the envelopes containing checksdrawn against the bank he represents forexamination and clearance.

4. Certificationa.Definition

i. an agreement by which a bankpromises to pay the check at anytime it is presented for payment

ii. When check certified by bank onwhich it is drawn, equivalent toacceptance

b. Requisites for a Valid Certificationi. Must be in writingii. Made on the check or another

instrument



iii. Check must be payable1) Checks cannot be certified

before payablec. Liability

i. Bank which certifies1) Becomes liable as an

acceptor2) REFUSAL to certify a check

doesn’t constitute dishonor; theholder at that stage cannot exercisehis right of recourse against thedrawer and the indorsersii. If procurement by:

1)Holdera) The bank becomes the

solidary debtor, andb) The drawer and all

indorsers discharged fromall liability (versus ordinarybill of exchange – notdischarged)

2) Drawera) secondary parties not

released

ROMAN CATHOLIC BISHOP V. IAC (1990)

A certified personal check is not legal tender nor isit the currency stipulated, and therefore cannotconstitute valid tender of payment.

NEW PACIFIC TIMBER v. SENERIS (1980)

(as cited in EPCIB v. Ong, Sept. 2006)

[S]ince the said check had been certified by thedrawee bank, by the certification, the fundsrepresented by the check are transferred from thecredit of the maker to that of the payee or holder,and for all intents and purposes, the latter becomesthe depositor of the drawee bank, with rights andduties of one in such situation. Where a check iscertified by the bank on which it is drawn, thecertification is equivalent to acceptance. Saidcertification “implies that the check is drawn uponsufficient funds in the hands of the drawee, thatthey have been set apart for its satisfaction, andthat they shall be so applied whenever the check ispresented for payment. It is an understanding thatthe check is good then, and shall continue good,and this agreement is as binding on the bank as itsnotes circulation, a certificate of deposit payable tothe order of depositor, or any other obligation itcan assume. The object of certifying a check,as regards both parties, is to enable theholder to use it as money.” When the holderprocures the check to be certified, “the checkoperates as an assignment of a part of thefunds to the creditors.” Hence, the exception tothe rule enunciated under Section 639 of theCentral Bank Act to the effect “that a check whichhas been cleared and credited to the account of thecreditor shall be equivalent to a delivery to thecreditor in cash in an amount equal to the amount

9“SEC. 63. Legal character . – Checks representing deposit

money do not have legal tender power and their acceptance in thepayment of debts, both public and private, is at the option of thecreditor: Provided, however, that a check which has beencleared and credited to the account of the creditor shall beequivalent to a delivery to the creditor of cash in an amountequal to the amount credited to his account.

credited to his account” shall apply in this case x xx.

5. Surrender of Checka. The surrender of the check by the

holder to the drawee bank upon itspayment is not negotiation. Bypaying the check, the drawee bankextinguishes it as a negotiableinstrument and converts it into a merevoucher.

b. Distinction between surrender of checkupon payment thereof and negotiationi. The delivery of the check by the

holder to the drawee bank upon itspayment is not negotiation. Bypaying the check, the drawee bankextinguishes it as a negotiableinstrument and converts it into amere voucher.

ii. In the case of a deposit of a checkby the holder thereof in a bankother than the drawee bank, thesignature at the back of the checkwould constitute an indorsement,unless otherwise indicated. Theholder in negotiating the check tothe depositary bank, which in turnwill collect on the check from thedrawee bank, through theclearinghouse.

BPI vs CA (2000)

In depositing the check in his name, privaterespondent did not become the outright owner ofthe amount stated therein. He was merelydesignating petitioner as the collecting bank. This isin consonance with the rule that a negotiableinstrument, such as a check, whether a manager’scheck or ordinary check, is not legal tender.

As such, after receiving the deposit, under its ownrules, petitioner shall credit the amount in privaterespondent’s account or infuse value thereon onlyafter the drawee bank shall have paid the amountof the check or the check has been cleared fordeposit.

Again, this is in accordance with ordinary bankingpractices and with this Court’s pronouncement that"the collecting bank or last endorser generallysuffers the loss because it has the duty to ascertainthe genuineness of all prior endorsementsconsidering that the act of presenting the check forpayment to the drawee is an assertion that theparty making the presentment has done its duty toascertain the genuineness of the endorsements."The rule finds more meaning in this case where thecheck involved is drawn on a foreign bank andtherefore collection is more difficult than when thedrawee bank is a local one even though the checkin question is a manager’s check

3. Secondary Parties

3.1. Liability of DRAWER1. Sec. 61, NIL

a. Admits existence of payee and his thencapacity to endorse



b. Engages that on due presentmentinstrument will be accepted, or paid, orboth, according to its tenor

c. That if it be dishonored + necessaryproceedings on dishonor duly taken,will pay the amount thereof to theholder or to a subsequent indorser whomay be compelled to pay it

2. Limiting Liability: drawer may insert in theinstrument an express stipulationnegativing / limiting his own liability toholder

PNB v. PICORNELL (1922)

Picornell obtained money from PNB Cebu topurchase tobacco to be shipped to Manila. Picornellthen drew a bill of exchange drawn against hisprincipal, Hyndman, Tavera & Ventura (HTV), infavor of PNB or his order. Upon presentation of thebill, HTV accepted it. However, HTV subsequentlyrefused to pay the bill because some of the tobaccoshipped were damaged.HELD:A. Liability of Acceptor (HTV)

PNB is a holder in due course and thepartial want of consideration does not existwith respect to the bank who paid full valuefor the bill of exchange.

The want of consideration between theacceptor and drawer does not affect therights of the payee who is a remote party.The payee or holder gives value to thedrawer, and if he is ignorant of the equitiesbetween the drawer and acceptor, his is inthe position of a bona fide indorsee.

B. Liability of Drawer (Picornell) As drawer of the bill, he warranted that it

would be accepted upon properpresentment & paid in due course. As itwas not paid, he became liable to thepayment of its value to PNB.

The fact that Picornell was an agent of HTVin the purchase of the tobacco does notnecessarily make him an agent of HTV indrawing the bill of exchange. These are 2different contracts. He cannot claimexemption from liability by invoking theexistence of agency.

Drawer received notice of protest infulfillment of the condition set by law forhis liability to arise.

Drawer's liability is only secondary as theliability of the acceptor is primary.

BANCO ATLANTICO v AUDITOR GENERAL(1978)

B fraudulently altered checks payable to her drawnby the Embassy by increasing the amounts. Bnegotiated these checks by indorsement to BA w/cpaid the full amount of the checks without firstclearing with the drawee bank, contrary to normalbanking practice. HELD: Drawer (embassy) notliable. BA is guilty of negligence in giving B specialtreatment as a privileged client, in disregard ofelementary principles of prudence that shouldattend banking transactions. Hence, it shouldsuffer the loss. BA could not have been a HDC.

NOTE: The Camposes note that the drawerwas not held liable because the decision wasbased on §23 on forgery instead of §124 onmaterial alteration. If BA had been a HDC,

the Embassy could have been held liable forthe original amount of the checks

3. CRIMINAL LIABILITY FOR BOUNCINGCHECKa. Under BP 22

PEOPLE v NITAFAN(1992)

Lim issued a memorandum check which wassubsequently dishonored for insufficiency of funds.A memorandum check has the same effect as anordinary check and within the ambit of BP 22.What the law punishes is the issuance itself of abouncing check & not the purpose for which it wasissued nor the terms & conditions relating to itsissuance.

b. Estafa under the RPC

PACHECO v CA (1999)

The essential elements in order to sustain aconviction under the above paragraph are:1. that the offender postdated or issued a check inpayment of an obligation contracted at the time thecheck was issued;2. that such postdating or issuing a check wasdone when the offender had no funds in the bank,or his funds deposited therein were not sufficient tocover the amount of the check;3. deceit or damage to the payee thereof.

PEOPLE v REYES (2005)

There is no estafa through bouncing checks when itis shown that private complainant knew that thedrawer did not have sufficient funds in the bank atthe time the check was issued to him. Suchknowledge negates the element of deceit andconstitutes a defense in estafa through bouncingchecks.

3.2. Liability of INDORSERS:

1. Indorser

a. Sec. 63, NIL: A person placing hissignature upon an instrument other than asa maker, drawer, or acceptor unless heindicates by appropriate words his intentionto be bound in some other capacity

i SAPIERA vs CA (1999). It isundisputed that the four (4) checksissued by de Guzman were signedby petitioner at the back withoutany indication as to how she shouldbe bound thereby and, therefore,she is deemed to be an indorserthereof.

b. Sec. 67, NIL: A person, who places hissignature on an instrument negotiable bydelivery, incurs all the liabilities of anindorser.

c. Sec 64, NIL: Irregular Indorseri When a person not otherwise a

party to an instrument, placesthereon his signature in blankbefore delivery, he is liable as anindorser, in accordance w/ theserules:



1) Instrument payable to order of3rd person: liable to payee andto all subsequent parties

2) Instrument payable to theorder of maker/drawer, orpayable to bearer: liable to allparties subsequent tomaker/drawer

3) Signs for accommodation ofpayee, liable to all partiessubsequent to payee

2. WARRANTIES:

a. Every person negotiating an instrumentby delivery or by a qualified indorsementwarrants: (Sec. 65, NIL)

ii Instrument genuine, in all respectswhat it purports to be

iii He has good title to itiv All prior parties had capacity to

contractv He has no knowledge of any fact

w/c would impair validity ofinstrument or render it valueless

vi in case of negotiation by deliveryonly, warranty only extends infavor of immediate transferee

b. General or Unqualified Indorser:Every person who indorses withoutqualification, warrants to all subsequentHDCs: (Sec. 66, NIL)

i. instrument genuine, good title,capacity of prior parties

ii. instrument is at time of indorsementvalid and subsisting

iii. eon due presentment, it shall beaccepted or paid, or both, according totenor

iv. if it is dishonored, and necessaryproceedings on dishonor be duly taken,he will pay the amt. To holder, or toany subsequent indorser who may becompelled to pay it

3. Order of Liability among Indorsers (Sec. 68,NIL):

a. among themselves: liable prima facie inthe order they indorse, but proof of anotheragreement admissible

b. but holder may sue any of the indorsers,regardless of order of indorsement

c. joint payees/indorsees deemed toindorse jointly and severally

TUAZON v RAMOS (2005)

After an instrument is dishonored by nonpayment,indorsers cease to be merely secondarily liable;they become principal debtors whose liabilitybecomes identical to that of the original obligor.The holder of a negotiable instrument need noteven proceed against the maker before suing theindorser.

3.3. Accomodation Party

1. Accomodation Party: one who signedinstrument as maker/drawer/acceptor/ indorser

w/o receiving value thereof, for the purpose oflending his name to some other person

2. Liability : Liable on the instrument to HFVeven if holder knew he was only an AP

MAULINI v. SERRANO (1914)In accommodation indorsement, the indorsermakes the indorsement for the accommodation ofthe maker. Such an indorsement is generally forthe purpose of better securing the payment of thenote, i.e. he lends his name to the maker not tothe holder. An accommodation note is one whichthe accommodation party has put his name,without consideration, for the purpose ofaccommodation some other party who is to use itand is expected to pay it.Note: Campos disagrees with this ruling, referringto the case of Goodman v Gaul where anaccommodation indorsement may be made for theaccommodation of the payee or holder.

ANG TIONG v. TING (1968)

It is not a valid defense that the accommodationparty did not receive any valuable considerationwhen he executed the instrument. Nor is it correctto say that the holder for value is not a holder indue course merely because at the time he acquiredthe instrument, he knew that the indorser was onlyan accommodation party.The fact that the accommodation party stands onlyas a surety in relation to the maker is a matter ofconcern exclusively between accommodationindorser & accommodated party. It is immaterialto the claim of a holder for value. The liability ofthe accommodation party remains primary &unconditional.

SADAYA v. SEVILLA (1967)

The solidary accommodation maker who madepayment has the right of contribution from his co-accommodation maker. This right springs from animplied promise between the accommodationmakers to share equally the burdens that mayensue from their having consented to stamp theirsignatures on the promissory note. The followingare the rules on reimbursement:1. A solidary accommodation maker of a note may

demand from the principal debtorreimbursement for the amount he paid to thepayee; and

2. A solidary accommodation maker who pays onthe note may directly demand reimbursementfrom his co-accommodation maker without firstdirecting his action against the principal debtorprovided that :

(a) he made the payment by virtue of ajudicial demand or

(b) the principal debtor is insolvent.

TRAVEL-ON, INC. v. CA

Travel-On was entitled to the benefit of thestatutory presumption that it was a HDC, that thechecks were supported by valuable consideration.The only evidence private respondent offered washis own testimony that he had issued the checks toTravel-On as payee to "accommodate" its GeneralManager; this claim was in fact a claim that the



checks were merely simulated, that privaterespondent did not intend to bind himself thereon.Only evidence of the clearest and most convincingkind will suffice for that purpose.

CRISOLOGO-JOSE v. CA.

Section 29 of the NIL does not apply tocorporations which are accommodation partiesbecause the issue or indorsement of negotiablepaper by a corporation without consideration isultra vires. Hence, one who has taken theinstrument with knowledge of the accommodationcannot recover against a corporation -accommodation party EXCEPT if the officer or agentof the corp. was specifically authorized to executeor indorse the paper for the accommodation of athird person.

Corporate officers, such as the president and vice-president, have no power to execute for mereaccommodation a NI of the corporation for theirindividual debts or transactions in which thecorporation has no legitimate concern. It is thesignatories thereof that shall be personally liabletherefor.

AGRO CONGLOMERATES v CA (2000)

An accommodation party is a person who hassigned the instrument as maker, acceptor, orindorser, without receiving value therefor, and forthe purpose of lending his name to some otherperson and is liable on the instrument to a holderfor value, notwithstanding such holder at the timeof taking the instrument knew (the signatory) to bean accommodation party. He has the right, afterpaying the holder, to obtain reimbursement fromthe party accommodated, since the relationbetween them has in effect become one ofprincipal and surety, the accommodation partybeing the surety.

3.4. Liability of an AGENT

1. AGENCY:

a. Signature of any party may be made byduly authorized agent, established as inordinary agency

b. Signature per procuration operates asnotice that the agent has limited authorityto sign, and the principal is bound only incase the agent in so signing acted withinthe actual limits of his authority

2. LIABILITY

a. GEN RULE: Where person adds to hissignature words indicating that he signs onbehalf of a principal, not liable if he wasduly authorized

b. WHEN LIABLE:

i. mere addition of words describinghim as an agent without disclosing hisprincipal

ii. Where a broker or agent negotiatesan instrument without indorsement, heincurs all liabilities in Sec. 65, unless hediscloses name of principal and factthat he’s only acting as agent. (Sec.69, NIL)

INSULAR DRUG v. PNB

The right of an agent to indorse commercial paperwill not be lightly inferred. A salesman withauthority to collect money does not have theimplied authority to indorse checks received inpayment. Any person taking checks made payableto a corporation does so at his peril & must abideby the consequences if the agent who indorses thesame is without authority.

PBC v ARUEGO (1981)

Aruego obtained a credit accommodation from PBC.For every printing of the publication, the printercollected the cost of printing by drawing a draftagainst PBC, which will later be sent to Aruego foracceptance. PBC seeks recovery on these drafts.Aruego invokes the defense that he signed thedocument in his capacity as President of the Phil.Education Foundation & only as an accommodationparty.HELD: Aruego is personally liable because nowherein the draft did he disclose that he was signing as arepresentative of the Phil Education Foundation.Neither did he disclose his principal.As an accommodation party, Aruego is liable on theinstrument to a holder for value, notwithstandingsuch holder, at the time of the taking of theinstrument knew him to be only an accommodationparty. Aruego signed as a drawee/acceptor. Asdrawee, he is primarily liable for the drafts.

4. Presentment

4.1. Definition:

1. the production of a BE to the drawee for hisACCEPTANCE, or to the drawer or acceptorfor PAYMENT; or

2. the production of a PN to the party liablefor payment

4.2. Presentment for Acceptance

1. When necessary (Sec. 143, NIL)

a. bill payable after sight, or in othercases where presentment foracceptance necessary to fix maturity

b. where bill expressly stipulates that itshall be presented for acceptance

c. where bill is drawn payable elsewherethan at residence / place of business ofdrawee

d. In no other case is presentment foracceptance necessary in order torender any party to the bill liable.

2. Effect of non-presentment [w/in reasonabletime] (Sec. 144, NIL) - discharges the drawerand all indorsers.

a. Reasonable Time: considerations

i nature of instrumentii usage of trade or business with

respect to instrumentiii facts of each case

3. How made (Sec. 145, NIL)a. BY or ON BEHALF of the holder



b. AT a reasonable hour,c. ON a business day and before the bill is

overdue,d. TO the drawee or some person

authorized to accept or refuseacceptance on his behalf; andi bill addressed to drawees not

partners, MUST be made to themall unless one has authority toaccept or refuse acceptance for all;

ii drawee is dead, MAY be made tohis personal representative;

iii drawee has been adjudged abankrupt or an insolvent or hasmade an assignment for the benefitof creditors, MAY be made:1) to him or2) to his trustee or assignee.

4. When made (Sec. 146, NIL) on any dayon which NIs may be presented forpayment under:a. Sec. 72, NIL – at a reasonable hour on

a business dayi Instruments falling due or

becoming payable on Saturday -next succeeding business day

ii EXCEPT instruments payable ondemand [at the option of theholder] – before twelve o'clocknoon on Saturday WHEN that entireday is not a holiday.

b. Sec. 85, NIL –i at the time fixed therein without

grace.c. Where the holder has no time, with the

exercise of reasonable diligence, topresent the bill for acceptance beforepresenting it for payment, delay isexcused and doesn’t discharge thedrawers and indorsers. (Sec. 147,NIL)

5. When Excused (Sec. 148, NIL) Bill maybe treated as dishonored by non-acceptance:a. Where the drawee is (1) dead, (2)

absconded, (3) fictitious, (4) does nothave capacity to contract by bill.

b. Where, after the exercise of reasonablediligence, presentment can not bemade.

c. Where, although presentment has beenirregular, acceptance has been refusedon some other ground.

6. Dishonor and Effectsa. Dishonor by nonacceptance:

i When duly presented foracceptance – acceptance is refusedor can not be obtained; or

ii When presentment for acceptanceis excused – bill is not accepted.(Sec. 149, NIL)

b. NON ACCEPTANCE of the billi Duty of holder: must treat the bill

as dishonored by nonacceptance orhe loses the right of recourseagainst the drawer and indorsers.(Sec. 150, NIL)

ii Right of holder: immediate rightof recourse against the drawer and

indorsers and no presentment forpayment is necessary. (Sec. 151,NIL)

c. NOTICE OF DISHONORi Recipient- (Sec.89, NIL) Except

as herein otherwise provided,1) to the drawer and2) to each indorser,

ii Effect of omission to give noticeof non-acceptance1) any drawer or indorser to

whom such notice is not givenis discharged

2) does not prejudice the rights ofa HDC subsequent to theomission. (Sec. 117, NIL)

4.3. Presentment for Payment

1. IN GENERAL

a. NECESSARY in order to charge thedrawer and indorsers(Sec. 70, NIL)

b. NOT necessary

i. to charge the person primarily liableon the instrument (Sec. 70, NIL)

ii. to charge the drawer where he hasno right to expect or require that thedrawee or acceptor will pay theinstrument. (Sec. 79, NIL)

iii. to charge an indorser where theinstrument was made or accepted forhis accommodation and he has noreason to expect that the instrumentwill be paid if presented. (Sec. 80,NIL)

iv. Excused:

1) Where, after the exercise ofreasonable diligence,presentment cannot be made;

2) Where the drawee is a fictitiousperson;

3) By waiver of presentment,express or implied.

v. when a bill is dishonored bynonacceptance – immediate right torecourse accrues to holder (Sec. 151,NIL)

vi. in case of waiver of protest, whetherin the case of a foreign bill of exchangeor other NI – deemed to be a waivernot only of a formal protest but also ofpresentment and notice of dishonor.(Sec. 111, NIL)

2. Date and time of presentment

a. bearing fixed maturity / not payableon demand – on the day it falls due

iii if day of maturity falls on Sundayor a holiday, the instruments fallingdue or becoming payable onSaturday are to be presented forpayment on the next succeedingbusiness day (Sec.85, NIL)

b. payable on demand – within areasonable time after its issue,



iv at the option of the holder, may bepresented for payment beforetwelve o'clock noon on Saturdaywhen that entire day is not aholiday (Sec. 85, NIL)

c. demand bill of exchange – within areasonable time after the last negotiation.(Sec. 71, NIL) (NOTE: though reasonabletime from last negotiation, it may beunreasonable time from issuance thusholder may not be HDC under sec. 71)

d. Check - must be presented for paymentwithin reasonable time after its issue ordrawer will be discharged from liabilitythereon to extent of loss caused by delay

i.How time computed. — Whenpayable at a (1) fixed period after date,(2) after sight, or (3) after thathappening of a specified event, excludeday from which the time is to begin torun, include date of payment. (Sec.86, NIL)

ii.Where the day, or the last day forpayment falls on a Sunday or on aholiday – may be done on the nextsucceeding secular or business day.(Sec. 194, NIL)

PNB v. SEETO (1952)

On 13 March, Seeto indorsed to PNB-Surigao abearer check dated 10 March drawn against PBC-Cebu. PNB-Surigao mailed the check to its Cebubranch on 20 March & was presented to the draweebank on 09 April. The check was dishonored forinsufficient funds because the delay in presentmentcause the exhaustion of the drawer's funds.Indorser Seeto asked that the suit be deferredwhile he made inquiries. He assured PNB that hewould refund the value in case of dishonor.HELD: The indorser is discharged from liability byreason of the delay in the presentment forpayment, under §84.Drawer had enough funds when he issued thecheck because his subsequent checks drawnagainst the same bank had been encashed.The assurances of refund by the indorser are theordinary obligation of an indorser which aredischarged by the unreasonable delay inpresentation of the check.NOTE: Camposes note that the discharge of theindorser should have been based on §§ 66 & 71 onpresentment as a condition to the indorser'sliability & presentment for payment of a demandbill made within a reasonable time from its lastnegotiation.

PAPA v A.U. VALENCIA (1998)

Granting that petitioner had never encashedthe check, his failure to do so for more than ten(10) years undoubtedly resulted in the impairmentof the check through his unreasonable andunexplained delay.

While it is true that the delivery of a checkproduces the effect of payment only when it iscashed, the rule is otherwise if the debtor isprejudiced by the creditor’s unreasonable delay inpresentment. The acceptance of a check impliesan undertaking of due diligence in presenting it forpayment, and if he from whom it is received

sustains loss by want of such diligence, it will beheld to operate as actual payment of the debt orobligation for which it was given.

It has, likewise, been held that if nopresentment is made at all, the drawer cannot beheld liable irrespective of loss or injury unlesspresentment is otherwise excused. This is inharmony with Article 1249 of the Civil Code underwhich payment by way of check or other negotiableinstrument is conditioned on its being cashed,except when through the fault of the creditor, theinstrument is impaired. The payee of a check wouldbe a creditor under this provision and if its non-payment is caused by his negligence, payment willbe deemed effected and the obligation for whichthe check was given as conditional payment will bedischarged.

3. Where DELAY excused - when the delay iscaused by circumstances beyond the control ofthe holder and not imputable to his default,misconduct, or negligence; when the cause ofdelay ceases to operate, presentment must bemade with reasonable diligence (Sec. 81,NIL)

4. Manner of Presentment

a. The instrument must be exhibited; whenpaid, must be delivered up to the partypaying it. (Sec. 74, NIL)

b. What constitutes a sufficientpresentment. (Sec. 72, NIL)

i.BY WHOM: the holder, or by someperson authorized to receive paymenton his behalf;

CHAN WAN v. TAN KIM(1960)

Tan Kim drew specially crossed checks payable tobearer. Chan Wan presented the checks forpayment to the drawee bank but they weredishonored due to insufficient funds. Chan Wanseeks recovery on these checks.HELD: Checks crossed specially to China Bankingshould have been presented for payment by thatbank, not by Chan Wan. Inasmuch as Chan Wanpresented them for payment himself, there was noproper presentment & the liability did not attach tothe drawer.But there was due presentment as clearanceendorsements by China Bank can be found at theback of the checks. However, some of the checkswere stamped account closed.As Chan Wan failed to indicate how the checksreached his hands, the court held him not to be aholder in due course who can still recover on thechecks but subject to personal defenses, such aslack of consideration.NOTE: Camposes note that despite the addition ofthe words "non-negotiable" on the specially crossedchecks, the Court considered the checks asnegotiable instruments. A check on its facenormally has all the requisites of negotiability, andthe addition of the above words should not changeits character as a negotiable instrument.

ASSOCIATED BANK v. CA & REYES (1992)

Different department stores issued crossed checksbearing "for payee's account only" payable to



Melissa's RTW. Sayson, acting without authority,deposited & encashed the checks with AssociatedBank.HELD: Citing State Invt House v IAC, the effects ofcrossing a check are:

1. check may not be encashed but onlydeposited in the bank;

2. check may be negotiated only one -- to onewho has an account with a bank; and

3. the act of crossing the check serves as awarning to the holder that the check hasbeen issued for a definite purpose so thathe must inquire if he has received thecheck pursuant to that purpose.

The effects of crossing a check relate to the modeof presentment for payment.The law imposes a duty of diligence on thecollecting bank to scrutinize checks deposited withit, for the purpose of determining their genuineness& regularity.

ii. TIME: reasonable hour on a businessday;

1) where instrument payable atbank. — must be made duringbanking hours, UNLESS theperson to make payment hasno funds there to meet it at anytime during the day, in whichcase presentment at any hourbefore the bank is closed onthat day is sufficient (Sec. 75,NIL)

iii. PLACE: proper place as hereindefined: (Sec. 73, NIL)1) place of payment specified – at

place of payment;2) no place of payment specified

but address of the person tomake payment is given in theinstrument – at the addressgiven;

3) no place of payment and noaddress is given – at the usualplace of business or residenceof the person to makepayment;1) in any other case –

wherever person to makepayment can be (1) found,or if presented (2) at hislast known place ofbusiness or residence

2) where principal debtor isdead and no place ofpayment is specified – tohis personal representative,IF any AND IF he can befound with the exercise ofreasonable diligence (Sec.76, NIL)

3) where persons primarilyliable are partners and noplace of payment isspecified, presentment for- to any one of them, eventhough there has been adissolution of the firm.(Sec. 77, NIL)

4) joint debtors and no placeof payment is specified - tothem all (Sec. 78, NIL)

iv. TO WHOM: (1) person primarilyliable on the instrument, or if he isabsent or inaccessible, (2) to anyperson found at the place wherethe presentment is made.

5. Dishonor by Nonpayment

a. Sec 83, NIL The instrument when:

i. duly presented for payment andpayment refused or cannot beobtained; or

ii. presentment is excused and theinstrument is overdue and unpaid.

b. Effect:: [subject to NIL provs] animmediate right of recourse to all partiessecondarily liable accrues to the holder.(Sec. 84, NIL)

i. Dishonor is a condition precedent tothe enforcement of the liability ofsecondary parties.

ii. This is conditioned upon the giving ofdue notice of dishonor

iii. An indorser whose liability hasbecome fixed by demand and notice is,as to holder, a principal debtor.

5. Notice of Dishonor

5.1.Definition

1. To bring either verbally or by writing, to theknowledge of the drawer or indorser of aninstrument, the fact that a specified NI,upon proper proceedings taken, has notbeen accepted or has not been paid, andthat the party notified is expected to pay it

2. General rule: MUST be given to drawerand to each indorser, and any drawer orindorser to whom such notice is not givenis discharged

5.2. When necessary1. Sec 89, NIL Except as herein provided,when a negotiable instrument has beendishonored by non-acceptance or non-payment, notice of dishonor must be given tothe drawer and to each indorser…2. Parties entitled to notice:

a. Drawerb. Indorserc. Accomodation Indorsers

i Joint maker excluded if not anindorser

3. Acceleration Clausea. If clause is optional on holder:

i The bringing of an action againstthe maker and indorsers constitutesa valid exercise of option and avalid notice of dishonor

b. Clause is automatic:i Notice of dishonor must be givem

at onceii Not sufficient to give it upon

commencement of action

GULLAS v. PNB (1935)



A notice of dishonor is necessary to charge anindorser & that the right of action against him doesnot accrue until the notice is given.As a general rule, a bank has a right of set off ofthe deposits in its hands for the payment of anyindebtedness to it on the part of a depositor.However, prior to the mailing of notice of dishonor& without awaiting any action by Gullas, the bankmade use of the money standing in his account tomake good for the treasury warrant. Gullas wasmerely an indorser & notice should actually havebeen given to him in order that he might protecthis interests.

5.3. Form and Contents (Sec 96)

1. Form of Notice:

a. may either be in writing, or oral

b. Campos: must be in a language that willinform the addressed party that theinstrument has been duly presented

2. Contents – must contain any terms whichsufficiently

a.identify the instrument, and

b. indicate that it has been dishonored bynon-acceptance or non-payment;

3.Mode of delivery

a. Personal service

i. There must be actual personalservice, or

ii. An ordinary intelligent and diligenteffort to make personal service

b. Through the mails

c. Campos: Through the telephonei Party to be notified must be fully

identified as the party at thereceiving end of the line

4.The ff. notice still sufficient: (Sec. 95, NIL)

a. a written notice, not signed

b. insufficient written notice, supplementedand validated by verbal communication

c. instrument suffering from misdescriptionUNLESS the party to whom the notice isgiven is in fact misled thereby.

5.4.Time and Place

1. Notice may be given as soon as theinstrument is dishonored and within the timefixed by NIL, unless delay excused (Sec. 102,NIL)

2. NOTICE to SUBSEQUENT PARTY: Each partywho receives a notice is given the same periodof time within which to notify prior indorsersthat the last holder had. (Sec. 107)

3. TIME FIXED BY THE NIL:

a. Where parties reside in same place (Sec.103, NIL): Must be given w/in the ff.times:

ii If given at the place of business ofthe person to receive notice -before the close of business hourson the day following

iii If given at his residence - beforethe usual hours of rest on the dayfollowing

iv If sent by mail - deposited in thepost office in time to reach him inusual course on the day following.

b. Where parties reside in different places(Sec. 104, NIL).:

i. If sent by mail - deposited in the postoffice in time to go by mail the dayfollowing the day of dishonor, or ifthere be no mail at a convenient houron last day, by the next mail thereafter

ii. Convenient hour: depends on theusual hours of opening of businesshouses and the post-office

iii. If given otherwise - within the timethat notice would have been received indue course of mail, if it had beendeposited in the post office within thetime specified above

c. Delay (Sec. 113, NIL)

i. Excused: when the delay is caused bycircumstances beyond the control ofthe holder and not imputable to hisdefault, misconduct, or negligence

ii. But, when the cause of delay ceasesto operate, notice must be given withreasonable diligence.

4. Sender deemed to have given due notice(Sec. 105, NIL)

a. Where notice of dishonor is dulyaddressed and deposited in the post office,

i. “deposit in post office” — whendeposited in any branch post office orin any letter box under the control ofthe post-office department. (Sec. 106,NIL)

b. notwithstanding any miscarriage in themails

4. Place where notice must be sent (Sec.108, NIL)a. to the address, if any, added by the

party to his signature; if address notgiven:i to the post-office nearest to his

place of residence or where he isaccustomed to receive his letters;or

ii If he lives in one place and has hisplace of business in another, toeither place; or

iii If he is sojourning in another place,to the place where he is sosojourning.

b. Notice sent to place not in accord withNIL, still SUFFICIENT



i Where the notice is actuallyreceived by the party within thetime specified in this Act,

5.5. By Whom Given

1. Sec. 90, NIL

a. By or on behalf of the holder or

b. any party to the instrument who may becompelled to pay it to the holder, and who,upon taking it up, would have a right toreimbursement from the party to whom thenotice is given

2. Agent

a. Notice of dishonor may be given by anagent either in his own name or in thename of any party entitled to give notice,whether that party be his principal or not(Sec. 91, NIL)

b. Where instrument has been dishonoredin hands of agent, he may either himselfgive notice to the parties liable thereon, orhe may give notice to his principal (withinthe same time as if agent were holder)(Sec. 94, NIL)

5.6. To whom notice MAY be given

1. If given by an agenta. to his principal, in case of an

instrument dishonored in the hands ofan agent (Sec. 94, NIL), or

b. to the parties liable thereonc. ex: collecting bank

2. IN GENERAL (Sec. 97)a. Party himselfb. Or his agent in that behalf

3. If party is dead and death known to theparty giving notice (Sec. 98, NIL)a. MUST be given to a personal

representative, if there be one, and ifwith reasonable diligence, he can befound;

b. If no personal representative – MAY besent to the last residence or last placeof business of the deceased.

4. To partners : to any one partner, eventhough there has been a dissolution. (Sec.99, NIL)

5. To joint parties(Sec. 100, NIL)a. to each of the partyb. unless one of them has authority to

receive such notice for the others.6. to bankrupt (Sec. 101, NIL)

a. to the party himself orb. to his trustee or assignee

5.7. In whose favor notice operates

1. when given by/on behalf of holder: inures tobenefit of (Sec. 92, NIL)

a. all subsequent holders and

b. all prior parties who have a right ofrecourse vs. the party to whom it’s given

2. where notice given by/on behalf of a partyentitled to give notice: inures for benefit (Sec.93, NIL)

a. holder

b. all parties subsequent to party to whomnotice given

5.8. When rule requiring notice not applied

1. In general

a. Sec 112: notice of dishonor is dispensedwith when after the exercise of reasonablediligence, it cannot be given to or does notreach the parties sought to be charged

b. Reasonable diligence depends upon thecircumstance of the case

2. When notice of non-acceptance is alreadygiven

a. Sec 116: Where due notice of dishonorby non-acceptance has been given, noticeof a subsequent debtor by non-payment isnot necessary, unless in the meantime theinstrument has been accepted

b. Ratio for the rule: dishonor by non-acceptance confers upon the holder animmediate right against all secondaryparties

3. Waiver

a. Waiver of notice may be made either:

i before the time of giving notice hasarrived or

ii after the omission to give duenotice; may be expressed orimplied. (Sec. 109, NIL)

b. Parties affected by waiver

i. Dependent upon where the waiver iswritten

ii. Where the waiver is embodied in theinstrument itself - binding upon allparties;

iii. where written above the signatureof an indorser - binds him only. (Sec.110, NIL)

5.9. When Notice Not Necessary

1.When not necessary to charge drawer(Sec. 114, NIL)

a. drawer/drawee same person

b. drawee fictitious, incapacitated

c. drawer is person to whom instrument ispresented for payment

d. drawer has no right to expect/requirethat drawee/acceptor will honor instrument

e. drawer countermanded payment

STATE INVESTMENT HOUSE v CA (1993)

Moulic issued 2 checks to Victoriano as security forpieces of jewelry to be sold on commission.Victoriano negotiated these checks to StateInvestment. As Moulic failed to sell the jewelry,she returned them to Victoriano. However, shefailed to retrieve her checks. Moulic withdrew herfunds from the drawee bank. Upon presentment,the checks were dishonored.



HELD: State Investment is a holder in due course& is not subject to the personal defense of lack ofconsideration.There is no need to serve the drawer a noticeof dishonor because she was responsible forthe dishonor of her checks. After withdrawingher funds, she could not have expected her checksto be honored.

2. Where not necessary to charge indorser(Sec. 115, NIL)

a. drawee fictitious, incapacitated, andindorser aware of the fact at time ofindorsement

b. indorser is person to whom instrumentpresented for payment

c. instrument made/accepted for hisaccommodation

7. Protest

A. Definition: testimony of some proper personthat the regular legal steps to fix the liability ofdrawer and indorsers have been taken

B. When necessary:1. In case of a FOREIGN BILL appearing on its

face to be such;2. protest for non-acceptance if dishonored by

nonacceptance &3. protest for nonpayment if not previously

dishonored by nonpayment.4. Effect of failure to protest: the drawer and

indorsers are discharged. (Sec. 152, NIL)C. Form

1. annexed to the bill or must contain a copythereof, and

2. must be under the hand and seal of thenotary making it;

D. Contents1. The time and place of presentment;2. The fact that presentment was made and

the manner thereof;3. The cause or reason for protesting the bill;4. The demand made and the answer given, if

any, or the fact that the drawee or acceptorcould not be found. (Sec. 153, NIL).

E. By whom1. A notary public; or2. any respectable resident of the place where

the bill is dishonored, in the presence oftwo or more credible witnesses. (Sec. 154,NIL)

F. Time1. on the day of its dishonor unless delay is

excused;2. when duly noted, the protest may be

subsequently extended as of the date ofthe noting. (Sec. 155, NIL);

G. Place1. at the place where it is dishonored,2. EXCEPT bill drawn payable at the place of

business or residence of person other thanthe drawee has been dishonored bynonacceptance,a. it must be protested for non-payment

at the place where it is expressed to bepayable, and

b. no further presentment for payment to,or demand on, the drawee isnecessary. (Sec. 156, NIL)

H. Protest for better security against thedrawer and indorsers — where the acceptor hasbeen adjudged a bankrupt or an insolvent orhas made an assignment for the benefit ofcreditors before the bill matures (Sec. 158,NIL)

I. Delay excused1. Requisites:

a. when caused by circumstances beyondthe control of the holder, and

b. not imputable to his default,misconduct, or negligence.

2. When the cause of delay ceases to operate,the bill must be noted or protested withreasonable diligence.;

J. When protest dispensed with - by anycircumstances which would dispense withnotice of dishonor. (Sec. 159, NIL)

K. Waiver of protest: deemed to be a waiver notonly of a formal protest but also ofpresentment and notice of dishonor. (Sec.111, NIL)

TAN LEONCO v GO INQUI(1907)

In exchange for the abaca from Tan Leonco'splantations, Go Inqui drew a bill of exchangeagainst Lim Uyco. Upon presentment of thedraft, it was refused payment due to a stoporder from the drawer. The bill was notprotested.HELD: The action is not brought upon the billof exchange which was used only as evidenceof the indebtedness. Under these conditions,protest & notice of nonpayment areunnecessary in order to render the drawerliable.

NOTE: The ruling of the Court on protest ismerely obiter dictum.

8. Acceptance or Payment for Honor

A. Acceptance1. Practice of accepting for honor is obsolete2. When bill may be accepted for honor. —

When a BE has been (1) protested fordishonor by non-acceptance or protestedfor better security and (2) is not overdue any person not being a party already liablemay, with the CONSENT of the holder,intervene and accept the bill supra protestfor the honor of any party liable thereon orfor the honor of the person for whoseaccount the bill is drawn.

3. The acceptance for honor may be for partonly of the sum for which the bill is drawn;

4. where there has been an acceptance forhonor for one party, there may be a furtheracceptance by a different person for thehonor of another party. (Sec. 161, NIL)

5. Referee in case of need — person whosename is inserted by the drawer of a bill andany indorser to whom the holder mayresort in case bill is dishonored by non-acceptance or non-payment; option of theholder to resort to the referee (Sec. 131,NIL)

B. PAYMENT FOR HONOR - any person mayintervene and pay bill protested for non-payment supra protest (Sec. 171, NIL)



6.3 INSTRUMENTS PAYABLE AT BANK

Sec 87: Where the instrument is made payable at abank, it is equivalent to an order to the bank tonpay the same for the account of the principaldebtor therein

BINGHAMPTON PHARMACY v FIRSTNATIONAL BANK (1915)

There is a distinction between the drawer of acheck & the maker of a note payable at a bank:

Note payable atbank

Check

maker of a noteis primarily liableon theinstrument

drawer of a checkis only liable afterdishonor

Law excusespresentment ofthe instrument

requirespresentment withina reasonable timeat the peril ofdischarging thedrawer

obligation of themaker of a noteis not aconditionalpromise to payonly at a specialplace, but is apromise to paygenerally, eventhough a place ofpayment

Breach of the dutyof the holder of acheck to presentfor payment at theplace where it ispayable at areasonable timedischarges thedrawer fromliability to theextent he isdamaged by thebreach.

9. Bills in Set

A. composed of various parts beingnumbered, and containing a reference tothe other parts, all of which parts constituteone bill of lading

B. Bills in set constitute one bill. (Sec. 178,NIL)

C. Right of HDCs where different parts arenegotiated. — the holder whose title firstaccrues is the true owner of the bill. Butnothing in this section affects the right of aperson who, in due course, accepts or paysthe parts first presented to him. (Sec.179., NIL)

D. Liability of holder who indorses two ormore parts of a set to different persons. —liable on every such part, and everyindorser subsequent to him is liable on thepart he has himself indorsed, as if suchparts were separate bills. (Sec. 180, NIL)

E. Acceptance - may be written on any partand it must be written on one part only. Ifthe drawee accepts more than one part andsuch accepted parts negotiated to differentholders in due course, he is liable on everysuch part as if it were a separate bill. (Sec.181, NIL)

F. Payment - When the acceptor of a billdrawn in a set pays it without requiring thepart bearing his acceptance to be deliveredup to him, and the part at maturity isoutstanding in the hands of a holder in due

course, he is liable to the holder thereon.(Sec. 182, NIL)

G. Effect of discharging one of a set. —Except as herein otherwise provided, thewhole bill is discharged. (Sec. 183, NIL)

Chapter VII

DISCHARGE

1. Definition: Discharge

The release of all parties, whether primary orsecondary, from the obligation on the instrument;renders the instrument non-negotiable

2. Discharge of the INSTRUMENT

2.1. How discharged: (Sec 119)10

1. By Payment in due coursea. Sec. 88: Payment is made in due

course when it is made:i at or after the maturity of the

paymento if payment is made before

maturity and the note isnegotiated to a HDC, the lattermay recover on the instrument.

ii to the holder thereofo payment to one of several

payees or indorsees in thealternative discharges theinstrument,

o but payment to one of severaljoint payees or joint indorsersis not a discharge. The partyreceiving payment must havebeen authorized by others toreceive payment.

iii in good faith and without noticethat his title is defective

b. By whom made:i payment in due course by or on

behalf of principal debtorii payment in due course by party

accommodated where party ismade/ accepted for accommodation

c. When check deemed paid by draweebanki Once the holder receives the cashii If the bank credits the amt of the

check to the depositor’s accountiii Where the drawee bank charges

the check to the account, indicatingintention to honor the check

2. intentional cancellation by holdera. if unintentional or under mistake or

without authority of holder,inoperative;

b. where instrument or signature appearsto have been cancelled, burden of proofon party which alleges it wasunintentional, etc. (Sec. 123, NIL)

3. any other act which discharges a simplecontract for payment of money

10Suggested Mnemonics: PICk ROAD: Payment in

due course, Intentional Cancellation, Renunciation,any Other Act, Debtor becomes holder.



a. ex. issuance of a renewal note—novation

b. Refer to Art 1231 of the Civil Code4. principal debtor becomes holder of

instrument at or after maturity in his ownright

5. renunciation of holder: (Sec. 122, NIL)a. holder may expressly renounce his

rights vs. any party to the instrument,before or after its maturity

b. absolute and unconditional renunciationof his rights against PRINCIPALDEBTOR made at or after maturitydischarges the instrument

c. renunciation does not affect rights ofHDC w/o notice.

d. Renunciation must be in writing unlessinstrument delivered up to personprimarily liable thereon

material alteration – review Sec. 125, NIL:what constitutes material alteration (Sec. 124,NIL: material alteration w/o assent of allparties liable avoids instrument except asagainst party to alteration and subsequentindorsers)

3. OF SECONDARY PARTIES (Sec.120, NIL)11

A. by discharge of instrumentB. intentional cancellation of signature by holderC. discharge of prior partyD. valid tender of payment by prior partyE. release of principal debtor, unless holder’s right

of recourse vs. 2ndary party reservedF. any agreement binding upon holder to extend

time of payment, or to postpone holder’s rightto enforce instrument, UNLESS1. made with assent of party secondarily

liable, or2. right of recourse reserved.

G. Failure to make due presentment (Secs. 70,144, NIL)

H. failure to give notice of dishonorI. certification of check at instance of holderJ. reacquisition by prior party

1. where instrument negotiated back to aprior party, such party may reissue andfurther negotiate, but not entitled toenforce payment vs. any intervening partyto whom he was personally liable

2. where instrument is paid by partysecondarily liable, it’s not discharged, buta. the party so paying it is remitted to his

former rights as regard to all priorparties

b. and he may strike out his own and allsubsequent indorsements, and againnegotiate instrument, excepti where it’s payable to order of 3rd

party and has been paid by drawerii where it’s made/accepted for

accommodation and has been paidby party accommodated

11Suggested Mnemonics: CuPID CRRAFFT:

intentional Cancellation, Prior Party and InstrumentDischarge, Certification, Release, Reacquisition, anyAgreement, Failure to make due presentment,Failure to give notice of dishonor, valid Tender ofpayment.

Chapter VIII

OTHER FORMS OF COMMERCIAL

PAPER

1. In General

1.1. Commercial papers –1. also Negotiable instruments;2. merely special forms of either PNs or BEs;3. also governed by the NIL

1.2. Quasi-negotiable includes commercial paperwhich though not governed by the NIL, havecertain attributes of negotiability.

2.1. Bonds

1. evidences of indebtedness, in the nature ofa PNs

2. usually accompanied by a mortgage of theproperty of the issuer

3. issued by the government (municipal &other public corporations) & privatecorporations;a. though not to mature for a long time,

assure some regular income tobondholders in the form of interest*,usually payable annually

b. bonds and interest coupons (evidencesinterest obligations)*

may be negotiable in form,therefore governed by NIL (Sec65);

both are actually promissorynotes

c. they run for long periods of time, andare often sold to the public in general

d. funds generated by such bonds areused to finance corporate projects andpublic works;

e. there is no warranty on the part of suchindorser or negotiator that prior partieshad capacity to contract. The qualifiedindorser & negotiator by delivery of abond do not warrant therefore that thecorporation which issued the bonds hasany judicial capacity to act. A generalindorser thereof however would beliable for such want of capacity.

2.2. Debentures

1. similar to bonds except that they areusually for a shorter tem and may or maynot be accompanied by a mortgage.

2. they are often issued on the general creditof the issuer corporation

3. Drafts and Letters of Credit

3.1. Drafts and Letters of Credit - The draft andthe letter of credit are generally used together toeffect payment in international transactions.3.2. Draft a form of BE generally used to facilitatethe transactions between persons physically remotefrom each other.3.3. Letters of Credit

1. one person requests some other person toadvance money or give credit to a third

2. Bonds and Debentures



person, and promises that he will repay thesame to the person making theadvancement, or accept bills drawn uponhimself for the like amount.

2. must be issued in favor of a definiteperson, and not to order.

3. under our law, a letter of credit cannot be anegotiable instrument because (a) it maynot contain the words of negotiability; (b)may be issued for an undeterminedamount. See Art 568 Code of Commerce.

4. “INDEPENDENCE PRINCIPLE”: Credits, bytheir nature, are separate transactions fromthe sales or other contract(s) on which theymay be based and banks are in no wayconcerned with or bound by suchcontract(s), even if any referencewhatsoever to such contract(s) is includedin the credit. Consequently, theundertaking of a bank to pay, accept andpay draft(s) or negotiate and/or fulfill anyother obligation under the credit is notsubject to claims or defenses by theapplicant resulting from his relationshipswith the issuing bank or the beneficiary. Abeneficiary can in no case avail himself ofthe contractual relationships existingbetween the banks or between theapplicant and the issuing bank.a. Thus, the engagement of the issuing

bank is to pay the seller or beneficiaryof the credit once the draft and therequired documents are presented toit. This principle assures the seller orthe beneficiary of prompt paymentindependent of any breach of the maincontract and precludes the issuing bankfrom determining whether the maincontract is actually accomplished ornot. Under this principle, banksassume no liability or responsibility forthe form, sufficiency, accuracy,genuineness, falsification or legal effectof any documents, or for the generaland/or particular conditions stipulatedin the documents or superimposedthereon, nor do they assume anyliability or responsibility for thedescription, quantity, weight, quality,condition, packing, delivery, value orexistence of the goods represented byany documents, or for the good faith oracts and/or omissions, solvency,performance or standing of theconsignor, the carriers, or the insurersof the goods, or any other personwhomsoever.

b. The independent nature of the letter ofcredit may be: (a) independence in totowhere the credit is independent fromthe justification aspect and is aseparate obligation from the underlyingagreement like for instance a typicalstandby; or (b) independence may beonly as to the justification aspect like ina commercial letter of credit orrepayment standby, which is identicalwith the same obligations under theunderlying agreement. In both casesthe payment may be enjoined if in thelight of the purpose of the credit thepayment of the credit would constitutefraudulent abuse of the credit.(Transfield vs. Luzon Hydro)

5. Pertinent Code of Commerce provisions:a. Art 567. Letters of credit - issued by

one merchant to another for thepurpose of attending to a commercialtransaction.

b. Art 568. The essential conditions ofletter of credit shall be:i issued in favor of a definite person,

and not to order.ii limited to a fixed and specified

amount, or to one or moreundetermined amount, but allwithin a maximum the limit ofwhich has to be stated exactly.

Note: Those which do not have any ofthese last circumstances shall beconsidered as mere letters ofrecommendation.

c. Art 569. The drawer of a letter ofcredit shall be liable to the person onwhom it was issued, for the amountpaid by virtue thereof, within themaximum fixed therein.Letters of credit may not be protestedeven if not be paid; bearer cannotacquire any right of action by reason ofnon-payment against the person whoissued it.The person paying has right to demandthe proof of the identity of the personin whose favor the letter of credit wasissued.

d. Art 570. The drawer of a letter ofcredit may annul it, informing thebearer and the person to whom it isaddressed

e. Art 571. The bearer of a letter orcredit shall pay the amount received tothe drawer without delay. Should henot do so, an action involving executionmay be brought to recover it, with legalinterest and the current exchange inthe place where it is repaid.

f. Art 572. If the bearer of a letter ofcredit does not make use thereof withinthe (1) period agreed upon with thedrawer, or in default of a period fixed,(2) within 6 months, counted from itsdate, in any point in the Philippines,and within 12 months anywhereoutside thereof, it shall be void in factand in law.

BPI v. DE RENY FABRIC (1970)

The company and its officers cannot shift theburden of loss to the bank because of the terms oftheir Commercial Letter of Credit Agreement withthe bank provides that latter shall not beresponsible for the any difference in character orcondition of the property. Furthermore, the bankwas able to prove the existence of a custom ininternational banking and financing circles negatingany duty of the bank to verify whether what hasbeen described in letters of credits or drafts orshipping documents actually tallies with what wasloaded aboard ship. Banks, in providing financingin international business transactions do not dealwith the property to be exported or shipped to theimporter, but deal only with documents.

LEE v CA (2002)



Modern letters of credit are usually not madebetween natural persons. They involve bank tobank transactions. Historically, the letter of creditwas developed to facilitate the sale of goodsbetween, distant and unfamiliar buyers and sellers.It was an arrangement under which a bank, whosecredit was acceptable to the seller, would at theinstance of the buyer agree to pay drafts drawn onit by the seller, provided that certain documentsare presented such as bills of lading accompaniedthe corresponding drafts. Expansion in the use ofletters of credit was a natural development incommercial banking. Parties to a commercial letterof credit include:

(a) the buyer or the importer,(b) the seller, also referred to asbeneficiary,(c) the opening bank which is usually thebuyer’s bank which actually issues theletter of credit,(d) the notifying bank which is thecorrespondent bank of the opening bankthrough which it advises the beneficiary ofthe letter of credit,(e) negotiating bank which is usually anybank in the city of the beneficiary. Theservices of the notifying bank must alwaysbe utilized if the letter of credit is to beadvised to the beneficiary through cable,(f) the paying bank which buys or discountsthe drafts contemplated by the letter ofcredit, if such draft is to be drawn on theopening bank or on another designatedbank not in the city of the beneficiary. As arule, whenever the facilities of the openingbank are used, the beneficiary is supposedto present his drafts to the notifying bankfor negotiation and(g) the confirming bank which, upon therequest of the beneficiary, confirms theletter of credit issued by the opening bank.

TRANSFIELD VS. LUZON HYDRO (2004)

Can the beneficiary invoke the independenceprinciple? Yes.To say that the independence principle may only beinvoked by the issuing banks would rendernugatory the purpose for which the letters of creditare used in commercial transactions. As it is, theindependence doctrine works to the benefit of boththe issuing bank and the beneficiary.

Certificate of Stock

A. or share certificate is the customary andconvenient evidence of the holder’s interest inthe corporation which issues it.

B. not a NI, but is included in the term “securities”bec does not contain any promise or order topay money;

C. described as Quasi-Negotiable becoftentimes, by application of the principles ofestoppel, and to effectuate the ends of justiceand the intention of the parties, the courtsdecree a better title to the transferee thanactually existed in his transferor, and is thesame as would be reached if the certificatewere negotiable.

D. When the shareholder signs the back ofcertificates of stock without filling in the blanks(for the name of the transferee and attorney-in-fact) and the certificate is delivered toanother, the latter appears to be the owner

thereof. A bona fide purchaser of value withoutnotice, will be protected in his acquisition,although such third person has diverted thecertificate from the purpose for which he wasentrusted therewith. (Principle of Estoppel)

E. The same rule is applicable if the certificate isin bearer form.

F. The rule is applicable where the certificate islost or stolen while signed in blank. Even apurchaser in good faith cannot acquire title asagainst the true owner. (?)

G. At common law, stock certificates are given theattributes of negotiability only where the ownerthereof has entrusted the wrongdoer with thepossession of such certificate and clothed himwith apparent ownership thereof.

SANTAMARIA v HONGKONG & SHANGHAIBANK (1951)

Plaintiff, in failing to take the necessary precautionupon delivering the certificate of stock to herbroker, was chargeable with negligence in thetransaction which resulted to her own prejudice,and as such, she is estopped from asserting title toit as against the defendant bank.A certificate of stock, indorsed in blank, is deemedquasi-negotiable, and as such the transfereethereof is justified in believing that it belongs to theholder and transferor.

DE LOS SANTOS, McGRATH (1955)

Although a stock certificate is sometimes regardedas quasi-negotiable, in the sense that it may betransferred by endorsement, coupled with deliveryit is well settled that the instrument is non-negotiable, because the holder thereof takes itwithout prejudice to such rights or defense as theregistered owner or credit may have under the law,except in so far as such rights or defenses aresubject tot eh limitations imposed by the principlesgoverning estoppel.

CAPCO v. MACASAET (1990)

Certificates of stocks are considered as quasi-negotiable instruments. When the owner orshareholder signs the printed form of sale orassignment at the back of every stock certificateswithout filling in the blanks provided for the nameof the transferee as well as for the name of theattorney-in-fact, the said owner or shareholder, ineffect, confers on another all the indicia ofownership of the said stock certificates.

4. Negotiable Documents of Title

5.1. In General1. as distinguished from negotiable

instruments, refer to goods and not tomoney; the sale of goods covered iseffected by the transfer of said document

2. not governed by the NIL but by the CivilCode.

3. includes any bill of lading, dock warrant,“quedan”, or warehouse receipt or order forthe delivery of goods, or any otherdocument used in the ordinary course ofbusiness in the sale or transfer of goods, asproof of the possession or control of thegoods, or authorizing or purporting toauthorize the possessor of the document to



transfer or receive, either by indorsementor by delivery, goods represented by suchdocument.

4. Documents of title negotiable when goodsrepresented thereby are deliverable to aspecified person , to order or to bearer.

5. valuable in commerce because it facilitatesthe sale and delivery of goods.

5.2. Kinds1. Warehouse receipts an agreement by a

warehouseman to store goods and deliverthem to a named person or his order or tobearer.

2. Bill of Lading a similar contract by acarrier to ship goods and deliver them tothe person named therein or his order or tobearer; negotiable bill of lading is usefulnot only as evidence of the receipt of thegoods by the carrier but as evidencing titleto goods covered by it. It also facilitatesthe purchase of goods by one person fromanother who is physically remote andprobably unknown to him.a. “straight” bill where the goods are to

be delivered to a specified person, it isnot negotiable and is called a “straight”bill. Otherwise, it is referred to as an“order” bill.

3. Certificate of Deposita receipt of a bank forcertain sum of money received upondeposit; generally framed in such FORM asto constitute a promissory note, payable tothe depositor, or to the depositor or order,or to bearer.a. it is taken when depositor does not

need his money for some extendedperiod of time and wants it to earninterest; more of an investment paperthan a commercial paper because it isnot attendant to a commercialtransaction the way a check or apromissory note is.

b. it is negotiable if it meets all therequirements of Sec 1 NIL

5.3. Negotiation - same as those used in NIs; toorder=delivery + indorsement, to bearer = delivery

1. The means of negotiating a document of titleare the same as those used in negotiableinstruments.2. If by the terms of the document, the goodsare deliverable to the order of a specifiedperson, then it should be indorsed by suchperson, either specially or in blank.3. If the goods are deliverable to bearer, or thedocument has been indorsed in blank, thennegotiation may be by mere delivery.

5.4. Rights of a Holder1. When free from personal defense

a. Under Art 1518 Civil Code, a holderof a negotiable document of title ingood faith, for value and without noticeis placed on the same level as a HDC ofa negotiable instrument – i.e., personaldefenses enumerated in said article arenot available against him. Personaldefenses include: negotiation was abreach of duty on the part of theperson making the negotiation, ownerof the document was deprived of thepossession of the same by loss, theft,

fraud, accident, mistake, duress orconversion.

b. Note Art 1518’s conflict with Art 1512.(see p 915)

2. What title acquired (NOTE: see Arts1513, 1514 and 1519 Civil Code)

a. A person to whom a negotiabledocument of title has been dulynegotiated acquires the title of theperson NEGOTIATING it as well as thetitle of the ORIGINAL BAILOR ordepositor of the goods.ex. if the original bailor had noauthority from such owner to depositthe goods, then the holder of thenegotiable document, even if thenegotiation to him was valid, cannotacquire title to the goods; AND even ifthe original bailor had authority, if thenegotiation to the present holder’stransferor was not valid, such holder,even if in good faith and for value, doesnot acquire any right to the goods. the holder’s remedy if any, is againsthis transferor and/or the guilty party.i Thus, if the original bailor or

depositor of the goods was not theowner thereof or had no authorityfrom such owner to deposit thegoods, then the holder of thenegotiable document, even if thenegotiation to him was valid,cannot acquire title to the goods.

ii On the other hand, even if theoriginal bailor or depositor was theowner or had authority from theowner, if the negotiation to thepresent holder’s transferor was notvalid, such holder, even if in goodfaith and for value, does notacquire any right to the goods.

iii In both cases, the holder’s remedyif any, is against his transferorand/or the guilty party.

b. The person to whom the document hasbeen negotiated acquires theobligation of the bailee to makedelivery to him, as if they hadcontracted directly with each other.i By issuing a negotiable document

of title, such bailee had given inadvance his consent to hold thegoods for any person to whom suchdocument is negotiated.

ii If document non-negotiable, noticeof any transfer should be given tothe bailee otherwise bailee or anyother person other than thetransferor not bound

iii Thus, the transferee’s rights maybe defeated by a levy ofattachment on the goods or by anotification to the bailee of a sale ofthe goods to another purchaser.

iv A sale of the goods without thedocument will not prejudice asubsequent purchaser who takesthe document in good faith and forvalue.

v The bailee’s delivery to the legalholder of the document wouldrelieve him of any furtherresponsibility for the goods.



5.5. Liability of Indorser1. The indorsement of a negotiable documentof title carries with it certain implied warrantiesby the indorser.2. As to the document, his warranty covers itsgenuineness, his legal right to negotiate it andhis lack of knowledge of any fact which wouldimpair its validity.3. As to the goods, he warrants that he hasthe right to transfer title thereto and that theyare merchantable.4. However, unlike the indorser of a NI who isliable if the primary party fails to pay, theindorser of a negotiable document of title is notliable for the failure of the bailee to fulfill hisobligation to deliver the goods.

ROMAN v ASIA BANKING CORP. (1922)

A warehouse receipt must be interpretedaccording to its evident intent and it is obviousthat the deposit evidenced by the receipt in thiscase was intended to be made subject to theorder of the depositor and therefore negotiable.The indorsement in blank of the receipt with itsdelivery which took place on the date of theissuance of the receipt demonstrate the intent tomake the receipt negotiable. Furthermore, thereceipt was not marked “non-negotiable.”

SIY CONG BIENG v. HSBC

If the owner of the goods permits another tohave the possession or custody of negotiablewarehouse receipts running to the order of thelatter, or to bearer, it is a representation of titleupon which bona fide purchasers for value areentitled to reply, despite breaches of trust orviolations of agreement on the part of theapparent owner.