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o TIP: It is advised that one memorizes the two

2. most important provisions of the NIL : Sec. 1


(Forms of negotiable instruments) and Sec. 52
Negotiable (What constitutes a holder in due course)

Instruments Law (Act MICHAEL A. OSMEÑA v. CITIBANK (2004)

No. 2031) The Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said
statute should not be tampered with haphazardly or
lightly. Nor should it be brushed aside in order to
Chapter I. meet the necessities in a single case.
INTRODUCTION
3. Life of a Negotiable
Instrument
1. The Negotiable Instrument
1. issue
• Written contract for the payment of money, by 2. negotiation
its form intended as substitute for money and 3. presentment for acceptance in certain bills
intended to pass from hand to hand to give the 4. acceptance
HDC the right to hold the same and collect the 5. dishonor by or acceptance
sum due. 6. presentment for payment
• Instruments are negotiable when they conform 7. dishonor by nonpayment
to all the requirements prescribed by the NIL 8. notice of dishonor
(Act 2031, 03 February 1911). 9. protest in certain cases
• Although considered as medium for payment of 10. discharge
obligations, negotiable instruments are not
legal tender (Sec. 60, New Central Bank Act,
R.A. 7653);
• Negotiable instruments shall produce the effect 4. Kinds of Negotiable
of payment only when they have been Instruments
encashed or when through the fault of the
creditor they have been impaired. (Art. 1249,
CC) BUT a CHECK which has been cleared and
4.1. Promissory note - a promise to pay
credited to the account of the creditor shall be money
equivalent to a delivery to the creditor of cash. • unconditional promise in writing made by
one person to another signed by the maker
• engaging to pay on demand, or at a fixed or
Negotiable Non-negotiable
determinable future time a sum certain in
Contains all the Does not contain all the
money to order or to bearer
requisites of Sec. 1 of requisites of Sec. 1 of
• where a note is drawn to the maker’s own
the NIL the NIL
order, not complete until indorsed by him
Transferred by Transferred by
(Sec. 184, NIL).
negotiation assignment
HDC may have better Transferee acquires
rights than transferor rights only of his
4.2. Bill of exchange - an order made by one
transferor person to another to pay money to a third person.
Prior parties warrant Prior parties merely • unconditional order in writing addressed by
payment warrant legality of title one person to another signed by the person
giving it
Transferee has right Transferee has no right
• requiring the person to whom it is addressed
of recourse against of recourse
to pay on demand or at a fixed or
intermediate parties
determinable future time a sum certain in
money to order or to bearer (Sec. 126, NIL).
→ Check: bill of exchange drawn on a
2. Negotiable Instruments Law bank payable on demand.

o The NIL applies only to instruments which Promissory Note Bill of Exchange
conform with the requisites laid down by Sec1 Unconditional promise Unconditional order
of the law. Should any of said requisites be Involves 2 parties Involves 3 parties
absent, the instrument would not be negotiable Maker primarily liable Drawer only secondarily
and would therefore not be governed by the liable
NIL but by the general law on contracts. Only 1 presentment - Generally 2
for payment presentments - for
acceptance and for 1. “ORDER OR PROMISE TO PAY”
payment a. PROMISSORY NOTE:
i. PROMISE TO PAY: should be
express on the face of the
5. Parties instrument
ii. Word "promise" is not absolutely
necessary. Any expression
5.1. As regards promissory note: equivalent to a promise is sufficient.
1. Promissor/maker iii. Mere acknowledgment of a debt
2. Payee - person to whom the promise to insufficient
pay is made. b. BILLS OF EXCHANGE:
i. Order - command or imperative
5.2. As regards bill of exchange: direction; the instrument, by its
1. Drawer - person who gives the order to nature, demanding a right.
pay. ii. Words which are equivalent to an
2. Drawee - addressee of the order. order are sufficient.
3. Payee - person to whom the payment is to iii. A mere request or authority to
be made. pay does not constitute an order.
iv. Although the mere use of polite
• Indorser - the payee of an instrument who words like "please" does not of itself
transfers it to another by signing it at the back deprive the instrument of its
thereof characteristics as an order, its
• Indorsee - person to whom the indorser language must clearly indicate a
negotiates the instrument, who, by such demand upon the drawee to pay.
negotiation, becomes the holder of the
instrument. 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…though
Chapter II. coupled with:
NEGOTIABILITY i. “An indication of a particular fund out
of which reimbursement is to be
made, or a particular account to be
debited with the amount
1 Requisites of Negotiability1 • UNCONDITIONAL: Mere
indication of the particular fund
1.1. Must be in Writing and Signed by out of which reimbursement is
to be made, or an indication of
the Maker a particular account to be
1. No person liable on the instrument whose
debited with the amount
signature does not appear thereon.
ii. “A statement of the transaction which
2. One who signs in a trade or assumed
gives rise to the instrument.
name liable to same extent as if he had
• UNCONDITIONAL: Mere
signed in his own name. (Sec. 18, NIL)
recital of the transaction or
3. Signature of party may be made by duly
consideration for which the
authorized agent; no particular form of
instrument was issued
appointment necessary. (Sec. 19, NIL)
• However, the fact that the
4. "In writing" - includes print; written or
condition appearing on the
typed
instrument has been fulfilled
5. Signature, binding so long it is intended
will not convert it into a
or adopted as the signature of the signer or
negotiable one.
made with his authority.
iii. But an order or promise to pay out of
a particular fund is not unconditional
1.2. Must contain an Unconditional • CONDITIONAL: when
Order or Promise to Pay reference to the fund clearly
indicates an intention that such
fund alone should be the source
1
Suggested Mnemonics: UP MaSCoT’S PaWN: of payment
Unconditional order and Promise, payable in
Money, Signed by maker, Certainty as to Time, Sum
and Parties, in Writing, include words of
Negotiability.
METROPOLITAN BANK v. CA (1991) 2.) No time for payment is expressed;
3.) Where an instrument is issued,
The treasury warrants in question are not NIs. They accepted, or indorsed when overdue, it
are payable from a particular fund, to wit, Fund is, as regards the person so issuing,
501. The indication of Fund 501 as the source of the accepting, or indorsing it, payable on
payment to be made on the treasury warrants demand.
makes the order or promise to pay "not
unconditional" and the warrants themselves non- Demand instruments: Holder may call for
negotiable. payment any time; maker has an option to
pay at any time, and the refusal of the
1.3. Sum Payable must be Certain holder to accept payment will terminate the
1. Sec. 2, NIL: The sum payable is a sum running of interest, if any, but the obligation
certain, even if: to pay the note remains.
a. With interest;
b. By stated installments; 2. at a fixed time
c. By stated installments with o Only on the stipulated date, and not
acceleration clause; before, may the holder demand its
d. With exchange, whether at a fixed rate payment.
or at the current rate; or o Should he fail to demand payment, the
e. With costs of collection or attorney's instrument becomes overdue but
fee. remains valid and negotiable. It is
2. A sum is certain if from the face of the merely converted to a demand
instrument it can be mathematically instrument.
computed.
3. A stipulation to pay a higher rate of 3. at a determinable future time
interest if the note is not paid or a lower
rate if it is paid on or before maturity does o Determinable future time, if
not render the instrument non-negotiable. expressed to be payable (Sec. 4, NIL):

1.) At a fixed period after date of sight;


1.4. Must be Payable in Money
2.) On or before a fixed or determinable
1. Capable of being transformed into money.
future time specified therein;
2. NON NEGOTIABLE: an instrument which
3.) On or at a fixed period after the
contains an order or promise to do an act
occurrence of a specified event
in addition to the payment of money
which is certain to happen, though
3. BUT If the order or promise gives the
the time of happening be uncertain.
holder an election to require something to
be done in lieu of payment of money, an
o If payable upon a contingency, both
instrument otherwise negotiable would not
negotiable, and the happening of the
be affected thereby. (Sec. 5, NIL)
event does not cure the defect.
→ But if the option is with the maker
or person primarily liable,
4. Effect of acceleration provisions
instrument is NOT negotiable.
o If option (absolute or conditional) to
4. Kind of current money does not affect
accelerate maturity is on the maker,
negotiability. Since the value of the note
still NEGOTIABLE.
can by a simple mathematical computation
§ Maker may pay earlier than the date
be expressed in the value of the lawful
fixed but this option, if exercised,
money of the latter country (Incitti v
would be a payment in advance of
Ferrante, 1933, US Jur)
a legal liability to pay. It is still
5. Obligations in foreign currency may be
payable on the date fixed, and
discharged in Philippine currency based on
holder has no right to enforce
the prevailing rate at the time of payment,
payment against the maker
pursuant to RA 8183 (Asia World
before such date.
Recruitment v NLRC, 1999).
o If option to accelerate is on the holder:
§ If option can be exercised only after
the happening of a specified
1.5. Time of Payment must be Certain event/act over which he has no
• Purpose: Informing the holder of the control (conditional), still
instrument of the date when he may NEGOTIABLE.
enforce payment thereof. § If option is unconditional, time of
• An instrument may be payable: payment is rendered uncertain,
NOT negotiable.
1. on demand (Sec. 7. NIL) o Other instances where instrument still
1.) Expressed to be payable on demand, NEGOTIABLE:
or at sight, or on presentation;
§ When option given to the holder The negotiability or non-negotiability of an instrument
to accelerate the maturity of an is determined from the face of the instrument itself.
installment note upon failure of The duty of the court in such case is to ascertain, not
the maker to pay any installment what the parties may have secretly intended but what
when due. is the meaning of the words they have used.
§ Acceleration, automatic upon
default. Traders Royal Bank v. CA (1997)
§ Acceleration by operation of law. The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom
5. Provisions extending time of payment to circulate as a substitute for money. Hence,
o General rule: Negotiability not freedom of negotiability is the touchtone relating to
affected. Effect is similar with that of the protection of holders in due course, and the
an acceleration clause at the option of freedom of negotiability is the foundation for the
the maker. protection which the law throws around a holder in
§ Negotiability not affected, even if due course.
the holder is given the option to
extend time of payment by mere • Postal money order, not negotiable,
inaction or indulgence for an because it does not contain words of
indefinite time depending on his negotiability.
will, because with or without this • Where words "or bearer" printed on a
provision, the holder may always check are cancelled by the drawer,
choose to be indulgent. instrument not negotiable.
o Exception: Where a note with a fixed • Bearer instrument may be negotiated by
maturity provides that the maker has mere delivery.
the option to extend time of payment o When instrument is payable to bearer
until the happening of contingency, (Sec. 9, NIL):
instrument NOT negotiable. The time a. Expressed to be so payable - ex: "I
for payment may never come at all. promise to pay the bearer the
sum…."
1.6. Must be Payable to Order or to b. Payable to a person named therein
Bearer/ Must contain Words of or bearer – ex. "Pay to A or
bearer."
Negotiability c. Payable to the order of a fictitious
• words of negotiability - serve as an
person or non-existing person, and
expression of consent that the such fact was known to the person
instrument may be transferred.
making it so payable - ex: "Pay to
o But the instrument need not follow John Doe or order."
the language of the law; any term
d. Name of payee does not purport to
which clearly indicates an intention
be the name of any person - ex:
to conform with the legal
"Pay to cash;" "Pay to sundries."
requirements is sufficient.
e. Only or last indorsement is an
indorsement in blank.
SALAS v CA (1990)
ANG TEK LIAN v. CA (1950)
Among others, the instrument in order to be
considered negotiable must contain the so-called A check drawn payable to the order of cash is a
"words of negotiability — i.e., must be payable to check payable to bearer, and the bank may
"order" or "bearer"". Under Section 8 of the pay it to the person presenting it for payment
Negotiable Instruments Law, there are only two without the drawer's indorsement.
ways by which an instrument may be made payable A check payable to bearer is authority for
to order. There must always be a specified person payment to the holder. Where the check is in
named in the instrument and the bill or note is to be the ordinary form and is payable to bearer, so
paid to the person designated in the instrument or that no indorsement is required, a bank, to
to any person to whom he has indorsed and which it is presented for payment, need not
delivered the same. have the holder identified, and is not negligent
in failing to do so.
CALTEX v. CA (1992)
• Order Instrument, negotiation requires
delivery and indorsement of the transferor.
o When instrument is payable to order:
Drawn payable to the order of a
specified person or to him or his order
(Sec. 8, NIL).
o Without the words "to order" or "to the can only be valid if given express legislative sanction.
order of," the instrument is payable
only to the person designated therein In common law, two kinds of judgment by
and is therefore non-negotiable. confession:
(Campos, as cited in Consolidated Judgment by cognovit actionem
Plywood Industries v IFC Leasing, Confession relicta verificatione
1987)

3. Omissions Not Affecting


1.7. Parties must be designated with
Certainty
Negotiability (Sec. 6)
a. Maker and drawer
• Sign the instrument at the lower A. Non-dating of the instrument
right-hand corner. B. Non-specification of value given, or that any
b. Payee value had been given
• When negotiating, sign at the back; C. Non-specification of place where it is drawn or
same with indorsers. place where it is payable
a. Drawee D. Bears a seal
• Name usually at the lower left-hand E. Designation of particular kind of currency in
corner, or across the top. which payment is to be made
• If instrument addressed to
drawee, he must be named or
indicated with reasonable 4. Rules of Construction
certainty.
• If it is not clear in what capacity the person (Sec.17)
signed, said person is considered an
indorser
A. Sum expressed in words takes precedence over
sum in numbers; BUT where words are so
ambiguous or uncertain, reference to the figures
should be made
2 Provisions Not Affecting B. Where interest is stipulated, without specification
of the starting date, the interest runs from the
Negotiability, (Sec. 5)2 date of the instrument, and if undated, from the
issue thereof
1. Authorizes sale of collateral securities; C. An undated instrument is considered dated as of
time issued.
2. Authorizes confession of judgment if instrument
D. Written provisions prevail over printed provisions
not paid at maturity; E. Where the instrument is ambiguous as to
3. Waives the benefit of any law intended for the whether it is a note or a bill, the holder may treat
advantage or protection of the obligor; or it as either at his election
4. Gives holder election to require something to F. When the capacity of signatory is not clear, he is
be done in lieu of payment of money. (if in to be deemed an indorser
addition to money – not NI) G. “I promise to pay” when signed by two or more
• Negotiability affected, when instrument persons is deemed to be jointly and severally
contains a promise or order to do any signed
act in addition to the payment of
money.

PNB v. MANILA OIL REFINING (1922)


Chapter III.
In this case, the note contains a provision that in
case that it would not be paid at maturity, the
TRANSFER
"maker authorizes any attorney to appear and
confess judgment thereon."
The Court ruled that said judgment note is illegal 1. Delivery and Issuance
and inoperative as such is against public policy. It
noted that it is in derogation of the constitutional A. Delivery means transfer of possession of
safeguards (a day in court). Such judgment note instrument by the maker or drawer, with intent
to transfer title to the payee and recognize him
as holder thereof. (de la Victoria v. Burgos)
2 B. NI incomplete and revocable until delivery for the
Suggested Mnemonic: WEJy S: Waives, gives purpose of giving effect thereto as between
holder Election, confession of Judgment, Sale of (Sec. 16, NIL):
Securities 1. immediate parties
2. a remote party other than holder in due • The indorsement must be written on the
course instrument itself or on a paper attached thereto
C. delivery, to be effectual, must be made by or (allonge). The signature of the indorser, without
under the authority of the party making / additional words, is sufficient indorsement.
drawing / accepting/indorsing (Sec.31, NIL)
D. delivery may be shown to have been
• Indorser generally enters into two contracts
conditional, or for a special purpose only, and (Implied contracts by Indorser):
not for the purpose of transferring the property
1. sale or transfer of instrument
in the instrument 2. to pay instrument in case of default of maker
E. PRESUMPTION OF DELIVERY
1. Where the instrument is no longer in the • Indorsement must be of entire instrument (can’t
possession of a party whose signature be indorsement of only part of amount payable,
appears thereon, a valid and intentional nor can it be to two or more indorsees severally.
delivery by him is presumed until the But okay to indorse residue of partially paid
contrary is proved instrument) (Sec. 32, NIL)
2. if it is in the hands of a HDC, the
presumption is conclusive 3.1. Kinds of Indorsements (Sec. 33)
3. Camposes: Should an undelivered
instrument come into the hands of a holder 1. as to manner of future method of
in due course, the maker is liable to him negotiation(Sec. 35, NIL):
regardless of any proof of the lack of valid
delivery. a. special – specifies the person to whom/to
F. PRESUMPTION AS TO DATE whose order the instrument is to be payable;
1. Date is not an essential element of indorsement of such indorsee is necessary to
negotiability further negotiation.
2. An undated instrument is considered to be • A special indorser is liable to all
dated as of the time it was issued subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable
GEMPESAW v CA (1993) only to those who take title through his
indorsement (Sec 40, NIL)
Every contract on a negotiable instrument is b. blank – specifies no indorsee, instrument so
incomplete and revocable until delivery of the indorsed is payable to bearer, and may be
instrument to the payee for the purpose of giving negotiated by delivery
effect thereto. The first delivery of the instrument, • a person who negotiates by mere
complete in form, to the payee who takes it as a delivery is liable only to his immediate
holder, is called issuance of the instrument. Without transferee.
the initial delivery of the instrument from the • the holder may convert a blank
drawer of the check to the payee, there can be no indorsement into a special indorsement
valid and binding contract and no liability on the by writing over the signature of the
instrument. indorser in blank any contract consistent
with the character of the indorsement
• An order instrument may be converted into a
2. Negotiation bearer instrument by means of a blank
indorsement.
• When an instrument is transferred from one • But a bearer instrument remains as such
person to another as to constitute the whether it has been indorsed specially or in
transferee the holder thereof. blank. It is the liability of the indorser which
is affected.
• If payable to BEARER, negotiated by delivery; if
payable to ORDER, negotiated by indorsement
of holder + delivery (Sec.30, NIL)
2. as to kind of title transferred:
SESBREÑO v. CA (1993)
a. restrictive – such indorsement either:
1) prohibits further negotiation of
A NI may, instead of being negotiated, ALSO be
instrument,
assigned or transferred. A non-NI may not be
o In this kind of restrictive indorsement,
negotiated; but it may be assigned or transferred,
the prohibition to transfer or negotiate
absent an express prohibition against assignment
must be written in express words
or transfer written in the face of the instrument.
at the back of the instrument, so
that any subsequent party may be
forewarned that ceases to be
3. Indorsement negotiable. However, the restrictive
indorsee acquires the right to receive
payment and bring any action a. Absolute – One by which the indorser binds
thereon as any indorser, but he can himself to pay, upon no other condition than
no longer transfer his rights as such the failure of prior parties to do so, and of
indorsee where the form of the due notice to him of such failure
indorsement does not authorize him b. Joint - Where instrument payable to the
to do so. (Gempesaw v CA 1993) order of two or more payees or indorsees not
partners, all must indorse, unless the one
2) constitutes indorsee as agent of indorsing has authority to endorse for the
indorser, or others (Sec. 41, NIL)
3) vests title in indorsee in trust for c. Irregular - Where a person, not otherwise a
another party to the instrument, places thereon his
o rights of indorsee in restrictive signature in blank before delivery, he is
ind.: liable as indorser
a) receive payment of inst.
b) Bring any action thereon
that indorser could bring 3.2. Other Rules on Indorsement
c) Transfer his rights as
such indorsee, but all 1. Indorsement by Collecting Bank - holder
subsequent indorsees deposits check with a bank other than the
acquire only title of first drawee, would in effect be negotiating the check
indorsee under restrictive to such bank, since he would have to indorse the
indorsement check before the bank will accept it for deposit.
b. non-restrictive In most cases, the bank is acting as a mere
collecting agent.
3. as to kind of liability assumed by indorser
a. qualified 2. Negotiation by Joint or Alternative Payees
• constitutes indorser as mere assignor or Indorsees - all must indorse, unless the one
of title (eg. “without recourse”) (Sec. indorsing has authority to endorse for the others
38, NIL).
• But this does not mean that the 3. Unindorsed instruments – Sec 49, NIL Where
transferee only has the rights of an holder of instrument transfers for value without
assignee. Transfer remains a indorsing, transfer vests in transferee:
negotiation and transferee can still be
a holder capable of acquiring a title a. such title as transferor had therein, subject
free from defenses of prior parties. to defenses and equities available to prior
• It relieves the qualified indorser of his parties
liability to pay the instrument should o ex: transferee can sue the transferor,
the maker be unable to pay at though he does not thereby
maturity. automatically become a HDC (Furbee v.
b. unqualified Furbee, 1936)
b. right to have indorsement of transferor,
after which, he becomes a holder or possibly
4. as to presence/absence of express limitations a HDC
put by indorser upon primary obligor’s o For purposes of determining whether or
privileges of paying the holder: not the transferee becomes a HDC after
securing the transferor’s indorsement,
a. conditional – additional condition annexed note that Sec. 52 must be met at the
to indorser’s liability. (Sec. 39, NIL) time of the negotiation, i.e., when
indorsement is actually made.
o Where an indorsement is conditional, a
party required to pay the instrument BPI vs CA (2007)
may disregard the condition, and
make payment to the indorsee or his The transaction [in Sec. 49, NIL] is an equitable
transferee, whether condition has been assignment and the transferee acquires the
fulfilled or not instrument subject to defenses and equities available
o Any person to whom an instrument so among prior parties. Thus, if the transferor had legal
indorsed is negotiated will hold the title, the transferee acquires such title and, in
same/proceeds subject to rights of addition, the right to have the indorsement of the
person indorsing conditionally transferor and also the right, as holder of the legal
title, to maintain legal action against the maker or
b. unconditional acceptor or other party liable to the transferor. The
underlying premise of this provision, however, is that
5. other classifications: a valid transfer of ownership of the negotiable
instrument in question has taken place.
Transferees in this situation do not enjoy the
presumption of ownership in favor of holders since Chapter IV.
they are neither payees nor indorsees of such
instruments… Thus, something more than mere
HOLDER IN DUE COURSE
possession by persons who are not payees or
indorsers of the instrument is necessary to
authorize payment to them in the absence of any 1. Holder (Sec. 191)
other facts from which the authority to receive • Definition: Payee or indorsee of a bill or note
payment may be inferred. who is in possession of it, or the bearer
thereof.
4. Cancellation of Indorsements - Holder may
strike out indorsements not necessary to his
• RIGHTS OF HOLDER (Sec. 51, NIL)
1. sue thereon in his own name
title. The endorser whose endorsement was
2. payment to him in due course discharges
struck out, and all endorsers subsequent to
instrument
him, are relieved from liability on the
instrument (Sec. 48, NIL)
2. Three Kinds of DUE COURSE
5. Indorsement by Agent - agent should make
it plain that he is signing in behalf of a principal
Holding
otherwise he may be made personally liable a. HDC under Sec 52
(Sec 20, NIL) b. HDC under Sec 58 : A holder who derives
title to the instrument through a HDC has all
o The Negotiable Instruments Law provides the rights of the latter even though he
that where any person is under obligation himself satisfies none of the requirements of
to indorse in a representative capacity, he due course holding (Campos & Campos)
may indorse in such terms as to negative c. HDC under Sec 59 (presumption): every
personal liability. An agent, when so holder is deemed prima facie to be a holder
signing, should indicate that he is merely in due course
signing in behalf of the principal and must
disclose the name of his principal; 3. Requisites to become a
otherwise he shall be held personally liable.
(FRANCISCO v CA, 1990)
holder in due course (Sec.52)3
6. Presumption as to Indorsement SALAS v. CA (1990)
o Time (Sec.45, NIL) - Every negotiation
deemed prima facie effected before The indorsee was a HDC, having taken the instrument
instrument was overdue, except where under the following conditions: (1) it is complete and
indorsement bears date after maturity of regular upon its face; (2) it became the holder
the instrument. thereof before it was overdue; (3) it took the same in
o Place (Sec.46, NIL) - Every indorsement good faith and for value; and (4) when it was
is presumed prima facie made at place negotiated to the indorsee, the latter had no notice of
where instrument is dated any infirmity in the instrument or defect in the title of
o Where instrument drawn or indorsed to the previous indorser.
person as cashier (Sec.42, NIL) - deemed
prima facie to be payable to the bank or HDC is one who has taken the instrument under the
corporation of which he is such officer; following conditions:
may be negotiated by either the
indorsement (1) of the bank or corporation 3.1. That it is complete and regular
or (2) of the officer.
upon its face
7. Continuation of Negotiable Character - An 1. COMPLETE
NI, although overdue, retains its negotiability o An instrument is complete if it contains
unless it has been paid or restrictively indorsed all the requisites for making it a
to prevent further negotiation (Sec. 47, NIL) negotiable one, even if it may have
blanks as to non-essentials.
8. Indorsement of bearer inst. o It is incomplete when it is wanting in
any material particular or particular
o Where an instrument payable to bearer is
indorsed specially, it may nevertheless be
further negotiated by delivery
o Person indorsing specially liable as indorser 3
suggested mnemonics: GROIN: Good faith and
to only such holders as make title through value, complete and Regular, not Overdue, no notice
his indorsement
of Infirmity at time of Negotiation; or GROCI: Good
faith and value, Regular, not Overdue, Complete, no
Infirmity,
proper to be inserted in a NI without i. Occurs when the party primarily
w/c the same will not be complete. liable fails to pay at the date of
maturity
2. Material Particulars ii. Date of Maturity
o What are material particulars? A 1) “payable after sight”—date of
change in the ff. is considered a presentment
material alteration (Sec. 125, NIL): 2) Payable on the occurrence of a
i. The date; specified event—date is fixed
ii. The sum payable, either for by happening of event
principal or interest; 3. An instrument is not invalid for the reason
iii. The time or place of payment; only that it is ANTE-DATED OR POST-DATED
iv. The number or the relations of the provided not done for an illegal or fraudulent
parties; purpose. The person to whom an instrument
v. The medium or currency in which so dated is delivered acquires the title
payment is to be made; thereto as of the date of delivery. (Sec.12,
vi. Or which adds a place of payment NIL)
where no place of payment is
specified, 3.3. That he took it in good faith AND
for value:
1. HOLDER FOR VALUE - (a) Where value has
3. Rights of HDC of instrument that has been
at any time been given for the instrument,
materially altered
the holder is deemed a HFV in respect to all
o enforce payment thereof according to
parties who become such prior to that time
its original tenor IF not a party to the
(Sec.26, NIL) and (b) Where the holder has
alteration. (Sec. 124, NIL)
a lien on the instrument, he is deemed a HFV
to the extent of his lien (Sec.27, NIL).
3.2. That he became the holder of it a. PRESUMPTION – Every NI is deemed
before it was overdue and without prima facie issued for valuable
notice that it had been previously consideration; and every person whose
signature appears thereon to have
dishonored, if such was the fact
become a party thereto for value (Sec.
1. “OVERDUE”
24, NIL)
a. The ff. cannot be HDCs: (Sec. 53,
i. In actions based upon a negotiable
NIL)
instrument, it is unnecessary to
i. A holder who became such after
aver or prove consideration, for
the date of maturity of the
consideration is imported and
instrument (instrument is
presumed from the fact that it is a
overdue);
negotiable instrument. The
ii. In case of demand instruments, a
presumption exists whether the
holder who negotiates it after an
words "value received" appear on
unreasonable length of time after
the instrument or not (Ong v
its issue
People, 2000)
b. Instruments with fixed maturity but
ii. BAYANI VS. PEOPLE (2004)
subject to acceleration: ultimate date
1) Under Section 28 of the
of maturity is the date of maturity for
Negotiable Instruments Law
the purpose of determining whether a
(NIL), absence or failure of
purchaser is a HDC
consideration is a matter of
c. Undated instruments: Prima facie
defense only as against any
presumption that it was negotiated
person not a holder in due
before it was overdue (Sec 45)
course.
d. NOTE: An overdue instrument is still
2) Moreover, Section 24 of the NIL
negotiable, but it is subject to the
provides the presumption of
defense existing at the time of the
consideration. Such
transfer.
presumption cannot be
overcome by the petitioner’s
2. DISHONOR
bare denial of receipt of the
a. Non-acceptance
[consideration].
i. Occurs when drawee refuses to
3) Only evidence of the clearest
accept the order of the drawer as
and most convincing kind will
stated in the bill
suffice for that purpose.
ii. Applicable only to bills of
(Travel-On Inc v CA, 1992)
exchange
iii. May occur before the date of
b. VALUE - any consideration sufficient to
maturity of the bill
support a simple contract. An
b. Non-payment
antecedent or pre-existing debt NOTICE OF DEFECT—
constitutes value, whether the To constitute notice of
instrument is payable on demand or at an infirmity in the
a future time. (Sec.25, NIL) instrument or defect in
the title of the person
i. MERCHANTS’ NATIONAL BANK negotiating the same,
OF ST. PAUL v. STA. MARIA the person to whom it
SUGAR CO. (1914) is negotiated must
The mere discounting of the note have had actual
and placing the amount of said knowledge of the
discount to the credit of the HFV infirmity or defect, or
would not then have constituted a knowledge of such
transfer for value. But if the sum facts that his action in
had subsequently been checked taking the instrument
out, then value would have amounted to bad faith.
passed. § It is therefore
The general rule as to the sufficient that the
application of payments, there buyer of a note had
being no special facts to interfere, notice or knowledge
is that the first payments apply to that the note was in
the oldest debts. some way tainted with
The first debits are to be charged fraud. It is not
against the first credits. It follows necessary that he
therefore, upon the facts as should know the
found, that the bank was a bona particulars of the
fide HFV without notice, and, in fraud.
accordance with the stipulation, 2) SUSPICIOUS
judgment should be entered for CIRCUMSTANCES
the plaintiff upon the note. a. BAD FAITH - does
Judgment reversed. not require actual
ii. Bank credit as value - When the knowledge of the
holder of a check deposits it with exact fraud that was
his bank (assuming it is not the practiced; knowledge
drawee bank) and the bank that there was
credits it to his account, is the something wrong
bank at this stage a HFV? about the assignor’s
o Majority View à first money acquisition of title is
in is presumed to be the first sufficient.
money paid out b. The burden is upon the
o Minority View à as long as defendant to show
the balance in the depositor’s that notwithstanding
account equals or exceeds the the SUSPICIOUS
amount of the instrument CIRCUMSTANCES, it
deposited, the latter cannot acquired the check in
be considered as withdrawn actual good faith. (De
for the purpose of treating Ocampo & Co. v.
the bank as a HFV. Gatchalian)
o (So far, there has been no o Purchase of an
decision by the SC on this instrument at a
issue.) DISCOUNT does not,
of itself, constitute bad
faith. However, if the
2. GOOD FAITH instrument is
a. Holder must have taken the pruchased at a heavy
instrument in good faith and that at discount, this fact
the time it was negotiated to him he together with other
had no notice of any infirmity in the facts, may be taken
instrument or defect in the title of the into account in
person negotiating it. deciding the issue of
b. NOT a Holder in GOOD FAITH purchase in good faith.
i. Holder acted in bad faith (Ham v. Meritt)
ii. Holder had NOTICE OF DEFECT
1) ACTUAL KNOWLEDGE VICENTE R. DE OCAMPO & CO. v. GATCHALIAN,
§ SEC 56. WHAT ET. AL. (1961)
CONSTITUTES
In order to show that the defendant had knowledge 2) In installment sales, the
of such facts that his action in taking the instrument buyer usually issues a note
amounted to bad faith, it is not necessary to prove payable to the seller to
that the defendant knew the exact fraud that was cover the purchase price.
practiced upon the plaintiff by the defendant’s 3) Many times, pursuant to a
assignor, it being sufficient to show that the previous arrangement with
defendant had notice that there was the seller, a finance
something wrong about the assignor’s company pays the full price
acquisition of title, although he did not have of the property sold and
notice of the particular wrong that was committed. the note is indorsed to it by
…The fact is that it acquired possession of the the seller, subrogating it to
instrument under circumstances that should have the right to collect the
put it to inquiry as to the title of the holder who price from the buyer.
negotiated the check to it. The burden was, 4) RULE à In such cases, the
therefore, placed upon it to show that tendency of the courts is to
notwithstanding the suspicious circumstances, it protect the buyer against
acquired the check in actual good faith. the finance company in the
One line of cases had adopted the test of the event that the goods sold
reasonably prudent man and the other that of turn out to be defective.
actual good faith. It would seem that it was the The finance company will
intent of the Negotiable Instruments Act to be subject to the defense
harmonize this disagreement by adopting the latter of failure of consideration
test. Negligence on the part of the plaintiff, or and cannot recover the
suspicious circumstances sufficient to put a prudent purchase price from the
man on inquiry, will not of themselves prevent a buyer. NOTE:
recovery, but are to be considered merely as Consolidated Plywood v.
evidence bearing on the question of bad faith. IFC à rule applied; Salas
v. CA à rule not applied
STATE INVESTMENT HOUSE v. IAC (1989)

A check with 2 parallel lines in the upper left hand 3.4. That at time it was negotiated to
corner means that it could only be deposited and
him, he had no notice of :
may not be converted to cash. Consequently, such
o any infirmity in instrument
circumstance should put the payee on inquiry and
o any defect in title of person
upon him devolves the duty to ascertain the
negotiating;
holders’ title to the check or the nature of his
1. title DEFECTIVE when (Sec. 55, NIL):
possession. Failing in this respect, the payee is
a. instrument / signature obtained by
declared guilty of gross negligence amounting to
fraud, duress, force or fear or other
legal absence of good faith and as such the
unlawful means OR for an illegal
consensus of authority is to the effect that the
consideration; or
holder of the check is not a holder in good faith.
b. instrument is negotiated in breach of
faith, or fraudulent circumstances
YANG v. CA (2003)
2. NOTICE of infirmity or defect –
… in accepting the cross checks and paying cash for
a. actual knowledge of the infirmity or
them, despite the warning of the crossing, the
defect OR knowledge of such facts that
subsequent holder could not be considered in good
his action in taking the instrument
faith and thus, not a holder in due course.
amounted to bad faith (Sec.56, NIL)
b. Notice to an AGENT is chargeable
against the principal.
iii. FINANCING COMPANY
c. INSUFFICIENT NOTICE
1) Consolidated Plywood v.
i. CONSTRUCTIVE NOTICE (ex.
IFC: A FINANCING
notice of defenses disclosed by
COMPANY that is the
public records, doctrine of lis
indorsee of a note issued
pendens) is insufficient to charge a
by a buyer payable to the
purchaser of a NI with notice.
seller of goods is NOT a
§ Just as a purchaser of a
holder in good faith as
negotiable instrument is
to the buyer. In case the
not put on inquiry, neither
goods sold turn out to be
is he charged with notice of
defective, it cannot
defenses or equities
recover the purchase
disclosed by public records,
price of the goods from
nor is he affected by the
the buyer.
doctrine of lis pendens.
However, notice to an such defective title (i.e., where defense is
agent is chargeable not his own) – presumption in favor of holder
against the principal.
ii. Notice of an ACCOMODATION
PARTY is not notice of a defect.
6. Rights of Holder in Due
§ Thus, an accomodation Course
party (one who has
signed the instrument as 6.1. Under the NIL4
maker, drawer, acceptor 1. to sue on the instrument in his own
or endorser, without name (Sec. 51, NIL)
receiveing value therefor, 2. to receive payment on the instrument
and for the purpose of – discharges the instrument (Sec. 51,
lending his name to some NIL)
other person) is liable on 3. holds instrument free of any defect of
the instrument, title of prior parties (Sec. 57, NIL)
notwithstanding the fact 4. free from defenses available to prior
that the holder knew him parties among themselves (Sec.57,
to be an accomodation NIL)
party. 5. may enforce payment of instrument
d. RIGHT of a transferee who receives for full amount, against all parties liable
NOTICE of any infirmity or defect (Sec.57, NIL)
BEFORE he has PAID THE FULL
amount for the instrument
i. He will be deemed a HDC only to
6.2. JUR: BPI v. ALFRED BERWIN & CO.
the extent of the amount Only a HDC may enforce payment on the PN.
therefore paid by him (Sec.54, In CAB, it is not clear whether A (the payee) is
NIL) 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 a second time to
the HDC (in case A was no longer one).
4. Effect of Qualified,
Conditional and Restrictive 6.3. DISADVANTAGE of being a
Indorsements NON HDC:
o The Negotiable Instruments Law does
A. The status of a holder as a HDC is not
not provide that a holder not in due
affected by his taking under a qualified
course can not recover on the
indorsement.
instrument. The disadvantage of … not
B. A conditional indorsement does not
being a holder in due course is that the
deprive the conditional indorsee or
negotiable instrument is subject to
subsequent holder of the rights of a HDC.
defenses as if it were non-negotiable.
If he fulfills all the requisites in Sec. 52
One such defense is absence or failure
then he is immune from all the personal
of consideration. (Atrium Mgt v de Leon,
defense.
2001)
C. A restrictive indorsement which prohibits
further negotiation will not prevent the
indorsee from being a HDC. BUT, if he
further indorses the instrument, then the 7. Rights of Purchaser from
subsequent indorsee will not be a due
course holder.
Holder in Due Course (Sec.58)
7.1. General Rule: In the hands of any
holder other than a HDC, NI is subject to same
5. Who is Deemed HDC defenses as if it were non-negotiable.
(burden of proof) (Sec.59)
A. General Rule: Prima facie presumption in 7.2. Exception: A holder who derives title
favor of holder through a HDC and who is NOT himself A PARTY
B. Exception: Burden is reversed (burden on TO ANY FRAUD or illegality has all rights of such
holder to prove that he or some person former holder in respect to all parties prior to the
under whom he claims acquired title as latter EVEN though he himself does not satisfy
HDC) when it is shown that the title of any Sec.52
person who has negotiated instrument was
defective
4
C. Exception to exception: There will be no Suggested Mnemonics: REFS: Receive and Enforce
reversal if the party being made liable payment, Free from any defect of title and defenses,
became bound prior to the acquisition of
Sue
2. Real Defenses
8. Presumption in Favor of Due
Course Holding 2.1. Incapacity: REAL defense but
available only to the incapacitated party (ex.
minor or corporation); the indorsement or
A. Every holder is deemed prima facie to be a assignment of the instrument by a corp. or by an
holder in due course; infant passes the property therein,
1. BURDEN SHIFTS when it is shown that notwithstanding that from want of capacity, the
the title of any person who has corp. or infant may incur no liability thereon.
negotiated the instrument was (Sec.22, NIL)
defective. Holder MUST PROVE that he
or some person under whom he claims
acquired the title as a holder in due
2.2. Incomplete, Undelivered
course.
2. But the last mentioned rule does not Instrument
apply in favor of a party who became 1. Instrument will not, if completed and
bound on the instrument prior to the negotiated without authority, be a valid
acquisition of such defective title. contract in the hands of ANY holder, as
(Sec.59., NIL) against any person whose signature was
B. However, this presumption arises only in placed thereon before delivery. (Sec.
favor of a person who is a holder as 15, NIL)
defined in Section 191 of the Negotiable 2. Who may be estopped from raising the
Instruments Law, meaning a “payee or real defense under Sec 15? A drawee
indorsee of a bill or note, who is in bank whose negligent custody of the
possession of it, or the bearer thereof.” checks, after partial execution,
(Yang v CA, 2003) contributed to its escape

3. Personal Defenses
Chapter V.
3.1. Complete, Undelivered
DEFENSES & EQUITIES Instrument
a. CONCLUSIVE presumption of a valid
delivery – where the instrument is in the
1. Defenses in General hands of a HDC
b. PRIMA FACIE presumption of a valid
delivery – where the instrument is no longer
1.1. REAL defense – attaches to
in the possession of a party whose sig
instrument on the principle that there was no
appears thereon (Sec. 16, NIL)
contract at all; available against ALL holders
including holders in due course. They are those
which attach to the instrument itself and 3.2. Incomplete, Delivered (sec.14)
generally, disclose an absence of one of the
essential elements of a contract. 1. This is a personal defense only because
provision states that if any instrument
1.2. PERSONAL defense – grows out of
so completed is negotiated to a holder in
the agreement or conduct of a particular person
due course, it is valid and effectual for
in regard to the instrument which renders it
all purposes
inequitable FOR HIM, though holding the legal
2. 2 Kinds of Writings:
title, to enforce it against the party sought to
i. Where instrument is wanting in
be made liable; not available against a HDC.can
any material particular: person in
be raised only against holders not on due
possession has prima facie
course. Here, the true contract appears , but
authority to complete it by filing up
for some reason , the defendant is excused
blanks therein
from the obligation to perform.
ii. Signature on blank paper
1.3. Equities or Claims of delivered by person making the
Ownership are of 2 Kinds signature IN ORDER that the paper
1. Legal – one who has legal title to the may be CONVERTED into a NI à
instrument may recover possession operates as prima facie authority to
thereof even from holder in due course fill up as such for any amount
2. Equitable – may only recover from a 3. The authority to fill up is limited by the
holder not in due course following:
a. When completed, it may be 2. REAL when the law expressly provides for
enforced upon the parties thereto illegality as a real defense (Statutory
only if it was filled strictly in declaration of illegality
accordance with the authority
given RODRIGUEZ v MARTINEZ (1905)
b. The filling up must be within a
reasonable time Maker cannot be relieved from the obligation of
paying the holder the amount of the note alleged to
NOTE: If the signature on a paper is have been executed for an unlawful consideration.
given only for autograph purposes (Illegality is personal, so defense only against a
and the same is converted into a NI, holder not in due course)
this will amount to forgery, The holder paid the value of the note to its former
constituting thus a valid defense holder. He did so without being aware of the fact
even against a HDC that the note had an unlawful origin. He accepted
note in good faith, believing the note was valid and
4. This provision contemplates delivered absolutely good. The maker even assured the
instruments, so the person in holder before the purchase that the note was good
possesion cannot be a thief or a finder and that he would pay it at a discount .
but a person in lawful possession- one
to whom the instrument has been 3.5. Duress
delivered. 1. In general, PERSONAL defense.
5. In order that any such instrument, 2. REAL if duress so serious as to give
when completed, may be enforced rise to a real defense for lack of
against any person who became a contractual intent
party thereto prior to its completion: 3. CAMPOS: There may be cases where
a. must be filled up strictly in the duress employed is so serious that it
accordance w/ AUTHORITY given will give rise to a real defense because
b. within a REASONABLE TIME – in of the lack of contractual intent .
determining what is reasonable Although the signer may know what he
time, regard is to be had to the is signing, there may be wanting the
(1) nature of the instrument, (2) intent or willingness to be bound. Then
usage of trade or business (if any) it becomes a real defense.
with respect to such instruments,
and 3) the facts of the particular
case
6. BUT if negotiated to HDC, may enforce 4. Sometimes Real, Sometimes
it as if it had been filled up properly Personal
7. What details may be filled up?
a. Amount, as to a signed blank
paper
b. Date (Sec 13 “… The insertion of a
4.1. Forgery (Sec. 23): made without
wrong date does not void the authority of person whose signature it purports to
instrument in the hands of a be
subsequent holder in due
course…”) 1. In general, a REAL defense: … Effect
c. Place of payment
d. Name of payee a. signature is wholly inoperative
b. no right to retain instrument, or
give discharge, or enforce payment
3.3. Lack of Consideration(Sec. against any party thereto, can be
28) acquired through or under such
1. ABSENCE or failure of consideration is a signature (unless forged signature
matter of defense as against any person unnecessary to holder’s title)
not a HDC. c. No subsequent party can acquire
2. PARTIAL FAILURE of consideration is a the right against any party thereto
defense pro tanto whether the failure is an (prior to the forgery) to:
ascertained and liquidated amount or i. Retain the instrument
otherwise . ii. Give a discharge there for
iii. Enforce payment thereof
3.4. Illegality
1. In general, a PERSONAL defense even if 2. PERSONAL if the party against whom it
CC1409 provides that a contract with an is sought to enforce such right is
illegal cause is void. PRECLUDED from setting up
forgery/want of authority;
a. Who are PRECLUDED? with the drawee bank.
i. parties who make certain RULE: The drawee who
warranties, like a general pays the holder of the bill
indorser or acceptor after cannot recover from the
forgery (Sec. 62, NIL) holder what he paid under
ii. estopped / negligent parties mistake
iii. parties who ratify (BUT there 2) Stop Payment Order is
are conflicting views whether one issued by the drawer
“precluded” includes of a check countermanding
ratification) his first order to the
drawee bank to pay the
b. One view holds that a forged check. RULE: The drawee
signature cannot be ratified bank is bound to follow the
because ratification involves the order, provided it is
relation of agency and a forger received prior to its
does not assume to act for certification or payment of
another. the check
3) SOME EXCEPTIONS:
3. ACCEPTANCE AND PAYMENT of a o If the payment to holder is
forged instrument a legitimate debt of the
When there is acceptance and drawer which the holder in
payment of a forged instrument, the due course could have
rights and liabilities of the parties recovered from the drawer
depend on whether the forgery anyway.
pertains to the drawer/maker’s o If the stop order comes
signature or merely of an after the bank has certified
indorsement. or accepted the check, the
a. Drawer/Maker’s signature bank is under the legal
i. PRICE v NEAL, The drawee duty to pay the holder and
who had paid an accepted bill will not be liable to the
as well as a non-accepted bill, drawer for doing so.
each of which was forged,
could NOT recover the money iii. Effect Of Negligence Of
paid out on the bill. The Depositor - If proximate cause
neglect was on the part of the of loss, the bank (drawee) is
drawee. not liable

PNB v QUIMPO (1988) 1) It is the duty of the


depositor/drawer to
A bank is bound to know the signatures of its carefully examine bank’s
depositors. If bank pays a forged check it must be statements, cancelled
considered as making the payment out of its own checks, his check stubs,
funds and cannot charge the account of the and other pertinent records
depositor whose signature was forged. within a reasonable time
and to report any errors
SAMSUNG CONSTRUCTION CO., INC. VS. FAR without unreasonable
EAST BANK AND TRUST CO. AND CA (2004) delay.
2) If a drawer/depositor’s
Consequently, if a bank pays a forged check, it
negligence and delay
must be considered as paying out of its funds and
should cause a bank to
cannot charge the amount so paid to the account
honor a forged check,
of the depositor. A bank is liable, irrespective of
drawer cannot later
its good faith, in paying a forged check.
complain should bank
refuse to recredit his
ii. Extensions Of The Price v
account.
Neal Doctrine: The bar to
recovery (Price v Neal
ILUSORIO vs CA (2002)
doctrine) is extended to
overdrafts and stop payment
True, it is a rule that when a signature is forged or
orders
made without the authority of the person whose
signature it purports to be, the check is wholly
1) Overdraft occurs when a
inoperative.
check is issued for an
However, the rule does provide for an exception,
amount more than what
namely: “unless the party against whom it is
the drawer has in deposit
sought to enforce such right is precluded should promptly notify the
from setting up the forgery or want of drawee bank
authority.” In the instant case, it is the
exception that applies. Petitioner is precluded REPUBLIC v EBRADA
from setting up the forgery, assuming there is
forgery, due to his own negligence in entrusting Drawee can recover. It is not supposed to be the
to his secretary his credit cards and checkbook duty of the drawee to ascertain whether the
including the verification of his statements of signatures of the payee or indorsers are genuine or
account. not.

SAMSUNG CONSTRUCTION CO., INC. VS. FAR ii. When drawee may recover
EAST BANK AND TRUST CO. AND CA (2004) from DRAWER

The general rule remains that the drawee who 1) Where the instrument is
has paid upon the forged signature bears the loss. originally a bearer
The exception to this rule arises only when instrument, because the
negligence can be traced on the part of the indorsement can be
drawer whose signature was forged, and the need disregarded as being
arises to weigh the comparative negligence unnecessary to the holder’s
between the drawer and the drawee to determine title
who should bear the burden of loss. 2) Indorsement forged by an
Still, even if the bank performed with utmost employee or agent of the
diligence, the drawer whose signature was forged drawer
may still recover from the bank as long as he or 3) If due to the drawer’s
she is not precluded from setting up the defense negligence/delay, the
of forgery. After all, Section 23 of the Negotiable forgery is not discovered
Instruments Law plainly states that no right to until it is too late for the
enforce the payment of a check can arise out of a bank to recover from the
forged signature. Since the drawer, Samsung holder or the forger
Construction, is not precluded by negligence from
setting up the forgery, the general rule should GEMPESAW v CA, PBC
apply.
While there is no duty resting on the drawer to look
b. Indorsement: for forged indorsements on his cancelled checks, a
i. When it is the signature of depositor is under a duty to set up an
the indorser that is forged, accounting system and business procedure as
the drawee and drawer CAN are reasonably calculated to prevent or render
recover vs holder the forgery of indorsements difficult, particularly
1) The drawee can recover by the depositor’s own employees.
the amount paid by him As a rule the drawee bank who has paid the check
in cases where only an with forged indorsement, cannot charge the drawer’s
indorsement has been account for the amount of the said check. An
forged . This is because exception to this rule is where the drawer is guilty of
drawee makes no such negligence which causes the bank to honor the
warranty as to the check.
genuineness of any
indorsement. iii. When drawee may not
2) Generally, the drawee recover from holder
may only recover from
the holder. Should he fail 1) Where the instrument is
to do so(for instance due originally a bearer
to insolvency) he cannot instrument , because the
recoup his loss by indorsement can be
charging it to the disregarded as being
drawer’s account unnecessary to the holder’s
3) Although a title
depositor/drawer owes a 2) If drawee fails to act
duty to his drawee bank promptly , if he delays in
to examine his cancelled informing the holder whom
checks, he has no he paid
similar duty as to forged
indorsements. iv. Between Drawee Bank and
4) The drawer, as soon as Collecting Bank
he comes to know of the 1) Collecting bank only liable
a forged indorsement for forged indorsements
and not forgeries of the the bank to know that the check was duly indorsed by
drawer or maker’s the original payee and where the bank pays the
signature. (PNB v CA, amount of the check to a 3rd person , who has forged
1968) the signature of the payee , the loss falls upon the
2) The collecting bank or bank who cashed the check , and its remedy is
last indorser generally against the person to whom it paid the money.”
suffers the loss because
it has the duty to BPI v CA (1992)
ascertain the
genuineness of all prior Section 23 of the NIL has 2 parts. The first part states
indorsements considering the general rule that a forged signature is wholly
that the act of presenting inoperative and payment made through or under such
the check for payment to signature is ineffectual. The second part admits of
the drawee is an exception. In this jurisdiction, the negligence of the
assertion that the party party invoking the forgery is an exception to the
making the presentment general rule.
had done its duty to Both drawee and collecting bank were negligent
ascertain the in the selection and supervision of their employees
genuineness of the resulting in the encashment of the checks by the
indorsements. (BPI v CA, impostor. Both banks were not able to overcome the
1992) presumption of negligence in the selection and
3) In presenting the checks supervision of their employees
for clearing the collecting Considering the comparative negligence of the
agent, made an express parties, the demands of substantive justice are
guarantee on the validity satisfied by allocating the loss and the costs on a 60-
of “all the prior 40 ratio.
endorsements”. ( BDO v
Equitable bank) ASSOCIATED BANK v CA (1996)
4) The drawee bank is not
similarly situated as the By reason of the statutory warranty of a general
collecting bank because indorser in Section 66 of the Negotiable Instruments
the former makes no Law, a collecting bank which indorses a check bearing
warranty as to the a forged indorsement and presents it to the drawee
genuineness of any bank guarantees all prior indorsements, including the
indorsement. The drawee forged indorsement. It warrants that the instrument
bank’s duty is but to is genuine, and that it is valid and subsisting at the
verify the genuineness of time of his indorsement. Because the indorsement is
the drawer’s signature a forgery, the collecting bank commits a breach of
and not of the this warranty and will be accountable to the drawee
indorsement because the bank. This liability scheme operates without regard to
drawer is its client. fault on the part of the collecting/presenting bank.
5) Where the negligence of Even if the latter bank was not negligent, it would still
the drawee bank is the be liable to the drawee bank because of its
proximate cause of the indorsement.
collecting bank’s
payment of a check with PCIB v. CA (2001)
a forged indorsement,
the drawee bank may be … A bank which cashes a check drawn upon another
held liable to the bank, without requiring proof as to the identity of
collecting bank . persons presenting it, or making inquiries with regard
6) When both are guilty of to them, cannot hold the proceeds against the drawee
negligence, the degree of when the proceeds of the checks were afterwards
negligence of each will be diverted to the hands of a third party. In such cases
weighed in considering the drawee bank has a right to believe that the
the amount of loss which cashing bank (or the collecting bank) had, by the
each should bear. (refer usual proper investigation, satisfied itself of the
to BPI v CA, 1992) authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been
GREAT EASTERN LIFE v HONGKONG & forged or diverted and in turn received payment
SHANGHAI BANK (1922) thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the
“Where a check is drawn payable to the order of fraud practiced on the drawee bank.
one person and is presented to a bank by another
and purports upon its face to have been duly
indorsed by the payee of the check , it is the duty of
4.2. Material Alteration (Sec.124) (PNB v CA, 1996; Int’l Corporate
1. As a DEFENSE: Bank v CA, 2006)
a. PERSONAL defense when used to c. EFFECT: an innocent alteration
deny liability according to the (generally, changes on items other
tenor of the instrument than those required to be stated
b. REAL defense when relied on to under Sec. 1, N. I. L.) and
deny liability according to the spoliation (alterations done by a
altered terms. stranger) will not avoid the
2. What constitutes material alteration? instrument, but the holder may
a. Statutory: Review Sec.125, NIL enforce it only according to its
i. change date original tenor. (PNB v CA, citing J.
ii. sum payable, either for Vitug)
principal or interest
iii. time or place of payment 4. EFFECT OF MATERIAL ALTERATION
iv. number/relations of parties
v. medium/currency of a. General Rule: Where NI materially
payment, altered w/o the assent of all parties
vi. adds place of payment where liable thereon it is AVOIDED,
none specified, except as against:
vii. other change/addition altering i. party who has himself made,
effect of authorized or assented to
viii. instrument in any respect alteration
ii. subsequent indorser because
b. Jurispridence by indorsement he warrants
i. An alteration is said to be that the instrument is in all
material if it changes the respects what it purports to be
effect of the instrument. It and that it was valid and
means that an unauthorized subsisting at the time of his
change in an instrument that indorsement (Secs. 65 and
purports to modify in any 66, NIL)
respect the obligation of a b. As to a HOLDER in DUE COURSE
party or an unauthorized i. When an instrument that has
addition of words or numbers been materially altered is in the
or other change to an hands of a HDC not a party to
incomplete instrument the alteration, HDC may
relating to the obligation of a enforce payment thereof
party. (PNB v CA, 1996) according to orig. tenor
ii. A material alteration is one ii. Alteration must NOT be
which changes the items apparent on the face of the
which are required to be instrument for the holder then
stated under Section 1 of the would not be a holder in due
Negotiable Instruments Law. course
(Metrobank v Cabilzo, 2006) iii. Where the interest rate is
altered , the holder in due
3. IMMATERIAL ALTERATION course can recover the principal
a. Campos: Any other alteration sum with the original rate of
would be non-material and would interest
not affect the liability of any prior c. When alteration is of the amount or
party . Note that #7 is a catch-all the interest rate is altered, the
provision such that sec 125 may holder can recover the ORIGINAL
still have broad applicability. AMOUNT/interest rate.
b. Alterations of the serial numbers
do not constitute material
alterations on the checks... [It] is 5. DRAWER’S NEGLIGENCE
not an essential requisite for a. The general rule is that the drawee
negotiability under Section 1 of cannot charge against the drawer’s
the Negotiable Instruments Law. account the amount of an altered
The aforementioned alteration did check.
not change the relations between b. BUT, the drawer’s negligence,
the parties. The name of the before or after the alteration, may
drawer and the drawee were not estop him from setting up alteration
altered. The intended payee was as a defense.
the same. The sum of money due c. However, the drawer is not bound
to the payee remained the same. to so prepare the check that nobody
else can successfully tamper with it
(ex. a drawer cannot be expected negligence which
to foresee that his clerk will use proximately
acid to alter his checks, Critten v. contributed to the
Chemical Natl Bank) erroneous
d. Where the negligence of the payment by
drawer consists in failing to drawee, holder
discover alterations previously liable (PCIB v CA,
made which he could have 2001)
discovered by a comparison of the
cancelled checks and check stubs MONTINOLA v PNB (1951)
or by diligent observation of his
records and could thus have The insertion of the words “Agent Philippine
prevented the drawee bank from National Bank” converted the bank from a mere
subsequently cashing other drawee to a drawer and therefore changes its
altered checks , the drawee can liability, constitutes material alteration of the
charge the subsequent check instrument without consent of the parties liable
against the negligent drawer’s thereon and so discharges the instrument. Drawee
account. bank is not liable.

6. EFFECT OF DRAWEE’S ACCEPTANCE HONGKONG & SHANGHAI BANK v PEOPLES


OF ALTERED CHECKS BANK (1970)5
a. Where the interest rate is altered,
the HDC can recover the principal The failure of the drawee bank to call the attention
sum with the original rate of of the collecting bank as to such alteration until
interest. after the lapse of 27 days would negate whatever
i. EXCEPT: A subsequent right it might have had. The remedy of the drawee
indorser, because by the bank is against the party responsible for the forgery
indorsement he warrants or alteration.
that the instrument is in all
respects what it purports to REPUBLIC BANK v CA (1991)
be and that it was valid and
subsisting at the time of his The collecting bank is protected by the24-hour
indorsement (Sec 65 and clearing house rule from the liability to refund the
66) amount paid by the drawee bank. [Note: A much
b. RECOVERY after acceptance or recent Circular changed the point of reckoning for
payment by the drawee bank the return of the altered check from within 24
i. FROM HOLDER hours from the clearing to within 24 hours from the
1) Prevailing view - Yes, discovery of the alteration]
bec. of (1) payment
under mistake, (2) Sec. ASSOCIATED BANK v CA (1996)
124 and (3) Sec.62 in The rule mandates that the checks be returned
relation to Sec. 132 within twenty-four hours after discovery of the
2) Minority view – No, bec. forgery but in no event beyond the period fixed by
of (1) estoppel, (2) law for filing a legal action. The rationale of the rule
stability of transactions is to give the collecting bank (which indorsed the
and (3) bank is in a check) adequate opportunity to proceed against the
better position to forger. If prompt notice is not given, the collecting
shoulder the loss. bankmaybe prejudiced and lose the opportunity to
3) SC: go after its depositor.
a. adopted the
minority view
but on a ii. FROM DRAWER: drawee has no
different basis— right to seek reimbursement
the Central Bank from drawer for its erroneous
Circular payment
regulating
clearing of METROBANK v CABILZO (2006)
checks and
limiting the In addition, the bank on which the check is drawn,
period within known as the drawee bank, is under strict liability to
which a drawee pay to the order of the payee in accordance with the
bank may return drawer’s instructions as reflected on the face and by
a spurious check
b. but if holder is 5
guilty of Affirmed the minority view that drawee cannot recover
the terms of the check. Payment made under where, by the exercise of
materially altered instrument is not payment done ordinary care, he could have
in accordance with the instruction of the drawer. discovered it.
When the drawee bank pays a materially altered ii. Three factors are typically used
check, it violates the terms of the check, as well as in determining the existence of
its duty to charge its client’s account only for bona negligence:
fide disbursements he had made. Since the drawee 1) legal character of the
bank, in the instant case, did not pay according to instrument which the
the original tenor of the instrument, as directed by signer thinks he is signing
the drawer, then it has no right to claim 2) the physical condition of
reimbursement from the drawer, much less, the the signer and his ability to
right to deduct the erroneous payment it made from read
the drawer’s account which it was expected to treat 3) whether the signer had the
with utmost fidelity. opportunity at the time of
signing, to ascertain the
BPI v BUENAVENTURA (2005) legal nature of the paper
he is executing
…It [the bank] should be able to detect alterations,
erasures, superimpositions or intercalations Chapter VI.
thereon, for these instruments are prepared,
printed and issued by itself, it has control of the
LIABILITY OF PARTIES
drawer's account, and it is supposed to be familiar
with the drawer's signature. It should possess
appropriate detecting devices for uncovering 1. In General
forgeries and/or alterations on these
instruments… 1.1. Parties primarily liable:
There is nothing inequitable in such a rule for if in 1. person who by the terms of the instrument is
the regular course of business the check comes to absolutely required to pay the same.
the drawee bank which, having the opportunity to a. Maker of promissory note
ascertain its character, pronounces it to be valid b. Acceptor of bill of exchange
and pays it, as in this case, it is not only a question 2. unconditionally liable; duty bound to pay the
of payment under mistake, but payment in neglect holder at date of maturity, WON holder
of duty which the commercial law places upon it, demands payment from him, and he is not
and the result of its negligence must rest upon it. relieved from liability even if the instrument
should become overdue due to failure of
holder to make such demand.
c. REMEDY: Unless a forgery or
alteration is attributable to the
fault or negligence of the drawer
1.2. Parties secondarily liable:
himself, the remedy of the drawee 1. SECONDARY PARTIES:
bank that negligently clears a a. Indorsers, both note and bill
forged and/or altered check for b. Drawer of bill
payment is against the party 2. Conditionally liable; not bound to pay unless
responsible for the forgery or the following has been fulfilled
alteration, otherwise, it bears the a. Due presentment or demand from primary
loss. (BPI v Buenaventura, 2005) party for payment or acceptance;
b. Dishonor by such party; and
c. Taking of proceedings required by law
4.3. Fraud after dishonor.

1. REAL DEFENSE
a. fraud in execution / fraud in 2. Primary Parties
factum: did not know that paper
was a NI when it was signed 2.1. PAYMENT: Presentment and
b. not liable to ANY holder
Tender
2. PERSONAL DEFENSE
1. Presentment for payment not necessary
a. Fraud in inducement: knows it is
to charge primary party
NI but deceived as to value/terms
2. if the instrument is, by its terms, payable at
i. Available as a defense against
a special place, and he is able and willing to
non-HDC
pay it there at maturity, such ability and
b. Fraud in factum accompanied by
willingness are equivalent to a tender of
NEGLIGENCE of maker or signer
payment upon his part. (Sec. 70, NIL)
i. Where the signor does not
know the nature of the
instrument he signs, but 2.2. Liability of MAKER
1. Promises to pay it according to its tenor
2. Admits existence of payee and his then
capacity to indorse. This was an action by a depositor against a bank for
a. Therefore, PRECLUDED from setting up damages resulting from the wrongful dishonor of the
the following defenses: depositor's checks. HELD: Araneta's claim for
i. the payee is a fictitious person temperate damages is legally justified because of the
ii. the payee was insane, a minor, or adverse reflection on the financial credit of a
a corporation acting ultra vires businessman, a prized and valuable asset, w/c
constitutes material loss.
2.3. DRAWEE and ACCEPTOR
1. Drawee HSBC VS. CATALAN (2004)
a. A person on whom a bill of
exchange or check is drawn and HSBC is not being sued on the value of the check
who is ordered to pay it itself but for how it acted in relation to Catalan’s claim
b. Liability of DRAWEE to: for payment despite the repeated directives of the
2. Holder drawer Thomson to recognize the check the latter
1) Not liable on the instrument issued.
until he accepts it and even a Her allegations in the complaint that the gross
holder in due course cannot inaction of HSBC on Thomson’s instructions, as well
sue him on the instrument as its evident failure to inform Catalan of the reason
before his acceptance for its continued inaction and non-payment of the
2) A bill/check of itself does checks, smack of insouciance on its part, are
not operate as an assignment sufficient statements of clear abuse of right for which
of the funds in the hands of it may be held liable under Article 19 of the Civil Code
the drawee/bank (Sec 189, for any damages she incurred resulting therefrom.
NIL), and the drawee/bank is HSBANK’s actions, or lack thereof, prevented Catalan
NOT LIABLE on the bill from seeking further redress with Thomson for the
unless and UNTIL he/it recovery of her claim while the latter was alive.
ACCEPTS (or certifies) the
same. (Sec. 127, NIL) 3. Acceptor: Liability
3. Drawer a. (Sec.62, NIL) Drawee is not liable
1) Payment despite Stop Payment unless he accepts the bill and in doing
Order so, he engages to pay the bill according
a) Before payment or to the tenor of his acceptance, and
certification by the bank, admits the following:
the drawer may i. existence of drawer
countermand the order, ii. genuineness of his signature
and payment thereafter iii. his capacity and authority to draw
to the payee by the bank the instrument
is wrongful. iv. existence of payee and his then
b) Since a check is not an capacity to endorse
assignment of the b. Meaning of "according to the tenor of
drawer’s fund, the bank his acceptance"
is liable for paying it in i. Majority and prevailing view:
disregard of the Where alteration consists in raising
countermand. the amount payable, acceptor liable
c) Moreover, drawee can no to HDC only as to its original
longer recover what it amount; if the alteration of payee's
voluntarily paid to the name, paying banks cannot charge
holder of the uncertified drawer's account with the amount
and unaccepted of the check because its duty is to
instrument. pay only “according to the order of
2) Refusal to Accept the drawer.”
a) Under some ii. Common law rule: Acceptor of
circumstances, the drawee altered check not liable to innocent
who refuses to accept may be holder except for the original
made liable for breach of amount
contract or for damages
based on a tort either to the 2.4. Acceptance
drawer (refer to Araneta v.
Bank of America) or to the 1. IN GENERAL:
holder (refer to HSBC v. a. Definition:
Catalan) i. "Acceptance" means an acceptance
completed by delivery or notification
ARANETA V. BANK OF AMERICA(1971) (Sec. 19, NIL)
ii. The signification by the drawee of maturity date has passed
his assent to the order of the drawer or the drawee’s refusal to
(Sec 132, NIL) accept or pay it.
b. REQUISITES for a valid acceptance d. PERIOD within which to accept
(Sec 132, NIL) i. The drawee is allowed 24 hours
i. It must be in writing and signed by after presentment to decide WON
the drawee; he will accept the bill; the
1) Thus there is no valid or acceptance, if given, dates as of the
implied acceptance except as day of presentation. (Sec. 136, NIL)
provided by Sec. 137 relating ii. Effect of non-acceptance within the
to constructive acceptance prescribed period
ii. It must not express that the drawee 1) Where bill is duly presented
will perform his promise by any other and is not accepted within
means than the payment of money. prescribed time, the person
iii. does not change the implied presenting it must treat the bill
promise of acceptor to pay only in as dishonored by non-
money acceptance or he loses right of
c. MANNER of acceptance recourse against the drawer
i. Campos: Usually made by writing and indorsers. (Sec. 150, NIL)
the word “accepted” and signing
immediately below 2. CONSTRUCTIVE ACCEPTANCE: occurs in the
1) BUT, drawee’s signature following circumstances
alone is sufficient (Campos a. SEC 137, NIL: Where the drawee
citing Lawless v. Temple) i. destroys the bill, or
ii. Sec 133, NIL: The holder of a bill ii. refuses within 24hrs or such other
presenting the same for period as the holder may allow, to
acceptance may require that the return the bill accepted or non-accepted
acceptance be written on the bill to the holder
and if such request is denied, may b. Under the clearing house rules, the
treat the bill as dishonored drawee bank’s failure to return within the
1) Effect: holder may go against prescribed time will be deemed payment or
the party’s secondarily acceptance of the check.
liable—the drawer and the c. If there is not demand for the return of
indorsers the bill and the drawee keeps it until after
iii. Acceptance of an INCOMPLETE bill the expiration of said period without
(Sec 138, NIL) expressly accepting or refusing it; two views:
1) A bill may be accepted: i. Constitutes constructive notice
a) before it has been signed ii. Constitutes dishonor because
by the drawer, or Sec.137, NIL uses the word "refuses"
b) while otherwise d. Acceptance, if given, will retroact to date
incomplete, or of presentation.
c) when it is overdue, or
d) after it has been SUMCAD v. PROVINCE OF SAMAR (1956)
dishonored by a previous
refusal to accept, or by
There was implied acceptance in view of the
non payment
circumstances of the case (furnishing of
2) But when a bill payable after
photostatic copies, presentment for certification)
sight is dishonored by non- by voluntary assuming the obligation of holding
acceptance and drawee
so much deposit as would be sufficient to cover
subsequently accepts it, the
the amount of the check.
holder, in the absence of diff
agreement, is entitled to have
3. ACCEPTANCE ON A SEPARATE
bill accepted as of date of the
INSTRUMENT
1st presentment.
e. Extrinsic acceptance - acceptance is
a) Sec. 138, NIL allows
written on a paper other than the bill
acceptance to be made
itself; doesn’t bind the acceptor except
while the bill is
in favor of a person to whom it is shown
incomplete.
and who, on the faith thereof, receives
b) The bill may be accepted the bill for value. (Sec. 134, NIL);
even after it is overdue acceptance of an existing bill
or dishonored, since an f. Virtual acceptance - unconditional
instrument DOES NOT promise in writing to accept a bill
LOSE ITS before it is drawn; deemed an actual
NEGOTIABILITY by the acceptance in favor of every person
mere fact that its
who, upon the faith thereof, receives d. BANKER'S acceptance - a negotiable
the bill for value. (Sec. 135, NIL); time draft or bill of exchange drawn on
acceptance of future bill and accepted by a commercial bank.
g. In both cases, the acceptance must
clearly and unequivocally identify 2.5. CHECKS : acceptance and
the bill to which the acceptance
certification
refers.
1. Definition: A check is an instrument in the
form and nature of a BE, but an unlike an
4. KINDS OF ACCEPTANCE: An
ordinary bill, always payable on demand and
acceptance is either (1) general or (2)
always drawn on a bank.
qualified.
2. Kinds:
a. GENERAL - assents without
a. Cashier's or manager's - drawn by a
qualification to the order of the
bank on itself and its issuance has the effect
drawer. (Sec.139, NIL); Includes
of acceptance; since the drawer and drawee
acceptance to pay at a particular
are the same, the holder may treat it is
place; unless expressly states that bill
either a BE or PN.
is to be paid there only and not
b. Memorandum check - where the word
elsewhere. (Sec. 140, NIL)
"memorandum" or "memo" is written across
b. QUALIFIED - in express terms varies
its face, signifying that the drawer will pay
the effect of the bill as drawn. (Sec.
the holder absolutely, without need of
139, NIL)
presentment.
i. Conditional; payment by the
c. Traveler's check - upon which the
acceptor dependent on the
holder's signature must appear twice -- first
fulfillment of a condition therein
when it is issued, and again when it is
stated;
cashed.
ii. Partial; to pay part only of the
d. Crossed – when the name of a particular
amount for which the bill is
banker or a company is written between the
drawn;
parallel lines drawn.
iii. Local; to pay only at a particular
place;
STATE INVESTMENT HOUSE V. IAC
iv. Qualified as to time;
v. The acceptance of some, one or
Crossed check should put the payee on inquiry to
more of the drawees but not of
ascertain the holders’ title to the check or the nature
all. (Sec. 141, NIL)
of his possession. Failing this, the payee is declared
1) The holder may refuse to
guilty of gross negligence to the effect that the holder
take a qualified acceptance;
of the check is not a holder in good faith. Effects of a
may treat the bill as
crossed check:
dishonored by non-
(a) the check may not be encashed but only
acceptance.
deposited in the bank;
2) Where a qualified acceptance
(b) the check may be negotiated only once – to
is taken, the drawer and
one who has an account with the bank; and
indorsers are discharged
(c) the act serves as a warning to the holder
from liability on the bill
that the check has been issued for a definite
unless they have
purpose so that he must inquire if he has
authorized the holder to
received the check pursuant to that purpose,
take a qualified acceptance,
otherwise, he is not a HDC.
or subsequently assent
thereto.
BATAAN CIGAR & CIGARETTE FACTORY, INC. v.
3) When the drawer or an
CA
indorser receives notice of a
qualified acceptance, he
The negotiability of a check is not affected by its
must, within a reasonable
being crossed, whether specially or generally. It may
time, express his dissent to
legally be negotiated as long as the one who
the holder or he will be
encashes the check with the drawee bank is another
deemed to have assented
bank, or if it is especially crossed, by the bank
thereto. (Sec. 142, NIL)
mentioned between the parallel lines.
c. TRADE - a draft or bill of exchange
with a definite maturity, drawn by a
RP v. PNB (1961)
seller on a buyer for the purchase
price of goods, bearing across its face
Demand drafts have not been presented either for
the acceptance of the buyer; always
acceptance or for payment, thus the bank never had
states upon its face the transaction
any chance of accepting or rejecting them; as such,
from which it arose.
these cannot be subject of escheat.
Cashier's check is the substantial equivalent of a ii. When check certified by bank on
certified check and is thus subject to escheat. which it is drawn, equivalent to
Telegraphic transfers are likewise subject to acceptance
escheat because upon making payment complete b. Requisites for a Valid Certification
the transaction insofar as he is concerned, though i. Must be in writing
insofar as the remitting bank is concerned, the ii. Made on the check or another
contract is executory until the credit is established. instrument
iii. Check must be payable
PAL V. CA (1990) 1) Checks cannot be certified
before payable
A check, whether a manager's check or ordinary c. Liability
check, and an offer of a check in payment of a debt i. Bank which certifies
is not a valid tender of payment and may be 1) Becomes liable as an acceptor
refused receipt by the obligee or creditor. 2) REFUSAL to certify a check
The issuance of the check to a person authorized to doesn’t constitute dishonor; the
receive it operates to release the judgment debtor holder at that stage cannot exercise
from any further obligations on the judgment. his right of recourse against the
drawer and the indorsers
INTERNATIONAL CORPORATE BANK v GUECO ii. If procurement by:
(2001) 1)Holder
a) The bank becomes the
A manager’s check is one drawn by the bank’s solidary debtor, and
manager upon the bank itself. It is similar to a b) The drawer and all
cashier’s check both as to effect and use. A indorsers discharged from
cashier’s check is a check of the bank’s cashier on all liability (versus ordinary
his own or another check. In effect, it is a bill of bill of exchange – not
exchange drawn by the cashier of a bank upon the discharged)
bank itself, and accepted in advance by the act of 2) Drawer
its issuance. It is really the bank’s own check and a) secondary parties not
may be treated as a promissory note with the bank released
as a maker. The check becomes the primary
obligation of the bank which issues it and ROMAN CATHOLIC BISHOP V. IAC (1990)
constitutes its written promise to pay upon
demand. The mere issuance of it is considered A certified personal check is not legal tender nor is it
an acceptance thereof. If treated as promissory the currency stipulated, and therefore cannot
note, the drawer would be the maker and in which constitute valid tender of payment.
case the holder need not prove presentment for
payment or present the bill to the drawee for NEW PACIFIC TIMBER v. SENERIS (1980)
acceptance (as cited in EPCIB v. Ong, Sept. 2006)

EPCIB v ONG (2006) [S]ince the said check had been certified by the
drawee bank, by the certification, the funds
A manager’s check is an order of the bank to pay, represented by the check are transferred from the
drawn upon itself, committing in effect its total credit of the maker to that of the payee or holder,
resources, integrity and honor behind its issuance. and for all intents and purposes, the latter becomes
By its peculiar character and general use in the depositor of the drawee bank, with rights and
commerce, a manager’s check is regarded duties of one in such situation. Where a check is
substantially to be as good as the money it certified by the bank on which it is drawn, the
represents. certification is equivalent to acceptance. Said
certification “implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
3. Clearing have been set apart for its satisfaction, and that they
a. Clearing - check collection process shall be so applied whenever the check is presented
b. Clearing house - where for payment. It is an understanding that the check is
representatives of different banks meet good then, and shall continue good, and this
every afternoon of every business day to agreement is as binding on the bank as its notes
receive the envelopes containing checks circulation, a certificate of deposit payable to the
drawn against the bank he represents for order of depositor, or any other obligation it can
examination and clearance. assume. The object of certifying a check, as
regards both parties, is to enable the holder to
4. Certification use it as money.” When the holder procures the
a.Definition check to be certified, “the check operates as an
i. an agreement by which a bank assignment of a part of the funds to the
promises to pay the check at any
time it is presented for payment
creditors.” Hence, the exception to the rule the genuineness of all prior endorsements considering
enunciated under Section 63 6 of the Central Bank that the act of presenting the check for payment to
Act to the effect “that a check which has been the drawee is an assertion that the party making the
cleared and credited to the account of the creditor presentment has done its duty to ascertain the
shall be equivalent to a delivery to the creditor in genuineness of the endorsements." The rule finds
cash in an amount equal to the amount credited to more meaning in this case where the check involved
his account” shall apply in this case x x x. is drawn on a foreign bank and therefore collection is
more difficult than when the drawee bank is a local
one even though the check in question is a manager’s
5. Surrender of Check check
a. The surrender of the check by the
holder to the drawee bank upon its
payment is not negotiation. By
paying the check, the drawee bank
3. Secondary Parties
extinguishes it as a negotiable
instrument and converts it into a mere 3.1. Liability of DRAWER
voucher. 1. Sec. 61, NIL
b. Distinction between surrender of check a. Admits existence of payee and his then
upon payment thereof and negotiation capacity to endorse
i. The delivery of the check by the b. Engages that on due presentment
holder to the drawee bank upon instrument will be accepted, or paid, or
its payment is not negotiation. By both, according to its tenor
paying the check, the drawee c. That if it be dishonored + necessary
bank extinguishes it as a proceedings on dishonor duly taken, will
negotiable instrument and pay the amount thereof to the holder or
converts it into a mere voucher. to a subsequent indorser who may be
ii. In the case of a deposit of a check compelled to pay it
by the holder thereof in a bank 2. Limiting Liability: drawer may insert in the
other than the drawee bank, the instrument an express stipulation negativing
signature at the back of the check / limiting his own liability to holder
would constitute an indorsement,
unless otherwise indicated. The PNB v. PICORNELL (1922)
holder in negotiating the check to
the depositary bank, which in turn Picornell obtained money from PNB Cebu to purchase
will collect on the check from the tobacco to be shipped to Manila. Picornell then drew
drawee bank, through the a bill of exchange drawn against his principal,
clearinghouse. Hyndman, Tavera & Ventura (HTV), in favor of PNB or
his order. Upon presentation of the bill, HTV accepted
BPI vs CA (2000) it. However, HTV subsequently refused to pay the bill
because some of the tobacco shipped were damaged.
In depositing the check in his name, private HELD:
respondent did not become the outright owner of A. Liability of Acceptor (HTV)
the amount stated therein. He was merely PNB is a holder in due course and the partial
designating petitioner as the collecting bank. This is want of consideration does not exist with
in consonance with the rule that a negotiable respect to the bank who paid full value for
instrument, such as a check, whether a manager’s the bill of exchange.
check or ordinary check, is not legal tender. The want of consideration between the
As such, after receiving the deposit, under its own acceptor and drawer does not affect the
rules, petitioner shall credit the amount in private rights of the payee who is a remote party.
respondent’s account or infuse value thereon only The payee or holder gives value to the
after the drawee bank shall have paid the amount of drawer, and if he is ignorant of the equities
the check or the check has been cleared for deposit. between the drawer and acceptor, his is in
Again, this is in accordance with ordinary banking the position of a bona fide indorsee.
practices and with this Court’s pronouncement that B. Liability of Drawer (Picornell)
"the collecting bank or last endorser generally As drawer of the bill, he warranted that it
suffers the loss because it has the duty to ascertain would be accepted upon proper presentment
& paid in due course. As it was not paid, he
6
became liable to the payment of its value to
“SEC. 63. Legal character . – Checks representing PNB.
deposit money do not have legal tender power and their The fact that Picornell was an agent of HTV
acceptance in the payment of debts, both public and in the purchase of the tobacco does not
private, is at the option of the creditor: Provided, however,
necessarily make him an agent of HTV in
that a check which has been cleared and credited to the
drawing the bill of exchange. These are 2
account of the creditor shall be equivalent to a delivery
to the creditor of cash in an amount equal to the different contracts. He cannot claim
amount credited to his account.
exemption from liability by invoking the the time the check was issued to him. Such
existence of agency. knowledge negates the element of deceit and
Drawer received notice of protest in constitutes a defense in estafa through bouncing
fulfillment of the condition set by law for checks.
his liability to arise.
Drawer's liability is only secondary as the
liability of the acceptor is primary. 3.2. Liability of INDORSERS:
1. Indorser
BANCO ATLANTICO v AUDITOR GENERAL a. Sec. 63, NIL: A person placing his
(1978) signature upon an instrument other than as
a maker, drawer, or acceptor unless he
B fraudulently altered checks payable to her drawn indicates by appropriate words his intention
by the Embassy by increasing the amounts. B to be bound in some other capacity
negotiated these checks by indorsement to BA w/c i SAPIERA vs CA (1999). It is
paid the full amount of the checks without first undisputed that the four (4) checks
clearing with the drawee bank, contrary to normal issued by de Guzman were signed
banking practice. HELD: Drawer (embassy) not by petitioner at the back without
liable. BA is guilty of negligence in giving B special any indication as to how she should
treatment as a privileged client, in disregard of be bound thereby and, therefore,
elementary principles of prudence that should she is deemed to be an indorser
attend banking transactions. Hence, it should suffer thereof.
the loss. BA could not have been a HDC. b. Sec. 67, NIL: A person, who places his
signature on an instrument negotiable by
NOTE: The Camposes note that the drawer delivery, incurs all the liabilities of an
was not held liable because the decision was indorser.
based on §23 on forgery instead of §124 on c. Sec 64, NIL: Irregular Indorser
material alteration. If BA had been a HDC, i When a person not otherwise a
the Embassy could have been held liable for party to an instrument, places
the original amount of the checks thereon his signature in blank
before delivery, he is liable as an
3. CRIMINAL LIABILITY FOR BOUNCING indorser, in accordance w/ these
CHECK rules:
a. Under BP 22 1) Instrument payable to order of
3rd person: liable to payee and
PEOPLE v NITAFAN(1992) to all subsequent parties
2) Instrument payable to the
Lim issued a memorandum check which was order of maker/drawer, or
subsequently dishonored for insufficiency of funds. payable to bearer: liable to all
A memorandum check has the same effect as an parties subsequent to
ordinary check and within the ambit of BP 22. What maker/drawer
the law punishes is the issuance itself of a bouncing 3) Signs for accommodation of
check & not the purpose for which it was issued nor payee, liable to all parties
the terms & conditions relating to its issuance. subsequent to payee
2. WARRANTIES:
b. Estafa under the RPC a. Every person negotiating an instrument by
delivery or by a qualified indorsement
PACHECO v CA (1999) warrants: (Sec. 65, NIL)
ii Instrument genuine, in all respects
The essential elements in order to sustain a what it purports to be
conviction under the above paragraph are: iii He has good title to it
1. that the offender postdated or issued a check in iv All prior parties had capacity to
payment of an obligation contracted at the time the contract
check was issued; v He has no knowledge of any fact
2. that such postdating or issuing a check was done w/c would impair validity of
when the offender had no funds in the bank, or his instrument or render it valueless
funds deposited therein were not sufficient to cover vi in case of negotiation by delivery
the amount of the check; only, warranty only extends in favor
3. deceit or damage to the payee thereof. of immediate transferee
b. General or Unqualified Indorser:
PEOPLE v REYES (2005) Every person who indorses without
qualification, warrants to all subsequent
There is no estafa through bouncing checks when it HDCs: (Sec. 66, NIL)
is shown that private complainant knew that the i. instrument genuine, good title,
drawer did not have sufficient funds in the bank at capacity of prior parties
ii. instrument is at time of indorsement the instrument, he knew that the indorser was only
valid and subsisting an accommodation party.
iii. eon due presentment, it shall be The fact that the accommodation party stands only as
accepted or paid, or both, according to a surety in relation to the maker is a matter of
tenor concern exclusively between accommodation indorser
iv. if it is dishonored, and necessary & accommodated party. It is immaterial to the claim
proceedings on dishonor be duly of a holder for value. The liability of the
taken, he will pay the amt. To holder, accommodation party remains primary &
or to any subsequent indorser who unconditional.
may be compelled to pay it
3. Order of Liability among Indorsers (Sec. 68, SADAYA v. SEVILLA (1967)
NIL):
a. among themselves: liable prima facie in The solidary accommodation maker who made
the order they indorse, but proof of payment has the right of contribution from his co-
another agreement admissible accommodation maker. This right springs from an
b. but holder may sue any of the indorsers, implied promise between the accommodation makers
regardless of order of indorsement to share equally the burdens that may ensue from
c. joint payees/indorsees deemed to their having consented to stamp their signatures on
indorse jointly and severally the promissory note. The following are the rules on
reimbursement:
TUAZON v RAMOS (2005) 1. A solidary accommodation maker of a note may
demand from the principal debtor reimbursement
After an instrument is dishonored by nonpayment, for the amount he paid to the payee; and
indorsers cease to be merely secondarily liable; 2. A solidary accommodation maker who pays on
they become principal debtors whose liability the note may directly demand reimbursement
becomes identical to that of the original obligor. from his co-accommodation maker without first
The holder of a negotiable instrument need not directing his action against the principal debtor
even proceed against the maker before suing the provided that :
indorser. (a) he made the payment by virtue of a
judicial demand or
(b) the principal debtor is insolvent.
3.3. Accomodation Party
1. Accomodation Party: one who signed TRAVEL-ON, INC. v. CA
instrument as maker/drawer/acceptor/ indorser
w/o receiving value thereof, for the purpose of Travel-On was entitled to the benefit of the statutory
lending his name to some other person presumption that it was a HDC, that the checks were
2. Liability : Liable on the instrument to HFV supported by valuable consideration. The only
even if holder knew he was only an AP evidence private respondent offered was his own
testimony that he had issued the checks to Travel-On
MAULINI v. SERRANO (1914) as payee to "accommodate" its General Manager; this
In accommodation indorsement, the indorser makes claim was in fact a claim that the checks were merely
the indorsement for the accommodation of the simulated, that private respondent did not intend to
maker. Such an indorsement is generally for the bind himself thereon. Only evidence of the clearest
purpose of better securing the payment of the note, and most convincing kind will suffice for that purpose.
i.e. he lends his name to the maker not to the
holder. An accommodation note is one which the CRISOLOGO-JOSE v. CA.
accommodation party has put his name, without
consideration, for the purpose of accommodation
some other party who is to use it and is expected to
pay it.
Note: Campos disagrees with this ruling, referring
to the case of Goodman v Gaul where an
accommodation indorsement may be made for the
accommodation of the payee or holder.

ANG TIONG v. TING (1968)

It is not a valid defense that the accommodation


party did not receive any valuable consideration
when he executed the instrument. Nor is it correct
to say that the holder for value is not a holder in
due course merely because at the time he acquired
Section 29 of the NIL does not apply to corporations authority to collect money does not have the implied
which are accommodation parties because the issue authority to indorse checks received in payment. Any
or indorsement of negotiable paper by a corporation person taking checks made payable to a corporation
without consideration is ultra vires. Hence, one who does so at his peril & must abide by the consequences
has taken the instrument with knowledge of the if the agent who indorses the same is without
accommodation cannot recover against a authority.
corporation - accommodation party EXCEPT if the
officer or agent of the corp. was specifically
authorized to execute or indorse the paper for the PBC v ARUEGO (1981)
accommodation of a third person.
Corporate officers, such as the president and vice- Aruego obtained a credit accommodation from PBC.
president, have no power to execute for mere For every printing of the publication, the printer
accommodation a NI of the corporation for their collected the cost of printing by drawing a draft
individual debts or transactions in which the against PBC, which will later be sent to Aruego for
corporation has no legitimate concern. It is the acceptance. PBC seeks recovery on these drafts.
signatories thereof that shall be personally liable Aruego invokes the defense that he signed the
therefor. document in his capacity as President of the Phil.
Education Foundation & only as an accommodation
party.
AGRO CONGLOMERATES v CA (2000)
HELD: Aruego is personally liable because nowhere in
the draft did he disclose that he was signing as a
An accommodation party is a person who has
representative of the Phil Education Foundation.
signed the instrument as maker, acceptor, or
Neither did he disclose his principal.
indorser, without receiving value therefor, and for
As an accommodation party, Aruego is liable on the
the purpose of lending his name to some other
instrument to a holder for value, notwithstanding
person and is liable on the instrument to a holder
such holder, at the time of the taking of the
for value, notwithstanding such holder at the time
instrument knew him to be only an accommodation
of taking the instrument knew (the signatory) to be
party. Aruego signed as a drawee/acceptor. As
an accommodation party. He has the right, after
drawee, he is primarily liable for the drafts.
paying the holder, to obtain reimbursement from
the party accommodated, since the relation
between them has in effect become one of
principal and surety, the accommodation party 4. Presentment
being the surety.
4.1. Definition:
3.4. Liability of an AGENT 1. the production of a BE to the drawee for his
1. AGENCY: ACCEPTANCE, or to the drawer or acceptor
a. Signature of any party may be made by for PAYMENT; or
duly authorized agent, established as in 2. the production of a PN to the party liable for
ordinary agency payment
b. Signature per procuration operates as
notice that the agent has limited authority 4.2. Presentment for Acceptance
to sign, and the principal is bound only in 1. When necessary (Sec. 143, NIL)
case the agent in so signing acted within a. bill payable after sight, or in other cases
the actual limits of his authority where presentment for acceptance
2. LIABILITY necessary to fix maturity
a. GEN RULE: Where person adds to his b. where bill expressly stipulates that it
signature words indicating that he signs on shall be presented for acceptance
behalf of a principal, not liable if he was c. where bill is drawn payable elsewhere
duly authorized than at residence / place of business of
b. WHEN LIABLE: drawee
i. mere addition of words describing d. In no other case is presentment for
him as an agent without disclosing his acceptance necessary in order to render
principal any party to the bill liable.
ii. Where a broker or agent negotiates
an instrument without indorsement, he 2. Effect of non-presentment [w/in reasonable
incurs all liabilities in Sec. 65, unless time] (Sec. 144, NIL) - discharges the drawer
he discloses name of principal and fact and all indorsers.
that he’s only acting as agent. (Sec. a. Reasonable Time: considerations
69, NIL) i nature of instrument
ii usage of trade or business with
INSULAR DRUG v. PNB respect to instrument
iii facts of each case
The right of an agent to indorse commercial paper 3. How made (Sec. 145, NIL)
will not be lightly inferred. A salesman with a. BY or ON BEHALF of the holder
b. AT a reasonable hour, b. NON ACCEPTANCE of the bill
c. ON a business day and before the bill i Duty of holder: must treat the bill
is overdue, as dishonored by nonacceptance or
d. TO the drawee or some person he loses the right of recourse
authorized to accept or refuse against the drawer and indorsers.
acceptance on his behalf; and (Sec. 150, NIL)
i bill addressed to drawees not ii Right of holder: immediate right
partners, MUST be made to them of recourse against the drawer and
all unless one has authority to indorsers and no presentment for
accept or refuse acceptance for payment is necessary. (Sec. 151,
all; NIL)
ii drawee is dead, MAY be made to c. NOTICE OF DISHONOR
his personal representative; i Recipient- (Sec.89, NIL) Except
iii drawee has been adjudged a as herein otherwise provided,
bankrupt or an insolvent or has 1) to the drawer and
made an assignment for the 2) to each indorser,
benefit of creditors, MAY be made: ii Effect of omission to give notice
1) to him or of non-acceptance
2) to his trustee or assignee. 1) any drawer or indorser to
whom such notice is not given
4. When made (Sec. 146, NIL) on any day is discharged
on which NIs may be presented for 2) does not prejudice the rights of
payment under: a HDC subsequent to the
a. Sec. 72, NIL – at a reasonable hour omission. (Sec. 117, NIL)
on a business day
i Instruments falling due or 4.3. Presentment for Payment
becoming payable on Saturday - 1. IN GENERAL
next succeeding business day a. NECESSARY in order to charge the
ii EXCEPT instruments payable on drawer and indorsers(Sec. 70, NIL)
demand [at the option of the b. NOT necessary
holder] – before twelve o'clock i. to charge the person primarily liable
noon on Saturday WHEN that on the instrument (Sec. 70, NIL)
entire day is not a holiday. ii. to charge the drawer where he has
b. Sec. 85, NIL – no right to expect or require that the
i at the time fixed therein without drawee or acceptor will pay the
grace. instrument. (Sec. 79, NIL)
c. Where the holder has no time, with iii. to charge an indorser where the
the exercise of reasonable diligence, to instrument was made or accepted for his
present the bill for acceptance before accommodation and he has no reason to
presenting it for payment, delay is expect that the instrument will be paid if
excused and doesn’t discharge the presented. (Sec. 80, NIL)
drawers and indorsers. (Sec. 147, iv. Excused:
NIL) 1) Where, after the exercise of
reasonable diligence,
5. When Excused (Sec. 148, NIL) Bill may presentment cannot be made;
be treated as dishonored by non- 2) Where the drawee is a fictitious
acceptance: person;
a. Where the drawee is (1) dead, (2) 3) By waiver of presentment,
absconded, (3) fictitious, (4) does not express or implied.
have capacity to contract by bill. v. when a bill is dishonored by
b. Where, after the exercise of nonacceptance – immediate right to
reasonable diligence, presentment can recourse accrues to holder (Sec. 151,
not be made. NIL)
c. Where, although presentment has vi. in case of waiver of protest, whether
been irregular, acceptance has been in the case of a foreign bill of exchange
refused on some other ground. or other NI – deemed to be a waiver not
only of a formal protest but also of
6. Dishonor and Effects presentment and notice of dishonor.
a. Dishonor by nonacceptance: (Sec. 111, NIL)
i When duly presented for
acceptance – acceptance is 2. Date and time of presentment
refused or can not be obtained; or a. bearing fixed maturity / not payable
ii When presentment for acceptance on demand – on the day it falls due
is excused – bill is not accepted.
(Sec. 149, NIL)
iii if day of maturity falls on Sunday PAPA v A.U. VALENCIA (1998)
or a holiday, the instruments
falling due or becoming payable Granting that petitioner had never encashed the
on Saturday are to be presented check, his failure to do so for more than ten (10)
for payment on the next years undoubtedly resulted in the impairment of the
succeeding business day (Sec.85, check through his unreasonable and unexplained
NIL) delay.
b. payable on demand – within a While it is true that the delivery of a check produces
reasonable time after its issue, the effect of payment only when it is cashed, the rule
iv at the option of the holder, may is otherwise if the debtor is prejudiced by the
be presented for payment before creditor’s unreasonable delay in presentment. The
twelve o'clock noon on Saturday acceptance of a check implies an undertaking of due
when that entire day is not a diligence in presenting it for payment, and if he from
holiday (Sec. 85, NIL) whom it is received sustains loss by want of such
c. demand bill of exchange – within a diligence, it will be held to operate as actual payment
reasonable time after the last negotiation. of the debt or obligation for which it was given.
(Sec. 71, NIL) (NOTE: though reasonable It has, likewise, been held that if no presentment is
time from last negotiation, it may be made at all, the drawer cannot be held liable
unreasonable time from issuance thus irrespective of loss or injury unless presentment is
holder may not be HDC under sec. 71) otherwise excused. This is in harmony with Article
d. Check - must be presented for payment 1249 of the Civil Code under which payment by way
within reasonable time after its issue or of check or other negotiable instrument is conditioned
drawer will be discharged from liability on its being cashed, except when through the fault of
thereon to extent of loss caused by delay the creditor, the instrument is impaired. The payee of
i.How time computed. — When a check would be a creditor under this provision and if
payable at a (1) fixed period after its non-payment is caused by his negligence,
date, (2) after sight, or (3) after that payment will be deemed effected and the obligation
happening of a specified event, for which the check was given as conditional payment
exclude day from which the time is to will be discharged.
begin to run, include date of payment.
(Sec. 86, NIL) 3. Where DELAY excused - when the delay is
ii.Where the day, or the last day for caused by circumstances beyond the control of
payment falls on a Sunday or on a the holder and not imputable to his default,
holiday – may be done on the next misconduct, or negligence; when the cause of
succeeding secular or business day. delay ceases to operate, presentment must be
(Sec. 194, NIL) made with reasonable diligence (Sec. 81,NIL)

PNB v. SEETO (1952) 4. Manner of Presentment

On 13 March, Seeto indorsed to PNB-Surigao a a. The instrument must be exhibited; when


bearer check dated 10 March drawn against PBC- paid, must be delivered up to the party
Cebu. PNB-Surigao mailed the check to its Cebu paying it. (Sec. 74, NIL)
branch on 20 March & was presented to the drawee b. What constitutes a sufficient
bank on 09 April. The check was dishonored for presentment. (Sec. 72, NIL)
insufficient funds because the delay in presentment i.BY WHOM: the holder, or by some
cause the exhaustion of the drawer's funds. person authorized to receive payment
Indorser Seeto asked that the suit be deferred while on his behalf;
he made inquiries. He assured PNB that he would
refund the value in case of dishonor. CHAN WAN v. TAN KIM(1960)
HELD: The indorser is discharged from liability by
reason of the delay in the presentment for payment, Tan Kim drew specially crossed checks payable to
under §84. bearer. Chan Wan presented the checks for payment
Drawer had enough funds when he issued the check to the drawee bank but they were dishonored due to
because his subsequent checks drawn against the insufficient funds. Chan Wan seeks recovery on these
same bank had been encashed. checks.
The assurances of refund by the indorser are the HELD: Checks crossed specially to China Banking
ordinary obligation of an indorser which are should have been presented for payment by that
discharged by the unreasonable delay in bank, not by Chan Wan. Inasmuch as Chan Wan
presentation of the check. presented them for payment himself, there was no
NOTE: Camposes note that the discharge of the proper presentment & the liability did not attach to
indorser should have been based on §§ 66 & 71 on the drawer.
presentment as a condition to the indorser's liability But there was due presentment as clearance
& presentment for payment of a demand bill made endorsements by China Bank can be found at the
within a reasonable time from its last negotiation. back of the checks. However, some of the checks
were stamped account closed.
As Chan Wan failed to indicate how the checks residence of the person to
reached his hands, the court held him not to be a make payment;
holder in due course who can still recover on the 1) in any other case –
checks but subject to personal defenses, such as wherever person to make
lack of consideration. payment can be (1) found,
NOTE: Camposes note that despite the addition of or if presented (2) at his
the words "non-negotiable" on the specially crossed last known place of
checks, the Court considered the checks as business or residence
negotiable instruments. A check on its face 2) where principal debtor is
normally has all the requisites of negotiability, and dead and no place of
the addition of the above words should not change payment is specified – to
its character as a negotiable instrument. his personal
representative, IF any AND
ASSOCIATED BANK v. CA & REYES (1992) IF he can be found with the
exercise of reasonable
Different department stores issued crossed checks diligence (Sec. 76, NIL)
bearing "for payee's account only" payable to 3) where persons primarily
Melissa's RTW. Sayson, acting without authority, liable are partners and no
deposited & encashed the checks with Associated place of payment is
Bank. specified, presentment for
HELD: Citing State Invt House v IAC, the effects of - to any one of them, even
crossing a check are: though there has been a
1. check may not be encashed but only dissolution of the firm.
deposited in the bank; (Sec. 77, NIL)
2. check may be negotiated only one -- to 4) joint debtors and no
one who has an account with a bank; and place of payment is
3. the act of crossing the check serves as a specified - to them all
warning to the holder that the check has (Sec. 78, NIL)
been issued for a definite purpose so that iv. TO WHOM: (1) person primarily
he must inquire if he has received the liable on the instrument, or if he is
check pursuant to that purpose. absent or inaccessible, (2) to any
The effects of crossing a check relate to the mode of person found at the place where the
presentment for payment. presentment is made.
The law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with
it, for the purpose of determining their genuineness 5. Dishonor by Nonpayment
& regularity. a. Sec 83, NIL The instrument when:
i. duly presented for payment and
payment refused or cannot be obtained;
ii. TIME: reasonable hour on a or
business day; ii. presentment is excused and the
1) where instrument payable at instrument is overdue and unpaid.
bank. — must be made b. Effect:: [subject to NIL provs] an
during banking hours, immediate right of recourse to all parties
UNLESS the person to make secondarily liable accrues to the holder.
payment has no funds there (Sec. 84, NIL)
to meet it at any time during i. Dishonor is a condition precedent to
the day, in which case the enforcement of the liability of
presentment at any hour secondary parties.
before the bank is closed on ii. This is conditioned upon the giving of
that day is sufficient (Sec. due notice of dishonor
75, NIL) iii. An indorser whose liability has
iii. PLACE: proper place as herein become fixed by demand and notice is,
defined: (Sec. 73, NIL) as to holder, a principal debtor.
1) place of payment specified –
at place of payment;
2) no place of payment specified
but address of the person to
5. Notice of Dishonor
make payment is given in the
instrument – at the address 5.1.Definition
given; 1. To bring either verbally or by writing, to the
3) no place of payment and no knowledge of the drawer or indorser of an
address is given – at the instrument, the fact that a specified NI, upon
usual place of business or proper proceedings taken, has not been
accepted or has not been paid, and that ii. An ordinary intelligent and diligent
the party notified is expected to pay it effort to make personal service
2. General rule: MUST be given to drawer b. Through the mails
and to each indorser, and any drawer or c. Campos: Through the telephone
indorser to whom such notice is not given i Party to be notified must be fully
is discharged identified as the party at the
receiving end of the line
5.2. When necessary 4.The ff. notice still sufficient: (Sec. 95, NIL)
1. Sec 89, NIL Except as herein provided, a. a written notice, not signed
when a negotiable instrument has been b. insufficient written notice, supplemented
dishonored by non-acceptance or non- and validated by verbal communication
payment, notice of dishonor must be given to c. instrument suffering from misdescription
the drawer and to each indorser… UNLESS the party to whom the notice is
2. Parties entitled to notice: given is in fact misled thereby.
a. Drawer
b. Indorser 5.4.Time and Place
c. Accomodation Indorsers 1. Notice may be given as soon as the instrument
i Joint maker excluded if not an is dishonored and within the time fixed by NIL,
indorser unless delay excused (Sec. 102, NIL)
3. Acceleration Clause 2. NOTICE to SUBSEQUENT PARTY: Each party
a. If clause is optional on holder: who receives a notice is given the same period of
i The bringing of an action against time within which to notify prior indorsers that
the maker and indorsers the last holder had. (Sec. 107)
constitutes a valid exercise of 3. TIME FIXED BY THE NIL:
option and a valid notice of a. Where parties reside in same place (Sec.
dishonor 103, NIL): Must be given w/in the ff. times:
b. Clause is automatic: ii If given at the place of business of
i Notice of dishonor must be givem the person to receive notice -
at once before the close of business hours
ii Not sufficient to give it upon on the day following
commencement of action iii If given at his residence - before the
usual hours of rest on the day
GULLAS v. PNB (1935) following
iv If sent by mail - deposited in the
A notice of dishonor is necessary to charge an post office in time to reach him in
indorser & that the right of action against him does usual course on the day following.
not accrue until the notice is given. b. Where parties reside in different places
As a general rule, a bank has a right of set off of the (Sec. 104, NIL).:
deposits in its hands for the payment of any i. If sent by mail - deposited in the post
indebtedness to it on the part of a depositor. office in time to go by mail the day
However, prior to the mailing of notice of dishonor & following the day of dishonor, or if there
without awaiting any action by Gullas, the bank be no mail at a convenient hour on last
made use of the money standing in his account to day, by the next mail thereafter
make good for the treasury warrant. Gullas was ii. Convenient hour: depends on the
merely an indorser & notice should actually have usual hours of opening of business
been given to him in order that he might protect his houses and the post-office
interests. iii. If given otherwise - within the time
that notice would have been received in
due course of mail, if it had been
5.3. Form and Contents (Sec 96) deposited in the post office within the
1. Form of Notice: time specified above
a. may either be in writing, or oral
b. Campos: must be in a language that will c. Delay (Sec. 113, NIL)
inform the addressed party that the i. Excused: when the delay is caused by
instrument has been duly presented circumstances beyond the control of the
2. Contents – must contain any terms which holder and not imputable to his default,
sufficiently misconduct, or negligence
a.identify the instrument, and ii. But, when the cause of delay ceases
b. indicate that it has been dishonored by to operate, notice must be given with
non-acceptance or non-payment; reasonable diligence.
3.Mode of delivery
a. Personal service 4. Sender deemed to have given due notice
i. There must be actual personal (Sec. 105, NIL)
service, or
a. Where notice of dishonor is duly a. MUST be given to a personal
addressed and deposited in the post office, representative, if there be one, and if
i. “deposit in post office” — when with reasonable diligence, he can be
deposited in any branch post office or found;
in any letter box under the control of b. If no personal representative – MAY be
the post-office department. (Sec. sent to the last residence or last place of
106, NIL) business of the deceased.
b. notwithstanding any miscarriage in the 4. To partners : to any one partner, even
mails though there has been a dissolution. (Sec.
99, NIL)
4. Place where notice must be sent (Sec. 5. To joint parties(Sec. 100, NIL)
108, NIL) a. to each of the party
a. to the address, if any, added by the b. unless one of them has authority to
party to his signature; if address not receive such notice for the others.
given: 6. to bankrupt (Sec. 101, NIL)
i to the post-office nearest to his a. to the party himself or
place of residence or where he is b. to his trustee or assignee
accustomed to receive his letters;
or 5.7. In whose favor notice operates
ii If he lives in one place and has his 1. when given by/on behalf of holder: inures to
place of business in another, to benefit of (Sec. 92, NIL)
either place; or a. all subsequent holders and
iii If he is sojourning in another b. all prior parties who have a right of
place, to the place where he is so recourse vs. the party to whom it’s given
sojourning. 2. where notice given by/on behalf of a party
b. Notice sent to place not in accord with entitled to give notice: inures for benefit (Sec.
NIL, still SUFFICIENT 93, NIL)
i Where the notice is actually a. holder
received by the party within the b. all parties subsequent to party to whom
time specified in this Act, notice given

5.5. By Whom Given 5.8. When rule requiring notice not


1. Sec. 90, NIL
applied
a. By or on behalf of the holder or
1. In general
b. any party to the instrument who may be
a. Sec 112: notice of dishonor is dispensed
compelled to pay it to the holder, and who,
with when after the exercise of reasonable
upon taking it up, would have a right to
diligence, it cannot be given to or does not
reimbursement from the party to whom the
reach the parties sought to be charged
notice is given
b. Reasonable diligence depends upon the
2. Agent
circumstance of the case
a. Notice of dishonor may be given by an
2. When notice of non-acceptance is already
agent either in his own name or in the
given
name of any party entitled to give notice,
a. Sec 116: Where due notice of dishonor by
whether that party be his principal or not
non-acceptance has been given, notice of a
(Sec. 91, NIL)
subsequent debtor by non-payment is not
b. Where instrument has been dishonored
necessary, unless in the meantime the
in hands of agent, he may either himself
instrument has been accepted
give notice to the parties liable thereon, or
b. Ratio for the rule: dishonor by non-
he may give notice to his principal (within
acceptance confers upon the holder an
the same time as if agent were holder)
immediate right against all secondary parties
(Sec. 94, NIL)
3. Waiver
a. Waiver of notice may be made either:
5.6. To whom notice MAY be given i before the time of giving notice has
1. If given by an agent arrived or
a. to his principal, in case of an ii after the omission to give due
instrument dishonored in the hands of notice; may be expressed or
an agent (Sec. 94, NIL), or implied. (Sec. 109, NIL)
b. to the parties liable thereon b. Parties affected by waiver
c. ex: collecting bank i. Dependent upon where the waiver is
2. IN GENERAL (Sec. 97) written
a. Party himself ii. Where the waiver is embodied in the
b. Or his agent in that behalf instrument itself - binding upon all
3. If party is dead and death known to the parties;
party giving notice (Sec. 98, NIL)
iii. where written above the signature D. Contents
of an indorser - binds him only. (Sec. 1. The time and place of presentment;
110, NIL) 2. The fact that presentment was made and the
manner thereof;
5.9. When Notice Not Necessary 3. The cause or reason for protesting the bill;
1.When not necessary to charge drawer 4. The demand made and the answer given, if
(Sec. 114, NIL) any, or the fact that the drawee or acceptor
a. drawer/drawee same person could not be found. (Sec. 153, NIL).
b. drawee fictitious, incapacitated E. By whom
c. drawer is person to whom instrument is 1. A notary public; or
presented for payment 2. any respectable resident of the place where
d. drawer has no right to expect/require the bill is dishonored, in the presence of two
that drawee/acceptor will honor instrument or more credible witnesses. (Sec. 154, NIL)
e. drawer countermanded payment F. Time
1. on the day of its dishonor unless delay is
STATE INVESTMENT HOUSE v CA (1993) excused;
2. when duly noted, the protest may be
Moulic issued 2 checks to Victoriano as security for subsequently extended as of the date of the
pieces of jewelry to be sold on commission. noting. (Sec. 155, NIL);
Victoriano negotiated these checks to State G. Place
Investment. As Moulic failed to sell the jewelry, she 1. at the place where it is dishonored,
returned them to Victoriano. However, she failed to 2. EXCEPT bill drawn payable at the place of
retrieve her checks. Moulic withdrew her funds business or residence of person other than
from the drawee bank. Upon presentment, the the drawee has been dishonored by
checks were dishonored. nonacceptance,
HELD: State Investment is a holder in due course & a. it must be protested for non-payment at
is not subject to the personal defense of lack of the place where it is expressed to be
consideration. payable, and
There is no need to serve the drawer a notice b. no further presentment for payment to,
of dishonor because she was responsible for or demand on, the drawee is necessary.
the dishonor of her checks. After withdrawing (Sec. 156, NIL)
her funds, she could not have expected her checks H. Protest for better security against the drawer
to be honored. and indorsers — where the acceptor has been
adjudged a bankrupt or an insolvent or has made
2. Where not necessary to charge indorser an assignment for the benefit of creditors before
(Sec. 115, NIL) the bill matures (Sec. 158, NIL)
a. drawee fictitious, incapacitated, and I. Delay excused
indorser aware of the fact at time of 1. Requisites:
indorsement a. when caused by circumstances beyond
b. indorser is person to whom instrument the control of the holder, and
presented for payment b. not imputable to his default,
c. instrument made/accepted for his misconduct, or negligence.
accommodation 2. When the cause of delay ceases to operate,
the bill must be noted or protested with
reasonable diligence.;
J. When protest dispensed with - by any
7. Protest circumstances which would dispense with notice
of dishonor. (Sec. 159, NIL)
A. Definition: testimony of some proper person K. Waiver of protest: deemed to be a waiver not
that the regular legal steps to fix the liability of only of a formal protest but also of presentment
drawer and indorsers have been taken and notice of dishonor. (Sec. 111, NIL)
B. When necessary:
1. In case of a FOREIGN BILL appearing on its
face to be such; TAN LEONCO v GO INQUI(1907)
2. protest for non-acceptance if dishonored by
nonacceptance & In exchange for the abaca from Tan Leonco's
3. protest for nonpayment if not previously plantations, Go Inqui drew a bill of exchange
dishonored by nonpayment. against Lim Uyco. Upon presentment of the
4. Effect of failure to protest: the drawer and draft, it was refused payment due to a stop
indorsers are discharged. (Sec. 152, NIL) order from the drawer. The bill was not
C. Form protested.
1. annexed to the bill or must contain a copy HELD: The action is not brought upon the bill
thereof, and of exchange which was used only as evidence
2. must be under the hand and seal of the of the indebtedness. Under these conditions,
notary making it; protest & notice of nonpayment are
unnecessary in order to render the drawer promise to pay payment at the place
liable. only at a special where it is payable at
place, but is a a reasonable time
NOTE: The ruling of the Court on protest is promise to pay discharges the
merely obiter dictum. generally, even drawer from liability
though a place of to the extent he is
payment damaged by the
8. Acceptance or Payment for breach.

Honor
A. Acceptance
9. Bills in Set
1. Practice of accepting for honor is obsolete
2. When bill may be accepted for honor. — A. composed of various parts being numbered,
When a BE has been (1) protested for and containing a reference to the other
dishonor by non-acceptance or protested parts, all of which parts constitute one bill of
for better security and (2) is not overdue lading
à any person not being a party already B. Bills in set constitute one bill. (Sec. 178,
liable may, with the CONSENT of the NIL)
holder, intervene and accept the bill supra C. Right of HDCs where different parts are
protest for the honor of any party liable negotiated. — the holder whose title first
thereon or for the honor of the person for accrues is the true owner of the bill. But
whose account the bill is drawn. nothing in this section affects the right of a
3. The acceptance for honor may be for part person who, in due course, accepts or pays
only of the sum for which the bill is drawn; the parts first presented to him. (Sec. 179.,
4. where there has been an acceptance for NIL)
honor for one party, there may be a further D. Liability of holder who indorses two or
acceptance by a different person for the more parts of a set to different persons. —
honor of another party. (Sec. 161, NIL) liable on every such part, and every indorser
5. Referee in case of need — person whose subsequent to him is liable on the part he
name is inserted by the drawer of a bill and has himself indorsed, as if such parts were
separate bills. (Sec. 180, NIL)
any indorser to whom the holder may
resort in case bill is dishonored by non- E. Acceptance - may be written on any part
and it must be written on one part only. If
acceptance or non-payment; option of the
holder to resort to the referee (Sec. 131, the drawee accepts more than one part and
such accepted parts negotiated to different
NIL)
B. PAYMENT FOR HONOR - any person may holders in due course, he is liable on every
intervene and pay bill protested for non- such part as if it were a separate bill. (Sec.
payment supra protest (Sec. 171, NIL) 181, NIL)
F. Payment - When the acceptor of a bill
6.3 INSTRUMENTS PAYABLE AT BANK drawn in a set pays it without requiring the
part bearing his acceptance to be delivered
Sec 87: Where the instrument is made payable at a up to him, and the part at maturity is
bank, it is equivalent to an order to the bank ton outstanding in the hands of a holder in due
pay the same for the account of the principal debtor course, he is liable to the holder thereon.
therein (Sec. 182, NIL)
G. Effect of discharging one of a set. — Except
BINGHAMPTON PHARMACY v FIRST NATIONAL as herein otherwise provided, the whole bill
BANK (1915) is discharged. (Sec. 183, NIL)
There is a distinction between the drawer of a check
& the maker of a note payable at a bank:
Note payable at Check
bank
maker of a note is drawer of a check is Chapter VII.
primarily liable on only liable after
the instrument dishonor DISCHARGE
Law excuses requires presentment
presentment of the within a reasonable
instrument time at the peril of 1. Definition: Discharge
discharging the
drawer
The release of all parties, whether primary or
obligation of the Breach of the duty of
secondary, from the obligation on the instrument;
maker of a note is the holder of a check
renders the instrument non-negotiable
not a conditional to present for
4. principal debtor becomes holder of
2. Discharge of the instrument at or after maturity in his own
INSTRUMENT right
5. renunciation of holder: (Sec. 122, NIL)
2.1. How discharged: (Sec 119)7 a. holder may expressly renounce his
1. By Payment in due course rights vs. any party to the instrument,
a. Sec. 88: Payment is made in due before or after its maturity
course when it is made: b. absolute and unconditional renunciation
i at or after the maturity of the of his rights against PRINCIPAL DEBTOR
payment made at or after maturity discharges the
o if payment is made before instrument
maturity and the note is c. renunciation does not affect rights of
negotiated to a HDC, the HDC w/o notice.
latter may recover on the d. Renunciation must be in writing unless
instrument. instrument delivered up to person
ii to the holder thereof primarily liable thereon
o payment to one of several material alteration – review Sec.
payees or indorsees in the 125, NIL: what constitutes material
alternative discharges the alteration (Sec. 124, NIL: material
instrument, alteration w/o assent of all parties
o but payment to one of several liable avoids instrument except as
joint payees or joint indorsers against party to alteration and
is not a discharge. The party subsequent indorsers)
receiving payment must have
been authorized by others to
receive payment. 3. OF SECONDARY PARTIES
iii in good faith and without notice
that his title is defective
(Sec. 120, NIL)8
b. By whom made:
i payment in due course by or on A. by discharge of instrument
behalf of principal debtor B. intentional cancellation of signature by holder
ii payment in due course by party C. discharge of prior party
accommodated where party is D. valid tender of payment by prior party
made/ accepted for E. release of principal debtor, unless holder’s right
accommodation of recourse vs. 2ndary party reserved
c. When check deemed paid by drawee F. any agreement binding upon holder to extend
bank time of payment, or to postpone holder’s right to
i Once the holder receives the cash enforce instrument, UNLESS
ii If the bank credits the amt of the 1. made with assent of party secondarily liable,
check to the depositor’s account or
iii Where the drawee bank charges 2. right of recourse reserved.
the check to the account, G. Failure to make due presentment (Secs. 70, 144,
indicating intention to honor the NIL)
check H. failure to give notice of dishonor
2. intentional cancellation by holder I. certification of check at instance of holder
a. if unintentional or under mistake or J. reacquisition by prior party
without authority of holder, 1. where instrument negotiated back to a prior
inoperative; party, such party may reissue and further
b. where instrument or signature appears negotiate, but not entitled to enforce
to have been cancelled, burden of payment vs. any intervening party to whom
proof on party which alleges it was he was personally liable
unintentional, etc. (Sec. 123, NIL) 2. where instrument is paid by party
3. any other act which discharges a simple secondarily liable, it’s not discharged, but
contract for payment of money a. the party so paying it is remitted to his
a. ex. issuance of a renewal note— former rights as regard to all prior
novation parties
b. Refer to Art 1231 of the Civil Code

8
Suggested Mnemonics: CuPID CRRAFFT:
intentional Cancellation, Prior Party and Instrument
7
Suggested Mnemonics: PICk ROAD: Payment in Discharge, Certification, Release, Reacquisition, any
due course, Intentional Cancellation, Renunciation, Agreement, Failure to make due presentment, Failure
any Other Act, Debtor becomes holder. to give notice of dishonor, valid Tender of payment.
b. and he may strike out his own and all delivery of a bond do not warrant
subsequent indorsements, and again therefore that the corporation which
negotiate instrument, except issued the bonds has any judicial
i where it’s payable to order of 3rd capacity to act. A general indorser
party and has been paid by thereof however would be liable for such
drawer want of capacity.
ii where it’s made/accepted for
accommodation and has been paid 2.2. Debentures
by party accommodated 1. similar to bonds except that they are usually
for a shorter tem and may or may not be
accompanied by a mortgage.
2. they are often issued on the general credit of
the issuer corporation
Chapter VIII.
OTHER FORMS OF 3. Drafts and Letters of
COMMERCIAL PAPER Credit
3.1. Drafts and Letters of Credit - The
1. In General draft and the letter of credit are generally used
together to effect payment in international
1.1. Commercial papers – transactions.
1. also Negotiable instruments; 3.2. Draft a form of BE generally used to facilitate
2. merely special forms of either PNs or BEs; the transactions between persons physically remote
3. also governed by the NIL from each other.
3.3. Letters of Credit
1.2. Quasi-negotiable includes commercial 1. one person requests some other person to
paper which though not governed by the NIL, have advance money or give credit to a third
certain attributes of negotiability. person, and promises that he will repay the
same to the person making the

2. Bonds and Debentures


2.1. Bonds advancement, or accept bills drawn upon
himself for the like amount.
2. must be issued in favor of a definite person,
1. evidences of indebtedness, in the nature of and not to order.
a PNs 3. under our law, a letter of credit cannot be a
2. usually accompanied by a mortgage of the negotiable instrument because (a) it may not
property of the issuer contain the words of negotiability; (b) may
3. issued by the government (municipal & be issued for an undetermined amount. See
other public corporations) & private Art 568 Code of Commerce.
corporations; 4. “INDEPENDENCE PRINCIPLE”: Credits, by
a. though not to mature for a long time, their nature, are separate transactions from
assure some regular income to the sales or other contract(s) on which they
bondholders in the form of interest*, may be based and banks are in no way
usually payable annually concerned with or bound by such contract(s),
b. bonds and interest coupons (evidences even if any reference whatsoever to such
interest obligations)* contract(s) is included in the credit.
§ may be negotiable in form, Consequently, the undertaking of a bank to
therefore governed by NIL pay, accept and pay draft(s) or negotiate
(Sec 65); and/or fulfill any other obligation under the
§ both are actually promissory credit is not subject to claims or defenses by
notes the applicant resulting from his relationships
c. they run for long periods of time, and with the issuing bank or the beneficiary. A
are often sold to the public in general beneficiary can in no case avail himself of
d. funds generated by such bonds are the contractual relationships existing
used to finance corporate projects and between the banks or between the applicant
public works; and the issuing bank.
e. there is no warranty on the part of a. Thus, the engagement of the issuing
such indorser or negotiator that prior bank is to pay the seller or beneficiary of
parties had capacity to contract. The the credit once the draft and the
qualified indorser & negotiator by required documents are presented to it.
This principle assures the seller or the Letters of credit may not be protested
beneficiary of prompt payment even if not be paid; bearer cannot
independent of any breach of the main acquire any right of action by reason of
contract and precludes the issuing non-payment against the person who
bank from determining whether the issued it.
main contract is actually accomplished The person paying has right to demand
or not. Under this principle, banks the proof of the identity of the person in
assume no liability or responsibility for whose favor the letter of credit was
the form, sufficiency, accuracy, issued.
genuineness, falsification or legal d. Art 570. The drawer of a letter of credit
effect of any documents, or for the may annul it, informing the bearer and
general and/or particular conditions the person to whom it is addressed
stipulated in the documents or e. Art 571. The bearer of a letter or credit
superimposed thereon, nor do they shall pay the amount received to the
assume any liability or responsibility drawer without delay. Should he not do
for the description, quantity, weight, so, an action involving execution may be
quality, condition, packing, delivery, brought to recover it, with legal interest
value or existence of the goods and the current exchange in the place
represented by any documents, or for where it is repaid.
the good faith or acts and/or f. Art 572. If the bearer of a letter of
omissions, solvency, performance or credit does not make use thereof within
standing of the consignor, the carriers, the (1) period agreed upon with the
or the insurers of the goods, or any drawer, or in default of a period fixed,
other person whomsoever. (2) within 6 months, counted from its
b. The independent nature of the letter of date, in any point in the Philippines, and
credit may be: (a) independence in within 12 months anywhere outside
toto where the credit is independent thereof, it shall be void in fact and in
from the justification aspect and is a law.
separate obligation from the
underlying agreement like for instance
a typical standby; or (b) independence BPI v. DE RENY FABRIC (1970)
may be only as to the justification
aspect like in a commercial letter of The company and its officers cannot shift the burden
credit or repayment standby, which is of loss to the bank because of the terms of their
identical with the same obligations Commercial Letter of Credit Agreement with the bank
under the underlying agreement. In provides that latter shall not be responsible for the
both cases the payment may be any difference in character or condition of the
enjoined if in the light of the purpose property. Furthermore, the bank was able to prove
of the credit the payment of the credit the existence of a custom in international banking and
would constitute fraudulent abuse of financing circles negating any duty of the bank to
the credit. (Transfield vs. Luzon verify whether what has been described in letters of
Hydro) credits or drafts or shipping documents actually
5. Pertinent Code of Commerce provisions: tallies with what was loaded aboard ship. Banks, in
a. Art 567. Letters of credit - issued by providing financing in international business
one merchant to another for the transactions do not deal with the property to be
purpose of attending to a commercial exported or shipped to the importer, but deal only
transaction. with documents.
b. Art 568. The essential conditions of
letter of credit shall be: LEE v CA (2002)
i issued in favor of a definite
person, and not to order. Modern letters of credit are usually not made between
ii limited to a fixed and specified natural persons. They involve bank to bank
amount, or to one or more transactions. Historically, the letter of credit was
undetermined amount, but all developed to facilitate the sale of goods between,
within a maximum the limit of distant and unfamiliar buyers and sellers. It was an
which has to be stated exactly. arrangement under which a bank, whose credit was
Note: Those which do not have any of acceptable to the seller, would at the instance of the
these last circumstances shall be buyer agree to pay drafts drawn on it by the seller,
considered as mere letters of provided that certain documents are presented such
recommendation. as bills of lading accompanied the corresponding
c. Art 569. The drawer of a letter of drafts. Expansion in the use of letters of credit was a
credit shall be liable to the person on natural development in commercial banking. Parties
whom it was issued, for the amount to a commercial letter of credit include:
paid by virtue thereof, within the (a) the buyer or the importer,
maximum fixed therein. (b) the seller, also referred to as beneficiary,
(c) the opening bank which is usually the E. The same rule is applicable if the certificate is in
buyer’s bank which actually issues the bearer form.
letter of credit, F. The rule is applicable where the certificate is lost
(d) the notifying bank which is the or stolen while signed in blank. Even a purchaser
correspondent bank of the opening bank in good faith cannot acquire title as against the
through which it advises the beneficiary of true owner. (?)
the letter of credit, G. At common law, stock certificates are given the
(e) negotiating bank which is usually any attributes of negotiability only where the owner
bank in the city of the beneficiary. The thereof has entrusted the wrongdoer with the
services of the notifying bank must always possession of such certificate and clothed him
be utilized if the letter of credit is to be with apparent ownership thereof.
advised to the beneficiary through cable,
(f) the paying bank which buys or SANTAMARIA v HONGKONG & SHANGHAI BANK
discounts the drafts contemplated by the (1951)
letter of credit, if such draft is to be drawn
on the opening bank or on another Plaintiff, in failing to take the necessary precaution
designated bank not in the city of the upon delivering the certificate of stock to her broker,
beneficiary. As a rule, whenever the was chargeable with negligence in the transaction
facilities of the opening bank are used, the which resulted to her own prejudice, and as such, she
beneficiary is supposed to present his is estopped from asserting title to it as against the
drafts to the notifying bank for negotiation defendant bank.
and A certificate of stock, indorsed in blank, is deemed
(g) the confirming bank which, upon the quasi-negotiable, and as such the transferee thereof
request of the beneficiary, confirms the is justified in believing that it belongs to the holder
letter of credit issued by the opening bank. and transferor.

TRANSFIELD VS. LUZON HYDRO (2004) DE LOS SANTOS, McGRATH (1955)

Can the beneficiary invoke the independence Although a stock certificate is sometimes regarded as
principle? Yes. quasi-negotiable, in the sense that it may be
To say that the independence principle may only be transferred by endorsement, coupled with delivery it
invoked by the issuing banks would render nugatory is well settled that the instrument is non-negotiable,
the purpose for which the letters of credit are used because the holder thereof takes it without prejudice
in commercial transactions. As it is, the to such rights or defense as the registered owner or
independence doctrine works to the benefit of both credit may have under the law, except in so far as
the issuing bank and the beneficiary. such rights or defenses are subject tot eh limitations
imposed by the principles governing estoppel.

CAPCO v. MACASAET (1990)


4. Certificate of Stock
Certificates of stocks are considered as quasi-
A. or share certificate is the customary and negotiable instruments. When the owner or
convenient evidence of the holder’s interest in shareholder signs the printed form of sale or
the corporation which issues it. assignment at the back of every stock certificates
B. not a NI, but is included in the term “securities” without filling in the blanks provided for the name of
bec does not contain any promise or order to the transferee as well as for the name of the
pay money; attorney-in-fact, the said owner or shareholder, in
C. described as Quasi-Negotiable bec
effect, confers on another all the indicia of ownership
oftentimes, by application of the principles of of the said stock certificates.
estoppel, and to effectuate the ends of justice
and the intention of the parties, the courts
decree a better title to the transferee than
actually existed in his transferor, and is the 5. Negotiable Documents of
same as would be reached if the certificate Title
were negotiable.
D. When the shareholder signs the back of
certificates of stock without filling in the blanks 5.1. In General
(for the name of the transferee and attorney- 1. as distinguished from negotiable
in-fact) and the certificate is delivered to instruments, refer to goods and not to
another, the latter appears to be the owner money; the sale of goods covered is effected
thereof. A bona fide purchaser of value without by the transfer of said document
notice, will be protected in his acquisition, 2. not governed by the NIL but by the Civil
although such third person has diverted the Code.
certificate from the purpose for which he was 3. includes any bill of lading, dock warrant,
entrusted therewith. (Principle of Estoppel) “quedan”, or warehouse receipt or order for
the delivery of goods, or any other 3. If the goods are deliverable to bearer, or the
document used in the ordinary course of document has been indorsed in blank, then
business in the sale or transfer of goods, negotiation may be by mere delivery.
as proof of the possession or control of the
goods, or authorizing or purporting to 5.4. Rights of a Holder
authorize the possessor of the document to 1. When free from personal defense
transfer or receive, either by indorsement a. Under Art 1518 Civil Code, a holder of
or by delivery, goods represented by such a negotiable document of title in good
document. faith, for value and without notice is
4. Documents of title negotiable when goods placed on the same level as a HDC of a
represented thereby are deliverable to a negotiable instrument – i.e., personal
specified person , to order or to bearer. defenses enumerated in said article are
5. valuable in commerce because it facilitates not available against him. Personal
the sale and delivery of goods. defenses include: negotiation was a
breach of duty on the part of the person
5.2. Kinds making the negotiation, owner of the
1. Warehouse receipts an agreement by a document was deprived of the
warehouseman to store goods and deliver possession of the same by loss, theft,
them to a named person or his order or to fraud, accident, mistake, duress or
bearer. conversion.
2. Bill of Lading a similar contract by a b. Note Art 1518’s conflict with Art 1512.
carrier to ship goods and deliver them to (see p 915)
the person named therein or his order or to 2. What title acquired (NOTE: see Arts 1513,
bearer; negotiable bill of lading is useful 1514 and 1519 Civil Code)
not only as evidence of the receipt of the a. A person to whom a negotiable
goods by the carrier but as evidencing title document of title has been duly
to goods covered by it. It also facilitates negotiated acquires the title of the
the purchase of goods by one person from person NEGOTIATING it as well as the
another who is physically remote and title of the ORIGINAL BAILOR or
probably unknown to him. depositor of the goods.
a. “straight” bill where the goods are to ex. if the original bailor had no authority
be delivered to a specified person, it is from such owner to deposit the goods,
not negotiable and is called a then the holder of the negotiable
“straight” bill. Otherwise, it is referred document, even if the negotiation to him
to as an “order” bill. was valid, cannot acquire title to the
goods; AND even if the original bailor
3. Certificate of Deposita receipt of a bank for had authority, if the negotiation to the
certain sum of money received upon present holder’s transferor was not
deposit; generally framed in such FORM as valid, such holder, even if in good faith
to constitute a promissory note, payable to and for value, does not acquire any right
the depositor, or to the depositor or order, to the goods. à the holder’s remedy if
or to bearer. any, is against his transferor and/or the
a. it is taken when depositor does not guilty party.
need his money for some extended i Thus, if the original bailor or
period of time and wants it to earn depositor of the goods was not the
interest; more of an investment paper owner thereof or had no authority
than a commercial paper because it is from such owner to deposit the
not attendant to a commercial goods, then the holder of the
transaction the way a check or a negotiable document, even if the
promissory note is. negotiation to him was valid, cannot
b. it is negotiable if it meets all the acquire title to the goods.
requirements of Sec 1 NIL ii On the other hand, even if the
original bailor or depositor was the
5.3. Negotiation - same as those used in NIs; owner or had authority from the
to order=delivery + indorsement, to bearer = owner, if the negotiation to the
delivery present holder’s transferor was not
1. The means of negotiating a document of title valid, such holder, even if in good
are the same as those used in negotiable faith and for value, does not acquire
instruments. any right to the goods.
2. If by the terms of the document, the goods iii In both cases, the holder’s remedy
are deliverable to the order of a specified if any, is against his transferor
person, then it should be indorsed by such and/or the guilty party.
person, either specially or in blank. b. The person to whom the document has
been negotiated acquires the obligation
of the bailee to make delivery to latter, or to bearer, it is a representation of title
him, as if they had contracted directly upon which bona fide purchasers for value are
with each other. entitled to reply, despite breaches of trust or
i By issuing a negotiable document violations of agreement on the part of the apparent
of title, such bailee had given in owner.
advance his consent to hold the
goods for any person to whom
such document is negotiated.
ii If document non-negotiable,
notice of any transfer should be
given to the bailee otherwise
bailee or any other person other
than the transferor not bound
iii Thus, the transferee’s rights may
be defeated by a levy of
attachment on the goods or by a
notification to the bailee of a sale
of the goods to another
purchaser.
iv A sale of the goods without the
document will not prejudice a
subsequent purchaser who takes
the document in good faith and
for value.
v The bailee’s delivery to the legal
holder of the document would
relieve him of any further
responsibility for the goods.

5.5. Liability of Indorser


1. The indorsement of a negotiable document of
title carries with it certain implied warranties by
the indorser.
2. As to the document, his warranty covers its
genuineness, his legal right to negotiate it and
his lack of knowledge of any fact which would
impair its validity.
3. As to the goods, he warrants that he has
the right to transfer title thereto and that they
are merchantable.
4. However, unlike the indorser of a NI who is
liable if the primary party fails to pay, the
indorser of a negotiable document of title is not
liable for the failure of the bailee to fulfill his
obligation to deliver the goods.

ROMAN v ASIA BANKING CORP. (1922)

A warehouse receipt must be interpreted


according to its evident intent and it is obvious
that the deposit evidenced by the receipt in this
case was intended to be made subject to the
order of the depositor and therefore negotiable.
The indorsement in blank of the receipt with its
delivery which took place on the date of the
issuance of the receipt demonstrate the intent to
make the receipt negotiable. Furthermore, the
receipt was not marked “non-negotiable.”

SIY CONG BIENG v. HSBC

If the owner of the goods permits another to have


the possession or custody of negotiable
warehouse receipts running to the order of the

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