Commercial Law
4.
Acceptance – written assent of the drawee to
the order;
5. Dishonor by non-acceptance – refusal to accept
by the drawee;
6. Presentment for payment – the instrument is
shown to the maker or drawee/ acceptor for
him to pay;
7. Dishonor by non-payment – refusal to pay by
the maker or drawee/ acceptor
8. Notice of dishonor – notice to the persons
secondarily liable that the maker or the
drawee/ acceptor refused to pay or to accept
instrument;
9. Protest
10. Discharge
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
Negotiable Instrument
It is a written contract for the payment of money
which is intended as a substitute for money and
passes from one person to another as money, in
such a manner as to give a holder in due course the
right to hold the instrument free from defenses
available to prior parties. (Sundiang Sr. & Aquino,
2011)
Laws governing Negotiable Instruments
1.
2.
3.
Negotiable Instruments are not legal tender
Checks representing demand deposits do not have
legal tender power and their acceptance in the
payment of debts, both public and private, is at the
option of the creditor: Provided, however, that a
check which has been cleared and credited to the
account of the creditor shall be equivalent to
delivery to the creditor of cash in an amount equal
to the amount credited to his account. (Sec. 60,
NCBA)
Negotiable Instruments Law (NIL) - For
instruments which meet the requisites of
negotiability.
New Civil Code (NCC) – Applies suppletorily in
cases of assignment and demand for payment
of a NI.
Code of Commerce (CC) – Applies suppletorily
to NIL in cases of crossed checks as no
provision in the NIL deals with crossed checks.
GR: The delivery of a negotiable instrument does
not by itself produce the effect of payment. (Roman
Catholic Bishop of Malolos vs. IAC, G.R. No. 72110,
November 16, 1990)
NOTE: When the instrument is not negotiable the
pertinent provision of the civil code, and other
pertinent special laws shall apply. GSIS v. CA, 170
SCRA 533, February 23, 1989)
XPNs: Negotiable instruments shall produce the
effect of payment when: (CaFaC)
Characteristics or Features of a negotiable
instrument (NAccu)
1.
2.
1.
2.
Negotiability – The note may pass from hand to
hand similar to money so as to give the holder
in due course (HIDC) the right to hold the
instrument and collect the sum payable for
himself free from any infirmity in the
instrument or defect in the title of any of the
prior parties or defenses available to them
among themselves.
Accumulation of secondary contracts– A
characteristic of a negotiable instrument
where additional parties become involved as
they are transferred from one person to
another. (De Leon, 2010)
3.
Q: Negotiable instruments are used as
substitutes for money, which means - (2012
BAR)
A: When negotiated, negotiable instruments can
be used to pay indebtedness. It is a medium of
exchange. It is a credit instrument that increases
credit circulation. It increases purchasing power in
circulation and is a proof of transaction. (Aquino)
Incidents in the life of a negotiable instrument
1.
2.
3.
Issue – first delivery of the instrument to the
payee;
Negotiation – transfer from one person to
another so as to constitute the transferee a
holder;
Presentment for acceptance (in certain kinds
of Bills of Exchange) (Sec. 143, NIL)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
They have been cashed (Art. 1249, NCC);
Through the fault of the creditor they have
been impaired (ibid); or
A check representing demand deposit has
been cleared and credited to the account of
the creditor. (Sec. 60, NCBA)
FORMS AND INTERPRETATIONS
Rules governing the use
Negotiable Instruments
597
of
phrases
in
Special Laws
1.
2.
As to promissory note
a. The word “promise” need not be used. Any
expression equivalent to a promise is
sufficient.
b. Mere acknowledgment of a debt is not a
promissory note.
c. Language used must indicate a written
undertaking to pay.
February 23, 1989)
Manner
of
Transfer
As to bill of exchange
a. It must contain an order for payment as
distinguished from a mere request.
b. The order is not invalidated just because it
contains words of civility. Thus, insertion
of polite words like “please” does not alter
the character of the instrument; as long as
the language expresses the drawer’s will
that the money be paid.
Status of
Transfer
ee
Rules of construction in case of ambiguities in a
Negotiable Instrument
1.
2.
3.
4.
5.
6.
7.
Words prevail over figures.
If date from which interest is to run is
unspecified, interest runs from the date of the
instrument; if undated, from the issue thereof.
If undated, instrument is considered dated as
of the time it was issued.
Written provisions prevail over printed.
If there is doubt whether it is a bill or note, the
holder may treat it as either at his election.
When not clear in what capacity it was signed,
it shall be deemed signed as an indorser.
When two or more persons signed a negotiable
instrument stating "promise to pay, "in case of
liability, they shall be deemed to be jointly and
severally liable. (Sec. 17, NIL)
Defenses
Available
Warranti
es
REQUISITES OF NEGOTIABILITY
Right of
Recourse
Factors to determine the negotiability (FRI)
1.
2.
3.
Words that appear on the Face of negotiable
instrument
Requirements enumerated in Section 1 of NIL
Intention of the parties by considering the
whole of the instrument
Negotiable Instrument
Instrument
BASIS
Governin
g Law
NEGOTIABLE
INSTRUMENT
Negotiable
Instruments
Law
vs.
Can
be
transferred by
negotiation or
by assignment.
The transferee
can be a holder
in due course
if
all
the
requirements
of Section 52
of the NIL are
complied with.
NOTE: If the
transferee is a
HIDC, he/ she
may
have
better rights
than
the
transferor.
A holder in
due course of a
negotiable
instrument
may enforce
payment of the
full
amount
thereof against
all the parties
liable thereon.
(NIL, Sec. 57)
Prior parties
warrant
payment
Transferee has
right
of
recourse
against
intermediate
parties.
Can be transferred
only
by
assignment.
The transferee can
never be a holder
in due course but
remains to be an
assignee
and
acquires only the
rights pertaining
to the transferor.
Assignee merely
steps into the
shoes
of
the
assignor.
All
defenses
available to prior
parties may be
raised against the
last
transferee.
(Sundiang Sr. &
Aquino, 2014)
Prior
parties
warrant legality of
title
Transferee has no
right of recourse.
Requisites of Negotiability
An instrument to be negotiable must conform to
the following requirements: (WU-DOrA)
Non-negotiable
1.
2.
NONNEGOTIABLE
INSTRUMENT
The Civil Code or
pertinent special
laws should apply.
(GSIS v. CA,
G.R. No. L-40824,
3.
4.
5.
598
It must be in Writing and signed by the maker
or drawer;
Must contain an Unconditional promise or order
to pay a sum certain in money;
Must be payable on demand, or at a fixed or
determinable future time;
Must be payable to Order or to bearer; and
Where the instrument is Addressed to a drawee,
he must be named or otherwise indicated
therein with reasonable certainty. (Sec.1, NIL)
Commercial Law
NOTE: The requirements stated in Sec. 1 must
appear on the face of the instrument otherwise the
instrument would not be negotiable. The law
prohibits relying on extrinsic evidence.
The drawee then
pays himself from
the particular fund
indicated.
Particular
fund
indicated is not the
direct source of
payment.
Instrument
is
negotiable.
A NI need not follow the exact language of NIL, as
long as the terms are sufficient which clearly
indicate an intention to conform to the
requirements of the law. (Sec. 10, NIL)
1. The instrument must be in writing
It must be reduced in writing or in tangible form.
The negotiability or non-negotiability of an
instrument is determined from the writing on the
face of the instrument itself. (De Leon, 2010)
The instrument must be signed by the maker or
drawer
Certainty as to sum
The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(ISDA-E)
2. Unconditional promise or order to pay
1.
2.
3.
An unqualified order or promise to pay is
unconditional though coupled with:
An indication of a particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or
A statement of the transaction which gave rise
to the instrument. But an order or promise to
pay out of a particular fund is conditional. (Sec
3, NIL)
4.
5.
With Interest;
By Stated installments;
By stated installments, with a provision upon
Default in payment of any installment or of
interest, the whole shall become due
(acceleration clause);
With cost of collection or an Attorney’s fees, in
case payment shall not be made at maturity; or
With Exchange, whether at a fixed rate or at
the current rate. (Sec. 2, NIL)
NOTE: A sum is certain within the contemplation
of Section 1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can
be determined on the face of the instrument even if
it requires mathematical computation. (Sundiang
Sr. & Aquino, 2014)
Indication
of
particular
fund
for
reimbursement vs. Indication of particular fund
for payment
FUND FOR PAYMENT
There is only one act the
drawee
pays
directly
from
the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Instrument is nonnegotiable. The fund
specified is the direct
source of payment;
therefore, it is subject
to the availability of
fund,
hence
conditional. (Sundiang
Sr. & Aquino, 2014)
An instrument payable upon a contingency is not
negotiable even if the condition thereon has been
fulfilled.
The signature is valid and binding as long as it
appears that a person intended to make the
instrument his own. The signature is prima facie
evidence of a person’s intention to be bound as
either maker or drawer.
FUND FOR
REIMBURSEMENT
The drawee pays
the payee from his
own funds.
Particular
fund
indicated is the direct
source of payment.
The promise or order to pay must not be
subject to any condition or contingency.
NOTE: Where a signature is so placed upon the
instrument that it is not clear in what capacity the
person making the same intended to sign, he is to
be deemed an indorser. [Sec. 17 (f), NIL]
2.
fund
NOTE: The word “promise” or “order” need not
appear in the instrument to satisfy the
requirements of Section 1(b) of the NIL. (Sundiang
Sr. & Aquino, 2014)
It is placed at the lower right-hand corner of the
instrument. Nonetheless, it may appear in any part
of the instrument whether at the top, middle or
bottom or at the margin. (De Leon, 2010)
1.
particular
indicated.
Payment with interest
Interest at a fixed rate or at increased or reduced
599
Special Laws
rate will not destroy negotiability because the
presence of such interest does not make uncertain
the sum payable. In the absence of a date as to
which interest is to run, it shall be from the date of
instrument, or in the absence thereof, at the date of
issue. In the absence of interest rate, it shall be the
legal rate. [Sec. 17 (b), NIL]
time of payment is rendered uncertain –
NON-NEGOTIABLE
Extension Clause
Extension Clauses are provisions extending the
time of payment.
Payment by installment
GR: An extension clause does not affect the
negotiability of the instrument.
Payment by installment is certain if the dates of
each installment are fixed and the amount to be
paid for each installment is stated. (Sundiang Sr. &
Aquino, 2009)
Q: Discuss
negotiability:
the
negotiability
or
XPN: Where a note with a fixed maturity provides
that the maker has the option to extend time of
payment until the happening of a contingency, the
date is uncertain, and the instrument is nonnegotiable. The time for payment may never come
at all.
non-
NOTE: If the right is given to the holder, the time of
payment need not contain a new fixed maturity
date or the length of extension does not have to be
specified.
Manila, June 3, 1993
P10,000.00
For value received, I promise to pay Sergio Dee
or order the sum of P10,000.00 in five (5)
installments, with the first installment payable
on October 5, 1993 and the other installments
on or before the fifth day of the succeeding
month or thereafter.
The reason is that the holder is free to demand
payment at maturity date or any time after said
date. On the other hand, if the obligor is the one
given the right to extend payment, the interest of
the extension must be specified to keep the
instrument negotiable, for of the right to extend is
without limit, it cannot be determined with
absolute certainty when the holder will have the
absolute right to be paid. Thus, where the maker of
the note is given the right to extend the time of
payment “for no longer than a reasonable time”
after maturity date, the note is non-negotiable
because the definite time requirement is not met
(De Leon, 2010).
(Sgd.) Lito Villa (1993 BAR)
A: The instrument is negotiable because it
complied with the requirements provided by
Section 1 of the NIL. The fact that it is payable in
installments does not make the instrument nonnegotiable as long as the dates of each installment
is fixed or at least determinable and the amount to
be paid for each installment is stated. (NIL, Sec.
2[b])
Sum to be paid with exchange
Payment with an acceleration clause
The exchange is the charge for the expense of
providing funds at the place where the instrument
is payable to cover such instrument which is issued
at another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills.
(De Leon, 2010)
Acceleration clause is a provision, that upon default
in payment of any installment or interest, the
whole shall become due. (Sec. 2(c), NIL)
NOTE: Negotiability of an instrument with an
acceleration clause, depends on who has the option
to exercise the same.
1.
2.
3.
Payable in Philippine Peso
If the option to accelerate the maturity is
on the maker, whether such option is
absolute or conditional – NEGOTIABLE
Where acceleration is at the option of the
holder and can only be exercised upon the
happening of the specified event –
NEGOTIABLE
Insecurity Clause - Where the holder’s
right to accelerate is unconditional, the
The “money” referred to may be our legal tender or
foreign currency. An instrument is still negotiable
although the amount to be paid is expressed in
currency that is not legal tender so long as it is
expressed in money. (Sec. 2(d); PNB v Zulueta, G.R.
No., L-7271, August 30, 1957)
NOTE: Under RA 8183, an agreement to pay in
foreign currency is valid.
600
Commercial Law
Sum to be paid with costs of collection and/or
attorney’s fees
is expressed to be payable: (ATiS)
a. At a fixed period after date or sight;
b. On or before a fixed or determinable
future time specified therein; or
c. On or at a fixed period after the occurrence
of a specified event which is certain to
happen, though the time of happening be
uncertain. (Sec. 4, NIL)
It does not affect the certainty of the amount
payable at maturity since the increase in the
amount due, even if uncertain, takes place after
maturity when the instrument ceases to be
negotiable in the full commercial sense [Sec. 2 (e),
NIL; De Leon 2010].
Q: Will an overdue instrument lose its
negotiability?
A: NO. It retains its negotiable character even if
overdue. An instrument negotiable in its origin
continues to be negotiable until it has been
restrictively indorsed or discharged by payment or
otherwise. (Sec. 47, NIL). It only loses its
negotiability in its strict and full commercial
sense. (Sec. 52(b), NIL)
Effect if a bill or note is payable other than in
money
GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or in
property, the same is not negotiable.
XPNs: Negotiability is not affected if the note
contains an additional provision which: (SECo
Law)
1.
2.
3.
4.
4. Payable to order
Authorizes the sale of collateral Securities in
case the instrument be not paid at maturity;
Gives the holder an Election to require
something to be done in lieu of payment of
money;
Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
Waives the benefit of any Law intended for the
advantage or protection of the obligor (Sec. 5,
NIL).
The instrument is payable to order where it is
drawn payable to the order of a specified person or
to him or to his order. It may be drawn payable to
the order of:
1.
2.
3.
4.
5.
6.
3. Payable on demand or at a fixed or
determinable future time
1.
Payable to bearer (ENaF PaLa)
Payable on demand – The holder may call for
payment any time, likewise, the maker may
also pay any time and the refusal of the holder
to accept payment shall stop the running of
interest should there be any, but obligation to
pay the note subsists.
1.
2.
3.
An instrument is payable on demand: (ENO)
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed
c. Where an instrument is issued, accepted,
or indorsed when overdue, it is, as regards
the person so issuing, accepting, or
indorsing it, payable on demand (Sec. 7,
NIL).
2.
At a fixed time – A term or time instrument is
payable only upon the arrival of the time for
payment.
3.
At a determinable future time - An instrument
is payable at a determinable future time which
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
A Payee who is not a maker, drawer, or
drawee;
The Drawer or maker;
The Drawee;
Two or more payees jointly;
One or some of Several payees; or
The Holder of an office for the time being. (Sec.
8, NIL)
4.
5.
When it is Expressed to be so payable; (e.g. I
promise to pay to bearer P10,000.00)
When it is payable to a person Named therein
or bearer; (e.g. Pay to P or bearer P10,000.00)
When it is payable to the order of a Fictitious
person or non-existing person, and such fact
was known to the person making it so payable;
(e.g. Pay to John Doe or order)
When the name of the Payee does not purport
to be the name of any person; (e.g. Pay to cash)
When the only or the Last indorsement is an
indorsement in blank. (Sec 9, NIL)
NOTE: An instrument which is a bearer in its
origin,
remains
a
bearer
instrument.
Indorsement of instrument payable to bearer Where an instrument, payable to bearer, is
indorsed specially, it may nevertheless be further
negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders
as make title through his indorsement. (Sec. 40)
601
Special Laws
A promissory note which does not have the words
"or order" or "or bearer" will render the
promissory note non-negotiable, and therefore the
note can still be assigned and the maker made
liable. (2012 Bar)
check knew that the fictitious payee cannot indorse
the instrument so that he must have intended for it
to be negotiated by mere delivery. (PNB v.
Rodriguez, G.R. No. 170325, September 26, 2008)
GR: In case of controversy, the drawer is liable and
the drawee bank is absolved from liability.
Q: MP bought a used cell phone from JR. JR
preferred cash but MP is a friend so JR accepted
MR‘s promissory note for P10,000. JR thought
of converting the note into cash by endorsing it
to his brother KR. The promissory note is a
piece of paper with the following hand-printed
notation: ― MP WILL PAY JR TEN THOUSAND
PESOS IN PAYMENT FOR HIS CELLPHONE 1
WEEK FROM TODAY. Below this notation MP‘s
signature with ―8/1/00 next to it, indicating
the date of the promissory note. When JR
presented MP‘s note to KR, the latter said it was
not a negotiable instrument under the law and
so could not be a valid substitute for cash. JR
took the opposite view, insisting on the note‘s
negotiability. You are asked to referee. Which
of the opposing views is correct? (2000 BAR)
XPN: When there is commercial bad faith,
whereby the drawee bank acts dishonestly and is a
party to the fraudulent scheme. The check is
deemed payable to order, and consequently, the
drawee bank bears the loss. (Ibid)
When drawee must be named with reasonable
certainty (BJ-Pa)
1.
2.
A: The view of KR is correct. The note is payable to
a specific person hence it is not negotiable. The law
provides that for an instrument to be negotiable, it
must comply with the requirements of section 1 of
the NIL pertaining to the part that a note must be
payable to order or bearer. In the given case, there
were no words of negotiability and it is silent as to
whether it is payable to order or bearer. Hence, the
instrument is non-negotiable.
3.
In a bill of exchange, the drawee must be
named or otherwise designated with
reasonable certainty. (Sec. 1, NIL)
A bill may be addressed to two or more
drawees jointly, but not to two or more
drawees in the alternative or in succession.
(Sec. 127, NIL) Eg. An instrument may be
addressed “to A and B” but not “to A or B”.
An instrument payable “to the order of the
bearer” has been held to be an instrument
payable to “order.”(10 C.J.S. 575-576)
Q: Indicate and explain whether the promissory
note is negotiable or non-negotiable.
a. I promise to pay A or bearer Php100,000.00
from my inheritance which I will get after
the death of my father.
b. I promise to pay A or bearer Php100,000
plus the interest rate of ninety (90) – day
treasury bills.
c. I promise to pay A or bearer the sum of
Php100,000 if A passes the 2012 bar exams.
d. I promise to pay A or bearer the sum of
Php100.000 on or before December 30,
2012.
e. I promise to pay A or bearer the sum of
Php100,000. (2012 BAR)
Difference between having a check payable to a
fictitious payee and payable to a specified
payee
1. If a check is payable to a specified payee – it is an
order instrument, which requires indorsement
from the payee or holder before it may be validly
negotiated.
2. If a check is payable to the order of fictitious or
non-existing person – it shall be considered as a
bearer instrument, provided such fact is known
to the person making it so payable. Thus, checks
issued to “Prinsipe Abante” or “Si Malakas at si
Maganda”, who are well-known characters in
Philippine mythology, are bearer instruments. (De
Leon, 2010)
A:
a. NON-NEGOTIABLE. It is based on a
contingency and not on an unconditional
promise or order to pay a sum certain in
money. [Sec. 1 (b), NIL]
b. NEGOTIABLE. The instrument is negotiable
despite the inclusion of interest since the sum
to be paid with said interest is still certain.
[Sec. 2 (a), NIL]
c. NON-NEGOTIABLE. The instrument is not an
unconditional promise or order to pay a sum
certain in money since payment depends upon
the happening of an event. [Sec. 1 (b), NIL]
Fictitious-Payee rule
The fictitious-payee rule contemplates that the
payee is fictitious or not intended to be the true
recipient of the proceeds. The check is considered a
bearer instrument negotiable by delivery alone.
The underlying theory is that the maker of the
602
Commercial Law
d.
e.
NEGOTIABLE. There is certainty in payment
since it is payable on or before a fixed or
determinable future time specified. [Sec. 4 (b),
NIL]
Note: The inclusion of the phrase “on or
before” simply means that the maker may
choose when he would pay. i.e. either on Dec.
30 2019, or before such period.
NEGOTIABLE. It is a bearer instrument that is
payable upon demand. [Sec. 7 (b) and 9 (b),
NIL]
Q: TH is an indorsee of a promissory note that
simply states: ― PAY TO JUAN TAN OR ORDER
400 PESOS. The note has no date, no place of
payment, and no consideration mentioned. It
was signed by MK and written under his
letterhead specifying the address, which
happens to be his residence. TH accepted the
promissory note as payment for services
rendered to SH, who in turn received the note
from Juan Tan as payment for a prepaid cell
phone card worth 450 pesos. The payee
acknowledged having received the note on
August 1, 2000. A Bar reviewee had told TH,
who happens to be your friend, that TH is not a
holder in due course under Article 52 of the
Negotiable Instruments Law (Act 2031) and
therefore does not enjoy the rights and
protection under the statute. TH asks for our
advice specifically in connection with the note
being undated and not mentioning a place of
payment and any consideration. What would
your advice be? (2000 BAR)
Q: Antonio issued the following instrument:
August 10, 2013
Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or
his designated representative the sum of ONE
HUNDRED THOUSAND PESOS (P100,000.00)
from my BPI Acct. No. 1234 if, by this due date,
the sun still sets in the west to usher in the
evening and rises in the east the following
morning to welcome the day.
A: The place and date are not essential to the
negotiability of the instrument except in certain
cases when [a] the date is necessary say to
determine when the note is due; or [b] the
interest is to run when the payment of interest
has been stipulated or whether the holder is barred
by the statute of limitations from enforcing the
note. The fact that there is no mention of
consideration is not essential because it is
presumed.
(Sgd.) Antonio Reyes
Explain each requirement of negotiability
present or absent in the instrument. (2013
BAR)
A: The instrument contains a promise to pay and
was signed by the maker, Antonio Reyes; the
promise to pay is unconditional insofar as the
reference to the setting of the sun in the west in the
evening and its rising in the east in the morning are
concerned, these are certain to happen; the
instrument contains a promise to pay a sum certain
in money, P100,000.00; the money is payable at a
determinable future time, sixty days after August
10, 2013; the instrument is not payable to order or
to bearer; the promise to pay is conditional
because the money will be taken from a particular
fund, the BPI Account No. 1234.
Q: Which of the following stipulations or
features of a promissory note (PN) affect or do
not affect its negotiability, assuming that the PN
is otherwise negotiable? Indicate your answer
by writing the paragraph number of the
stipulation or feature of the PN as shown below
and your corresponding answer, either ―
Affected or Not affected. Explain.
a. The date of the PN is ―February 30, 2002.
b. The PN bears interest payable on the last
day of each calendar quarter at a rate equal
to five percent (5%) above the then
prevailing 91-day Treasury Bill rate as
published at the beginning of such calendar
quarter.
c. The PN gives the maker the option to make
payment either in money or in quantity of
palay or equivalent value.
d. The PN gives the holder the option either to
require payment in money or to require the
maker to serve as the bodyguard or escort
of the holder for 30 days. (2002 Bar)
Provisions that do not affect the negotiability of
an instrument (DaCS-VP)
1.
2.
3.
4.
5.
Omission of Date
Designation of particular kind of Currency in
which payment is to be made
Bears a seal
Non-specification of Value given or that any
value had been given
Non-specification of Place where it is drawn or
payable
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
603
Special Laws
A:
a. NOT AFFECTED. Date is not one of the
requirements for negotiability therefore it is
not essential except when the date is
necessary to determine when the note is due
b. NOT AFFECTED. An instrument payable with
interest determinable at a fixed time is
negotiable. The law provides under section
2(a) of the NIL, a sum is still considered as
certain although it is to be paid with interest.
c. AFFECTED. An option given to the maker
makes the promise conditional
d. NOT AFFECTED. An option given to the holder
does not make the promise conditional
A: NO, since it contains a promise to do an act in
addition to the payment of money.
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives
an election to require something to be done in lieu
of payment of money.
Q: A writes a promissory note in favor of his
creditor, B. It says: “Subject to my option, I
promise to pay B Php1 Million or his order or
give Php1 Million worth of cement or to
authorize him to sell my house worth Php1
Million. Signed, A.” Is the note negotiable?
(2011 BAR)
Q: B borrowed Php1 million from L and offered
to him his BMW car worth Php 1 Million as
collateral. B then executed a promissory note
that reads: “I, B, promise to pay L or bearer the
amount of Php1 Million and to keep my BMW
car (loan collateral) free from any other
encumbrance. Signed, B.” Is this note
negotiable? (2011 BAR)
A: NO because the exercise of the option to pay lies
with A, the maker and debtor.
NOTE: In order not to affect the negotiability of the
instrument, the option must be with the
holder/creditor.
Q: Distinguish a negotiable document from a negotiable instrument (2005 BAR)
BASIS
Substitute
money
for
Forms
Subject Matter
Capability
of
Accumulating
Secondary Contracts
NEGOTIABLE INSTRUMENT
A written contract intended as a
substitute for money like promissory
notes and bill of exchange.
It may either be a bill of exchange or a
promissory note.
The subject matter is a sum certain in
money.
Capable of accumulating secondary
contracts resulting from indorsements
at the back thereof.
KINDS OF NEGOTIABLE INSTRUMENTS
2.
It actually stands for the goods it covers.
Not capable of accumulating secondary
contracts resulting from indorsements at
the back thereof.
future time a sum certain in money to order or
to bearer. (NIL, Sec. 126)
Kinds of negotiable instruments
1.
NEGOTIABLE DOCUMENT
Held to be non-negotiable in the technical
sense because they do not have the
requisites under the NIL.
It has various forms such as but not
limited to bill of lading, stock certificates,
warehouse receipts, and pawn tickets.
3.
Promissory notes (PN) – An unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable
future time, a sum certain in money to order or
to bearer. (NIL, Sec. 184)
Check – A bill of exchange drawn on a bank
payable on demand. (NIL, Sec. 185)
Promissory note vs. Bill of exchange
BASIS
Undertakin
g
As
to
number of
original
parties
Bill of exchange (BOE) – An unconditional
order in writing addressed by one person to
another signed by the person giving it,
requiring the person to whom it is addressed
to pay on demand or at a fixed or determinable
604
PROMISSORY
NOTE
Promise to
pay
2 parties
BILL OF
EXCHANGE
Order to pay
3
parties
(upon
acceptance of
the
drawee
Commercial Law
As
liability
parties
to
of
As
to
number of
presentmen
ts needed
Maker
primarily
liable
is
Only
1
presentment
(for
payment) is
needed
d. Warehouse Receipts
e. Treasury warrants payable from a specific
fund
f. Certificate of Indebtedness
g. Electronic messages
Sec. 127)
Drawer
is
secondarily
liable
2
presentments
(for
acceptance
and
for
payment) are
generally
needed
A:
a. Postal money order is not a negotiable
instrument because, as held in Phil. Education
Co. vs Soriano, there are many restrictions
which make them incompatible with concepts
of negotiable instruments, thereby making the
order conditional, in contrast to Sec. 1 of the
NIL. Furthermore, such is governed by postal
rules and regulations and it may only be
negotiated once.
b. The certificate of time deposit is a negotiable
instrument because it is an acknowledgement
in writing by the bank of the amount of deposit
with a promise to repay the same to the
depositor or bearer thereof at a specific time.
(Caltex Philippines, Inc. vs. Court of Appeals and
Security Bank and Trust Company, G.R. No.
97753, August 10, 1992)
c. A letter of credit is not negotiable because it is
generally conditional and has limited
negotiability - it is issued in favor of a specific
person. But the Supreme Court held in Lee vs.
Court of Appeals, that the drafts issued in
connection with the letters of credit are
negotiable instruments.
d. A warehouse receipt is not a negotiable
instrument because the obligation of a
warehouseman is not to pay but to deliver the
goods under the warehouse receipt which fails
to comply with the requirements set forth
under Sec. 1 of the NIL. It is merely considered
as a negotiable document that does not result
in the accumulation of contracts.
e. A treasury warrant requires appropriations
from the national government which means
that the particular fund may or may not exists
which renders it conditional, thereby nonnegotiable.
f. Not negotiable. A certificate of indebtedness
merely acknowledges an obligation to pay a
sum of money to a specified persons or entity.
Since a certificate of indebtedness which is
not payable to order or bearer but is payable
to a specific person is not negotiable, the
assignee takes it subject to the defect in the
title of the assignor. Thus, when the person
who signed the deed of assignment was not
authorized by the board of directors, the
assignor had no title to convey to the assignee.
(Traders Royal Bank vs. Court of Appeals,
Filriters Guaranty Assurance Corporation and
A bill of exchange itself does not operate as an
assignment of the funds in the hands of the drawee
available for the payment thereof, and the drawee
is not liable on the bill unless and until he accepts
the same. (Sec. 127, NIL)
A bill of exchange may be addressed to two or
more drawees jointly, whether partners or not; but
not to two or more drawees in the alternative or in
succession. (Sec. 128, NIL)
Inland Bill of Exchange vs. Foreign Bill of
Exchange
An inland bill of exchange is one which is, or on its
face purports to be, both drawn and payable within
the Philippines. Any other bill is a foreign bill.
Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (Sec. 129,
NIL).
When a bill of exchange may be treated as
promissory note (2015 BAR) (FACS)
1.
2.
3.
4.
The drawee is a fictitious person;
When the instrument is so ambiguous that
there is doubt whether it is a bill or a note, the
holder may treat it either at his election;
The drawee does not have the capacity to
contract ;
Where in a bill the drawer and the drawee are
the same person. (Sec. 130; Sec. 17(e), NIL)
Q: State and explain whether the following are
negotiable instruments under the Negotiable
Instruments Law:
a. Postal Money Order
b. A certificate of time deposit which states
“This is to certify that bearer has deposited
in this bank the sum of FOUR THOUSAND
PESOS (P4,000) only, repayable to the
depositor 200 days after date.”
c. Letters of Credit
UNIVERSITY OF SANTO TOMAS
605
Special Laws
g.
Central Bank of the Philippines, G.R. No. 93397,
March 3, 1997)
The electronic messages are not signed by the
investor-clients as supposed drawers of a bill
of exchange; they do not contain an
unconditional order to pay a sum certain in
money as the payment is supposed to come
from a specific fund or account of the
investor-clients; and, they are not payable to
order or bearer but to a specifically
designated third party. Thus, the electronic
messages are not bills of exchange.
(Hongkong & Shanghai Banking Corp. v. CIR,
G.R. Nos. 166018 & 167728, June 4, 2014)
Parties to a negotiable instrument and their liabilities
BASIS
PARTIES
Maker
PN
Payee
Drawer
BOE
Drawee
Payee
Acceptor
FUNCTION
LIABILITY
One who makes the promise and signs
the instrument.
The party to whom payment is
originally payable.
The person who issues and draws the
bill.
The party upon whom the bill is
drawn.
The party to whom payment is
originally payable.
The acceptor is the drawee who
accepts the bill.
NOTE: Drawee does not assume automatic liability
unless he “accepts” the command of the drawer.
Acceptance signifies the assent by writing the word
“accepted” and signing his name on the face of the
instrument.
Primarily
liability.
liable; cannot limit his
Secondarily liable, except when
drawee refused to accept; may insert
in the instrument an express
stipulation negativing or limiting his
own liability to the holder. (Sec. 61)
Not liable until he becomes acceptor.
The party to whom payment is
originally payable.
Primarily liable.
Steps in the issuance of a negotiable instrument
1.
2.
Q: What is the remedy in case the drawee does
not accept?
A: Payee cannot file a suit against the drawee. The
remedy is to go after the drawer. Payee has no
cause of action against the drawee if no acceptance
has been made.
The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of
NIL.
Delivery - The transfer of possession, actual or
constructive, from one person to another (NIL,
Sec. 191), with the intent to transfer title to
payee and recognize him as holder thereof.
INSERTION OF DATE
GR: The date is not essential to the negotiability of
the instrument (not one of the requirements under
Sec. 1).
Importance of acceptance of the bill of
exchange by the drawee
XPNs: Date is important to determine maturity:
(FiDeI)
The acceptance of a BOE is not important in the
determination of its negotiability. The nature of
acceptance is important only in the determination
of the kind of liabilities of the parties involved.
(Philippine Bank of Commerce v. Aruego, G.R. Nos. L25836-37, January 31, 1981)
1.
2.
COMPLETION AND DELIVERY
606
Where the instrument is payable within a fixed
period after date is issued undated, or the
acceptance of the instrument payable at a fixed
period after sight is undated. (Sec. 13, NIL)
When the instrument is payable on demand,
date is necessary to determine whether the
instrument was presented within a reasonable
Commercial Law
3.
time from issue, or from the last negotiation.
[Secs. 71 and 143 (a), NIL]
When the instrument is an interest-bearing
one, to determine when the interest starts to
run.
COMPLETION OF BLANKS
Meaning of a “Material particular”
It is any particular that may be properly be
inserted in a negotiable instrument to make it
complete.
Insertion of a wrong date
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
due course, but as to a HIDC, the date so inserted is
to be regarded as the true date. With respect to the
person who inserted the wrong date, however, the
instrument is avoided. (Bank of Houston v. Day, 145
Mo. Appl. 410, 122 SW 756)
Various
situations
instruments
Q: Can a bill of exchange or a promissory note
qualify as a negotiable instrument if:
a. it is not dated;
b. or the day and the month, but not the year
of its maturity, is given; or
c. it is payable to ―cash
d. it names two alternative drawees (1997
BAR)
Incomplete instrument
a. Delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
b. Not delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
2.
Complete instrument
a. Delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
b. Not delivered
i.
With forgery and alteration
ii.
Without forgery and alteration
NOTE: If an instrument is complete and delivered
without forgery and alteration, all parties are
bound.
INCOMPLETE BUT
DELIVERED INSTRUMENTS Sec. 14
A:
a. YES. Date is not an essential requirement for
the negotiability of an instrument as provided
for in Section 1 of the NIL XPN: (FiDeI)
b. NO. Since the year is not determined, the time
for payment is not determinable.
c. YES. When the name of the payee does not
purport to be the name of any person, the law
provides in Section 9(d) of the NIL that the
maker or drawer intends the same to be
payable to bearer, hence the instrument
qualifies as a negotiable instrument.
d. NO. When the bill is addressed to two or more
payees in the alternative, the law provides in
section Section 128 of the NIL that it is
conditional and therefore non-negotiable.
Prima facie authority to fill up the blanks
A signature on a blank paper delivered by the
person making the signature in order that the
paper may be converted into a negotiable
instrument operates as a prima facie authority to
fill it up as such for any amount.
In order, however, that any such instrument when
completed may be enforced against any person
who became a party thereto prior to its
completion, it must be filled up strictly in
accordance with the authority given and within a
reasonable time. (Sec. 14, NIL
NOTE: While under the law, the one in possession
had a prima facie authority to complete the check,
such prima facie authority does not extend to its
use (i.e., subsequent transfer or negotiation) once
the check is completed. (Patrimonio v. Gutierrez,
G.R. No. 187769, June 4, 2014)
Holder may insert the date in an instrument in
the following instances (EA)
1.
2.
Where an instrument expressed to be payable
at a fixed period after date is issued undated
Where the acceptance of an instrument
payable at a fixed period after sight is undated.
(Sec. 13, NIL)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
negotiable
1.
Ante-dating or post-dating an instrument
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone,
provided it is not done for illegal or fraudulent
purpose. (Sec. 12, NIL)
involving
Q: To secure certain advances from the bank, X
and Y executed several promissory notes. When
607
Special Laws
the obligation became due, X and Y failed to pay
the same despite repeated demands. To evade
their liability, they claimed that they signed the
promissory notes in blank and they had not
received the value of said notes. Is their defense
tenable? (2006 BAR)
reasonable time as if it had been filled up strictly in
accordance with the authority given.
INCOMPLETE
AND UNDELIVERED INSTRUMENTS
Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands
of any holder, as against any person whose
signature was placed thereon before delivery. (Sec.
15, NIL)
A: NO. It is no defense that the promissory notes
were signed in blank as Section 14 of the
Negotiable Instruments Law concedes the prima
facie authority of the person in possession of
negotiable instruments to fill in the blanks.
(Quirino Gonzales Logging Concessionaire vs. CA,
G.R. No. 126568, April 30, 2003)
NOTE: Non-delivery of an incomplete instrument is
a real defense which may be set up even against a
holder in due course.
Enforcement of an incomplete but delivered
instrument; effect if a completed instrument
was negotiated to a holder in due course
Q: Jun was about to leave for a business trip. As
his usual practice, he signed several blank
checks. He instructed Ruth, his secretary, to fill
them as payment for his obligations. Ruth
filled one check with her name as payee,
placed P30,000.00 thereon, endorsed and
delivered it to Marie. She accepted the check in
good faith as payment for goods she delivered
to Ruth. Eventually, Ruth regretted what she
did and apologized to Jun. Immediately he
directed the drawee bank to dishonor the
check. When Marie encashed the check it was
dishonored.
In order that any such instrument when completed
may be enforced against any person who became a
party thereto prior to its completion, it must be
filled up strictly in accordance with the authority
given and within reasonable time.
However, if such instrument, after completion, is
negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in
accordance with the authority given and within
reasonable time. Hence, the defense that the blanks
were filled up beyond the authority given and/ or
beyond the reasonable time, is not available
against a HIDC
Supposing the check was stolen while in Ruth's
possession and a thief filled the blank check,
endorsed and delivered it to Marie in payment
for the goods he purchased from her, is Jun
liable to Marie if the check is dishonored?
(2006 BAR)
NOTE: Non-delivery of complete instrument is a
personal defense.
Q: Lorenzo signed several blank checks
instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one
check with her name as payee, placed
P30,000.00 thereon, endorsed and delivered it
to Evelyn as payment for goods the latter
delivered to the former. When Lorenzo found
out about the transaction, he directed the
drawee bank to dishonor the check. When
Evelyn encashed the check, it was dishonored.
Is Lorenzo liable to Evelyn? (2004, 2006 Bar)
A: NO. The check is an incomplete instrument not
delivered in contemplation of law. An incomplete
instrument not delivered is not a valid contract in
the hands of any holder as against any person
whose signature was placed thereon before
delivery. As such, Jun is not liable to Marie since
he does not assume any responsibility whatsoever
upon the said check. He is a party prior to the
unauthorized completion and delivery. (Sec. 15,
NIL)
NOTE: Delivery is not conclusively presumed
where the instrument is incomplete
A: YES. This covers the delivery of an incomplete
instrument under Section 14 of the Negotiable
Instruments Law, which provides that there was
prima facie authority on the part of Nicky to fill-up
any of the material particulars thereof. Having
done so, and when it is first completed before it is
negotiated to a HIDC like Evelyn, it is valid for all
purposes, and she may enforce it within a
Q: PN makes a promissory note for P5,000.00,
but leaves the name of the payee in blank
because he wanted to verify its correct spelling
first. He mindlessly left the note on top of his
desk at the end of the workday. When he
returned the following morning, the note was
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Commercial Law
missing. It turned up later when X presented it
to PN for payment. Before X, T who turned out
to have filched the note from PN’s office, had
endorsed the note after inserting his own name
in the blank space as the payee. PN dishonored
the note, contending that he did not authorize
its completion and delivery. But X said he had
no participation in, or knowledge about the
pilferage and alteration of the note and
therefore he enjoys the rights of a holder in due
course under the Negotiable Instruments Law.
Who is correct and why? (2000 BAR)
The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
person who takes it as holder. (Sec. 191, NIL)
Conditional delivery or delivery for a special
purpose
The delivery is made conditional or for a special
purpose if it was made not for the purpose of
transferring the property (title) to the instrument.
In such case, if the instrument lands in the hands of
an HIDC (one who does not know of the conditional
delivery or of its special purpose), the instrument
is treated as if there is no condition. If such
delivery was made to a holder not in due course,
prior parties are not bound by the instrument. (Sec.
16, NIL)
A: PN is correct. Since the negotiable instrument is
still incomplete and has not yet been delivered, PN
is correct in dishonoring the said instrument. Sec.
15 provides that where an incomplete instrument
has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in
the hands of any holder, as against any person
whose signature was placed thereon before
delivery. Thus, under this section, it is a real
defense that can even be interposed against a
holder in due course.
NOTE: The law contemplates that the condition is
orally or verbally conveyed to the holder upon
delivery, because of the rule that the negotiability
is determined only upon the face of the instrument.
Imposing a verbal condition is a personal defense.
NOTE: Personal defense can only be interposed by
parties prior to completion. Those parties after
completion cannot assert personal defense.
Presumption as to delivery
If the instrument is in the possession of a HIDC,
valid delivery is conclusively presumed.
COMPLETE
BUT UNDELIVERED INSTRUMENTS Sec. 16
If the instrument is in the possession of a party
other than a HIDC, possession of such party
constitutes only prima facie presumption of
delivery.
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (Sec.
16, NIL). Delivery is essential to the validity of any
negotiable instrument. (Sundiang Sr. & Aquino,
2009)
Immediate Parties
Immediate parties are persons having knowledge
of the conditions or limitations placed upon the
delivery of an instrument. It means privity, and not
proximity.
Where a debtor who drew two checks payable to
his creditor never delivered the checks to his
creditor and a third party was able to collect the
proceeds of the checks by forging the endorsement
of the creditor as payee, the creditor has no cause
of action against anyone on the basis of the checks,
since the payee acquires no interest in the check
until its delivery to him. (Development Bank of Rizal
v. Sim Wei, G.R. No. 85419, March 9, 1993)
A payee who is a holder in due course is not an
immediate party in the sense of Section 16. (Liberty
Trust Co. v. Tilton, 105 N.E. 05.)
Remote Parties
NOTE: The defense of want of delivery of a
complete instrument is only a personal defense
which means that it is only available against a
holder NOT in due course.
Persons without knowledge as to the conditions or
limitations placed upon the delivery of an
instrument, even if he is the next party physically
or parties who are not in direct contractual relation
to each other, but if they are chargeable, for
example, with knowledge or notice of any
infirmities in the instrument or defect in the title of
the person negotiating the same, they will be
considered as immediate parties for purposes of
Section16.
NOTE: Delivery with the intent to transfer is a prerequisite to liability.
Issuance of an instrument
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
609
Special Laws
that the signature is the usual signature of the
maker.
SIGNATURE
SIGNING IN TRADE NAME
As a general rule, only persons whose signatures
appear on an instrument are liable thereon. But
one who signs in a trade or assumed name is liable
as if he signed his own name. (Sec. 18, NIL)
Validity of signature in a negotiable instrument
A party may use his full name, surname, initials or
even any mark in signing a negotiable instrument
to indicate his intention to bind himself.
NOTE: It is necessary that the party who signs in a
trade name intended to be bound by his signature.
NOTE: A signature may be made in any manner as
long as the person signing has the intention to be
bound.
SIGNATURE OF AGENT
Requisites for an agent to be exempt from
liability (DADi)
Persons liable on an instrument
GR: Only persons whose signatures appear on an
instrument are liable thereon. (Sec. 18, NIL)
1.
2.
He is Duly Authorized
He Adds words to his signature indicating that
he signs as an agent/representative and
He Discloses the name of his principal. (Sec. 20,
NIL)
XPNs: Notwithstanding the absence of their
signatures in their own names, the following
persons are deemed liable: (TraP FAP)
3.
1.
Legal effects of an agent’s signature
2.
3.
4.
5.
Person who signs in Trade or assumed name
(Sec. 18, NIL)
Principal who signs through a duly authorized
agent and such agent discloses the name of his
principal and adding words to show he is
merely signing in a representative capacity
(Sec. 19, 20, NIL)
Forger (Sec. 23, NIL)
Acceptor, who makes his acceptance of a bill
on a separate paper (Sec. 134, NIL)
Person, who makes a written Promise to
accept the bill before it is drawn (Sec. 135, NIL)
The agent’s signature, provided that the above
requisites are complied with, will bind his principal
and he will be exempt from personal liability.
Procuration
It is the act by which a principal gives power to
another to act in his place as he could himself. (Fink
v. Scott, 143 S.E. 305)
It operates as notice or a warning that the agent
has but a limited authority to sign and the principal
is bound only in case the agent in so signing acted
within the actual limits of his authority. (Sec. 21,
NIL)
Where a signature is so placed upon the
instrument that it is not clear in what capacity the
person signed, he is deemed to be an indorser, not a
maker or drawer. (Sec. 17(f), NIL)
INDORSEMENT BY MINOR OR A CORPORATION
Q: Juan borrowed P10,000.00 from Joe as
evidenced by a promissory note. All other
requisites of negotiability are present except
that Juan did not affix his usual signature
thereon as he was ailing at that time and was
only able to put “X” in the blank space meant
for the signature of the maker. Is the requisite
that the instrument must be signed by the
maker complied with?
1.
Minor
GR: A contract entered into by a minor is
voidable, at the option of the minor. It is a real
defense that can be invoked only by the minor,
even against a holder in due course, and cannot
be invoked by the other parties.
XPN: Where a minor committed actual fraud
by specifically stating that he is of legal age, a
minor can be bound by his signature in an
instrument. (PNB v. CA, G.R. No. L-34404, June
25, 1980)
A: YES. The letter “X” is sufficient to comply with
the requirement. It appears from the problem that
such letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary
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Commercial Law
NOTE: While a minor is not bound by his
indorsement for lack of capacity, he is however
not incapacitated to transfer his rights.
NOTE: Section 23 applies only to forged signatures
or signatures made without authority.
Burden of proof in proving forgery
Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery. (Chiang Yia
Min v. CA, G.R. No. 137932, March 28, 2001)
Illustration
Q: A executed a promissory note in favor of M
which reads:
I promise to pay P (16 years old) or order
P10,000.
Sgd. M
Pay to P or order P10,000 30 days after sight.
P indorsed it to A.
To X
a.
May A collect from M notwithstanding that
P, the indorser is a minor?
b. In case that A cannot collect from M, can he
collect from P?
P presented the instrument for acceptance. X
accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the
holder presented the instrument to X for payment
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of
the drawer’s signature. (Sec. 62, NIL)
A:
a. YES. A can collect from M. Notwithstanding the
fact that P is a minor, the indorsement of P (the
minor) passes title to A. The holder. M cannot
invoke the defense of minority because such
defense would only be available to P.
b. NO. A cannot collect from P, as he has a real
defense of minority on his part.
2.
NOTE: Forged signature of a maker or drawer is
different and has a different effect from/against
forged indorsements.
Incapacitated person – An incapacitated person
may also use as a real defense his incapacity
to enter into a contract. Contract entered into
by the incapacitated are voidable.
A payee may sue the collecting bank for the
amount of the checks it paid under a forged
indorsement even when the instrument has not
been delivered to the payee
Incapacitated persons include:
a) insane or demented persons; and
b) deaf and blind who does not know how to
write.
3.
The collecting bank is liable to the payee and must
bear the loss because it is its legal duty to ascertain
that the payee’s indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
since the payee merely used one action to reach, by
desirable shortcut, the person who ought in any
event to be ultimately liable as among the innocent
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings.
(Westmont Bank v. Ong, 373 SCRA 212)
Corporation - Issuance or indorsement of an
instrument by a corporation acting beyond its
powers (ultra vires) is a real defense.
GR: Infants and corporations (ultra vires) incur no
liability by their indorsement or assignment of an
instrument. (Sec. 22, NIL)
Effects: No liability attached to the infant or the
corporation. The instrument is still valid and the
indorsee acquires title.
Effects of forgery
It does not avoid the instrument but only the
forged signature. In other words, rights may still
exist and be enforced by virtue of such instrument
as to those signatures thereto are found to be
genuine.
FORGERY
It is the counterfeit making or fraudulent alteration
of any writing. It happens when a signature is
affixed by one who does not claim to act as an
agent and who has no authority to bind the person
whose signature he has forged. (Sec. 23, NIL)
GR: As regard the signature that is forged, the same
shall be wholly inoperative.
XPNs:
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
(Sgd)D, (forged by P)
611
Special Laws
1.
2.
If the party against whom it is sought to
enforce such right is precluded from setting up
forgery or want of authority; (Sec. 23, NIL)
Where the forged signature is not necessary to
the holder’s title, in which case, the forgery
may be disregarded. (Sec. 48, NIL)
employees. And if the drawer (depositor) learns
that a check drawn by him has been paid under a
forged indorsement, the drawer is under duty
promptly to report such fact to the drawee bank.
For his negligence or failure either to discover or to
report promptly the fact of such forgery to the
drawee, the drawer loses his right against the
drawee who has debited his account under a
forged indorsement. In other words, he is
precluded from using forgery as a basis for his
claim for re-crediting of his account. (Gempesaw v.
CA G.R. No. 92244, February 9, 1993)
Persons precluded from setting up the defense
of forgery (2010 BAR) (SEA) [E – asin]
1.
2.
3.
Those who Admit or warrant the genuineness
of the signature such as indorsers, persons
negotiating by delivery and acceptor
Those who by their acts, silence, or negligence
(asin), are Estopped from claiming forgery
A holder of a bearer instrument who
Subsequently negotiates such instrument with
a prior forged indorsement, because in bearer
instrument, the forged signature is not
necessary to the holder’s title it being
negotiably by mere delivery.
Rules on liabilities of parties on a forged
instrument
In a Promissory Note:
1.
Cut-off Principle
2.
Although rights may exist between and among
parties subsequent to the forged indorsement, not
one of them can acquire rights against parties prior
to the forgery. Such forged indorsement cuts off the
rights of all subsequent parties as against parties
prior to the forgery. However, the law makes an
exception to these rules where a party is precluded
from setting up forgery as a defense [SEA].
3.
In a Bill of Exchange:
Problems arising from forged indorsements of
checks
1.
The drawer’s account cannot be charged by the
drawee where the drawee paid.
2. The drawer has no right to recover from the
collecting bank
3. The drawee bank can recover from the
collecting bank
4. The payee can recover from the drawer
5. The payee can recover from the recipient of
the payment, such as the collecting bank
6. The payee cannot collect from the drawee
bank
7. The collecting bank bears the loss but can
recover from the person to whom it paid
8. If payable to bearer, the rules are the same as
in PN.
9. If the drawee has accepted the bill, the drawee
bears the loss and his remedy is to go after the
forger
10. If the drawee has not accepted the bill but has
paid it, the drawee cannot recover from the
drawer or the recipient of the proceeds,
absence any act of negligence on their part.
As a matter of practical significance, problems
arising from forged indorsements of checks may
generally be broken into two types of cases:
1.
2.
A party whose indorsement is forged on a note
payable to order and all parties prior to him
including the maker cannot be held liable by
any holder.
A party whose indorsement is forged on a note
originally payable to bearer and all parties
prior to him including the maker may be held
liable by a holder in due course provided that
it was mechanically complete before the
forgery.
A maker whose signature was forged cannot be
held liable by any holder.
Where forgery was accomplished by a person
not associated with the drawer — for example,
a mail robbery; and
Where the indorsement was forged by an
agent of the drawer.
This difference in situations would determine the
effect of the drawer's negligence with respect to
forged indorsements.
While there is no duty resting on the depositor to
look for forged indorsements on his cancelled
checks in contrast to a duty imposed upon him to
look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a
business procedure as are reasonably calculated to
prevent or render difficult the forgery of
indorsements, particularly by the depositor's own
Liabilities of the parties to a negotiable
instrument where an indorsement is forged
612
Commercial Law
Illustration
1.
2.
If the instrument is payable to order and the
indorsement of one of the indorsers is forged,
C can enforce the note against X and B but not
against M, P or A, because were it not for the
forgery of X the instrument will not reach the
possession of C (Cut Off Rule).
If the instrument is payable to bearer, the
indorsement of X is not necessary to vest title
to C because negotiation on bearer instrument
requires only delivery.
3.
When the indorser’s signature is forged
Drawee bank bears the loss as it is under
strict liability to pay the check to the order of
the payee. Payment under forged indorsement
is not to the drawer’s order. Ensuingly, if the
drawee bank pays a check bearing forged
signature of indorser, it does so at its own peril.
NOTE: In all three cases, when the drawer is guilty
of negligence, he should bear the loss. He is
precluded from setting up forgery because the
proximate cause of the loss is his own negligence.
(Pre-Week Reviewer in Commercial Law,
Dimaampao and Escalante)
May E recover on the bill from C, the drawee?
Explain. (2016 BAR)
Responsibility of Drawee Bank
A: NO, E cannot recover from C, the drawee. The
forged endorsement of B did not result in
transfer of title in favor of E as no right can be
acquired under such forged endorsement.
If Forged Signature
GR: Bank assumes the responsibility of seeing that
the money gets to the party authorized to receive
it. Hence, if it pays money out on forged signature,
the depositor being free from blame/negligence, it
must bear the loss.
Legal consequences when a bank honors a
forged check
When drawer's signature is forged
Drawee bank is liable because the bank is
bound to know the signature of its customers
and if it pays a forged check, it must be
considered as making the payment out of its
own funds and cannot ordinarily charge the
amount so paid to the account of the depositor
whose name was forged. It is also in a superior
position to detect the forgery because it has a
specimen of the signature of the maker. Lastly,
by accepting the instrument, it becomes an
acceptor who admits the genuineness of the
drawer’s signature.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
When the payee’s signature is forged
Drawee bank is liable because it owes to the
drawer-depositor an absolute and contractual
duty to pay the check only to the person to
whom it is made payable. Drawee bank, in such
case, should credit back and restore to
drawer’s account the value of the check
wrongfully encashed.
However, the drawee bank may pass the
liability to the collecting bank who cannot
interpose the defense of forgery. Under Sec. 16
of NIL the collecting bank is an indorser who
warrants that the instrument is genuine and in
all respect what it purports to be. The
collecting bank had no right to be paid by the
drawee bank since the forged indorsement is
inoperative. The collecting bank may
ultimately recover from the forger.
Q: After securing a Pl million loan from B, A
drew in B's favor a bill of exchange with C as
drawee. The bill reads: "October 1, 2016. Pay to
the order of B the sum of P1 million. To: C
(drawee). Signed, ”A." A then delivered the bill
to B who, however, lost it. It turned out that it
was stolen by D, B's brother. D lost no time in
forging B's signature and negotiated it to E who
acquired it for value and in good faith.
1.
2.
XPN: Payee was not a client of the bank (did not
maintain an account in the said bank) and latter
therefore had no way of ascertaining the
authenticity of payee’s indorsements on all checks
which were deposited in the account. The bank
cannot be held negligent where it caused checks to
pass thru the clearing house before proceeds were
withdrawn.
If Forged Indorsement
GR: The Drawee bank who has paid the check on
which an indorsement has been forged cannot
613
Special Laws
debit or charge upon drawer’s account for the
amount of said check. It is not entitled to
indemnification from the drawer. Risk of loss falls
on the drawee bank
XPN: If drawer is guilty of negligence which causes
the bank to honor such checks, he shall bear the
loss.
b.
c.
Q: X Corporation opened an account with Y
Bank
with
its
President
and
Secretary/Treasurer as signatories. While they
are abroad, several checks bearing their
signatures were presented to and approved by
the bank. The amount of these checks was then
debited against the account of the corporation.
Upon noticing the deductions in their account,
they requested the bank to credit back the
same amount, claiming that the deductions
were unauthorized and fraudulently made. The
bank refused to restore the amount. Who
should bear the loss?
2.
b.
ABC Bank, the drawee-bank, may charge
the amount thereof to the account of the
drawer because the forged indorsement
did not prevent the transfer of title. The
remedy of the drawer is against the forger.
Drawer has no cause of action against
collecting bank, since the duty of
collecting bank is only to the payee
(Manila Lighter Transportation, Inc. v. CA,
G.R. No. L-50373 February 15, 1990). The
drawee-bank can recover from the
collecting bank because even if the
indorsement on the check deposited by the
bank's client is forged, collecting bank is
bound by its warranties as an indorser and
cannot set up defense of forgery as against
drawee bank. (Associated Bank v. CA, G.R.
No. 107382, January 31, 1996)
Q: X entrusted his check books, credit cards,
passbooks, bank statements and cancelled
checks to his secretary. He also introduced the
secretary to the bank for purposes of
reconciliation of his accounts. Subsequently, X’s
secretary forged his signature on the checks
and was able to withdraw his money. Is the
drawee bank liable for the amounts withdrawn
by the secretary?
Q: X fraudulently obtained possession of the
check and forged P’s signature and then
indorsed and deposited the check with XYZ
bank which honored the check and placed the
amount thereof to his credit. Thereafter, XYZ
Bank indorsed the check to the drawee bankABC bank which paid it and charged the
account of the drawer.
A: Yes. However, there is contributory negligence
on the part of X in clothing his secretary with such
authority, consequently making him partly liable.
Furthermore, he is precluded from setting up the
forgery due to his own negligence in entrusting to
his secretary his credit cards and check book
including the verification of his statements of
account. (Ilusorio v. CA, G.R. No. 139130, November
27, 2002)
Illustrate the liability of a drawer and a
drawee-bank in an 1) instrument payable to
order and in an 2) instrument payable to
bearer in case of a forgery on payee’s signature.
A:
1. If the instrument is payable to order:
a.
If the instrument is payable to bearer:
a.
A: As between a bank and its depositor, where the
bank’s negligence is the proximate cause of the loss
and the depositor is guilty of contributory
negligence, the greater proportion of the loss shall
be borne by the bank. The bank was negligent
because it did not properly verify the genuineness
of the signatures in the applications for manager’s
checks while the depositor was negligent because
it clothed its accountant/bookkeeper with
apparent authority to transact business with the
Bank and it did not examine its monthly statement
of account and report the discrepancy to the Bank.
(PNB vs. FF Cruz and Company, G.R. No. 173259, July
25, 2011)
account cannot be charged because the
indorsement of the payee is a forgery.
Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the
drawer for its payment.
XYZ Bank is, however, liable to the drawee
bank because of its warranty as an
indorser. (Sec. 66, NIL)
D, the drawer, is not liable on the check
because his order is to pay P or his order
and not to any other person.
Q: The drawer’s signature was forged. There is,
however, a provision in the monthly bank
statement that if the drawer’s signature was
forged, the drawer should report it within 10
The drawee bank is liable to the drawer
for the amount of the check and his
614
Commercial Law
days from receipt of the statement to the
drawee. The drawer, however, failed to do so.
What will be its effect insofar as the drawer’s
right is concerned?
then negotiated the bill to her sister, Elena, who
paid for it for value, and who did not know who
Lorenzo was. On due date, Elena presented the
bill to Diana for payment, but the latter
promptly dishonored the instrument because,
by then, Diana had already learned of her
husband’s dalliance. Does the illicit cause or
consideration adversely affect the negotiability
of the bill? Explain. (2009 BAR)
A: The failure of the drawer to report the forgery
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
the drawer from questioning the mistake of the
drawee bank despite the provision. (BPI v. CASA
Montessori Internationale, G.R. No. 149454, May 28,
2004)
A: NO. The illicit cause or consideration does not
adversely affect the negotiability of the bill,
especially in the hands of a holder in due course.
Under Sec. 1 of the Negotiable Instruments Law,
the bill of exchange is a negotiable instrument.
Every negotiable instrument is deemed prima facie
to have been issued for valuable consideration, and
every person whose signature appears thereon is
deemed to have become a party thereto for value.
(Sec. 24, NIL)
Q: If forgery was committed by an employee of
the drawer whose signature was forged, does
the relationship amount to estoppel such that
the drawer is precluded in recovering from the
drawee bank?
A: The bare fact that the forgery was committed by
an employee of the party whose signature was
forged can not necessarily imply that such party’s
negligence was the cause of the forgery in the
absence of some circumstances raising estoppel
against the drawer. (Samsung Construction Co. v.
FEBTC, G.R. No. 129015, August 13, 2004)
Q: R issued a check for P1M which he used to
pay S for killing his political enemy. Can the
check be considered a negotiable instrument?
(2007 BAR)
A: YES. The check can be considered as a
negotiable instrument since it complied with the
requirements of negotiability under Sec. 1 of the
Negotiable Instruments Law. The unlawful
consideration for the issuance of the check is of no
moment and will not affect the negotiability of the
check as it merely constitutes a defect of title under
Sec. 55 of the NIL.
CONSIDERATION
It is an inducement to a contract that is the cause,
price or impelling influence, which induces a party
to enter into a contract.
Holder for value
NOTE: Every negotiable instrument is deemed
prima facie to have been issued for a valuable
consideration. (Sec. 24, NIL)
A holder for value is one who has given a valuable
consideration for the instrument. A holder for
value is deemed as such not only as regards the
party to whom the value has been given to by him
but also in respect to all those who became parties
prior to the time when value was given. (Sec.26,
NIL)
Effect: Every person whose signature appears
thereon is a party for value. (Sec.24) This
presumption is disputable.
A check constitutes an evidence of indebtedness
and is a veritable proof of an obligation. Thus,
based on Sec. 24 of the NIL, checks complete and
delivered to a person by another are sufficient by
themselves to prove the existence of the loan
obligation obtained by the latter from the former.
(Ting Ting Pua v. Spouses Tiong and Caroline Teng,
G.R. No. 198660, October 23, 2013, in Divina, 2014)
NOTE: Where the holder has a lien on the
instrument, arising either from contract or by
implication of law, he is deemed a holder for value
to the extent of his lien. (Sec. 27, NIL)
Value
It is any consideration sufficient to support a
simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
whether the instrument is payable on demand or at
a future time. (Sec. 25, NIL)
Q: Lorenzo drew a bill of exchange in the
amount of P100,000.00 payable to Barbara or
order, with his wife, Diana, as drawee. At the
time the bill was drawn, Diana was unaware
that Barbara is Lorenzo’s paramour. Barbara
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
615
Special Laws
Note: Liberality can be considered as valuable
consideration.
the time of taking the instrument, knew him to be
only an accommodation party. (Sec. 29, NIL)
Want or absence of consideration vs. Failure of
consideration (1996, 2007 BAR)
Requisites to be an accommodation party
(SiNoLe)
WANT OR ABSENCE
OF CONSIDERATION
Total lack of any valid
consideration for the
contract
1.
FAILURE OF
CONSIDERATION
Failure or refusal of one
of the parties to do,
perform or comply with
the consideration agreed
upon
2.
3.
NOTE: It does not mean, however, that one cannot
be an accommodation party merely because he has
received some consideration for the use of his
name. The phrase “without receiving value
therefor” only means that no value has been
received “for the instrument” and not “for lending
his name.”
Effect of want of consideration
It is a matter of defense as against any person not a
holder in due course, thus, a personal defense.
(Sec. 28, NIL)
Q: Susan Kawada borrowed P500,000 from XYZ
Bank which required her, together with Rose
Reyes who did not receive any amount from the
bank, to execute a promissory note payable to
the bank, or its order on stated maturities. The
note was executed as so agreed. What kind of
liability was incurred by Rose, that of an
accommodation party or that of a solidary
debtor? Explain. (2003 BAR)
Partial failure of consideration
Partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and
liquidated amount or otherwise. (Ibid.)
Inadequacy of consideration
GR: Inadequacy of consideration
invalidate the instrument.
does
Accommodation party must Sign as maker,
acceptor, indorser or drawer
No value is received by the accommodation
party from the accommodated party
The purpose is to Lend the name
not
A: Rose incurs the liability of an accommodation
party since she executed the promissory without
receiving value therefor and for the purpose of
lending his name to Susan Kawada, the
accommodated party.
Nonetheless, as an
accommodation maker, Rose is primarily and
unconditionally liable on the promissory note to
a holder for value, regardless of whether she
stands as a surety or solidary co-debtor since such
distinction would be entirely immaterial and
inconsequential as far as a holder for value is
concerned.
XPN: There has been fraud, mistake or undue
influence. (Art. 1355, NIL)
NOTE:
1. Absence of consideration is where no
consideration was intended to pass.
2. Failure of consideration implies that
consideration was intended by that it
failed to pass.
3. The defense of want of consideration is
ineffective against a holder in due course.
4. A drawee who accepts the bill cannot
allege want of consideration against the
drawer.
Q: Juan Sy purchased from “A” Appliance Center
one generator set on installment with chattel
mortgage in favor of the vendor. After getting
hold of the generator set, Juan Sy immediately
sold it without consent of the vendor. Juan Sy
was criminally charged with estafa. To settle
the case extra judicially, Juan Sy paid the sum of
P20,000 and for the balance of P5,000.00 he
executed a promissory note for said amount
with Ben Lopez as an accommodation party.
Juan Sy failed to pay the balance.
ACCOMODATION PARTY
An accommodation party is one who has signed the
instrument as maker, acceptor, indorser or
drawer, without receiving value therefor, and
for the purpose of lending his name to some other
person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder, at
a.
What is the liability of Ben Lopez as an
accommodation party? Explain.
b. What is the liability of Juan Sy? (2003 BAR)
616
Commercial Law
A:
a. Section 29 of the Negotiable Instruments Law
provides that an accommodation party is liable
on the instrument to a holder for value,
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. As an accommodation
party, Ben Lopez is primarily and
unconditionally liable on the promissory note
to a holder for value as if the contract was not
for accommodation.
b. Under Section 14 of the NIL, Juan Sy is
primarily liable to the extent of P5,000 in the
hands of a holder in due course. However, if
Ben Lopez paid the note, Juan Sy has the
obligation to reimburse the former to the
extent of the amount paid.
holder
course
due
May not sue
Q: PCIB granted a credit line to Gonzales
through the execution of the Credit-On-Hand
Loan Agreement (COHLA). Gonzales drew from
said credit line through the issuance of check.
Gonzales issued a check in favor of Rene Unson,
drawn against the credit line. However, upon
presentment for payment by Unson of said
check, it was dishonored by PCIB due to the
termination by PCIB of the credit line under
COHLA for the unpaid periodic interest dues
from the loans of Gonzales and the spouses
Panlilio. Gonzales, through counsel, wrote PCIB
insisting that the check he issued had been fully
funded, and demanded the return of the
proceeds of his FCD as well as damages for the
unjust dishonor of the check. Was it proper for
PCIB to dishonor the check issued by Gonzales
against the credit line under the COHLA?
A: NO. An accommodation note is one to which the
accommodation party has put his name, without
consideration, for the purpose of accommodating
some other party who is to use it and is expected to
pay it. The accommodation is not one to the
person who takes the note — that is, the payee or
indorsee, but one to the maker or indorser of the
note. In this case, the indorser, Dagul, in making the
indorsement to the lender, Facundo, was merely
acting as agent for the latter or, as a mere vehicle
for the transference of the naked title from the
borrower or maker of the note and was not acting
as an accommodation party.
A: NO. While a maker who signed a promissory
note for the benefit of his co-maker (who received
the loan proceeds) is considered as an
accommodation party, he is, nevertheless, entitled
to a written notice on the default and the
outstanding obligation of the party accommodated.
There being no such written notice, the Bank is
grossly negligent in terminating the credit line of
the accommodation party for the unpaid interest
dues from the loans of the party accommodated
and in dishonoring a check drawn against such
credit line. (Eusebio Gonzales v. Philippine
Commercial and International Bank, Edna Ocampo,
and Roberto Noceda, G.R. No. 180257, February 23,
2011)
Accommodation party vs. Regular party
REGULAR PARTY
Extent of liability of an accommodation party
(Re2Con)
Signs the instrument
for value (Sec. 24,
NIL)
1.
Not for that purpose
2.
Cannot
disclaim
personal liability by
parol evidence
3.
May avail of such
defense
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
in
May
sue
reimbursement after
paying
the
holder/subsequent
party
Q: Dagul has a business arrangement with
Facundo. The latter would lend money to
another, through Dagul, whose name would
appear in the promissory note as the lender.
Dagul would then immediately indorse the note
to Facundo. Is Dagul an accommodation party?
Explain. (2005 BAR)
ACCOMMODATION
PARTY
Signs an instrument
without receiving value
therefor
Purpose of signing is to
lend his name to
another person
May always show, by
parol evidence, that he
is only such
Cannot avail of the
defense
of
absence/failure
of
consideration against a
not
617
Right to Revoke accommodation – before the
instrument has been negotiated for value.
Right
to
Reimbursement
from
the
accommodated party – the accommodated
party is the real debtor. Hence, the cause of
action is not on the instrument but on an
implied contract of reimbursement.
Right to Contribution from other solidary
accommodation maker. (Sadaya v. Sevilla, G.R.
No. L-17845, April 27, 1967)
Special Laws
Note: Since the relationship of the accommodation
party and the accommodated party is considered
as that of a surety – principal debtor, they are
solidarily liable. Hence, the payee can run after the
surety for the entire amount.
holder of the note, he has the right to sue the
accommodated party for reimbursement, since
the relation between them is in effect that of
principal and surety, the accommodation
party being the surety. Thus, after paying the
holder, Pedro may seek reimbursement from X,
the accommodated party.
The surety can seek reimbursement from principal
debtor.
Q: As a rule, under the NIL, a subsequent party
may hold a prior party liable but not vice-versa.
Give 2 instances where a prior party may hold a
subsequent party liable. (2008 BAR)
Accommodation party cannot raise the defense
of absence or want of consideration
An accommodation party who lends his name to
enable the accommodated party to obtain credit or
raise money is liable on the instrument to a holder
for value even if he receives no part of the
consideration. He assumes the obligation to the
other party and binds himself to pay the note on its
due date. By signing the note, the accommodation
party thus became liable for the debt even if he had
no direct personal interest in the obligation or did
not receive any benefit therefrom. (Dela Rama v.
Admiral United Savings Bank, G.R. No. 154740, April
16, 2008)
A: A party may hold a subsequent party liable in
the following instances: (1) in case of an
accommodated party; and (2) in case of an
acceptor for honor. An accommodation party may
hold the party accommodated liable to him, even if
the party accommodated is a subsequent party.
The relation between them is that of principal and
surety. For the same reason, an acceptor for honor
may hold the party for whose honor he accepted a
bill of exchange liable to him. A payer for honor is
subrogated to the rights of the holder as regards
the party for whose honor he paid and all parties
liable to the latter.
Holder for value may recover from an
accommodation party notwithstanding his
knowledge that the accommodation party is
only signing as such
Accommodation made by a corporation
Q: On June 1, 1990, A obtained a loan of
₱100,000 from B, payable not later than
December 20, 1990. B required A to issue him a
check for that amount to be dated December
20, 1990. Since he does not have any checking
account, A, with the knowledge of B, requested
his friend, C, President of Saad Banking
Corporation (Saad) to accommodate him. C
agreed, he signed a check for the aforesaid
amount dated December 20, 1990, drawn
against Saad’s account with the ABC
Commercial Banking Co. The By-laws of Saad
requires that checks issued by it must be signed
by the President and the Treasurer or the VicePresident. Since the Treasurer was absent, C
requested the Vice-President to co-sign the
check, which the latter reluctantly did. The
check was delivered to B. The check was
dishonoured upon presentment on due date for
insufficiency of funds.
a. Is Saad liable on the check as an
accommodation party?
b. If it is not, who then, under the above facts,
is/are liable? (1991 BAR)
Q: For the purpose of lending his name without
receiving value therefor, Pedro makes a note
for P20,000 payable to the order of X, who in
turn negotiates it to Y, the latter knowing that
Pedro is not a party for value.
a. May Y recover from Pedro if the latter
interposes the absence of consideration?
b. Supposing under the same facts, Pedro pays
the said Php20,000.00, may he recover the
same amount from X? (1990, 1996, 1998
BAR)
A:
a. YES, Y may recover from Pedro. Section 29 of
the NIL provides that a person who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person is liable on the instrument to a
holder for value, notwithstanding the fact that
such holder at the time of taking the
instrument knew him to be only an
accommodation party. Pedro, being an
accommodation maker of a note, may thus be
held primarily and unconditionally liable
therefor.
b. YES, Pedro may recover from X. When the
accommodation party makes payment to the
A:
a. NO. Saad is not liable as an accommodation
party. This is because the issue or indorsement
of negotiable paper by a corporation without
618
Commercial Law
b.
consideration and for the accommodation of
another is ultra vires. Hence, one who has
taken the instrument with knowledge of the
accommodation nature thereof cannot recover
against a corporation where it is only an
accommodation party. While it may be legally
possible for a corporation whose business is to
provide financial accommodations in the
ordinary course of business, such as one given
by a financing company, to be an
accommodation party, this situation, however,
is not the case at bar.
Considering that both the President and the
Vice-President were signatories to the
accommodation, they themselves can be
subject to the liabilities of accommodation
parties to the instrument in their personal
capacity. (Crisologo-Jose v. CA, G.R. No. 80499,
September 15, 1989)
assignment written on
its face.
As to right acquired
The transferee does
not become a holder
and can have no better
right
than
his
transferor; he merely
steps into the shoes of
the assignor.
As to liability and right of recourse
The holder can hold
The transferee has no
the drawer and the
right of recourse for
indorsers liable if the
payment
against
party primarily liable
immediate parties.
does not pay.
As to defenses available
Any defense available
A personal defense is
against the transferor
not available against
is available against the
an HIDC.
transferee
As to the notice requirement
Notice of negotiation
is not necessary. The
Notice of assignment
maker or drawer need
is required.
not be informed of the
negotiation.
As to warranty
The
indorser
warrants the solvency The assignor does not
of the maker or warrant the solvency
drawer as the case of the obligor.
may be.
The transferee, if he is
a HIDC may acquire
better rights than his
transferor.
NEGOTIATION
Negotiation is the transfer of an instrument from
one person to another so as to constitute the
transferee the holder thereof. (Sec. 30, NIL)
NOTE: A holder is the payee or indorsee of a bill or
note, who is in possession of it, or the bearer
thereof. (Sec. 191, NIL)
Methods of transferring an instrument (INA)
1.
2.
3.
Issuance – first delivery of the instrument
complete in form to a person who takes it as a
holder.
Negotiation
Assignment – transfer of the title to the
instrument, with the assignee generally taking
only such title as his assignor has, subject to all
defenses available against the assignor.
MODES OF NEGOTIATION
Modes of negotiation (Sec. 30, NIL)
If Payable to bearer
If Payable to order
DISTINGUISHED FROM ASSIGNMENT
NEGOTIATION
As to governing law
ASSIGNMENT
Q: Ligaray charged Wagas with estafa, alleging
that Wagas placed an order of 200 bags of rice
over the telephone with a post-dated check
payable to cash as payment. The seller Ligaray
delivered the rice to Cañada, brother-in-law of
Wagas. In turn Ligaray received a post-dated
check issued by Wagas, which was later on
dishonored due to insufficiency of funds.
Assignment
is
governed by the law
Negotiation
is
on assignment of
governed by the NIL
credit under the Civil
Code
As to the subject instrument
Non-negotiable
Only a negotiable
instrument may be
instrument may be
assigned absent any
negotiated.
prohibition
against
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Negotiated by mere
delivery
Negotiated
by
the
indorsement
of
the
holder, completed by
delivery
During trial, Wagas averred that he issued the
check to Cañada, and that it was the latter who
had transacted with Ligaray. While admitting
619
Special Laws
that he signed a letter acknowledging his debt
to Ligaray, Wagas insisted that he signed the
same just to accommodate the pleas of his
sister and her husband Cañada.
Later, C, without indorsing the promissory note,
transfers and delivers the same to D. The note
is subsequently dishonored by A. May D
proceed against A for the note? (1998 BAR)
Is Wagas guilty of estafa?
A: YES. D may collect from A. The note made by A
is a bearer instrument. Where an instrument,
payable to bearer is indorsed, it may nevertheless
be further negotiated by delivery. Despite the
special indorsement made by B, the note remained
a bearer instrument and can be negotiated by mere
delivery. When C delivered and transferred the
note to D, the latter became a holder thereof. As
such, D can proceed against A.
A: NO. Under the NIL (Sec. 9 and Sec. 30), a check
made payable to cash is payable to the bearer and
could be negotiated by mere delivery without the
need of indorsement. This rendered it highly
probable that Wagas had issued the check not to
Ligaray, but to somebody else like Cañada, his
brother-in-law, who then negotiated it to Ligaray.
It bears stressing that the accused, to be guilty of
estafa as charged, must have used the check in
order to defraud the complainant. What the law
punishes is the fraud or deceit, not the mere
issuance of the worthless check. The proof of guilt
must still clearly show that it had been Wagas as
the drawer who had defrauded Ligaray by means
of the check. (People v. Gilbert Wagas, G.R. No.
157943, September 4, 2013)
NOTE: Once a bearer instrument, always a bearer
instrument.
Delivery of negotiable instrument
A: Php 50,000.00, but with the obligation to hold
Php 20,000.00 for Y's benefit.
Q: X executed a promissory note with a face
value of Php 50,000.00 payable to the order of
Y. Y indorsed the note to Z, to whom Y owed
Php 30,000.00. If X has no defense at all against
Y, for how much may Z collect from X? (2011
BAR)
Delivery means transfer of possession, actual or
constructive, from one person or another. (Sec. 191,
NIL)
Delivery of an order instrument without
indorsement
NOTE: Where the instrument is no longer in the
possession of the party whose signature appears
thereon, there is a prima facie presumption of a
valid and intentional delivery by him. (Sec. 16, NIL)
If an order instrument is not indorsed, the
negotiation is incomplete, and the instrument is in
effect merely assigned. The transferee acquires the
right to have the indorsement of the transferor. It
is only at the time of indorsement that negotiation
takes effect and the transferee acquires the rights
of a holder. (Sec. 49, NIL)
Bearer
instrument
is
negotiated
by
indorsement and delivery (“Once a bearer,
always a bearer” rule)
Negotiation by a prior party
A bearer instrument, when indorsed specially, may
nevertheless be further negotiated by delivery; but
the person indorsing specially is liable as indorser
only to such holders who acquired title through his
indorsement (Sec. 40, NIL). This spawns the rule
that A BEARER INSTRUMENT IS ALWAYS A
BEARER INSTRUMENT.
Where an instrument is negotiated back to a prior
party, such party may reissue and further negotiate
the same. However, he is not entitled to enforce
payment thereof against any intervening party to
whom he was personally liable. (Sec. 50, NIL)
NOTE: Notwithstanding the limitation under Sec.
50, a prior party may strike out the intervening
indorsements not necessary for his title. The
indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved
from liability on the instrument. (Sec. 48, NIL)
Q: A makes a promissory note payable to
bearer and delivers the same to B. B, however,
endorses it to C in this manner:
“Payable to C.
e.g. “A”, the payee indorsed the instrument to B,
then B indorsed it to C, C to D, then D to B. B can
further negotiate the instrument. He may also
Signed: B.”
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Commercial Law
strike out the indorsement of C and D. (Sundiang
Sr. & Aquino, 2014)
XPN: Sec. 40, NIL. If the instrument is originally a
bearer and it was indorsed specially, it may further
be negotiated by mere delivery.
Limitations on re-negotiation
2.
In the following cases, a prior party cannot further
negotiate the instrument: (TAP)
1.
2.
3.
Where it is payable to the order of a third
person, and it has been paid by the drawer.
[Sec. 121 (a), NIL]
Where it was made or accepted for
accommodation and has been paid by the
party accommodated. [Sec. 121 (b), NIL]
In other cases, where the instrument is
discharged when acquired by a prior party.
[Sec. 119 (e), NIL]
NOTE: The indorsement need not follow the
words of negotiability. What should follow the
words of negotiability is the promissory note
or the bill of exchange but not the
indorsmement.
KINDS OF INDORSEMENT
Example: The indorsement may simply be
written as “Pay to X” with the payee’s signature
instead of “Pay to the order of A.”
Indorsement
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the
same.
3.
GR: Indorsement must be of the entire instrument.
It must be in the instrument itself or in a paper
attached to the instrument called allonge.. (Sec. 32,
NIL)
b.
Indorsement to two or more indorsees severally
does NOT operate as a negotiation of the
instrument.
Constitutes the indorsee the agent of the
indorser; or
Example: Pay to K for collection only. Sgd
P.
c.
Indorsement should be placed:
1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called “allonge” (Sec. 31, NIL)
Vests the title in the indorsee in trust for
or to the use of some persons.
Example: Pay to A in trust for X.
NOTE: Mere absence of words implying power
to negotiate does not make an instrument
restrictive. (Sec. 36, NIL)
Kinds of indorsement (SB-ReQuACo-JIFS)
Special – Specifies the person to whom, or to
whose order, the instrument is to be payable. It
is also known as specific indorsement, or
indorsement in full. (Sec. 34, NIL)
4.
NOTE: An instrument payable to bearer
indorsed specially may nevertheless be
negotiated by delivery (once a bearer always a
bearer). (Sec. 40, NIL)
Qualified– Constitutes the indorser a mere
assignor of the title to the instrument made by
adding to the indorser’s signature words like,
“without recourse”, “sans recourse” or “at the
indorsee’s own risk”. The indorsement serves as
an ordinary equitable assignment.
NOTE: Qualified indorsement does not impair
the negotiable character of an instrument. (Sec.
38, NIL)
GR: An order instrument needs indorsement for
further negotiation.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Restrictive - When the instrument: (PAT)
a. Prohibits further negotiation of the
instrument (it destroys the negotiability
of the instrument);
Example: Pay to Z only. Sgd P.
XPN: When the instrument has been paid in part.
1.
Blank – Specifies no indorsee. (BS)
a. Instrument is payable to bearer and may
be negotiated by delivery; (Sec. 34, NIL)
b. May be converted to special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of indorsement. (Sec.
35, NIL)
5.
621
Absolute – The indorser binds himself to pay:
(FaNot)
Special Laws
a.
b.
6.
Upon no other condition than failure of
prior parties to do so;
Upon due notice to him of such failure.
for dishonor is not one of those provided under
Sec. 65. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or
non-payment due to: (ForGo-CaVa)
Conditional - Right of the indorsee is made to
depend on the happening of a contingent
event. The party required to pay may disregard
the conditions. (Sec. 39, NIL)
1.
2.
3.
NOTE: The condition refers to the indorsement
not on the instrument itself.
4.
The condition is only between the conditional
indorser and conditional indorsee.
7.
Joint – Indorsement made payable to two or
more persons who are not partners.
8.
Irregular – A person who, not otherwise a
party to an instrument, places thereon his
signature in blank before delivery. (Sec. 64,
NIL)
9.
NOTE: Always consider first the reason behind non
–payment:
If the ground is bankruptcy or insolvency, the
holder has no recourse, hence, the indorser is not
liable.
If the ground is breach of warranties under Sec. 65,
NIL, the indorser can be held liable.
Facultative –Indorser waives presentment and
notice of dishonor, enlarging his liability and
his indorsement.
Instances when the indorsement is considered
only as equitable assignment (Pa-QT)
10. Successive – Indorsement to two persons or
more in succession. Any of them can indorse to
effect negotiation of the instrument.
1.
2.
3.
Restrictive Indorsement
Indorsee has the following rights in a restrictive
indorsement: (RATS)
1.
2.
3.
4.
Forgery;
Lack of good title on the part of the indorser;
Lack of capacity to indorse on the part of the
prior parties; or
The fact that at the time of the indorsement,
the instrument was valueless or not valid at
the time of the indorsement which fact was
known to him.
Indorsement of only a part of the amount of
the instrument (Sec. 32, NIL)
In cases of qualified indorsement (Sec. 38, NIL)
Transfer of an instrument payable to order by
mere delivery (Sec. 49, NIL)
Joint indorsement
GR: All must indorse in order for the transaction to
operate as a negotiation. (Sec. 41, NIL)
To receive payment of the instrument;
To bring any action thereon that the indorser
could bring; and
To transfer his rights as such indorsee, where
the form of the indorsement authorizes him to
do so
All subsequent indorsees acquire only the title
of the 1st indorsee under the restrictive
indorsement. (Sec. 37, NIL)
XPN: Only one of them may indorse in case the:
(PaA)
1.
2.
Payees or indorsees are partners; and
Payee or indorsee indorsing has authority to
indorse for the others.
Indorsing an instrument as cashier or other
officers of a corporation
An instrument negotiable in origin is always
negotiable until paid, which is still true even if the
NI was dishonored or is already overdue, unless
the instrument has been restrictively indorsed or
when discharged by payment or otherwise. (Sec.
47, NIL)
The negotiable instrument is deemed prima facie
payable to the corporation of which said person is
such an officer. It may be negotiated further by
either indorsement of the corporation or
indorsement of the officer. (Sec. 42, NIL)
Qualified indorsement
Date of indorsement
A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that
the qualified indorser is NOT liable when reason
622
Commercial Law
GR: Every negotiation is deemed prima facie to
have been effected before the instrument was
overdue.
in case of non-payment, but not all the rights of a
holder in due course under Sec. 52. (Caltex v. CA,
G.R. No. 97753 August 10, 1992)
XPN: Except where an indorsement bears date
after the maturity of the instrument. (Sec. 45, NIL)
1. Complete and regular on its face
An instrument is complete when it is not wanting in
any material particular and regular when there is
no alteration apparent on the face of the
instrument.
Striking out of an indorsement
The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out and all
indorsers subsequent to him are relieved from
liability on the instrument. (Sec. 48, NIL)
Q: R issued a check for P1M which he used to
pay S for killing his political enemy.
a.
Does S have a cause of action against R in
case of dishonor by the drawee bank?
b. If S negotiated the check to T, who accepted
it in good faith and for value, may R be held
secondarily liable by T? (2007 BAR)
RIGHTS OF A HOLDER
Holder
A:
a. NO. S does not have a cause of action against R
in case of dishonor by the drawee bank. S is not
a holder in due course; thus, R can raise the
defense that the check was issued for an illegal
consideration.
b. YES. R may be held liable by T since T is a
holder in due course of the instrument. The
unlawful consideration of the check is only a
personal defense that cannot be interposed to a
holder in due course who receives the check
free from the defect of title of S.
A holder is the payee or indorsee of a bill or note
who is in possession of it or the bearer thereof.
(Sec. 191, NIL)
In general, a holder has the right to sue and to
receive payment. (Sec. 51, NIL)
Classes of holders
(G-VaD)
1.
2.
3.
Holders in general (Simple Holders) (Sec. 51,
NIL)
Holders for value (Sec. 26, NIL)
Holders in due course (Secs. 52, 57, NIL)
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the
sum of P1,000. However, Evelyn inserted
P5,000 in violation of the instruction. She
negotiated the note to Julie who had no
knowledge of the infirmity. Julie in turn
negotiated said note to Devi for value and who
had no knowledge of the infirmity. Can Devi
enforce the note against Larry and if she can,
for how much? Explain. (1993 BAR)
HOLDER IN DUE COURSE (HIDC)
To be considered as a HIDC, the holder must have
taken the instrument: (COFI)
1.
2.
3.
4.
That is Complete and regular upon its face;
Became the holder before it was Overdue, and
without notice that it has been previously
dishonored, if such was the fact;
Took it in good Faith and for value; and
At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or
defect in the title of the person negotiating it.
(Sec. 52, NIL)
A: YES, Devi can enforce the note against Larry
since she is a holder in due course. Since the
document delivered to Evelyn is in blank and she
was authorized to fill up the amount in the
promissory note, Devi can enforce against Larry
the amount of P5,000.00 as this case falls squarely
under Sec 14 of the Negotiable Instruments Law.
As against a holder in due course, the instrument is
always valid and enforceable to the full extent. The
defense of filing-up contrary to authorization is a
mere personal or equitable defense. (Villanueva,
2009)
Q: Does a pledgee qualify as a holder in due
course?
A: NO. A pledgee is only a holder for value to the
extent of his lien. His rights as a pledgee will be
governed by the provisions under the Civil Code.
The right of the pledgee is to foreclose the pledge
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
623
Special Laws
2. That he became the holder before it was
overdue
the person negotiating the same before he had paid
the full amount agreed to be paid, he will be
deemed a holder in due course only to the extent of
the amount paid by him. (Sec. 54, NIL)
An overdue instrument is still negotiable although
it is subject to defenses existing at the time of
transfer. A negotiable instrument in circulation
past its maturity date carries strong indication that
it has been dishonored. An overdue instrument
puts all persons on notice that it might not have
been paid because of a valid defense to such
payment. (De Leon, 2010)
Infirmity vs. Defect
INFIRMITY
Refers to those
that vitiate the
instrument
itself
3. That he took it in good faith and for value
Good faith is the holder’s well founded or honest
belief that the person from whom he received the
instrument was the owner thereof, with the right
to transfer it. (Duran v IAC, G.R. No. L-64159,
September 10, 1985)
Value may be some right, interest, profit or benefit
to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc. to
the other. (BPI v. Roxas, G.R. No. 157833, October 15,
2007)
DEFECT
Refers to how he obtained
the instrument or the
signature thereto, as by
fraud, duress, or force and
fear, or other unlawful
means, or for an illegal
consideration or when he
negotiates it in breach of
faith, or under any other
circumstances as amount to
a fraud. (Sec. 55, NIL)
Defect of title:
Q: X borrowed money from Y in the amount of
Php 1 Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no
consideration. When Z deposited the check to
her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due
course? Explain your answer. (2012 BAR)
1.
In its acquisition – When he obtained the
instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful
means, or for an illegal consideration.
2.
In the negotiation – When he negotiates it in
breach of faith, or under such circumstances as
amount to a fraud. (Sec. 55, NIL)
Q: A drawer issued a check for the payment of a
car, which check was delivered to the agent of
the owner of the car for safekeeping. The check
was then used by the agent to pay the medical
bills of his wife in a clinic. The projected
purchase did not materialize. Is the clinic
considered a holder in due course?
A: NO. A holder in due course is a holder who has
taken the instrument under the following
conditions: xxx ; (c) That he took it in good faith and
for value; xxx. All of the four conditions must
concur in order for a holder to qualify as a holder
in due course. In the case at hand, Z did not acquire
the instrument for value. As such she cannot be
considered as a holder in due course.
A: NO. The rule that a possessor of the instrument
is prima facie a HIDC does not apply to the clinic
because it cannot be said to have acquired the
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
instrument was not payable “to the agent or to
bearer;” also the drawer had no account with the
clinic, the agent did not show or tell the payee why
he had the check in his possession and why he was
using it for the payment of his own account.
4. At the time it was negotiated to him, he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it
The person to whom it is negotiated must have had
actual knowledge of such facts or knowledge of
other facts that his action in taking the instrument
amounted to bad faith. (Sec. 56, NIL)
As the holder’s title was defective or suspicious, it
cannot be stated that the payee acquired the check
without knowledge of said defect in holder’s title,
the presumption that the clinic is a HIDC does not
exist. (De Ocampo & Co. v. Gatchalian, G.R. No. L15126, November 30, 1961)
Presence or absence of defect or infirmity must be
determined at the time the instrument was
negotiated to the holder.
NOTE: Where the transferee receives notice of any
infirmity in the instrument or defect in the title of
624
Commercial Law
A holder is presumed to be an HIDC (1993,
2007 BAR)
note, who is in possession of it, or the bearer
thereof. (Yang v. CA, G.R. No. 138074, August 15,
2003)
GR: Every holder is deemed prima facie to be an
HIDC.
There can be no doubt that a proper interpretation
of Negotiable Instruments Law as a whole, leads to
the conclusion that a payee may be a holder in due
course under the circumstances in which he meets
the requirements of Sec. 52. (De Ocampo v.
Gatchalian, supra)
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective.
But this is only as regards a party who became such
after the acquisition of the defective title. (Sec.59,
NIL)
Drawee as holder in due course
Specifically, a HIDC is entitled to the following
rights (1998, 2007, 2009 BAR)
A drawee does not become a HIDC by simply
paying a bill. A holder refers to one who has taken
the instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance
and payment, strips the instrument of negotiability
and reduces it to a mere voucher or proof of
payment.
(Ho2RSE)
1.
2.
3.
4.
5.
Hold the instrument free from defenses
available to parties among themselves;
Hold the instrument free from any defect of
title of prior parties;
Receive payment;
Sue; and
Enforce payment of the instrument for the full
amount thereof against all parties liable;
Persons not deemed a holder in due course
(MUA)
Possession of a negotiable instrument after
presentment and dishonor
1.
A holder who acquires the instrument after its
date of maturity.
2.
Where an instrument payable on demand is
negotiated for an unreasonable length of time
after its issue. (Sec. 53, NIL)
It does not make the possessor a holder for value
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or
indorsers. (STELCO Marketing Corp. vs. CA, G.R. No.
96160, June 17, 1992)
NOTE: A note payable on demand is due when
payment is demanded. A check becomes
overdue when it is not presented for payment
within a reasonable time, usually 6 months
from date the thereof, afterwards, it becomes a
stale check.
Q: Is a corporation to which four crossed checks
were indorsed by the payee corporation a
holder in due course and hence entitled to
recover the amount of the checks when the
same had been dishonored for the reason of
“payment stopped”?
3.
A: NO. The checks were crossed checks and
specifically indorsed for deposit to payee’s account
only. From the beginning, the corporation was
aware of the fact that the checks were all for
deposit only to payee’s account. Clearly then, it
could not be considered an HIDC. (Atrium
Management Corp. v. CA, G.R. No. 109491, February
28, 2001)
Rights of a holder not a holder in due course
The rights of a holder not an HIDC are similar to an
assignee. The other rights are: (ReDS)
1.
Payee as holder in due course
2.
Every holder of a negotiable instrument is
deemed prima facie a holder in due course.
However, this presumption arises only in favor of a
person who is a “holder” as defined in Section 191
of the NIL, meaning a payee or indorsee of a bill or
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Where the instrument contains an acceleration
clause, knowledge of the holder at the time of
acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
overdue.
3.
625
He may receive payment and if the payment is
in due course, the instrument is discharged;
He is entitled to the instrument but holds it
subject to the same defenses as if it were nonnegotiable;
He may sue on the instrument in his own
name. (Sec. 51, NIL)
Special Laws
NOTE: Even if the holder is not HIDC, he/she can
still collect or receive payment.
could interpose the real and personal defenses to
defeat the claim of Baby. However, because of the
shelter principle in Negotiable Instruments Law,
Baby could be elevated to a status of a holder in
due course since a person not holder in due course
steps in the shoes of the prior party. Therefore,
Baby could enforce the note against Larry the same
way as Devi could enforce it.
Shelter principle or Holder in Due Course by
Subrogation
Under the "shelter principle," the HIDC, by
negotiating the instrument, to a party not an HIDC,
transfers all his rights as such holder to the latter
and acquires the right to enforce the instrument as
if he was an HIDC. The principle applies to a
"sheltered" holder who is not a party to any fraud
or illegality impairing the validity of the
instrument.
DEFENSES AGAINST THE HOLDER
Defenses against the holder
The defenses available against the holder are
classified as follows:
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the
sum of P1,000. However, Evelyn inserted
P5,000 in violation of the instruction. She
negotiated the note to Julie who had no
knowledge of the infirmity. Julie in turn
negotiated said note to Devi for value and who
had no knowledge of the infirmity. Supposing
Devi endorses the note to Baby for value but
who has knowledge of the infirmity, can the
latter enforce the note against Larry? (1993
BAR)
1.
Real or Absolute Defenses – those that are
attached to the instrument itself and are
available against all parties, both immediate
and remote, including holders in due course.
2.
Personal or Equitable Defenses –defenses which
are only available against a holder not in due
course. Those which grow out of the
agreement or conduct of a particular person
which renders it inequitable for him, though
holding the legal title, to enforce it against the
party sought to be made liable.
A: Baby cannot enforce the note against Larry since
she is not a holder in due course because Larry
Real defenses available against a holder vs. Personal defenses
REAL DEFENSES
(IM In Ultra. AFForD PODIF)
1. Incomplete and undelivered instrument
2. Minority (available only to the minor)
3. Incapacity as far as incapacitated persons are
concerned
4. Ultra –vires acts of a corporation
5. Want of Authority, apparent and real
6. Fraudulent alteration
7. Forgery
8. Duress amounting to Forgery
9. Prescription
10. Other infirmities appearing on the face of the
instrument
11. Discharge in insolvency
12. Illegal Contract
13. Fraud in Factum or Esse Contractus
PERSONAL DEFENSES
(InnocentS2 ADD FUn In Fraud)
1. Innocent alteration or spoliation
2. Discharge of party Secondarily liable by
discharge of prior party.
3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the
Authority given
5. Acquisition of instrument by Duress or force
and fear; unlawful means or for an illegal
consideration
6. Discharge by payment or renunciation or
release before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
NOTE: Fraud in factum exists in those cases in
which a person, without negligence, has signed an
instrument, but was deceived as to the character of
the instrument and without knowledge of it, as
where a note was signed by one under the belief
NOTE: Fraud in inducement relates to the
quality, quantity, value or character of the
consideration of the instrument. Here, deceit is
not in the character of the instrument but in its
amount or terms. This exists when a person is
626
Commercial Law
that he was signing as a witness to a deed. This kind
of fraud is a real defense because there is no
contract, since the person did not know what he
was signing. (De Leon, 2010)
induced to sign a note for the price of a worthless
stock which was fraudulently represented by the
payee as to its value. Such type of fraud is only a
personal defense because it does not prevent a
contract. (De Leon, 2010)
Q: Eva issued to Imelda a check in the amount
of P50,000 post-dated Sept. 30, 1995, as
security for a diamond ring to be sold on
commission. On Sept. 15, 1995, Imelda
negotiated the check to MT investment which
paid the amount of P40,000 to her.
delivered the same to Pete who accepted the
note as payment of the debt.
What defense or defenses can Señorita Isobel
set up against Pete? Explain. (2005 BAR)
A: Señorita Isobel may set up the defenses of:
Eva failed to sell the ring, so she returned it to
Imelda on Sept. 19, 1995. Unable to retrieve her
check, Eva withdrew her funds from the drawee
bank. Thus, when MT Investment presented the
check for payment, the drawee bank
dishonored it. Later on, when MT Investment
sued her, Eva raised the defense of absence of
consideration, the check having been issued
merely as security for the ring that she could
not sell. Does Eva have a valid defense? Explain.
(1996 BAR)
a. Incomplete but delivered instrument. The
authority she gave Brad was to fill up the note for
P10,000.00 only and not P100,000.00. This is a
personal defense that may be raised against Pete
who is clearly not a holder in due course.
b. Force and intimidation. Señorita Isobel was
forced and intimidated into writing and issuing the
note as she was threatened that Pete would kill
Brad, her cousin if the debt is not paid.
Q: X makes a promissory note for P10,000
payable to A, a minor, to help him buy school
books. A endorses the note to B for value, who
in turn endorses the note to C. C knows A is a
minor. If C sues X on the note, can X set up the
defenses of minority and lack of consideration?
(1998 BAR)
A: NO. Eva does not have a valid defense. First, MT
Investment is a holder in due course and, as such,
holds the post-dated check free from any defect of
title of prior parties and from defenses available to
prior parties among themselves. Eva can invoke
the defense of absence of consideration against MT
only if the latter was a privy to the purpose for
which the checks were issued and, therefore, not a
holder in due course. Second, it is not a ground for
the discharge of the post-dated check as against a
holder in due course that it was issued merely as
security. The only grounds for the discharge of a
negotiable instrument is enumerated in the
Negotiable Instruments Law and none of those
grounds are available to Eva. The latter may not
unilaterally discharge herself from her liability by
mere expediency of withdrawing her funds from
the drawee bank.
A: No. X cannot set up the defense of the minority
of A. Defense of minority is available to the minor
only. Such defense is not available to X. Also, X
cannot set up the defense of lack of consideration
against C, because lack of consideration is a
personal defense which is only available between
the immediate parties or against parties who are
not holders in due course. C’s knowledge that A is a
minor does not prevent C from being a holder in
course. C took the promissory note from a holder
for value.
Q: Brad was in desperate need of money to pay
his debt to Pete, a loan shark. Pete threatened
to take Brad’s life if he failed to pay. Brad and
Pete went to see Señorita Isobel, Brad’s rich
cousin, and asked her if she could sign a
promissory note in his favor in the amount of
P10,000.00 to pay Pete. Fearing that Pete would
kill Brad, Señorita Isobel acceded to the
request. She affixed her signature on a piece of
paper with the assurance of Brad that he will
just fill it up later. Brad then filled up the blank
paper, making a promissory note for the
amount of P100,000.00. He then indorsed and
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Q: A bill of exchange has T for its drawee, U as
drawer, and F as holder. When F went to T for
presentment, F learned that T is only 15 years
old. F wants to recover from U but the latter
insists that a notice of dishonor must first be
made, the instrument being a bill of exchange.
Is he correct? (2011 BAR)
A: NO, since F can treat U as maker due to the
minority of T, the drawee.
627
Special Laws
1.
LIABILITIES OF PARTIES
2.
Parties primarily liable (MAC)
1.
2.
3.
3.
Maker – of a promissory note;
Acceptor – of a bill of exchange; and
Certifier of a check
Q: A issued a promissory note payable to B or
bearer. A delivered the note to B. B indorsed
the note to C. C placed the note in his drawer,
which was stolen by the janitor X. X indorsed
the note to D by forging C’s signature. D
indorsed the note to E who in turn delivered
the note to F, a holder in due course, without
indorsement. Discuss the individual liabilities
to F of A, B and C. (2001, 1997 BAR)
Parties secondarily liable (DraIn)
1.
2.
Drawer of a bill
Indorser of a note or a bill
Negotiable instrument should be presented for
payment to the party primarily liable (Sec. 72[d],
NIL).
PRIMARILY LIABLE
Unconditionally
bound
A: A is primarily and unconditionally liable to F as
the maker of the promissory note. Section 60
provides that, by making the instrument, the maker
obliges himself to pay according to the tenor of the
instrument. He is liable to both payee and
subsequent holder in due course. Despite the
presence of the special indorsements on the note,
these do not detract from the fact that a bearer
instrument, like the promissory note in question, is
always negotiable by mere delivery, until it is
indorsed restrictively “For Deposit Only.”
SECONDARILY
LIABLE
Conditionally
bound
Undertakes to pay
only after the ff.
conditions have been
fulfilled: (Pre-DiD)
1.
Absolutely required
to pay the instrument
upon maturity
2.
3.
Engages that he will pay it according to its
tenor, and
Admits the existence of the payee and his then
capacity to indorse. (Sec. 60, NIL; 1995, 2001
Bar)
The maker is liable the moment he makes the
NI. His liability is primary and unconditional.
Due
presentment for
payment
or
acceptance
to
primary party;
(Sec. 143, NIL)
Dishonor
by
such
party;
(Sec.184,
151,
NIL)
Send notice of
dishonor. (Sec.
89, NIL)
B as a general indorser is secondarily liable to F. By
placing his signature on the bearer instrument, he
warrants that the instrument is genuine and in all
respects what it purports to be; that he has good
title to it; that all prior parties had capacity to
contract; that he has no knowledge of any fact
which would impair the validity of the instrument
or render it valueless; that at the time of
indorsement, the instrument is valid and
subsisting; and that on due presentment, it shall be
accepted or paid, or both, according to its tenor,
and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay.
The drawee is not liable for payment of a bill of
exchange
The mere issuance of a bill of exchange does not
operate as an assignment of the funds in the hands
of a drawee. The drawee must accept the
instrument (thus, becomes an acceptor) in order
that he may be primarily liable for the payment of a
bill of exchange.
C, however, cannot be held liable because the
signature purporting to be his is a product of
forgery. C can raise the defense of forgery since it
his signature that was forged.
Q: On the right bottom margin of a PN appeared
the signature of the corporation’s president
and treasurer above their printed names with
the phrase “and in his personal capacity.” The
corporation failed to pay its obligation. Are the
officers liable?
MAKER
The maker of a negotiable instrument, by making
such instrument: (TEP)
628
Commercial Law
A: YES, persons who sign their names on the face of
promissory notes are makers and liable as such. As
the promissory notes are stereotype ones issued by
the bank in printed form with blank spaces filled
up as per agreed terms of the loan, following
customary procedures, leaving the debtors to do
nothing but read the terms and conditions therein
and to sign as makers or co-makers. The officers
are co-makers and as such, they cannot escape
liability arising therefrom. (Republic Planters Bank
v. CA, G.R. No. 93073, December 21, 1992)
The drawer is secondarily liable to the holder or to
any subsequent indorser who may be compelled to
pay. But the drawer may insert in the NI an express
stipulation negating or limiting his own liability to
the holder. (Sec. 61, NIL)
Q: A delivers a bearer instrument to B. B then
specially indorses it to C and C later indorses it
in blank to D. E steals the instrument from D
and, forging the instrument of D, succeeds in
"negotiating" it to F who acquires the
instrument in good faith and for value.
Q: Richard Clinton makes a promissory note
payable to bearer and delivers the same to
Aurora Page. Aurora Page, however, endorses it
to X in this manner: "Payable to X. Signed:
Aurora Page."
Later, X, without endorsing the promissory
note, transfers and delivers the same to
Napoleon. The note is subsequently dishonored
by Richard Clinton. May Napoleon proceed
against Richard Clinton for the note? (1998
BAR)
a.
If for any reason, the drawee bank refuses
to honor the check, can F enforce the
instrument against the drawer?
b. In case of the dishonor of the check by both
the drawee and the drawer, can F hold any
of B, C and D liable secondarily on the
instrument? (1997 BAR)
A:
a. YES. F can proceed against the drawer, A, in
case of dishonor by the drawee bank. Section
61 of the NIL provides that by drawing the
instrument, the drawer engages that the
instrument will be accepted or paid or both
according to its tenor. Not only is the drawer
obliged to pay the amount of the instrument to
the holder, but he shall likewise be liable to the
subsequent indorser who was compelled to
pay it. The forged signature is unnecessary to
presume the juridical relation between or
among the parties prior to the forgery and the
parties after the forgery. Moreover, the only
party who can raise the defense of forgery
against a holder in due course is the person
whose signature is forged.
A: YES. Richard Clinton is liable for the promissory
note. Under Section 60 of the NIL, the maker of a
negotiable instrument, by making the same,
engages that he will pay according to its tenor, and
admits the existence of the payee and his then
capacity to indorse. The liability of the maker is
primary which means he is absolutely and
unconditionally required to pay. He engages to pay
the instrument according to its terms without any
condition. He is not only liable to the payee but also
to the subsequent holder in due course. Since the
instrument is a bearer instrument (which nature
was not changed even if it was specially indorsed
by Aurora), Napoleon became a legal holder
thereof by mere delivery from X to him. Thus, as a
legal holder of the promissory note, he is entitled
to proceed against the maker thereof, Richard
Clinton.
b.
DRAWER
The drawer, by drawing the instrument: (EDPa)
1. Admits the existence of the payee and his then
capacity to indorse;
2. Engages that on due presentment the
instrument will be accepted or dishonored;
and
3. That if necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who
may be compelled to pay it. (Sec. 61, NIL; 1991
Bar)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Only B and C can be held liable by F. According
to Section 67, when a person puts his signature
on a bearer instrument as a form of
indorsement, he becomes subject to all
liabilities of an indorser. D cannot be held
liable as an indorser because his signature is
forged by E, hence, there was no consent from
D. The forged signature is deemed inoperative
and no right can arise out of it. However, the
effect of being inoperative affects only the
signature which is the product of forgery. It
will not deem to affect other signatures
subscribed with knowledge and voluntariness.
Therefore, B and C are liable as indorsers.
Q: D draws a bill of exchange that states: “One
month from date, pay to B or his order
Php100,000.00. Signed, D.” The drawee named
in the bill is E. B negotiated the bill to M, M to N,
629
Special Laws
N to O, and O to P. Due to non-acceptance and
after proceedings for dishonor were made, P
asked O to pay, which O did. From whom may O
recover? (2011 BAR)
does not have sufficient funds, the bank honors
the check when it is presented for payment.
Apparently, X has conspired with the bank's
bookkeeper so that his ledger card would show
that he still has sufficient funds. The bank files
an action for recovery of the amount paid to B
because the check presented has no sufficient
funds. Decide the case (1998 BAR).
A: D, being the drawer.
ACCEPTOR
The acceptor, by accepting the instrument: (AGE)
1.
2.
3.
A: The bank cannot recover the amount paid to B
for the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
primarily and directly liable to the payee/holder B.
Engages that he will pay the NI according to
the tenor of his acceptance;
Admits the existence of the drawer, the
genuineness of his signature and his capacity
and authority to draw the instrument; and
Admits the existence of the payee and his then
capacity to indorse. (Sec. 62, NIL; 1992; 1998
Bar)
The recourse of the bank should be against X and
its bookkeeper who conspired to make X's ledger
show that he has sufficient funds.
INDORSER
Party who can accept the bill of exchange
A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to
be an indorser, unless he clearly indicates by
appropriate words his intention to be bound in
some other capacity. (Sec. 63, NIL)
GR: Only the drawee may accept. A stranger or
volunteer is not bound by the acceptance.
XPN: In case of a bill which is accepted for honor
supra protest. (Sec. 161, NIL)
NOTE: A person who places his indorsement on a
bearer instrument incurs all liabilities of an
indorser. (Sec. 67, NIL)
Honor supra protest or acceptance for honor is
an undertaking by a stranger to a bill after
protest for the benefit of any party liable
thereon or for the honor of the person for
whose account the bill is drawn which
acceptance inures also to the benefit of all
parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the
bill when it becomes due if the original drawee
does not pay it. (De Leon, 2010)
Drawer vs. Indorser
DRAWER
Party only to a bill
Makes admission as to
the existence of the
payee and his capacity
to indorse
Makes no warranties,
but engages to pay
after
certain
conditions
are
complied with
NOTE: Drawee does not become liable until he
accepts the instrument, in which case he becomes
an acceptor. An acceptor engages to pay according
to the tenor of his acceptance, which may not be
the same as the tenor of the bill itself because the
acceptance may be qualified.
INDORSER
Party either a bill or
note
No such admission
Has warranties
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of
the sale, M wrote a promissory note promising
to pay P or his order Php5,000.00. P then
indorsed the note to X (who did not know about
the shabu), and X to Y. Unable to collect from P,
Y then sued X on the note. X set up the defense
of illegality of consideration. Is he correct?
(2011 BAR)
Difference between the liability of an acceptor
or drawee-acceptor and a maker
While both are primarily liable, the acceptor
engages to pay the negotiable instrument
according to the tenor of his acceptance. On the
other hand, the maker engages to pay the
negotiable instrument according to the tenor of the
bill itself.
A: NO, since X, a general indorser, warrants that
the note is valid and subsisting.
Q: X draws a check against his current account
with Bonifacio Bank in favor of B. Although X
630
Commercial Law
General indorser vs. Irregular indorser (2005
BAR)
GENERAL INDORSER
A regular party to the
instrument and signs
upon delivery of the
document.
Makes either a blank or
special indorsement
Indorses the instrument
after its delivery to the
payee
Liable only to parties
subsequent to him
NOTE: Parol evidence is NOT admissible to relieve
an agent or broker whose endorsement brings him
within the above liability.
IRREGULAR
INDORSER
Not a party to the
instrument
but
he
becomes one because of
his signature in the
instrument.
Always makes a blank
indorsement
Indorses before its
delivery to the payee
Q: Can a collecting bank debit the account of the
depositor when the checks indorsed to it
(bank) were forged?
A: YES, because the depositor of a check as
indorser warrants that it is genuine and in all
respects what it purports to be. Thus, when the
checks deposited had forged indorsements and the
collecting bank, as a consequence of such forgery,
was made to pay the drawee bank, the collecting
bank can debit the account of the depositor for his
breach of warranty. (Jai-Alai Corporation of The
Philippines v. BPI, G.R. No. L-29432, August 6, 1975)
Liable to the payee and
subsequent
parties
unless he signs for the
accommodation of the
payee in which case he
is liable only to all
parties subsequent to
the payee
(Secs. 64, 66, NIL; De Leon, supra)
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude.
When Trude is about to encash the check, the
drawee Union Bank refused to encash it due to
insufficiency of funds. Trude sued James for
payment of money. James alleged that the suit
should be dismissed because Phebean is an
indispensable party. Does James’ argument
hold water?
NOTE: The holder or subsequent indorser who
tries to claim under the instrument which had been
dishonored for "irregular indorsement" must not
be the irregular indorser himself who gave cause
for the dishonor. (Gonzales v. Rizal Commercial
Banking Corporation, G.R. No. 156294, November 29,
2006)
A: NO. There is no privity between the drawer and
the holder. The drawer is merely secondarily liable.
As indorser, he warranted that upon due
presentment, the checks were to be accepted or
paid, or both, according to their tenor, and that in
case they were dishonored, she would pay the
corresponding amount. After an instrument is
dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal
debtors whose liability becomes identical to that of
the original obligor. (Tuazon v. Heirs of Bartolome
Ramos, G.R. No. 156262, July 14, 2005)
Qualified indorser
A qualified indorser is a person who indorses
without recourse. (Sec. 65, NIL)
Order of liability among the indorsers
1.
2.
Among themselves – Liable prima facie in the
order in which they indorse. (Sec. 68, NIL)
To the holder – In any order
Q: X is the holder of an instrument payable to
him (X) or his order, with Y as maker. X then
indorsed it as follows: “Subject to no recourse,
pay to Z. Signed, X.” When Z went to collect from
Y, it turned out that Y's signature was forged. Z
now sues X for collection. Will it prosper?
(2011 BAR)
Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to
him. (Sec. 68, NIL)
Liability of an agent or broker who negotiates
an instrument without indorsement
A: YES, because X, irrespective of his qualified
indorsement, is an indorser who warrants that the
note is genuine.
He incurs all the liabilities prescribed to a general
indorser unless he discloses the name of his
principal and the fact that he is acting only as an
agent. (Sec. 69, NIL)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
631
Special Laws
Warranties and liabilities of parties who are secondarily liable
ABSOLUTE LIABILITY
Drawerof a BOE
Warrants: (EDPa)
a. The existence of payee and his then capacity
to indorse;
b. That the instrument will be accepted or paid
upon due presentment by the party primarily
liable according to its tenor; and
c. That if dishonored, he will pay the party
entitled to be paid. (Sec. 61, NIL)
General indorser
a. Warrants that: (GeGoCaVs)
i. Instrument is genuine
ii. He had good title to it
iii. All prior parties had capacity to contract
iv. Instrument, at the time of indorsement,
was valid and subsisting;
b.
On due presentment, it shall be accepted or
paid, or both according to its tenor
c. If the instrument is dishonored and the
necessary proceedings on dishonor be duly
taken, he will pay the holder. (Sec. 66, NIL)
Irregular indorser
a. In an order instrument, liable to the payee and
all subsequent parties
b. If bearer instrument or payable to order of
maker or drawer, liable to all parties
subsequent to the maker or drawer
c. If he signs for accommodation of the payee,
liable to all parties subsequent to payee. (Sec.
64, NIL)
LIMITED LIABILITY
Qualified Indorser
Warrants that the: (GeGoCK)
a. Instrument is genuine;
b. He has good title to it;
c. Capacity to contract of all prior parties; and
d. No knowledge of any fact which would
impair the validity of the instrument.
(Sec.65, NIL)
NOTE: He is liable to all parties who derive
their title through his indorsement.
Person negotiating by delivery
Same warranties as a qualified indorser. But
unlike a qualified indorser, a person negotiating
by mere delivery is liable only to his immediate
transferee. (par. 2, Sec. 65, NIL)
NOTE: Person negotiating by mere delivery and
a qualified indorser’s secondary liability is
limited, namely, to their warranties.
632
Commercial Law
WARRANTIES
implied warranties. As warrantor, his liability is
unconditional.
Warranties are affirmations of fact on the part of
the parties that impose no direct obligation to pay
in the absence of breach thereof. Liability for
breach of warranty is not conditioned on
presentment and notice of dishonor. Action for
breach of warranty, occurring as it does at the
time of the transfer may be brought at any time.
The party who committed the breach may held
liable or barred from asserting a particular defense.
(Aquino supra at 183)
PRESENTMENT FOR PAYMENT
It is the presentation of an instrument to the
person primarily liable for the purpose of
demanding and receiving payment. (i.e.,
Promissory note or Accepted bill)
Manner of presentment
GR: Instrument must be exhibited to the person
from whom payment is demanded; when paid, it
must be delivered to the person paying it. (Sec. 74,
NIL)
Qualified indorser and persons negotiating by
delivery: (GeGoCK)
1.
2.
3.
4.
That the instrument is genuine and in all
respects what it purports to be;
That he has good title to it;
That all prior parties had capacity to contract;
and
That he has no knowledge of any fact which
would impair the validity of the instrument or
render it useless.
NOTE: It requires personal or face to face demand
at the proper place, exhibiting the instrument to
the maker or acceptor from whom payment is
demanded. (Grese vs. Le Monte, 162 NYS 982)
Exhibition is MANDATORY – If the instrument is
not exhibited, the presentment would be
INEFFECTUAL as the debtor is entitled to see the
instrument and demand its surrender upon
payment. (E.G., Demand from telephone NOT
sufficient because exhibition is NOT possible.
Robinson vs. Loncaster 138 ATL. 58)
But when the negotiation is by delivery only,
the warranty extends to the immediate
transferee only. (Sec 65, NIL)
NOTE: In case of qualified indorsers, their
warranty extends to all parties who derive their
title through his indorsement.
XPNs: When exhibition is excused: (DeDe)
1.
General Indorser: (GeGoCaVs)
1.
2.
3.
4.
That the instrument is genuine and in all
respects what it purports to be;
That he has good title to it;
That all prior parties had capacity to contract;
and
That the instrument is at the time of his
indorsement, valid and subsisting.
2.
The bank remains liable to the holder if it paid the
certificate of deposit payable to bearer without
requiring its surrender. (FEBTC v. Querimit, G.R.
No. 148582, January 16, 2002)
Payee cannot claim payment for a promissory
note which was stolen and as such is not in his
possession. To make presentment for payment, it
is necessary to exhibit the instrument, which he
cannot do because he is not in possession thereof.
In addition, general indorser engages that on due
presentment, it shall be accepted or paid, or both,
as the case may be, according to its tenor, and that
if it be dishonored and the necessary proceedings
on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent
indorser who may be compelled to pay it. (Sec. 66,
NIL)
Q: AB issued a promissory note for P1,000
payable to CD or his order on September 15,
2002. CD indorsed the note in blank and
delivered the same to EF. GH stole the note
from EF and on September 14, 2002 presented
it to AB for payment. When asked by AB, GH
NOTE: Indorser’s liability as warrantor is distinct
from his liability to pay the instrument. Even a
qualified indorser may incur liability for breach of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Debtor does not demand to see the
instrument and refuses payment on some
other grounds; or
Instrument is lost or destroyed.
633
Special Laws
said CD gave him the note in payment for two
cavans of rice. AB therefore paid GH P1,000 on
the same date. On September 15, 2002, EF
discovered that the note of AB was not in his
possession and he went to AB. It was then that
EF found out that AB had already made
payment on the note.
and suit thereon may be maintained
though no demand has been made. (Sec.
70, NIL)
NOTE: Ability and willingness on the part
of the primary party to pay at maturity
are equivalent to a tender or offer of
payment.
a. Can EF still claim payment from AB? Why?
b. As a sequel to the same facts narrated
above, EF, out of pity for AB who had
already paid P1,000 to GH, decided to
forgive AB and instead go after CD who
indorsed the note in blank to him. Is CD
still liable to EF by virtue of the
indorsement in blank? Why? (2002 BAR)
Requisites for a sufficient presentment for
payment (1994, 2002 BAR)
Presentment for payment, to be sufficient, must be
made: (HoRe-PP)
1.
A:
a. Since the instrument became a bearer
instrument, EF could no longer claim payment
from AB. EF is not a holder of the promissory
note. To make the presentment for payment,
it is necessary to exhibit the instrument,
which EF cannot do because he is not in
possession thereof.
b. NO because CD negotiated the instrument by
delivery.
2.
3.
4.
NOTE: Demand for payment must first be made
upon the person primarily liable, if the instrument
is not presented to the person primarily liable, the
drawer or the indorsers are discharged from their
secondary liability unless such presentment is
excused or dispensed with. (Sec 79, 80, NIL)
NECESSITY OF PRESENTMENT FOR
PAYMENT
Presentment for payment is not necessary in
order to charge the person primarily liable on the
instrument. It is only necessary to charge persons
secondarily liable—drawer and indorsers. (Sec. 70,
NIL)
Time for presentment for payment
INSTRUMENT
Presentation for payment to person primarily
liable NOT necessary:
1.
2.
3.
4.
By the holder, or his agent authorized to
receive payment on his behalf;
At a reasonable hour on a business day;
At a proper place; and
To the person primarily liable, or if he is
absent or inaccessible, to any person found at
the place where the presentment is made.
(Sec. 72, NIL)
Payable at a
fixed
or
determinable
future time
Liability absolute on date for payment –
maker or the acceptor may be sued by the
holder even without demand from the
latter as soon as date of payment has
passed without the instrument being
paid.
Where the instrument is payable at a
special place (e.g., at a bank, at an office
but not at an UNSPECIFIED PLACE e.g.,
CITY OF MANILA
Not necessary even if it is required
according to the terms of the instrument
Presentment for payment is not necessary
to charge the person primarily liable is
applicable to notes payable on demand,
Promissory
note payable
on demand
Bill
of
exchange
payable on
demand
634
TIME FOR PRESENTMENT
GR: On the day it falls due. (Sec.
85, NIL)
XPN: If the due date falls on a
Saturday, presentment must be
made on the next Monday.
NOTE: If presentment for
payment is made before
maturity, it will not result to a
discharge of the instrument.
(Sec. 50, NIL)
Within a reasonable time after
its issue.
Within a reasonable time after
the last negotiation thereof.
(Sec. 71, NIL)
NOTE:
“Last
negotiation”
means the last transfer for
Commercial Law
sufficient, must be made by the holder or by some
person authorized to receive on his behalf. The
checks here had been crossed and issued “for
payee’s account only.” This only signifies that the
drawer had intended the same for deposit only by
the person indicated. (Associated Bank v. CA, G.R.
No. 89802, May 7, 1992)
value. Subsequent transfers
between banks for purposes of
collection are not negotiations
within the meaning of Sec. 71.
“Reasonable time” means not
more than 6 months from the
date of issue. Beyond said
period, the check becomes stale
and valueless and thus, should
not be paid.
Order of preference with regard to the place of
presentment (SAU-FoK)
1.
2.
NOTE: Every NI is payable at the time fixed
therein without grace.
3.
Rules on presentment for payment when
maturity date is fixed
TIME OF MATURITY
OF INSTRUMENT
On a Sunday or holiday
On a Saturday
If instrument which
falls due on a Saturday
is payable on demand
4.
5.
WHEN TO PRESENT
FOR PAYMENT
On the next succeeding
business day
On the next succeeding
business day
Before 12:00 noon on
Saturday,
or
on
Monday, at the option
of the holder
Instrument is payable at a bank
When the instrument is payable at bank,
presentment must be made during banking hours,
unless the person to make payment has no funds
there to meet it at any time during the day, in
which case presentment at any hour before the
bank is closed on that day is sufficient, and where
a note is payable at a DESIGNATED BRANCH,
presentment at title principal office or at any
other branch of the company is NOT sufficient.
(Secs. 75 And 87, NIL)
Delay in making presentment is excused
(CoDe)
1.
2.
When caused by circumstances beyond the
control of the holder; and
It is not imputable to his default, misconduct,
or negligence.
Payment in due course (H&M)
In order for payment to constitute payment in due
course, it must be made:
Only the delay in presentment is excused and not
the presentment itself. Hence, as soon as the cause
of delay ceases to operate, presentment must be
made with reasonable diligence. (Sec. 81, NIL)
1.
2.
Circumstances beyond the control of the holder
are events which could not be foreseen or even if
foreseen are inevitable. See sec. 147 (e.g. extreme
weather conditions)
At or after the maturity of the instrument
To the holder thereof, in good faith and
without notice that his title is defective. (Sec.
88, NIL)
PARTIES TO WHOM PRESENTMENT FOR
PAYMENT SHOULD BE MADE
GR: Presentment for payment must be made to
the: (MAD)
Q: Is the bank liable to the payee for depositing
and encashing the crossed checks to an
unauthorized person?
1.
2.
3.
A: YES, the effects of crossing a check relate to the
mode of its presentment for payment. Under Sec.
72 of the NIL, presentment for payment, to be
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Specified place in the instrument
Address of the person to make the payment if
given in the instrument
Usual place of business or residence of the
person to make the payment
Wherever he can be found; or
At his last known place of business or
residence. (Sec. 73, NIL)
635
The maker in case of a promissory note, or
The acceptor in case of an accepted bill.
If the bill of exchange or check is payable on
demand, the presentment must be made to
the drawee although he is not automatically
liable on the bill.
Special Laws
XPNs: Where the person/s primarily liable is/are:
1.
2.
3.
4.
and acceptance of the initial premium or first
installment . Section 78 of the Insurance Code in
effect allows waiver by the insurer of the
condition of prepayment by making an
acknowledgment in the insurance policy of receipt
of premium as conclusive evidence of payment so
far as to make the policy binding despite the fact
that premium is actually unpaid. Section 77
merely precludes the parties from stipulating that
the policy is valid even if premiums are not paid,
but does not expressly prohibit an agreement
granting credit extension, and such an agreement
is not contrary to morals, good customs, public
order or public policy. (GSIS v. Prudential
Guarantee, G.R. No. 165585, November 20, 2013)
Dead – presentment for payment must be
made to his personal representative. (Sec. 76,
NIL)
Liable as partners and no place of payment
specified – presentment for payment may be
made to any of them though there has been
dissolution of the firm. (Sec. 77, NIL)
(If a party dies before the maturity of a
partnership note, a demand on the surviving
partner will be sufficient)
Several persons, not partners, and no place of
payment is specified – presentment for
payment must be made to all of them. (Sec. 78,
NIL)
If the person primarily liable is absent or
inaccessible - presentment for payment must
be made to any person of sufficient discretion
at the proper place of presentment. (Sec. 72[d]
, NIL)
DISPENSATION WITH PRESENTMENT FOR
PAYMENT
GR: Drawer and the indorsers are discharged
from their secondary liability when presentment
is not made.
Q: While GSIS remitted to PGAI the reinsurance
premiums for the first three quarters, it,
however, failed to pay the fourth and last
reinsurance premium due despite demands.
PGAI to file a complaint for sum of money
against GSIS. PGAI alleged that the first three
reinsurance premiums were paid to PGAI by
GSIS and, in the same vein, NEA paid the first
three reinsurance premiums due to GSIS.
Further, that GSIS failed to pay PGAI the fourth
and last reinsurance premium. On the other
hand, GSIS admitted that it remitted to PGAI
the first three reinsurance premiums which
were paid by NEA but it failed to remit the
fourth and last reinsurance premium to PGAI.
GSIS,
however,
denied
that
it
had
acknowledged its obligation to pay the last
quarter’s reinsurance premium to PGAI.
Further, GSIS avers that the complaint states
no cause of action against it because the nonpayment of the last reinsurance premium only
renders the reinsurance contract ineffective,
and does not give PGAI a right of action to
collect. Does GSIS have to pay PGAI the amount
of the fourth and last reinsurance premium?
XPNs:
1. Presentment for payment is not required to
charge drawer and indorser when:
a. Drawer- when he has no right to expect or
require that the drawee or acceptor will
pay the instrument. (Sec. 79, NIL)
b. Indorser – When the NI was made or
accepted for his accommodation and he
has no reason to expect that the
instrument will be paid if presented. (Sec.
80, NIL)
A: YES. While the import of Section 77 is that
prepayment of premiums is strictly required as a
condition to the validity of the contract, We are
not prepared to rule that the request to make
installment payments duly approved by the
insurer, would prevent the entire contract of
insurance from going into effect despite payment
2.
When presentment for payment is dispensed
with (Sec. 82, NIL) (WaRF)
a. Where, after the exercise of reasonable
diligence, presentment for payment
cannot be made;
b. Where the drawee is fictitious person;
or
c. By waiver of presentment, express or
implied.
3.
When the BOE has been dishonored by nonacceptance, since no Presentment for
Payment for is necessary. (Sec. 151, NIL)
Q: Gemma drew a check on September 13,
2010. The holder presented the check to the
drawee bank only on March 5, 2012. The bank
dishonored the check on the same date. After
dishonor by the drawee bank, the holder gave
a formal notice of dishonor.
636
Commercial Law
a.
What is meant by reasonable time as
applied to presentment?
b. Is Gemma still liable to the holder?
NOTE: Immediate right of recourse against
secondary parties will accrue only AFTER THE
GIVING OF DUE NOTICE OF DISHONOR.
A:
a. Reasonable time is relative. Regard is to be
had to the facts of each case, usage of
business and trade, and the nature of the
instrument (FUN).
b. With respect to checks, current banking
practice dictates that the check becomes stale
if it is not presented for payment within 6
months from issuance.
c. NO. Gemma is discharged from secondary
liability under the check because presentment
and notice of dishonor were made after an
unreasonable length of time. The check was
already stale at the time of presentment.
Persons primarily liable need not be given notice
of dishonor because they are the ones who
dishonored the instrument.
NOTE: After an instrument is dishonored by
nonpayment, the persons secondarily liable
become the principal debtors.
Purposes for requiring notice of dishonor
1.
2.
DISHONOR BY NON-PAYMENT
Q: Notice of dishonor is not required to be
made in all cases. One instance where such
notice is not necessary is when the indorser is
the one to whom the instrument is supposed to
be presented for payment. (2011 BAR)
Subject to the provisions of the law, when the
instrument is dishonored by non-payment, an
immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.
(Sec. 84, NIL)
A: The rationale here is that the indorser already
knows of the dishonor and it makes no sense to
notify him of it.
Instances when an instrument is dishonored
by non-payment
NON-PAYMENT
UPON
DUE
PRESENTATION
The instrument is
duly presented for
payment to party
primarily liable and it
is either refused or
cannot be obtained.
(NIL, Sec 83)
Time of giving the notice of dishonor
NON-PAYMENT
W/OUT
PRESENTATION
Presentment
is
excused
and
the
instrument is overdue
and unpaid. (NIL, Sec
83)
GR: As soon as instrument was dishonored. (Sec.
102, NIL)
XPN: Delay is excused. (Sec. 113, NIL)
NOTE: An instrument cannot be dishonored by
non-payment until after the maturity.
Place of giving the notice of dishonor
1.
Parties reside in the same place
a. Place of business – Before close of
business hours on the day following
b. Residence – Before the usual hours of rest
on the day following
c. By mail – Deposited in the post office in
time to reach him in the usual course on
the day following. (Sec. 103, NIL)
2.
Parties reside in different places
a. By mail – Deposited in the post office in
time to go by mail (actual departure in the
course of mail from the post office in
NOTICE OF DISHONOR
It is a notice given by the holder to the parties
secondarily liable, drawer and each indorser, that
the instrument was dishonored by non-payment
or non-acceptance by the drawee/maker.
It is a notice given by the holder to the parties
secondarily liable, drawer and each indorser, that
the instrument was dishonored by non-payment
or non-acceptance by the drawee/maker.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
To inform parties secondarily liable that the
maker or acceptor, as the case may be, has
failed to meet his engagement; and
To advise the parties that they will be
required to make payment
637
Special Laws
b.
c.
3.
which the notice was deposited) the day
following the day of dishonor.
If no mail – At a convenient hour (of the
sender) on that day, by the next mail
thereafter
Other than by post office (e.g. personal
messenger) – Within the time that notice
would have been received in due course
of mail, if it has been deposited in the post
office within the time specified in Sec.
104(a).
3.
4.
5.
6.
Time of notice to antecedent parties – Same
time for giving notice that the holder has after
the dishonor. (Sec. 107, NIL)
7.
NOTE: Actual receipt of the party within the time
specified by law is sufficient though not sent in the
places specified above. (Sec. 108, NIL)
In case the instrument was dishonored in the
hands of the agent, notice of dishonor should be
given:
Instances when a negotiable instrument is
considered dishonored
1.
For BOE:
1.
2.
If not accepted when presented for
acceptance; or
If presentment for acceptance is excused and
the bill is not accepted. (Sec. 149, NIL)
2.
For PN:
1.
2.
His agent (Sec. 97, NIL)
Where party is dead – to a personal
representative, if there be one, and if with
reasonable diligence he can be found. If there
be no personal representative, notice may be
sent to the last residence or last place of
business of the deceased (Sec. 98, NIL)
When the parties to be notified are partners –
notice to any one partner though there has
been a dissolution (Sec. 99, NIL)
Notice to joint parties who are not partners
must be given to each of them, unless one of
them has authority to receive such notice for
the others (Sec. 100, NIL)
Where a party has been adjudged a bankrupt
– either to the party himself or to his trustee
or assignee (Sec. 101, NIL)
To the parties secondarily liable – Within the
time fixed by Secs. 102-104, and 107,
otherwise, they are discharged for lack of
notice, unless the principal himself notifies
them within the same time
To his principal – The principal must give
notice to parties secondarily liable as if his
agent were an independent holder (Sec. 94,
NIL).
A party who receives notice of dishonor is entitled
to give notice of such dishonor to prior parties
within the same period of time that the holder has
after the dishonor, as if he were the said holder.
(Sec. 107, NIL)
Not paid (that is, payment is refused or not
obtained) when presented for payment at
maturity; or
Where presentment is excused or waived and
the instrument is overdue and unpaid. (Sec.
83, NIL)
PARTIES WHO MAY GIVE NOTICE OF
DISHONOR
Liability of a person secondarily liable when
the instrument is dishonored
The parties who may give notice of dishonor
(HARe)
After the necessary proceedings for dishonor had
been duly taken, an immediate right of recourse to
all parties secondarily liable thereon accrues to
the holder. (Sec. 84, NIL)
1.
2.
3.
PARTIES TO BE NOTIFIED
Parties to whom notice must be given
Notice of dishonor should be given to: (DIA-RePJoB)
1. The drawer
2. Indorser
Holder
Another in behalf of the holder (Agent)
Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
would have a right to reimbursement from
the party to whom notice is given. (Sec. 90,
NIL)
EFFECTS OF NOTICE OF DISHONOR
638
Commercial Law
Notice of dishonor, if given by or on behalf of the
holder, inures to the benefit of:
1. All holders subsequent to the holder who has
given notice; and
2. All parties prior to the holder but subsequent
to the party to whom notice has been given
and against whom they may have a right of
recourse. (Sec. 92, NIL)
It is the intentional abandonment of a known
right; and with reference to notice of dishonor, it
is the willingness on the part of the drawer or
indorser to be bound as such even without due
notice of dishonor.
Waiver of notice maybe given:
1.
Notice of dishonor if given by party entitled
thereto, inures to the benefit of:
1. The holder; and
2. All parties subsequent to the party to whom
notice is given. (Sec. 93, NIL)
2.
Ways to give a waiver of notice
FORM OF NOTICE
1.
2.
Form and contents of a notice of dishonor
(OWPeC-DiPLo)
1.
2.
3.
Oral
In writing
It may be given by personal delivery, or by
mail. (Sec. 96, NIL)
1.
2.
All parties - if embodied on the face of the
instrument
Particular indorser - if written above the
signature of such indorser. (Sec. 110, NIL)
Waiver of protest
Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has
been dishonored (If protest is necessary,
notice must also contain a statement that
it has been protested); and
c. Statement that the party giving the notice
intends to look for the party addressed
for payment.
It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
steps necessary to fix the liability of the drawee
and the indorsers have been taken. Thus, it is
deemed to be a waiver not only of a formal protest
but also of presentment and notice of dishonor.
(Sec. 111, NIL)
DISPENSATION WITH NOTICE
NOTE: A written notice need not be signed, and an
insufficient notice may be supplemented and
validated
by
verbal
communication.
A
misdescription of the instrument does not vitiate
the notice unless the party to whom the notice is
given is in fact misled thereby. (Sec. 95, NIL)
Instances when notice of dishonor is not
necessary (WaWa-ReDIG)
1.
2.
3.
How notice is given:
1. By Personal Delivery; or
2. Mail
4.
5.
6.
Note: As provided under section 96, the word
“may” is construed to mean “must”.
WAIVER
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Express; or
Implied (e.g. Payment by an indorser after he
learns of the default of the maker; admission
of liability after dishonor). (Sec. 109, NIL)
Parties affected by the waiver of notice
NOTE: Thus, notice may be given by
telephone or telegraph.
4.
Before the time of giving notice has arrived;
or
After the omission to give due notice. (Sec.
109, NIL)
639
Waiver of notice (Sec. 109, NIL)
Waiver of protest (Sec. 111, NIL)
When notice is dispensed with when after
exercise of reasonable diligence, notice
cannot be given or does not reach the parties
sought to be charged (Sec. 112, NIL)
Drawer in cases under Sec. 114, NIL.
Indorser in cases under Sec. 115, NIL.; and
Where due notice of dishonor by nonacceptance has been given (notice of dishonor
by non-payment not necessary) (Sec. 116, NIL)
Special Laws
Instances when a notice of dishonor to the
Drawer may be dispensed with (SaF-PEC)
1.
2.
3.
4.
5.
2.
3.
Where the drawer and drawee are the same
person
Drawee is fictitious or does not have the
capacity to contract
Drawer is the person to whom the instrument
is presented for payment (he is the one who
dishonored the instrument)
Drawer has no right to expect or require that
the drawee or acceptor will honor the
instrument.
Drawer has countermanded the payment (e.g.
stop payment order). (Sec. 114, NIL)
EFFECT OF FAILURE TO GIVE NOTICE
GR: Any person to whom such notice is not given
is discharged, but he will still be liable for breach
of warranties pertaining to the instrument.
XPNs:
1. Waiver (Sec. 109, NIL)
2. Notice is dispensed with (Sec. 112, NIL)
3. Notice not necessary to drawer (Sec. 114, NIL)
4. Notice not necessary to indorser (Sec. 115,
NIL)
NOTE: The holder of two checks which were
dishonored because the drawer withdrew her
funds from the bank can hold the drawer liable
even if no notice of dishonor was given to the
drawer, since the drawer had no right to expect
that the drawee bank would honor the checks.
(SIHI vs. CA, G.R. No. 101163, January 11, 1993)
NOTE: Holder is not required to notify all
indorsers, he may select to hold only one or more
indorsers. Indorsers who are discharged from
liability by reason that no notice of dishonor was
given to them is still liable for breach of
warranties as to the NI.
Q: P authorized A to sign a negotiable
instrument in his (P’s) name. It reads: “Pay to
B or order the sum of Php1 million. Signed, A
(for and in behalf of P).” The instrument shows
that it was drawn on P. B then indorsed to C, C
to D, and D to E. E then treated it as a bill of
exchange. Is presentment for acceptance
necessary in this case? (2011 BAR)
Effect of the omission of a previous holder to
give notice of dishonor by non-acceptance
It does not prejudice the rights of a holder in due
course subsequent to the omission to present the
instrument to the drawee for acceptance and
notify the drawer and indorsers if acceptance is
refused. (Sec. 117, NIL)
A: NO since the drawer and drawee are the same
person.
Effect of lack of notice of dishonor on the
instrument which is payable in installments
Q: Juben issued to Y two post-dated checks as
security for pieces of jewelry to be sold. Y
negotiated the check to S. When Juben failed to
sell the jewelry, he withdrew all his funds from
the drawee bank. After dishonor, Juben
contends that the holder failed to give him a
notice of dishonor. Is notice of dishonor
necessary?
1.
2.
No acceleration clause – Failure to give notice
of dishonor on a previous installment does
not discharge drawers and indorsers as to
succeeding installments.
With acceleration clause – It depends upon
whether the clause is automatic or optional.
a.
A: NO, Juben was responsible for the dishonor of
his checks, hence, there was no need to serve him
notice of dishonor. (SIHI v. CA, supra.)
b.
Instances when it is not necessary to give a
notice of dishonor to the Indorser (FiPA)
1.
Indorser is person to whom the instrument is
presented for payment
Instrument was made or accepted for his
accommodation. (Sec. 115, NIL)
Drawee is fictitious or has no capacity to
contract, and indorser was aware of these
facts at the time he indorsed the instrument
640
Automatic – failure to give notice of
dishonor as to a previous installment will
discharge the persons secondarily liable
as to the succeeding installments;
Optional – if not exercised, the rule would
be the same as if there is no acceleration
clause. If exercised, the rule would be the
same as if the installment contains an
automatic acceleration clause. (Town
Savings Bank v. CA, G.R. No. 106011, June
17, 1993)
Commercial Law
dishonored because of insufficient funds. Ben
sued Bong and Baby on the dishonored BPI
check. Bong interposed the defense that the
BPI check was discharged by novation when
Ben accepted the crossed DBP check as
replacement for the BPI check. Bong cited
Section 119 of the NIL which provides that a
negotiable instrument is discharged “by any
other act which will discharge a simple
contract for the payment of money.” Is Bong
correct? (2014 BAR)
DISCHARGE OF NEGOTIABLE INSTRUMENT
DISCHARGE OF NEGOTIABLE INSTRUMENT
It is the release of all parties, whether primary or
secondary, from the obligations arising
thereunder. It renders the instrument without
force and effect, and consequently, it can no longer
be negotiated.
A: NO. Bong is not correct. While Section 119 of
the NIL in relation to Article 1231 of the Civil Code
provides that one of the modes of discharging a
negotiable instrument is by any other act which
will discharge a simple contract for the payment
of money, such as novation, the acceptance by the
holder of another check which replaced the
dishonored bank check did not result to novation.
Methods for discharge of instrument (PACARe)
1.
2.
3.
4.
Payment by principal debtor:
a. By or on behalf of principal debtor;
b. At or after its maturity;
c. To the holder thereof; and
d. In good faith and without notice that the
holder’s title is defective
Payment by accommodated party
Intentional cancellation of instrument by the
holder (by expressly stating it in the
instrument or when the instrument is torn up,
burned or destroyed)
Any act which discharges a simple contract
for the payment of money under Art. 1231 of
the NCC, specifically remission, novation, and
merger.
There are only 2 ways which indicate the presence
of novation and thereby produce the effect of
extinguishing an obligation by another which
substitutes the same. First, novation must be
explicitly stated and declared in unequivocal terms
as novation is never presumed. Secondly, the old
and the new obligation must be incompatible on
every point.
In the instant case, there was no express
agreement that the holder’s acceptance of the
replacement check will discharge the drawer and
endorser from liability. Neither is there
incompatibility because both checks were given
precisely to terminate a single obligation arising
from the same transaction. (Anamer Salazar v. J.Y.
Brothers Marketing Corp., G.R. No. 171998, October
20, 2010, in Divina 2014)
NOTE: Loss of the negotiable instrument will not
extinguish liability; compensation is not available
so long as an obligation is evidenced by a
negotiable instrument. (Villanueva, 2009)
5.
Reacquisition by principal debtor in his own
right. Reacquisition must be:
a. By the principal debtor;
b. In his own right; and
c. At or after date of maturity
Q: Is a manager’s check as good as cash? Why
or why not? (2015 BAR)
NOTE: If reaquisition is made before maturity, the
instrument is not discharge as it may be
renegotiated. (Sec. 119, NIL)
A: YES, the Supreme Court held in various
decisions that a manager’s check is good as cash. A
manager’s check is a check drawn by the bank
against itself. It is deemed pre-accepted by the
bank from the moment of issuance. The check
becomes the primary obligation of the bank
which issues it and constitutes its written promise
to pay. By issuing it, the bank in effect commits its
total resources, integrity and honor behind the
check. (Tan v. CA, 239 SCRA 310; International
Corporate Bank v. Gueco, 351 SCRA 516; Metrobank
v. Chiok, GR No. 172652, Nov. 26, 2014)
Q: Bong bought 300 bags of rice from Ben for
P300,000. As payment, Bong indorsed to Ben a
BPI check issued by Baby in the amount of
P300,000. Upon presentment for payment, the
BPI check was dishonored because Baby’s
account from which it was drawn has been
closed. To replace the dishonored check, Bong
indorsed a crossed DBP check issued also by
Baby for P300,000. Again, the check was
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
641
Special Laws
A manager's check as a check drawn by the bank's
manager upon the bank itself and accepted in
advance by the bank by the act of its issuance. It is
really the bank's own check and may be treated as
a promissory note with the bank as its maker.
Consequently, upon its purchase, the check
becomes the primary obligation of the bank and
constitutes its written promise to pay the holder
upon demand. It is similar to a cashier's check
both as to effect and use in that the bank
represents that the check is drawn against
sufficient funds. The drawee bank of a manager's
check may interpose personal defenses of the
purchaser of the manager's check if the holder is
not a holder in due course. In short, the purchaser
of a manager's check may validly countermand
payment to a holder who is not a holder in due
course. Accordingly, the drawee bank may refuse
to pay the manager's check by interposing a
personal defense of the purchaser. (RCBC v.
Odrada, G.R. No. 219037, October 19, 2016)
5.
A manager’s check, like a cashier’s check, is an
order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity,
and honor behind its issuance. By its peculiar
character and general use in commerce, a
manager’s check or a cashier’s check is regarded
substantially to be as good as the money it
represents. While manager’s and cashier’s checks
are still subject to clearing, they cannot be
countermanded for being drawn against a closed
account, for being drawn against insufficient
funds, or for similar reasons such as a condition
not appearing on the face of the check. Long
standing and accepted banking practices do not
countenance the countermanding of manager’s
and cashier’s checks on the basis of a mere
allegation of failure of the payee to comply with its
obligations towards the purchaser. (Metrobank v.
Chiok, GR No. 172652, Nov. 26, 2014)
1.
2.
DISCHARGE OF PARTIES SECONDARILIY
LIABLE
1.
6.
Q: The rule is that the intentional cancellation
of a person secondarily liable results in the
discharge of the latter. With respect to an
indorser, the holder's right to cancel his
signature is: (2011 BAR)
A: Limited to the case where the indorsement is
not necessary to his title.
Effects of payment by persons secondarily
liable (DiCReF)
3.
4.
3.
4.
Instrument is not discharged
It only cancels his own liability and that of the
parties subsequent to him
Instrument may be renegotiated
Person paying is remitted to his former rights
(as regards prior parties) and he may strike
out his own and all subsequent indorsements.
(Sec. 121, NIL)
RIGHT OF THE PARTY WHO DISCHARGED
INSTRUMENT
GR: The party (secondarily liable) so discharging
the instrument is remitted to his former rights as
regards all prior parties, and he may strike out his
own and all subsequent indorsements, and again
negotiate the instrument.
XPNs:
2.
Methods of discharge of secondary parties
(ACS TReE)
1.
2.
Release of the principal debtor, unless the
holder’s right of recourse against the party
secondarily liable is expressly reserved
Extension of time of payment, unless:
a. Extension is consented to by party
secondarily liable
b. Holder expressly reserves his right of
recourse against such party (Sec. 120,
NIL)
Any Act which discharges the instrument;
Intentional Cancellation of his signature by
the holder
Discharge of prior party which may be made
when signature is Stricken out
Valid Tender of payment by a prior party;
Where it is payable to the order of a third
person, and has been paid by the drawee; and
It was made or accepted for accommodation,
and has been paid by the party
accommodated.
NOTE: The above exceptions have the same effect
as payment by the party primarily liable.
RENUNCIATION BY THE HOLDER
Renunciation
642
Commercial Law
It is the act of surrendering a claim or right with
or without recompense. (De Leon, 2014)
Instances that constitute material alteration
Any alteration which changes:
Manner of making renunciation by the holder
1.
2.
1.
Must be written
If oral, the instrument must be surrendered to
the person primarily liable. (Sec. 122, NIL)
NOTE: The change in the date of indorsement
is not material where the date is not
necessary to fix the maturity of the
instrument.
Effects of renunciation
1.
2.
3.
Made in favor of principal debtor made at or
after the maturity (made absolutely and
unconditionally) of the instrument –
discharges the instrument, and all parties
thereto (Sec. 122, NIL).
Made in favor of a secondary party may be
made by the holder before, at or after maturity
– discharges only the secondary parties and
all subsequent to him, but the instrument
itself remains in force. (Sec. 122, NIL)
Renunciation does not affect the rights of a
holder in due course without notice. (Sec. 120 ,
NIL)
Rule regarding
instrument
the
cancellation
of
2.
3.
4.
5.
6.
7.
Sum payable, either for principal or interest
The time or place of payment
Number or the relations of the parties
Currency in which payment is to be made
Adds a place of payment where no place is
specified
Any other change or addition which alters the
effect of the instrument. (Sec. 125, NIL)
NOTE: There is no material alteration when the
serial number of a check had been altered. The
alteration of the serial number of a check did not
change the relations between the parties nor the
effect of the instrument. Hence, the alteration on
the serial number of a check is not a material
alteration. (International Corporate Bank v. CA,
G.R. No. 141968, February 12, 2001)
an
It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the
authority of the holder. But where an instrument
or any signature appears to have been cancelled,
the burden of proof lies on the party alleging that
the cancellation was made unintentionally, or
under a mistake or without authority. (Sec. 123,
NIL)
Spoliation
It refers to material alteration of an instrument
done by a stranger. It has the same effect as
alteration.
EFFECT OF MATERIAL ALTERATION
Material alteration of a negotiable instrument,
without the assent of all parties liable thereon, has
the following effects:
MATERIAL ALTERATION
CONCEPT
1.
Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent
to the alteration because of their
warranties (2001 BAR)
2.
If negotiated to an HIDC:
a. He may enforce the payment thereof
according to its original tenor against the
person not a party to the alteration.
Material alteration
It is any change in the instrument which affects or
changes the liability of the parties in any way.
It means an unauthorized change in an instrument
that purports to modify in any respect the
obligation of a party or an unauthorized addition
of words or numbers or other change to an
incomplete instrument relating to the obligation
of a party.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Date
643
Special Laws
b.
3.
He may also enforce payment thereof
against the party responsible for the
alteration for the altered amount.
2.
3.
4.
If negotiated to a holder not an HIDC:
a. He cannot enforce payment against the
person not a party prior to the
alteration.
b. He may, however, enforce payment
according to the altered tenor from the
person who caused the alteration and
from the indorsers. (Sec. 12, NIL)
another state (unless the other state requires
for written acceptance)
Must express a promise to pay money
Signed by the drawee
Delivered to the holder.
NOTE: Before delivery or notification,
acceptor may revoke or cancel his acceptance.
Upon acceptance, the bill, in effect becomes a note.
The drawee who thereby becomes an acceptor
assumes the liability of the maker (who has
primary liability) and the drawer, that of the first
indorser.
A drawee who accepts a materially altered check
cannot recover from the holder and the drawer.
(2011 BAR)
MANNER
Manner of making an acceptance
A material alteration avoids an instrument except
as against an assenting party and subsequent
indorsers, but a holder in due course may enforce
payment according to its original tenor. Thus,
when the drawee bank pays a materially altered
check, it violates the terms of the check, as well as
its duty to charge its client’s account only for bona
fide disbursements he had made. If the drawee did
not pay according to the original tenor of the
instrument, as directed by the drawer, then it has
no right to claim reimbursement from the drawer,
much less, the right to deduct the erroneous
payment it made from the drawer’s account which
it was expected to treat with utmost fidelity. The
drawee, however, still has recourse to recover its
loss. It may pass the liability back to the collecting
bank which is what the drawee bank exactly did in
this case. It debited the account of Equitable-PCI
Bank for the altered amount of the checks. (Areza
v. Express Savings Bank, G.R. No. 176697 September
10, 2014)
Acceptance may be made
1.
2.
On the bill itself
On a separate paper:
a. It may be acceptance as to an existing bill;
or
b. It may be acceptance as to a non-existing
bill.
NOTE: If the bill is non-existent, the acceptance on
a separate paper must comply with following
requirements: (DReC)
1.
2.
3.
The contemplated drawee shall describe the
bill to be drawn and promise to accept it;
Bill shall be drawn within a reasonable time
after such promise is written; and
The holder shall take the bill upon the credit
of the promise.
Kinds of acceptance
ACCEPTANCE
1.
DEFINITION
2.
Acceptance of a bill
General Acceptance -It assents without
qualification to the order of the drawer. (Sec.
139, NIL)
Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as
drawn. (ibid.)
Requisites for acceptance (WESH)
NOTE: A holder may refuse to accept a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as
dishonored by non-acceptance. (Sec. 142, NIL)
1.
Kinds of qualified acceptance (CoPaL-QuaD)
It is a signification by the drawee of his assent to
the order of the drawer. (Sec. 132, NIL)
It must be in writing, except constructive
acceptance and to a foreign bill payable in
644
Commercial Law
1.
2.
3.
4.
5.
Conditional – makes payment by the acceptor
dependent on the fulfillment of a condition
therein stated.
Partial – an acceptance to pay part only of the
amount for which the bill is drawn.
Local – an acceptance to pay only at a
particular place.
Qualified as to time– a bill is accepted to be
paid on or after a specified date.
As to drawee - acceptance of some one or
more of the drawees but not of all. (Sec. 141,
NIL)
b.
3.
Such person must take the bill for value
on the faith of such acceptance. (Sec. 134,
NIL)
Virtual
a. Unconditional promise in writing to
accept a bill
b. Promise made before it is drawn
c. Any person who, upon faith thereof,
receives the bill for value. (Sec. 135, NIL)
TIME FOR ACCEPTANCE
Q: A bill of exchange states on its face: “One (1)
month after sight, pay to the order of Mr. R the
amount of Php 50,000.00, chargeable to the
account of Mr. S. Signed, Mr. T.” Mr. S, the
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay Php
30,000.00 three (3) months after sight.” May
he accept under such terms, which varies the
command in the bill of exchange? (2011 BAR)
The drawer has 24 hours after presentment to
decide whether or not he will accept the bill. The
acceptance, if given, dates as of the day of
presentation. (Sec. 136, NIL)
NOTE: Drawee bank is not entitled to 24 hours to
decide whether or not to pay a check since a check
is presented for payment, not acceptance.
RULES GOVERNING ACCEPTANCE
A: YES, since a drawee is allowed to effect a
qualified acceptance in which case he shall be
liable according to the tenor of his acceptance.
Effect of accepting an instrument with a
qualified acceptance
Q: X, drawee of a bill of exchange, wrote the
words: “Accepted, with promise to make
payment within two days. Signed, X.” The
drawer questioned the acceptance as invalid.
Is the acceptance valid?
GR: When the holder takes a qualified acceptance
the drawer and indorsers are discharged from
liability on the bill.
A: YES, because the acceptance is in reality a clear
assent to the order of the drawer to pay. Qualified
acceptance as to time is allowed. [Sec. 141 (d , NIL]
1.
XPNs: (AsAR)
2.
3.
Other kinds of acceptance
1.
2.
Constructive/implied
a. Drawee to whom the bill is delivered for
acceptance destroys it
b. Drawee refuses, within 24 hours after
such delivery, or within such time as is
given him, to return the bill accepted or
non-accepted. (Sec. 137, NIL)
NOTE: The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as
dishonored by non-acceptance. (Sec. 142, NIL)
Extrinsic
The acceptance is written on a paper other
than the bill itself. To be binding upon the
acceptor:
a. Acceptance must be shown to the person
to whom the instrument is negotiated;
and
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
When they have expressly or impliedly
authorized the holder to take a qualified
acceptance;
Subsequently assent thereto; or
Implied assent - when they did not express
their dissent to the holder within a reasonable
time when they received a notice of qualified
acceptance.
Acceptance of an incomplete bill
Acceptance may be made before the bill has been
signed by the drawer or while otherwise
incomplete, or after it is overdue, or even after it
has been dishonored by non-acceptance or nonpayment. (Sec. 138, NIL)
645
Special Laws
Effect of the certification by the drawee bank
1.
2.
3.
4.
Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction and
that they shall be so applied whenever the check is
presented for payment. Where a check is certified
by the bank on which it is drawn, the certification
is equivalent to acceptance. (Secs. 187, 189, NIL;
New Pacific Timber v. Seneris, G.R. No. L-41764,
December. 19, 1980)
By or on behalf of the holder;
At a reasonable hour on a business day;
Before the bill is overdue; and
To the drawee or some person authorized to
accept or refuse to accept on his behalf. (Sec.
145, , NIL)
WHEN
Bill addressed to 2
or more drawees
who
are
not
partners
PRESENTMENT FOR ACCEPTANCE
Drawee is dead
Presentment for acceptance is necessary only in
the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL). In no
other case is presentment
for
acceptance
necessary in order to render any party to the bill
liable. Obviously then, sight drafts do not require
presentment for acceptance.
Drawee
is
adjudged
a
bankrupt
or
insolvent or has
made
an
assignment for the
benefit of creditors
It is the production or exhibition of a bill of
exchange to the drawee for his acceptance or
payment. A presentment for acceptance includes
presentment for payment.
GR: Acceptance is not necessary to render any
party to the bill liable. (NIL, Sec. 143, par. 2)
2.
3.
NOTE: Presentment is
merely permissive since it
is excused by. [Sec. 148(a),
NIL]
To drawee or his trustee/
assignee. [Sec. 145(c), NIL]
EFFECT OF FAILURE TO MAKE PRESENTMENT
XPNs: (SEXE)
1.
PRESENTMENT MUST BE
MADE TO
All of them unless one has
authority to accept or
refuse acceptance for all, in
which case presentment
may be made to him only.
[Sec. 145(a), NIL]
Drawee's
personal
representative [Sec. 145(b),
NIL]
Failure to make such presentment will discharge
the drawer from liability or to the extent of the
loss caused by the delay. (Sec. 186, NIL; Republic of
the Philippines vs. PNB, G.R. No. L-16106, December
30, 1961)
Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument
When bill expressly stipulates that it shall be
presented for acceptance
Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee. (NIL, Sec. 143, par. 1)
However, where the holder of a bill drawn payable
elsewhere than at the place of business or the
residence of the drawee has no time, with the
exercise of reasonable diligence, to present the bill
for acceptance before presenting it for payment
on the day that it falls due, the delay caused by
presenting the bill for acceptance before
presenting it for payment is excused and does not
discharge the drawers and indorsers. (Sec. 147,
NIL)
In said exceptions, the holder must either present
it for acceptance or negotiate it within a
reasonable time, otherwise, the drawer and all
indorsers are discharged. (Sec. 144, NIL)
TIME/PLACE/MANNER OF ACCEPTANCE
Instances
(DafRI)
Proper presentment for acceptance
It must be made: (BRO-D)
646
when
presentment
is
excused
Commercial Law
1.
2.
3.
Where the drawee is dead, or has absconded,
or is a fictitious person not having capacity to
contract by bill
Where, after exercise of reasonable diligence,
presentment cannot be made
Where, although presentment has been
irregular, acceptance has been refused on
some other ground. (Sec. 148, NIL)
Acceptance for honor
It is an undertaking by a stranger to a bill after
protest for the benefit of any party liable thereon
or for the honor of the person for whose account
the bill is drawn which acceptance inures to the
benefit of all parties subsequent to the person for
whose honor it is accepted, and conditioned to pay
the bill when it becomes due if the original drawee
does not pay it. (Sec. 161, NIL)
DISHONOR BY NON-ACCEPTANCE
Instances when a bill is dishonored by nonacceptance
1.
2.
Requisites of acceptance for honor (WISh)
1.
2.
When it is duly presented for acceptance and
such an acceptance is refused or cannot be
obtained
When presentment for acceptance is excused,
and the bill is not accepted. (Sec. 149, NIL)
3.
It is not sufficient that presentment for acceptance
is excused, it is also necessary that the bill remains
not accepted.
PROMISSORY NOTE
An unconditional promise in writing made by one
person to another, signed by the maker, engaging
to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to
bearer (NIL, Sec. 184).
Duty of the holder where bill is not accepted
If within 24 hours after due presentment, the bill
is not accepted, the person presenting it must
treat the bill as dishonored by non-acceptance
otherwise he will lose the right of recourse against
the drawer and indorsers. (Sec. 150, NIL)
Special types of promissory notes
1.
Rules when a bill is dishonored by nonacceptance
1.
2.
3.
4.
Right of recourse against all secondary parties
accrues to the holder.
No presentment for payment is necessary
since dishonor of the instrument by nonpayment is to be expected.
If the instrument is accepted after it has been
dishonored by non-acceptance, presentment
for payment is necessary upon maturity.
In case of non-payment, holder must give the
corresponding notice of dishonor; otherwise,
secondary parties are discharged.
Certificate of deposit – a written
acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which
the bank or banker promises to pay to the
depositor, to the order of the depositor, or to
some other person or his order, whereby the
relation of debtor and creditor between the
bank and the depositor is created.
NOTE: A document to be considered a
certificate of deposit need not be in a specific
form. Thus, a passbook issued by a bank
qualifies as a certificate of deposit drawing
interest because it is considered a written
acknowledgement by a bank that it has
accepted a deposit of a sum of money from a
depositor. Thus, it is subject to documentary
stamp tax. (Prudential Bank v. CIR, G.R. No.
180390, July 27, 2011, in Divina, 2014)
Rights of a holder when bill is not accepted
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer
and indorsers accrues to the holder, and no
presentment for payment is necessary. (Sec. 151,
NIL)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Must be in Writing
Must Indicate that it is an acceptance for
honor
Must be Signed by the acceptor for honor.
(Sec. 162, NIL)
2.
647
Bonds – an evidence of indebtedness issued by
a public or private corporation which
constitutes a promise, under seal, to pay
Special Laws
money. It runs for a longer period of time than
a PN.
3. Registered Bond – one payable only to the
person whose name appears on the face of the
certificate and in the books of the company.
4. Coupon Bond – one to which are attached
coupons which entitle the holder to interest
when due.
5. Bank Note – instrument issued by a bank for
circulation as money payable to bearer on
demand.
6. Due Bill - PN which shows on its face that one
person acknowledges his indebtedness to
another. The word “due” is commonly used.
7. Mortgage Note – an instrument secured by
either a real (REM) or personal property
(Chattel).
8. Title-Retaining Note – an instrument used to
secure the purchase price of goods. It
ordinarily provides that title to the goods
shall remain in payee’s name until the note is
paid in full.
9. Collateral Note – it is used when the maker
pledges securities to the payee to secure the
payment of the amount of the note.
10. Judgment Note – this is a note to which a
power of attorney is added enabling the payee
to take judgment against the maker without
the formality of a trial if the note is not paid
on its due date. (De Leon, supra)
be discharged from liability thereon to the extent
of the loss caused by the delay.
Essential characteristics of checks
1.
2.
Checks, completed and delivered, are sufficient by
themselves to prove the existence of loan
obligation. The Court has expressly recognized
that a check constitutes an evidence of
indebtedness and is a veritable proof of an
obligation. This is the very same principle
underpin Section 24 of the NIL which provides
that “every negotiable instrument is deemed
prima facie to have been issued for a valuable
consideration; and every person whose signature
appears thereon to have become a party for
value.” (2014 BAR; Pacheco v. CA G.R. No. 126670
December 2, 1999)
Q: Tan maintained a current and savings
account with PCIB, now EPCIB, with a balance
of P35,147.59. He issued a post-dated PCIB
check in favor of SLI in the amount of
P34,588.72. After clearing, the amount of the
check was immediately debited by EPCIB from
Tan’s account thereby leaving him with a
balance of only P558.87. He thereafter issued
three (3) checks payable to ASELCO, ANECO,
and the other payable in cash. When the latter
were presented for payment, the three (3)
checks were dishonored for being drawn
against insufficient funds. As a result, the
electric power supply for the two minisawmills owned and operated by Tan, was cut
off and it was restored only after sometime.
After trial, the RTC ruled in favor of EPCIB and
dismissed the complaint. On appeal the CA
reversed the decision of the RTC. Is EPCIB
liable due to its premature debiting of the
post-dated check, thereby affecting Tan’s
business operations?
Instances when a bill of exchange may be
treated as a promissory note (2015 BAR)
1.
2.
3.
4.
They are drawn on a bank
Payable instantly on demand
The drawer and the drawee are the same
person
The drawee is a fictitious person
The drawee has no capacity to contract
The instrument is so ambiguous that there is
doubt whether it is a bill or a note. (Sundiang
Sr. & Aquino, 2014, citing NIL, Secs. 17[e] and
130)
CHECK
A: YES. The premature debiting of the postdated
check by the bank which resulted to insufficiency
of funds that brought about the dishonor of two
checks causing the electric supply to be cut-off and
affected business operations indicates the
negligence of the bank. For its failure to exercise
extra-ordinary diligence, it should be made liable
in the case. (Equitable PCI Bank v. Arcelito B. Tan,
G.R. No. 165339, August 23, 2010, in Divina, 2014)
DEFINITION
It is a bill of exchange drawn on a bank and
payable on demand. (Sec. 185, NIL)
A check must be presented for payment within a
reasonable time after its issue or the drawer will
648
Commercial Law
Check vs. Bill of Exchange
BASIS
CHECKS
Always
drawn on a
bank
or
banker
against
a
previous
deposit of
funds
Always
payable on
demand
Drawee
Payability
Function
Presentment
for Payment
Discharge
Liability
of
Ordinarily
intended for
immediate
payment
Must
be
presented
for payment
within
a
reasonable
time after its
issue
(Sec.186,
NIL)
When
a
check
is
accepted or
certified, the
drawer
&
indorsers
are
discharged
from
liability
thereon
(Sec.
188,
NIL)
BOE
May or may not
be drawn on a
bank and need
not be drawn
against a deposit
Effect of the
Death of the
Drawer
Either payable on
demand or at a
fixed
or
determinable
future time (Sec.4,
NIL)
Intended
for
circulation
as
instrument
of
credit
Must
be
presented
for
payment within a
reasonable time
after
its
last
negotiation
(Sec. 171, NIL)
Presentment
for Acceptance
Death of the
drawer of an
ordinary bill does
not revoke the
authority of the
drawee to pay.
Must
be
presented
for
acceptance
in
certain cases (Sec.
143, NIL)
Stopping payment
The drawer has the right to order the drawee to
stop payment of a check and this right flows from
the rule that the issuance of a check by itself is not
an assignment of funds by the drawee. If a bank
pays a check after it has been notified to stop
payment, it pays in its own responsibility and will
not be permitted to charge the account. The
drawer may countermand payment if he has a
valid defense against the holder of the check.
Thus, countermanding of a check is proper where
the payee failed to deliver the goods that he was
supposed to deliver. (Sundiang Sr. & Aquino, 2014,
citing Bataan Cigar and Cigarette Factory v. CA, GR.
No. 93048, March 3, 1994)
They
remain
liable
despite
acceptance
(Sec. 84, NIL)
Q: A check was dishonored due to material
alteration. The creditor then filed an action
against drawee bank for the amount. Will the
action prosper?
A drawer of
a check not
presented
within
a
reasonable
time after its
issue
is
discharged
from
liability
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
thereon to
the extent of
the
loss
caused by
the
delay
(Sec.
186,
NIL)
Death of the
drawer of a
check with
the
knowledge
of the bank
revokes the
authority of
the bank to
pay.
Need not be
presented
for
acceptance
(Sec.
185,
NIL)
A: NO. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections
185 and 189 of the NIL, sue the bank. The payee
should instead sue the drawer who might in turn
sue the bank. This is so because no privity of
contract exists between the drawee-bank and the
payee. (Villanueva v. Nite, G.R. No. 148211, July 25,
2006)
649
Special Laws
NOTE: A check by itself does not operate as an
assignment of any part of the funds to the credit of
the drawer with the bank, and the bank is not
liable to the holder, unless and until it accepts or
certifies the check. (Sec. 189, NIL)
from the proper authorities to investigate on
the matter.
The results of the investigation disclosed that
unknown then to Company X, its chief
accountant Bonifacio Santos is part of a
syndicate that devised a scheme to syphon its
funds. It was discovered that though
deposited, the check was never paid to the BIR
but was passed on by Santos to Winston Reyes,
Bank B's branch manager and Santos' coconspirator. Instead of bringing the check to
the clearing house, Reyes replaced Check No.
12345 with a worthless check bearing the
same amount, and tampered documents to
cover his tracks. No amount was then credited
to the BIR. Meanwhile, Check No. 12345 was
subsequently cleared and the amount therein
credited into the accounts of fictitious persons,
to be later withdrawn by Santos and Reyes.
Mere issuance of a worthless check holds the
person liable under BP 22 irrespective of
intent (2014 BAR)
The rule is that every act or omission punishable
by law has its accompanying civil liability. If the
accused, however, is not found to be criminally
liable, it does not necessarily mean that he/she
will not likewise be held civilly liable because
extinction of the penal action does not carry with
it extinction of civil action. In cases of violation of
BP 22, a special law, the intent in issuing a check is
immaterial. Thus, regardless of intent, the accused
remains civilly liable because the act or omission,
the making and issuing of the subject check, from
which his/her civil liability arises.
Company X then sued Bank B for the amount of
P500,000.00
representing
the
amount
deducted from its account. Bank B interposed
the defense that Company X was guilty of
contributory negligence since its confidential
employee Santos was an integral part of the
scheme to divert the proceeds of Check No.
12345.
Is
Company
X
entitled
to
reimbursement from Bank B, the collecting
bank? Explain. (2016 BAR)
Effect of erasure or alteration on checks
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective
January 4, 2016, the following shall no longer be
eligible or acceptable for clearing:
a.
b.
Any check that shows or indicates on its face
erasure or alteration regardless of any
signature or initials that appear to indicate
authorization of the alteration or erasure; or
Does not indicate the date, payee, amount
payable in figures, amount payable in words,
or signature of the drawer
A: Yes, Company X is entitled to reimbursement
from the collecting bank. In a similar case, the
Supreme Court ruled that the drawer could
recover the amount deducted from its account
because it failed to ensure that the check be paid
to the designated payee while the collecting bank
should share ½ of the loss because its branch
manager conspired in the fraud. (PCIB v. CA, 350
SCRA 446 [2001])
Effect of contributory negligence between the
drawer and collecting bank
KINDS
Q: Company X issued a Bank A Check No.
12345 in the amount of P500,000.00 payable
to the Bureau of Internal Revenue (BIR) for the
company's taxes for the third quarter of 1997.
The check was deposited with Bank B, the
collecting bank with which the BIR has an
account. The check was subsequently cleared
and the amount of P500,000.00 was deducted
from the company's balance. Thereafter,
Company X was notified by the BIR of its nonpayment of its unpaid taxes despite the
P500,000.00 debit from its account. This
prompted the company to seek assistance
Special types of checks
1.
2.
650
Cashier’s Check – a BOE drawn by the bank
upon itself and is accepted at its issuance. It is
usually signed by the cashier of the bank. It
has the same legal effects of a manager’s
check and a certified check.
Manager’s Check – a BOE drawn by the bank
upon itself and is accepted at its issuance and
signed by a manager on behalf of a bank.
Commercial Law
NOTE: A manager’s check is as good as cash. It
is a check drawn by the bank against itself. It
is deemed pre-accepted by the bank from the
moment of issuance. The check becomes the
primary obligation of the bank which issues it
and constitutes its written promise to pay. By
issuing it, the bank in effect commits its total
resources, integrity and honor behind the
check (Metrobank and Trust Company vs
Chiok, GR No. 172652, November 26, 2014).
(2015 Bar)
The effects of crossing a check are: (DOW)
1. That the check may not be encashed but only
deposited in the bank;
2. That the check may be negotiated only onceto one who has an account with a bank; and
3. That the act of crossing the check serves as a
warning to the holder that the check has been
issued for definite purpose so that he must
inquire if he has received the check pursuant
to the purpose. Otherwise, he is not an HIDC.
(SIHI v. IAC, G.R. No. 72764, July 13, 1989)
NOTE: Differentiate cashier’s from manager’s
check in the headoffice, it is the cashier who
signs it because it is where the cashier holds
office. However, in branches, it is the manager
who signs the check. The process for both is
the same.
3.
4.
5.
6.
Q: Po Press issued in favor of Jose a postdated
crossed check, in payment of newsprint which
Jose promised to deliver. Jose sold and
negotiated the check to Excel Inc. at a discount.
Excel did not ask Jose the purpose of crossing
the check. Since Jose failed to deliver the
newsprint, Po ordered the drawee bank to
stop payment on the check. Efforts of Excel to
collect from Po failed. Excel wants to know
from you as counsel:
Certified Check – Drawn by a depositor upon
funds to his credit in a bank which an officer
of a bank certifies will be paid on
presentation.
Crossed Check – Done by writing 2 parallel
lines on the left top portion of the check. The
marking signifies that the bank should pay
only with the intervention of the company
only.
Memorandum Check – A check with
“Memorandum” written on its face. The
writing signifies that the drawer engages to
pay the bona fide holder absolutely, without
any condition concerning its presentment.
Traveler’s Checks – Instruments purchased
from banks or express companies which can
be used like cash upon the second signature by
the purchaser. (De Leon, supra)
a.
Whether as second indorser and holder of
the crossed check, is it a holder in due
course?
b. Whether Po’s defense of lack of
consideration as against Jose is also
available as against Excel? (1994, 1995,
2005 BAR)
A:
a. Excel Inc. is not a holder in due course. The
act of crossing the check imposes upon the
holder thereof the duty to ascertain the
indorser’s, title to the check or the nature of
his possession or the purpose for which it was
issued. Excel is guilty of gross negligence
amounting to legal absence of good faith for
its failure to inquire from Jose the purpose for
which the three checks were crossed despite
such warning, hence, it is not deemed a holder
in due course.
b. YES, the defense of lack of consideration as
against Jose is also available as against Excel.
For not being a holder in due course, Excel is
subject to personal defenses as if the check
were non-negotiable, such as lack of
consideration between Po Press and Jose. In
this case, Jose’s failure to deliver the
newsprint resulted in the absence of
consideration for the issuance of the check.
Consequently, Po Press cannot be made liable
to pay the face value of the check.
Crossed check
A crossed check is a check with two (2) parallel
lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
payment must be made to the right party;
otherwise, the bank has no authority to use the
drawer's funds deposited with the bank.
The purpose is to insure payment to the payee. It
can only be deposited but may not be converted
into cash by the drawer. Crossing a check does not
destroy its negotiability but the check may be
negotiated only once – to one who has an account
with the bank. (De Ocampo v. Gatchalian, G.R. No.
L-15126, November 30, 1961)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
651
Special Laws
Q: PCIB filed an action against Balmaceda, it is
alleging that between 1991 and 1993, by
taking advantage of his position as branch
manager, he fraudulently obtained and
encashed 31 Managers checks in the
P10,782,150.00. PCIB moved to be allowed to
file an amended complaint to implead Rolando
Ramos as one of the recipients of a portion of
the proceeds from Balmacedas alleged fraud.
Since Balmaceda did not file an Answer, he was
declared in default. On the other hand, Ramos
filed an Answer denying any knowledge of
Balmacedas scheme. The RTC issued a decision
in favor of PCIB. On appeal, the CA dismissed
the complaint against Ramos. According to the
CA, the mere fact that Balmaceda made Ramos
the payee in some of the Managers checks does
not suffice to prove that Ramos was complicit
in Balmacedas fraudulent scheme. Is PCIB
itself at fault as employer?
Q: Three crossed checks payable to the order
of SPPI were issued by Interco as payment for
the welding electrodes bought by the latter
from the former. Each check was crossed with
the notation “account payee only” and was
drawn against Equitable. Due to Uy’s,
fraudulent representations and Equitable’s
reliance on Uy’s words that he had good title
thereto, the three checks were deposited in
Uy’s account. Hence, SSPI filed a complaint for
damages against Uy and Equitable for payment
of damages in the form of interest
incomewhich it failed to realize. Equitable
moved for the dismissal of the complaint for
lack of cause of action. It argued that SSPI
cannot assert a right against the bank based on
the undelivered checks because a payee, who
did not receive the check, cannot require the
drawee bank to pay it the sum stated on the
checks.
a. Does SSPI has a cause of action against
Equitable?
b. Is Equitable guilty of gross negligence?
A: YES. While its manager forged the signature of
the authorized signatories of clients in the
application for manager’s checks and forged the
signatures of the payees thereof, the drawee bank
also failed to exercise the highest degree of
diligence required of banks in the case at bar. It
allowed its manager to encash the manager’s
checks that were plainly crossed checks. A crossed
check is one where two parallel lines are drawn
across its face or across its corner. Based on
jurisprudence, the crossing of a check has the
following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the
check may be negotiated only once — to the one
who has an account with the bank; and (c) the act
of crossing the check serves as a warning to the
holder that the check has been issued for a
definite purpose and he must inquire if he
received the check pursuant to this purpose;
otherwise, he is not a holder in due course. In
other words, the crossing of a check is a warning
that the check should be deposited only in the
account of the payee. When a check is crossed, it is
the duty of the collecting bank to ascertain that
the check is only deposited to the payee’s account.
In complete disregard of this duty, PCIB’s systems
allowed Balmaceda to encash 26 manager’s checks
which were all crossed checks, or checks payable
to the “payee’s account only.” (PCIB v. Balmaceda
and Ramos, G.R. No. 158143 September 21, 2011, in
Divina, 2014)
A:
a. YES. SSPI’s cause of action is not based on the
three checks. SSPI does not ask Equitable or Uy to
deliver to it the proceeds of the checks as the
rightful payee. SSPI does not assert a right based
on the undelivered checks or for breach of
contract. Instead, it asserts a cause of action based
on quasi-delict. SSPI claims damages in the form of
interest income from the parties who willfully or
negligently withheld its money from it.
b. YES. The checks that Interco issued in favor of
SSPI were all crossed, made payable to SSPI’s
order, and contained the notation account payee
only. This creates a reasonable expectation that
the payee alone would receive the proceeds of the
checks and that diversion of the checks would be
averted. At the very least, the nature of crossed
checks should place a bank on notice that it should
exercise more caution or expend more than a
cursory inquiry, to ascertain whether the payee on
the check has authorized the holder to deposit the
same in a different account. Since the banking
business is impressed with public interest, the
trust and confidence of the public in it is of
paramount importance. Consequently, the highest
degree of diligence is expected, and high
standards of integrity and performance are
required of it. Equitable did not observe the
required degree of diligence expected of a banking
institution
under
the
existing
factual
Crossed check with notation “Account Payee
Only”
652
Commercial Law
circumstances. The fact that a person, other than
the named payee of the crossed check, was
presenting it for deposit should have put the bank
on guard. Misplaced reliance on empty words is
tantamount to gross negligence, which is the
absence of or failure to exercise even slight care or
diligence, or the entire absence of care, evincing a
thoughtless disregard of consequences without
exerting any effort to avoid them. (Equitable
Banking Corporation v. Special Steel Products, Inc.
and Augusto Pardo, G.R. No. 175350, June 13, 2012,
Del Castillo, J.)
the check, Chelsea cannot thus be made liable to
pay the face value of the check and this constitutes
a defense not only against Moises but even against
Dragon who is not a holder in due course.
Q: On March 1, 1996, Pentium Company
ordered a computer from CD Bytes, and issued
a crossed check in the amount of P30,000 postdated Mar 31, 1996. Upon receipt of the check,
CD Bytes discounted the check with Fund
House. On April 1, 1996, Pentium stopped
payment of the check for failure of CD Bytes to
deliver the computer. Thus, when Fund House
deposited the check, the drawee bank
dishonored it. If Fund House files a complaint
against Pentium and CD Bytes for the payment
of the dishonored check, will the complaint
prosper? Explain (1996 BAR)
Q: Distinguish clearly crossed checks from
cancelled checks (2004 BAR)
A: A crossed check is one with two parallel lines
drawn diagonally on the left portion of the check.
On the other hand, a cancelled check is one
marked or stamped "paid" and/or "cancelled" by
or on behalf of a drawee bank to indicate payment
thereof. A crossed check may not be encashed but
only deposited in the bank. While the payee or
bearer of a cancelled check may be refused
encashment.
A: The case will prosper as against the CD Bytes,
the immediate indorser but not as against
Pentium Company. The effect of crossing a check
relates to the mode of its presentment for
payment which must be made by the holder, or by
some person authorized to receive payment on his
behalf. Thus, in the absence of due presentment,
as in this case where the check was not presented
by the payee (CD Bytes) or the proper party
authorized to make presentment of the checks, the
drawer (Pentium Company) cannot be held liable.
However, Fund House may recover from the
immediate indorser, if the latter has no valid
excuse for refusing payment.
Q: On Oct 12, 1993, Chelsea Straights, a
corporation engaged in the manufacture of
cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed
checks postdated 15 Mar 94 and 15 Apr 94 in
full payment therefor. On 19 Jan 94 Moises
sold to Dragon Investment House at a discount
the two checks drawn by Chelsea in his favor.
Moises failed to deliver the bales of tobacco as
agreed
despite
Chelsea’s
demand.
Consequently, on 1 Mar 94 Chelsea issued a
“stop payment” order on the 2 checks issued to
Moises. Dragon, claiming to be a holder in due
course, filed a complaint for collection against
Chelsea for the value of the checks. Rule on the
complaint of Dragon. Give your legal basis.
(1995 BAR)
Stale check
A check which has not been presented for
payment within a reasonable time after its issue. It
is valueless and thus, should not be paid. A check
becomes stale 6 months from date of issue.
Memorandum check
A memorandum check is an evidence of debt
against the drawer and although may not be
intended to be presented, has the same effect as
an ordinary check and if passed on to a third
person, will be valid in his hands like any other
check. (People v. Nitafan, G.R. No. 75954, October
22, 1992)
A: The complaint should be dismissed. The act of
crossing the check imposes upon the holder
thereof the duty to ascertain the indorser’s, in this
case Moises’ title to the check or the nature of his
possession. Failing in this respect, Dragon cannot
be deemed a holder in due course and as such,
Moises is subject to personal defenses as if the
check were non-negotiable, such as lack of
consideration between Chelsea and Moises for
Moises’ failure to deliver the bales of tobacco.
There being no consideration for the issuance of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
When drawer of check discharged from
liability (ReSA)
653
Special Laws
1.
2.
3.
The check is not presented within a
reasonable time after its issue;
The drawer suffers loss; and
The loss suffered by the drawer is attributable
to the delay. (De Leon, 2010)
2.
Q: X and Y are disputing over a property. To
settle the dispute, they entered into a
compromise agreement by which they agreed
to have the property in dispute be sold. X
bought the property and delivered a
manager’s check to Y. Y refused to accept the
same, hence it was consigned with the court. Y
later accepted the check and three years after
acceptance, he filed an action alleging that the
check payment did not amount to legal tender
and that he never even encashed the check. Is
the contention of Y tenable?
PRESENTMENT FOR PAYMENT
TIME
A check must be presented for payment within a
reasonable time after its issue or the drawer will
be discharged from liability thereon to the extent
of the loss caused by the delay. (Sec. 186, NIL)
Effect when a bank allows the withdrawal of
the value of a check prior to its clearing
A: NO. It is true that a check is not a legal tender
and while delivery of a check produces the effect
of payment only when it is encashed, the rule is
otherwise if the debtor (X) was prejudiced by the
creditor’s (Y) unreasonable delay in presentment.
Acceptance of a check implies an undertaking of
due diligence in presenting it for payment. If no
such presentment was made, the drawer cannot
be held liable irrespective of loss or injury
sustained by the payee. Payment will be deemed
effected and the obligation for which the check
was given as conditional payment will be
discharged. (Pio Barretto Realty Development Corp.
vs. CA, G.R. No. 132362, June 28, 2001)
Q: Ofelia Camacho Cheah accommodated a
friend’s friend to deposit and encash a check
issued by the Bank of America. The check was
deposited to Ofelia’s account in PNB. A US
dollar denominated check is normally subject
to a 15-day clearing period. However, 12 days
after the check’s deposit, the bank informed
Ofelia that the check was cleared and credited
to her account. Hence, Ofelia immediately
withdrew the check’s amount and the
accommodated friend was able to take entire
amount. It was only days after said withdrawal
that PNB was informed by its correspondent
bank of the insufficiency of funds to which the
check was drawn. At that time, it was too late
to recover the money withdrawn. Is PNB liable
for the money lost on the said transaction?
Q: To ensure payment and as a business
practice, SMC required Puzon to issue
postdated checks equivalent to the value of the
products purchased on credit before the same
were released to him. Said checks were
returned to Puzon when the transactions
covered by these checks were paid or settled
in full. Puzon purchased products on credit
and issued to SMC, two (2) BPI checks to cover
the said transaction. During one of his visits to
the SMC Paranaque Sales Office, he allegedly
requested to see BPI Check No. 17657.
However, when he got hold of BPI Check No.
27903 which was attached to a bond paper
together with BPI Check No. 17657, he
allegedly immediately left the office with his
accountant, bringing the checks with them.
SMC sent a letter to Puzon, demanding the
return of the said checks. Puzon ignored the
demand hence SMC filed a complaint against
him for theft. The investigating prosecutor
recommended the dismissal of the case for
lack of evidence. On appeal, the CA agreed with
A: Yes. The payment of the amounts of checks
without previously clearing them with the drawee
bank especially so where the drawee bank is a
foreign bank and the amounts involved were large
is contrary to normal or ordinary banking
practice. Jurisprudence provides that when the
bank allowed the withdrawal of the value of a
check prior to its clearing, before the check shall
have been cleared for deposit, the collecting bank
can only ‘assume’ at its own risk that the check
would be cleared and paid out. (PNB v. Spouses
Cheah, G.R. No. 170895 & 170892, April 25, 2012)
EFFECT OF DELAY
1.
The indorser shall be discharged from
liability. (PNB vs. Seeto, G.R. No. L-4388, August
13, 1952)
The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay. (Ibid.)
654
Commercial Law
the prosecutor. Were the prosecutor and the
DOJ correct in finding no probable cause for
theft?
A: Yes. If the subject check was given by Puzon to
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title
to or ownership of the check was transferred upon
delivery. However, if the check was not given as
payment, there being no intent to give effect to the
instrument, then ownership of the check was not
transferred to SMC. (SMC v. Puzon, G.R. No. 167567,
September 22, 2011)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
655