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Commercial Law Review
Glenn Tuazon, 4-AAtty. Jack JimenezSY 2010-11
4 Quizzes (50 each) + MT (100) + Finals (100) divided by 4 = Final Grade
Part 1: Negotiable Instruments Law
HISTORY: contrast a negotiable instrument with a non-negotiable PN:o First objection: a person stepping into the shoes of the seller is
exposed otherwise to the defenses that the buyer may launch against the seller
Law’s solution – exempt from personal defenseso Second objection: “I don’t know the maker, I just know the one
negotiating it to me. How will I know he’s solvent?” Law’s solution – will make the indorser liable
regardless (Accumulation of secondary contracts) The more indorsers, the more you can sue
Two general parts in the law:o 1 – what makes an instrument negotiableo 2 – rights and obligations of parties
Two basic forms:o Promise to pay (PN)o Order to pay (bill of exchange)
If it does not comply with the requisites of negotiability, it is still a contract, but not covered by the NIL.
Either:o Payable to order – negotiated by indorsement, and deliveryo Payable to bearer – delivery is sufficiento N.B. If payable to a specific person, it is not negotiable
Four basic contracts involved:o 1. Makingo 2. Drawingo 3. Negotiatingo 4. Accepting
To show consento N.B. But for all, there must be delivery
Basic principles: NIL is for justice.o 1. Bad faith: So if a person is in BF, he cannot invoke
defenses. (Ex. Issued a negotiable instrument to pay for a car that is defective. The indorsee knows that the car is defective, he is in bad faith.)
o 2. Estoppel – ex. A father allowing a son to steal a check and forge his signature is estopped from denying it
o 3. Comparative fault If a bank honors a check with a forged signature, the
bank is considered negligent too But if the negligence of the drawer outweighs the
negligence of the bank, the law shifts the fault to the drawer
o 4. The law will only protect you from personal defenses if you are a holder in due course (Sec. 52)
Good faith With value Before overdue (see below) With no notice of defenses
o 5. General rule: there must be demand , before an instrument becomes overdue. Exception: If time is of the essence.
Ex. Reserve requirements of banks must be kept afloat, so overnight, banks sometimes transact with each other
“An overdue instrument is shouting to the high heavens – I have been dishonored!”
Requirements – found in Sec 1. 2-9 are elaborations of such.o 1a. It must be in writingo 1b. It must be signed – symbol of consent
If one signed another name or a symbol, it will bind him if he intended for it to bind him
Location is immaterialo 2a. Must contain a promise or order to pay
Need not use exact words, even equivalent words are fine
Creates a NEW obligation to pay, not a mere acknowledgement of an old debt
Exception 1: date of payment is mentioned, or at least, a date of maturity
Exception 2: insertion of “or order” (words of negotiability) in the old terms
Authorization to pay or a mere request does not create a binding obligation to pay.
o 2b. The promise to pay or order must be unconditional Do not look into evidence aliunde. You must confine
yourself within the four corners of the instrument to deem whether it is absolute.
Fall back on obligations and contracts – distinguish between uncertain events and certain events, although indeterminate (ex. Moment of death of mother-in-law)
o 2c. Sum certain, and payable in money Because it is meant to be a substitute for money Also, specify the denomination. Cannot just be a
number.o 3. Payable on demand or on a determinable future timeo 4. Payable to order or bearer
Need not use exact words But there must be reasonable certainty so people
know from whom they could demand payment Ex. instead of “order” pay to X or his indorsees;
pay to X or his assigns Ex. instead of “bearer” pay to X or holder; pay to X
or possessoro 5. Where the instrument is addressed to a drawee, he must be
named or otherwise indicated with reasonable certainty If name of the drawee is left blank, it is an incomplete
instrument which can be filled up as a remedy Most cases involve fraud, by taking advantage of the features of the
law. Sec 2: when a sum is certain
o Even when there is a stipulation of interest. It must be in writing.
o The stipulated rate controls – there is no more ceiling on interest rate. But it is unconscionable, it is void, and the rate is reduced to 12% (in circular 416).
o If there is stipulated interest, without a rate, 12% as well.o If payment is by installment, for the instrument to be valid, the
amount of installments must be indicated and the date of maturity of each installment is specified.
“Promise to pay Jose Cruz or order P100,000 in 10 installments.” not negotiable
You have to specify both AMOUNT and WHEN EACH is due. You cannot just give the starting point (ex. Nov 2005)
o If there is an acceleration clause – failure to pay an installment will make the entire balance due and demandable.
o It is now valid to stipulate payment in foreign currency.o If you talk about an exchange rate, you have to talk about at
least 2 currencies. It cannot be just one.o Under Civil Code, general rule is attorney’s fees are not
recoverable, except when there is written stipulation. Stipulating such makes the NI more attractive.
Ex. “I will pay reasonable attorney’s fees in case there is failure to pay” – is this a sum certain? Yes. Because you know how much is due at the date of maturity (it doesn’t matter what you pay after maturity). This is the reckoning point – at the date of maturity, is the sum certain? ALSO, stipulations on attorney’s fees is always subject to court control anyway.
Sec 3: promise is unconditionalo Instructions on how payment will be entered into the books of
account does not affect unconditional nature Neither does “reimburse yourself” affect TEST: it must indicate the source of reimbursement,
not source of payment. The latter is not negotiable.o Statement of how the original obligation came about does not
affect conditionality But it will become non-negotiable if mention of the
prior contract (ex. deed of sale) makes the NI subject
to the terms and conditions of the contract. This makes it conditional.
o Elizalde: Person bought cars. He issued a PN, secured with a CM over vehicles. The PN said that the payment is secured by the CM. It was negotiated to Elizalde by the car selling company. Elizalde sought to collect. Issue is whether the statement of security (CM) made it non-negotiable. HELD: Negotiable, because the promise to pay is still conditional, and is not dependent to the CM. Test: does the promise to pay rely on the terms and conditions of the security? If so, it is not negotiable. Else, it is negotiable.
o Abubakar: A Treasury Warrant is not negotiable. It is payable out of a particular fund, so you do not apply Sec. 66. “No money should be paid out of the Treasury without an appropriation for that purpose” (Constitution).
FACTS here: X deposited treasury warrants with a rural bank. The rural bank deposited with Metrobank. Even before the treasury warrants were cleared by the clearing house, Metrobank allowed withdrawal. The warrants were spurious. Metrobank is suing the rural bank to recover, since the rural bank warranted the treasury warrants by negotiating it to Metrobank. HELD: Metrobank is wrong, because the treasury warrants are not negotiable instruments.
o BUT a reference from which fund the obligation would be paid does not destroy negotiability if payment is not limited to come from such fund.
Sec 4; payable at determinable future timeo 1st situation: “Pay Jose Cruz or order… if the holder feels
insecure, he may demand that I post reasonable securities, and if I fail to do so, he can declare the entire balance due and demandable.”
One view: non-negotiable – because date of maturity becomes uncertain because holder can accelerate payment, and there is an additional undertaking other than payment of money.
Other view: negotiable – because the undertaking to put up a security is merely an accessory obligation. The date of maturity is not uncertain because
acceleration is within control of the maker; he can prevent it by complying with the additional security. (better view)
o 2nd situation: “same… if the holder feels unsecure, he can declare the entire balance due and demandable.”
It is not negotiable, because here, the holder has the absolute option to make the obligation due and demandable.
o Differentiate: When the maker may choose to pay before a certain
date, it is still negotiable (ex. “on or before June 15” maker can pay before June 15 at his option)
Effect: all other secondary contracts are discharged. It benefits everybody.
When the holder may absolutely choose to have the obligation due, it is not
Effect: everybody becomes secondarily liable by ripening their obligation. Thus, this is not valid.
o If hinged upon a contingency, non-negotiable even if the event or condition happens.
o Philippine Education v. Soriano: A money order is not negotiable, because although it says “pay to the order of,” under Postal Regulations, obligation to pay is conditional, depending on different grounds where the post office can refuse to pay. Also, it can only be indorsed once.
Sec 5: additional provisions that do not affect negotiabilityo GENERAL RULE: Other obligation or undertaking aside from
payment of money makes it non-negotiable (“secured by CM over my car, which I will keep in good condition”)
o EXCEPTIONS:o Authority for holder to foreclose pledge/CM or collateral
securitieso Authorizes confession of judgment if instrument not paid upon
maturity N.B. the SC said, however, this is a void stipulation
o Waiver of benefit of law Waiver of notice of dishonor
Waiver of venue Waiver of exemption from execution
o Holder can require something other than payment of money If option is upon holder to demand either cash or rice,
it is still negotiable because the holder can ALWAYS demand money
Sec 6: omissions which do not affecto 1. Not datedo 2. Failure to mention consideration
It is presumed in this contracto 3. Does not specify place where it is drawn or payableo 4. Bears a sealo 5. Designates currency in which payment will be made
Sec 7: When it is payable on demando Upon sight or presentationo Instrument is silent on when payment is madeo When it is overdue
As to the maker, he is discharged BUT as to the indorser, it is upon demand
Sec 8: When it is payable to ordero [It may be upon order of]o 1. Order of payee who is not maker, drawer, or draweeo 2. Drawer
Ex. Jose Cruz writing a check saying “Pay to the order of Jose Cruz” – this is better than making a check paid to cash, which anyone can encash if lost and found
In this example, it is not complete until Jose indorses it, because there has to be delivery (at least two parties to a contract)
o 3. Draweeo 4. Two or more payees jointly
Ex. Pay to the order of Jose Cruz AND Manuel Santos
o 5. One or some of several payees Ex. Pay to the order of Jose Cruz OR Manuel Santos
o 6. Holder of an office for the time being (ex. Treasurer of the city of Makati)
o If the drawee is not indicated with reasonable certainty, then it is not negotiable.
Sec 9: When it is payable to bearero 1. Expressed as such
Caltex: [unclear facts] Caltex required collateral for a credit line. Requestor had as security a time deposit (Security Bank). Caltex accepted it. [yada yada yada] Bottomline, requestor maxed his credit line and disappeared. Caltex and Security bank are in dispute. HELD: It says that the deposit is payable to the depositor, and the depositor is bearer. It is a bearer instrument.
[As explained by Phil. Law Library]: The Certificates of Time Deposit are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. (Caltex)
o 2. To person or bearero 3. Order of fictitious person
GENERAL RULE of the following three cases: there must be intent by the maker or drawer of the NI that the instrument be issued to a fictitious person (knowledge is paramount)
Weller and Martin: Either partner can sign or issue checks. X wanted to steal money from the partnership. He drew a check payable to a corporation where he was just the corporate secretary. He was just the corp. sec., and was not authorized to indorse; but he indorsed the check to himself nonetheless. Y, his partner, sued the bank for restoration of the amount. HELD: it is payable to bearer. The Drawer did not intend the payee (the Corporation) to get the proceeds of the check, EVEN
IF the payee actually existed or not. It fell under this provision.
Assume same facts. If, however, the company required two signatories to all checks, and X signed it with intent to steal, and Y signed it not knowing X’s intent, then it does not become payable to bearer. For the payee to be fictitious, both must have same intent.
American Sash: Had a payroll clerk, who prepares checks payable to employees. He then makes the officers sign the checks. Clerk padded payroll with ghost employees, had the officers sign the checks (the officers did not know that the employees didn’t exist), and the clerk collected money. Issue: is this payable to fictitious persons. These ghost employees did not actually exist. HELD: [N.B. first, the court found that there was forgery because the drawer did not know the payees were fictitious.] It was not a bearer instrument. The DRAWERS were the officers who signed the checks. Their intent controls. So the checks DID NOT become payable to bearer because they DID NOT KNOW that the ghost employees were not part of the payroll.
Rodriguez v. PNB: Employees of PNB formed a savings and loan association (SLA). Rodriguez spouses meanwhile, had current accounts with PNB. Whenever the SLA lends to members, it issues post-dated checks. But most of the time, the SLA does not have enough money. The borrowers thus endorse the checks to Rodriguez; in turn, Rodriguez rediscounts the checks (issuing checks lower than face value). The SLA has a policy: when a member has an outstanding loan, they cannot get another loan. So the officers who wanted to borrow more, to circumvent this, they made it appear that it is the other members who are borrowing. The SLA, in accordance with the usual procedure, issued post-dated checks to the “supposed borrowers” (but really
for the officers). The officers indorsed the checks to Rodriguez. Rodriguez issued discounted checks. PNB found out about this and closed the SLA account. Meanwhile, the checks issued to Rodriguez, which bounced because the SLA account was shut down – since the checks they issued were cleared, and the checks issued to them were from a closed account. Contention of spouses: How can PNB accept the indorsement of those checks, when the ones who indorsed were the officers and not the supposed borrowers. Contention of PNB: it is intended for fictitious persons, since there was no intent that they actually get the money (even if the supposed borrowers really exist). HELD: Rodriguez spouses won. For the checks to be considered as payable to fictitious persons, the fact must be known to the person issuing the negotiable instrument. Here, the Rodriguez spouses did not know that the supposed payees were not the real borrowers (when it fact it was the officers). PNB must reinstate the amounts to the Rodriguez spouses.
o 4. Name of payee is not name of existing person Classic example: payable to cash
o 5. Last indorsement is in blank
Sec 12: Ante-dating or post-dating does not affect negotiability Sec 13:
o When the date of acceptance is not inserted by the drawee, the holder may insert date of issue or date of acceptance
o What if he places the wrong date? If negotiated to a holder in due course, that is the
correct date as far as the holder in due course is concerned – even if it is not
Purpose: the law protects a holder in due course, who is relying on that date in good faith
o But what if the one who put the wrong date presented it for payment to the acceptor/drawee?
Not valid. Cannot claim.o SAMPLE QUESTION:
A check drawn by X says “Pay to the order of Y P10000 thirty days after sight.” It was accepted by E on Sept. 15, but did not date the instrument. Y negotiated it to Z, telling the latter that the instrument was accepted November 1. Z placed in the instrument this date.
Can he collect from E?o Yes, even if it is more than 30 days
from acceptance. Z is a HIDC and the Nov 2 date is true as to him.
If Y inserted the wrong date instead and did not indorse it to Z, can he collect from E?
o No. He is not a HIDC. Sec 14:
o When it is wanting of a material particular – the person possessing it has prima facie authority to fill up the blanks
CONTROLLING FACTOR: The blank or incomplete instrument must have been delivered with intent that the holder turn it into a negotiable instrument
o In a case, a person signed an instrument in blank and left it with the bank. The bank filled it up with an amount. What happens?
The amount inserted by the bank controls.o What are the two requirements for this instrument to be
enforceable? 1. It must be filled up in accordance with the authority
given to him 2. It must be filled up within reasonable time
o X gave a check with a blank amount to Y, telling Y that he should fill it up according to what X ultimately owes Y, but not over P50000. X owes Y P30000, but Y put P60000.
Can Y collect P60000 from X? No. It was beyond the authority given him.
Y indorsed the check to Z, a HIDC. Can Z collect P60000 from X?
Yes. The defense does not apply to him.o Case: X works abroad, but allows property to be rented out,
and the payments are deposited in an account. The husband (retired lawyer) however withdraws money from that account for his own support, to X’s ire. X asked her inaanak to hire a lawyer for this purpose. The inaanak hired a lawyer but subsequently terminated the services so she asked for a return of the acceptance fee. The lawyer said that he will return the fee in installments. X asked the inaanak to sign a piece of paper claiming that it was a “witness” signature that the lawyer will pay X back. But X actually made it appear that it was a PN where the inaanak promised to pay money to her five years prior, corresponding to the attorney’s fees. HELD: The court believed the contention that the inaanak never intended for the signature to be for a PN. There must be intent to leave a signature to make a PN.
Sec 15: incomplete and undelivered instrumento Will not be a valid contract in the hands of any holder, as
against the person whose signature was placed on the instrument prior to delivery (real defense)
BUT indorsers are liableo Ex. Left signed checks, and an employee took them and filled
up amounts. Incomplete and undelivered instrument.o Ex. Officers of country club went abroad and left signed
checks for payment of checks. Abusive employees put their own names and signed their own names. HELD: By pre-signing checks and leaving them with employees, it became possible for them to do this. The officers were negligent and shared in the loss (60-40).
Sec 16: Complete but undelivered instruments. o NI is incomplete until deliveredo Ex. You cannot sue if you hold checks that were not delivered
to you. You never acquired a right over them. BUT a HIDC will not be subject to this defense (Like
Sec. 14)o BPI Family Savings: BPI issued a check payable to City
Treasurer of Iloilo to pay for local taxes. They did not deliver it to the treasurer, and just gave it to the employee. The
employee used it to pay for somebody else’s local taxes. HELD: There was no payment because BPI never delivered it to the city treasurer, so BPI cannot claim to have paid.
o Associated Bank: Somebody was selling RTW clothes, and shopping malls (buyers) issued crossed checks. Somehow, the checks fell into the hands of someone else, who indorsed it to someone else, and were deposited to Associated Bank. The seller was wondering why she wasn’t being paid. [If you are legalistic, the RTW seller must sue the shopping malls, etc., because the checks were not delivered to her. In turn, the shopping malls, etc. must sue the drawee banks, and then the drawee banks sue Associated Bank why it cleared the checks. HELD: The SC allowed the RTW seller to sue Associated Bank directly because it cleared the checks. (Same in Westmont Bank case)
o It may be showed that delivery between immediate parties is conditional, or for a special purpose.
o Ex. A godson is taking the CPA test, but X is not in the Philippines. He gave P10,000 check on the condition that he pass the test. The godson cannot enforce payment on the check. BUT if the godson negotiates the check to a holder in due course, the law will protect the HDC.
Sec 17: Rule of interpretationo Words prevail over figures
Romero: Amount indicated in words is One Million Two Hundred Pesos. Amount in figures: 1,200,000. Balance in the account is 1,100,000. The check bounced. The words prevailed.
o Payment of interest Runs from date from instrument Or if none, date of issue
o Not dated assumed to be dated from time of issueo Written > printed provisionso If ambiguous whether a bill or note, the holder has the option to
treat it as eithero Ambiguous role of signature deemed an indorser
Because the indorser has the least liability among all characters in a NI
o If “I promise to pay” note is signed by two or more persons deemed solidarily liable
Sec 18 –o GENERAL RULE: person whose signature does not appear on
the instrument is not liableo EXCEPTIONS:
1. Duly authorized agent signing for principal 2. Forger liable for signature he forges 3. Signature in separate paper (“allonge”) because
the instrument has no more space 4. Estoppel 5. Signing under trade/assumed name 6. Instrument can be negotiated by mere delivery
Sec 19/20o To avoid liability as signing agent:
A) agent must disclose he is an agent B) disclose his principal C) he has authority
Minority/incapacity of corporationo Maker of a PN cannot refuse to pay to a holder on the ground
that the indorser is a minor. Neither can he raise the defense that the prior indorsee is a minor. ONLY the minor can raise the defense of minority, no one else.
o Can apply this principle by analogy to other incapacitated persons (Ex. corporation action ultra vires)
o Exceptions: 1. The minor actively misrepresented his age and it
appears that he is physically of such age 2. Minor kept fruits/benefits 3. Minor spent the money in good faith
Sec 23 – Forgery
o The person whose signature is forged did not give consent to the contract
Except when he is estoppedo There are different instances of forgery:
1. Signature is copied May be done by tracing.
Practices imitating a specimen signature 2. Fraud in esse contractus
Fraud in factum. Misled to signing instrument, not knowing it was a
negotiable instrument, when he thought it was something else.
3. Duress amounting to forgery It must be duress in the execution (ex. Grab the hand
of the intimidated), NOT duress in inducement 4. Fraudulent impersonation
In this case, in general, it is NOT a forgery The person to whom the note was given is presumed
to be intended to receive the note (because he knew the intended payee)
o Different situations: 1. Promissory note
A (signature forged by B)-B-C-D-Eo E cannot collect from Ao E can collect from B (forger)o E can collect from C, D as indorsers
(warranted the instrument) EVEN if it is a bearer instrument, then A (signature
forged by B)-B-C-D-Eo Indorsing an instrument that need not be
indorsed leads to a warrant of such [ORDER INSTRUMENT] A-B-C (signature forged by
D)-D-Eo E cannot collect from A or B (since it is an
order instrument, there is a cut-off to A and B, since C’s signature is forged)
o E cannot collect from C (no consent)o E can collect from D as indorser
A B or bearer-C (signature forged by D)-D-Eo NOTE: This is an instrument payable to
bearer; delivery is sufficient, no need for indorsement.
o Can E collect from A?
Depends. If E is not a holder in due course, A will claim that there was no delivery of complete instrument by B since C stole it from him
If E is a holder in due course, he may collect from A since it is payable to bearer
o Can E run after C? No, C’s indorsement was forged. Neither can he run after A or B,
because he cannot trace his right to them [cut off by the forgery].
He can run after D, because by indorsing the instrument (even if bearer), he warranted it.
o NOTE: if a bearer instrument is indorsed even if it is not needed, the indorser warrants the instrument as what it purports to be.
2. Bill of Exchange A. Drawer
o 1. Order Accepted Unaccepted
o 2. Bearer Accepted Unaccepted
A’s signature on an order instrument was forged by B and then indorsed to C-D-E. X accepted as drawee. Can E collect from A?
o No. No consent. Can E run after X?
o Yes.o Sec. 62, the acceptor admits the instrument
is genuine when he accepts and pays.o What is X’s remedy?
To sue B, the forger. Can E run after B?
o Yes. Forger
o Can E run after C and D? Yes. Warranted by indorsement
NOTE: If X did not accept, then he cannot be recovered from, because he did not accept.
o But the same answers apply for the others. NOTE: Apply the same rules on indorsement of a
bearer instrument if there was indorsement even if there is no need to do so, there is warrant of the genuineness of the instrument by the indorsers.
NOTE: If it’s a bearer instrument, even if C’s indorsement to D is forged, then the payee can still collect from A (because he just promised to pay the bearer). Remedy of the acceptor is to just run after the thief.
A issued a BOE payable to B or order. B C. D forged C’s signature D E. X accepted and paid.
X cannot debit A’s account, because A ordered to pay B or order. C did not order X to pay D. B’s order was cut off by forgery.
X can get money back from E because X only admits A’s signature is genuine (which it is), and not the indorsers.
E cannot run after A (cut off) or B or C. He can run after D, who forged.
A issued BOE payable to B or bearer. Indorsed to C. C’s signature was forged, indorsed to D, then E. X accepted the BOE. What happens?
X can debit A’s account because A promised to pay bearer.
X cannot get back the money from E. E is the bearer. C can run after D, the forger.
A issued BOE payable to B or bearer. Indorsed to C. C’s signature was forged, indorsed to D, then E. X did not accept the BOE. What happens to E’s claim?
Cannot go after X, did not accept. Cannot go after C, no consent. Can go after D, indorsed (warranted) Cannot go after B, cannot trace title to him since C’s
signature is forged.
Can go after A if E is a HDC. Cannot go after A if E is not HDC.
EXCEPTIONS to general rules:o 1. When there is estoppel (ex. father saying that his son’s
forgery of his signature was genuine)o 2. When there is unreasonable delay by the drawer in
informing the drawee about the forgery Drawer can check the statements sent by the bank to
him Test : If the drawer had acted quickly, would the
drawee have been able to stop or freeze payment? PNB v Quimpo:
o Left check book with his friend, who was in the car. The friend forged his signature in a check book left lying there. HELD: Not negligent; no reason to suspect friend of bad faith.
BPI v. Casa Montessori:o An external auditor was hired to reconcile records. He
managed to forge the signatures of the officers of Casa Montessori over a long time. Sued bank, which refused to reinstate the amounts. Bank argued Casa was negligent. HELD: An external auditor is not an employee. It is an independent contractor, so you cannot blame Casa for negligence in hiring an employee.
o Estoppel does not apply, because Casa had no way to know the auditor was stealing money, because he was precisely the one tasked with safeguarding the school records and comparing with bank records.
Cases on Comparative fault principle Security Bank v. Triumph Lumber:
o Robbers broke into Triumph Lumber. Check book was stolen, but triumph did not report it to the bank. Robbers were able to cash checks. HELD: Triumph was negligent for not reporting the theft.
o But JJ believes that the bank should have been held negligent for authenticating the checks.
MWSS v. CA:o MWSS did not have their checks printed by the central bank.
They had a private printing press print their checks. The
signatures of the officers of MWSS were forged. PNB paid them. HELD: MWSS must bear the loss for failing to exercise caution – did not ask printing press to surrender plates, account for spoilage, and MWSS did not examine the signatures in the bank returns.
Ilusorio:o Ilusorio was leaving for abroad and he left his checkbook with
his secretary, who he asked to reconcile bank statements. Secretary forged his signature. HELD: Ilusorio should bear the loss for his negligence. He trusted his secretary.
Gempesaw:o Gempesaw owes several groceries. She trusted a bookkeeper
blindly. When she ordered supplies, the bookkeeper prepared the checks, and Gempesaw signed the checks without verifying the statements. The bookkeeper was able to steal more than P1M. HELD: Negligent; did not confirm or examine the invoices, receipts, etc. before signing the checks used to pay the suppliers.
o Split accountability – 50-50 Province of Tarlac:
o Province of Tarlac had account with PNB. Province issues checks to the physician/head of the clinic. The cashier already retired, but he was still hanging around. Cashier was able to forge when he picked up the checks. HELD: Province was negligent, for allowing the cashier to pick up the checks even when he was retired, so he was able to indorse the checks through forgeries.
o Split accountability – 50-50 General rule:
o If the indorsement is forged, the collecting bank must return the money to the drawee bank
Basis: Sec 23 – because the payee did not indorse the check
This is NOT a case of negotiation, but presentment for payment. So you cannot use the “warranty argument”
Mellicor:
o Maasim forged endorsement of Mellicor, and then PNB presented check to HSBC for payment. The person was able to withdraw money for HSBC. Great Eastern sued for return. HELD: HSBC must return, because Mellicor (drawer) never indorsed the check. [?]
Ford Philippines:o Before, you file your ITR with the BIR. So the employee of
Ford was tasked to pay sales tax (P18M), made payable to a payee (for payee’s account only), which is the Insular Bank of America, the authorized collecting agent of BIR. The employee showed a fake BIR receipt (“See, I paid BIR na.”) to Ford. Instead, they deposited a worthless check with Insular Bank of America (not funded), which they substituted with the check issued by Ford Philippines. In their internal records, they made it appear the worthless check was deposited. Citibank honored the check. The person who deposited collected from Bank of America. Ford had to pay BIR again. They sued.
o HELD: Citibank must return the money to Ford, because Ford ordered it to pay the BIR, which Citibank disobeyed. It says “for payee’s account only” and there was no indorsement from BIR.
o Citibank was guilty only of negligence.o The bank manager (who was complicit) was criminally liable.o JJ doesn’t agree with the court as regards Insular Bank of
America’s liability.o Check: G.R. 121413 29 Jan. 2001
Price v. Nealo See Jack notes
PNB v. CAo See Jack notes, tooo Acceptor cannot get back the money, when it paid, because it
admits the genuineness of the signature of the drawer Four general rules :
o 1. A party whose signature is forged is not liable Unless he’s in estoppel
o 2. An acceptor who pays on a BOE cannot recover the money because he admits the genuineness of the signature of the drawer
o 3. A Holder in Due Course acquires good title if forged indorsement is not necessary for his title
(ex. in a bearer instrument)o 4. A person negotiating an instrument after forgery is liable
(due to warranties) Rules on clearing
o Checks are brought to a clearing house and are run through a clearing house. They check the magnetic strips on the checks. The amount will then be transferred to the collecting bank.
o Then the checks will be physically given to the drawee bank. The drawee bank has 24 hours to honor/dishonor the check.
o If it dishonors it, the drawee bank returns the check to the clearing house. The computer will return the amounts paid.
o Any return beyond 24 hours: time-barred. Here, the doctrine applies to the forged signature of
the drawer. BUT this 24 hour rule SHOULD NOT apply when it is
the payee’s or indorsee’s signature that is forged, because the drawee bank has no way to find out, until the drawer informs them.
But the SC wrongly applied the 24 hour rule to the payee’s forged signature.
o New rules (to prevent ping-pong of checks): If a check is dishonored, you can only present it one
more time. [Usual reason why one failure is allowed – drawn against insufficient funds]
What is the effect when the drawee does not return the check within 24 hours?
The drawee cannot ask the computer to reverse the entries.
BUT you are not precluded from suing to collect after. But since the computer cannot reverse, while you are litigating, you do not have the amount.
Consideration
Under the law, consideration is presumedo Travel Inc.: Travel agency sued on the basis of a bouncing
check issued by a guy bringing in passengers. The CA was wrong for asking the agency to prove the value of the ticket purchased. There is a presumption of valuable consideration, and that the check was for such amount.
Ex. in BP 22, there is no need to prove the check was issued for valuable consideration
In civil law, generosity, love, affection, etc. are valid consideration.o [Glenn’s note: Sundiang says love and affection, etc.
cannot be considered valuable consideration. But Jack says that a donation is a “simple contract” and the law simply requires consideration sufficient to support a simple contract. So love and affection is valuable consideration.]
Rule on holder for value vis-à-vis prior parties :o Rule: Where value is given for the NI, the holder is a holder for
value in respect to all parties who became such prior to [the time consideration was given]
o A issued a PN to B, but there is no consideration. B indorsed it to C for consideration. C, then to D. What is D’s status as holder for value?
D is a holder for value with respect to A, B, and C because C gave value. A and b are parties who became bound prior to the value given.
Rule on holder who has a lien on the instrument: He is a holder for value only to the extent of the lien.
o Company appealing a lost case posts supersedeas bond (ex. P500,000). Surety company asks for collateral (ex. cash, time deposit, money market placement, treasury bills, etc.)
o The surety company is a holder for value to the extent of P500K, even if the company issued a certificate of time deposit negotiable for P1M.
Absence of consideration is a matter of defense against a person not a HIDC (personal defense)
Partial failure of consideration is a proportionate defense. Somebody issued a check for P20000 for 10 sacks of rice. The check bounced. The seller however only delivered 5 sacks of rice. HELD: He can only sue for P10000
Want of consideration between drawer and payee cannot be invoked as defense of drawee who accepted a BOE (Cornell)
o A drew a BOE for the amount of P10M in favor of B, the payee, in exchange for 10 cars. B only delivered 5 cars.
o [Same facts] X, the drawee, did not accept. Can A launch the defense of partial failure of consideration against B?
Yes. Want of consideration is a defense against the payee.
o [Same facts] X accepted. Can X refuse to pay on account of partial failure of consideration?
No. The acceptor cannot use want of consideration as defense. By accepting, he admits authority of the drawer to draw the instrument, and that he will pay.
Accommodation partieso Signs as party but does not received consideration or value
therefore, from the underlying contract. Only lends his credit. Liable to a holder for value, even if the holder for
value knowing him as merely an accommodation party at the time that holder took the instrument.
o Ex. Some banks try to get borrowers to get surety companies to sign borrowing agreements. Surety companies charge premiums for signing as co-makers. The surety company, not receiving any part of the proceeds, is deemed an accommodation party.
Clark: But note that independent consideration for the surety/accommodation is not an absolute prerequisite. The consideration that supports the surety is the same consideration for the original obligation.
Jose:o Dispute over parcel of land. Decided to settle. The other
party’s lawyer, Beltran, helped settle by issuing a company check (check of a corporation, signed by the President, and countersigned by the VP). Mrs. Jose sued the corporation. HELD: Here, the issuance of the check was ultra vires. It was not pursuant to the corporation’s business. The client of Beltran was supposed to pay, not the corporation. Sue agents for acting in excess of authority. As a general rule: a corporation cannot be an accommodation party to an
instrument, because there is no business purpose to such [unless that is the business of the corporation].
Prudencio: (JJ doesn’t agree)o Construction project. Borrowed from PNB for working capital.
The bank required two other signors. The firm got the Prudencio spouses who issued checks. The project was failing. PNB agreed to release part of the security money to help the project. But the project died anyway. PNB sued Prudencio spouses. HELD: Prudencio spouses are accommodation parties. The court held that PNB is not a holder in due course, because it knew that the spouses did not receive consideration. When PNB released a portion of the money, it was in BF.
o JJ’s comment: the law says “Holder for value” not “HIDC.” You cannot claim PNB was in bad faith when it released the money because the project was already failing. PNB took a risk, rather than ensure the certain failure of the project, the released funds could have improved the project.
o Sec. 52: definition of HIDC – point in which a person must be is in GF is when he took the instrument. The release of the funds happened long after.
o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which makes accommodation parties liable to holders for value, then the Prudencio spouses should pay PNB because PNB is a holder for value!!!
Maniego:o X was exchanging a post-dated check for cash to the
disbursing officer of AFP. AFP asked Y, X’s sister, to sign as accommodation indorser. The check bounced. Y was acquitted for conspiracy charges, but was held civilly liable. Correct? HELD: Yes. That’s what an accommodation party is tasked to do – when the check bounces, she pays.
Negotiation
When a bearer instrument is indorsed although unnecessary, but it still ultimately negotiated.
o See Caltex case. When pledging a NI, there are no specific provisions. Fall back on the NCC. Must comply with
requirements of putting it in a public instrument and indorsement.
Indorsement must appear on the instrument itself.o Or to a paper attached to it
Indorsement must be of the entire instrument.o Indorsing only part of the amount will make it cumbersome.o Prohibited to indorse to 2 or more indorsees severally. Ex: A
check for P100K is negotiated to Jose Cruz for 50K and Manuel Santos for P50K.
o PARTIAL indorsement is treated under law as an assignment. It is subject to personal defenses.
o EXCEPTION: When it has been paid in part (ex. on installments)
Types of indorsements:o Special – specified person to whom it is being indorsedo Blank – does not name any person
Indorsement of an order instrument in blank can convert the indorsement into a special indorsement by writing his name
This ensures that the order instrument does not become a bearer instrument
Ex. A issued a PN to B or order for P10K. B indorses it to C, but in blank. What can C do?
C can insert “To C” over the signature to keep it an order instrument.
C CANNOT put “To C, waiving notice of dishonor.” The contract must be consistent with the tenor of the indorsement
Types of restrictive indorsements
Negotiability Passing of title
Consideration presumed
Defense available
Pay to Jose Cruz only
X Yes Yes X, because indorsee is a HIDC, defenses against indorser cannot apply to him
To Jose Cruz, for collection only (as agent only)
Yes, but subject to same restriction that he only holds it for collection
X, because the indorsee is a mere agent of the indorser
X, because there is no transfer of title
Yes, defenses against indorser can be raised against indorsee because he is just an agent
To Jose Cruz, as trustee for Glenn Tuazon (indorsee named as trustee)
Yes, but subject to same trust
Yes Yes, because there is transfer of title
X, because title transfers
Rights of indorsee in restrictive indorsement:o A) collect paymento B) bring action indorser could bringo C) transfer rights, if allowed to do so
Qualified indorsemento Done by writing ‘without recourse’ – although the instrument is
still negotiableo This can be done if the instrument will fall due for a long time
(ex. 5 years), and the indorser does not want to be insecure for such a long time.
o But qualified indorser still has some warranties under Sec. 65; Genuine as to what it purports to be
(ex. not forged or materially altered) Warrants his valid title All prior parties have capacity to contract That he is not aware of any fact that makes the
instrument valueless (ex. that the maker is insolvent)
o Ex. A issues a PN to B or order for P50K. B indorses to C, then C to D. D indorses to E “without recourse.”
Can E collect from D?
No. The indorsement is qualified. If A’s signature turned out to be forged, can E
collect from D? Yes. Because he warranted that the
instrument is genuine as to what it purports to be.
If D turned out to have forged C’s indorsement to him, can E collect from D?
Yes, more so. He warranted his valid title to E.
Conditional indorsemento The maker (or acceptor) may disregard the condition because
the maker made an unconditional promise to pay. The indorser cannot change the original obligation
o The maker can also say “let’s wait and see if the condition is fulfilled”
o If the maker pays, but the conditioned turned out to be unfulfilled after, the remedy of the conditional indorser to run after the indorsee to get back the money. The conditional indorser cannot run after the maker/acceptor because the M/A has every right to dispose of his obligation while he feels solvent.
Signing of an instrument payable to bearero [wait for discussion on Sec 65]o It can still be indorsed through mere deliveryo But the special indorser is only liable to those who can make
title through his indorsement Payable to two or more payees –
o All must endorseo But if they are partners, there is mutual agency
Instrument payable to cashier or fiscal officero Assumed that the instrument is payable to the corporation he
represents If name is misspelled
o Must indorse the instrument according to the misspelled name, because other parties will not know that there was a mistake made
o If he wants, after signing as the misspelled name, he can sign his real name, so it will appear wrong name indorsed to real name
Indorsed as an agento Must state that he is negotiating as an agent, and disclose the
principal, and that he is duly authorized If there is date attached to the negotiation
o Presumed to be correct, but rebuttableo If no date, the negotiation is presumed to have been done
before it was overdue Useful to establish HIDC
Indicates a placeo Law of that country will govern as to questions of indorsement
Not every restrictive indorsement will destroy negotiabilityo Only that in subsection A will destroyo Crossed check is still negotiable
Can strike out an indorsement not needed for his titleo Example – bearer instrument: can strike out indorsements B to
E If it’s an order instrument, can E strike out B?
No. Because it is payable to the order of B. You cannot take him out, or else, E cannot draw title to the instrument.
o ABCDE. E cancels the indorsement of C to D. He loses the right to run after C. D is also discharged, because D lost his chance to run after C.
oo RULE: The indorser who is struck out and ALL indorsers after
him are eliminated Ex. If there is indorsement from A to Z, and you
cancel C, persons C to Y are discharged. Instruments transferred without indorsement:
o Transferee will only step into the shoes of the transferoro So defenses against transferor apply to the transferee tooo But the transferee can compel the transferor to indorse it
BUT in determining whether he is HIDC, the reckoning point is that time of indorsement
Ex. Did not know necklace was fake at time of transfer; knew it was fake at time of indorsement = not HIDC
Indorsement to a prior indorsero A-B-C-D-E-Bo Can B run after C, D, and E?
No. Because they in turn can run after B too! There is compensation under law. The law will not
allow them to run around in circles.
Rights of the Holder
Rights of a holdero Can sue in own nameo Payment in due course discharges the instrument
Payment at or after maturity is in due course, and without notice his title is defective
Sec 52 – Holder in due course [very important]o Requisites:
1. Instrument is complete and regular on its face 2. Must have become a holder before it was overdue
and without notice of prior dishonor, if so 3. Took it in GF and for value 4. When he took, no notice of infirmity in instrument or
defect in title of the indorser This elaborates #3 Defect in title of indorser = if he took it
through unlawful means, illegal consideration, or negotiated it in breach of faith
Fraud ex. issuing it for a fake ring Duress ex. ransom money Unlawful means ex. stolen check Illegal consideration ex. issued for
marijuanao Rule on instruments payable on installments:
Status on payment Knowledge EffectAn installment has not Holder is aware HDC as to installments
been paid and there is no acceleration clause
not due on the face of the instrument
An installment is not paid and there is an acceleration clause (automatic)
Holder is aware Not a HDC
An installment is not paid and there is an acceleration clause (automatic)
Holder is not aware HDC as to installments not due on the face of the instrument
An installment is not paid and there is an optional acceleration clause
Holder not aware of the exercise of this option
HDC as to installments not due on the face of the instrument
An installment is not paid and there is an optional acceleration clause
Holder is aware of its exercise
Not a HDC
A holder must be aware that something is wrong, but chose not to investigate further as to not be a HDC. The test:
o Did he take it? Was is honest for him to take the instrument under these circumstances?
Gatchalian:o X issued a crossed check to Y, in order to buy a car from Z.
However, Y took the check and paid it to ABC hospital, and the value of the check was greater than his bill to ABC hospital (which gave change). X stopped payment. ABC sued X. X launched defense of failure of consideration.
o Issue: is ABC a HDC?o No. Since the check was crossed, it can only be deposited.
ABC should have inquired as to the title of Y, but it did not. Similar case: State Investment House and Bataan GENERAL RULE: If the checks are crossed, the taker
must inquire as to the nature of the indorser’s title Banco Atlantico:
o X paid Y a check, drawn against ABC bank. Y altered the amounts. Y deposited it in DEF (her bank). Y told DEF not to present the check for payment right away, even if it was already due, and to let Y to draw the amount anyway. The
alteration was discovered. ABC refused to pay. DEF sued to recover.
o Issue: is DEF a HDC?o No. The circumstances show that the check was already due
but Y asked DEF not to present it for payment yet. And DEF allowed Y to withdraw even if the check has not been cleared yet.
Mesina:o X left a cashier’s check (issued by ABC bank) payable to X’s
order. Y stole it and indorsed it to Z. ABC refused to pay. Z sued.
o HELD: Z was not a HIDC because Z refused to explain how the check was indorsed to him.
o JJ thinks it’s better to use forgery as the theory of this case. Y forged X’s indorsement. But the court used HDC anyway.
Stelco:o The claimant received a check that was not indorsed to it by
the payee, and the check had a notice of prior dishonor due to DAIF (drawn against insufficient funds). Claimant is not a HDC.
Salas and State Investment House (2):o In both cases there was lack or failure of consideration
between the maker/drawer and payee of the NI. In one case, it was merely issued as security, and in the other, the car delivered had the wrong chassis number. But in both cases, the payee already indorsed the check to another person. Those persons are HDCs and the defense of failure/lack of consideration does not vest.
May a payee be a HDC?o Yes, because the law simply provides “holder.” A payee is a
holder, too. (53) Negotiation of an instrument payable on demand after an
unreasonable length of time the holder is not a HDC.o Consider the nature of the instrument, customs, and particular
facts (54) A transferee who receives notice of infirmity before he has paid the
amount agreed for the instrument is a HDC only to the extent of the amount paid by him.
o Ex. X issued a post-dated check to Y with value of P100K, and X told Y to just pay him P80K right away because X could not wait for the maturity of the check. Y has only paid P40K so far. Then Y found out that the check was issued for a fake ring. The check was presented but it was dishonored. Y sued Z, the drawer. Can he collect?
o HELD: Yes, but only to P50K, since that is half the value of the check, and Y only paid half of the agreed consideration. He is a HDC only to the extent of half the check.
Rights of HDC:o 1. Sue in own name and receive paymento 2. Free from personal defenseso 3. May enforce payment against all parties liable thereono Exception: when he cannot recover full payment –
37 – restrictive indorsement [GT: I don’t know why.] Maybe JJ meant qualified indorsement under
38? 54 – notice before full amount is paid 124 – when materially altered, a HDC may still
enforce against the maker/drawee according to the original tenor of the instrument
General rule: the instrument is avoided as to those not party to the alteration or did not indorse it
o But not everyone can invoke real defenses against a HDC. For instance, an indorser warrants an instrument is genuine in all respects it purports to be. Also, an acceptor warrants the authority of the drawer to pay.
Personal defenses Real defensesThere’s a contract with some inequitable or iniquitous fact behind it
No contract because an element is missing; or void against public policy
Voidable contract Void contractEx: no consideration, undelivered complete instrument, acquired by force/illegal means, illegal consideration, negotiation in breach
Ex; material alteration (so the consent is not anymore to this instrument); undelivered incomplete instrument (no consent); forgery (no
of faith, mistake, ultra vires act of corporation
consent); minority (lack of capacity)
Not applicable to HDC Applicable to HDC
Personal defenses are available against a non-HDC. This does not mean the non-HDC cannot collect. It just means that personal defenses may be raised against him.
(58b) IMPT. Shelter Principle (GT)o What it simply says is that a holder who (1) derives title from a
HDC (2) and is not a party to the illegality or fraud has the same rights as the HDC as to the prior parties to the indorser, even if he is not.
o Ex. A was induced by B through fraud to issue a PN to B or order. B C, who was NOT aware of the fraud (HDC). C D who was aware of the fraud but not a party to it. What is the effect?
D is a holder in due course as to the parties prior to the indorser (A and B)
What if D indorses it to E, who is not an HDC? Since E derives title from D, who is not an
HDC, E does not have the rights of an HDC.o There can be no “curing.” So D can’t indorse the instrument to
F, an HDC, and have it re-indorsed back to him to “cure” his title. He resumes his position as not a HDC.
PRESUMPTION:o General rule – every holder is a HDCo Exception – if it is shown that the title of the negotiator is
defective, then the holder has to prove that either the holder or the negotiator is a HDC
o Exception to the exception – the exception does not apply to a party that has become bound to the instrument prior to the acquisition of defective title
Ex. A – B – C – D – E. D swindled C, then indorsed to E.
When E runs after A, he is not required to prove that he is a HDC because A was bound to the instrument before the defective title occurred.
Fossum:o X issued a check to Y, a HIDC. Y negotiated to Z, which was
not a HIDC (it was aware of the failure of consideration between X and Y). Z sued X to collect. X refused and raised personal defense of lack of consideration. What is the implication?
The burden of proof shifts upon Z to prove that either Z or Y is a HIDC. In this case, it failed to do so.
In this case, Z loses the presumption of being HDC because Y’s title, as negotiating party, is defective. Y has no benefit of the presumption because it is not a holder anymore.
Liabilities of parties
Party Obligations WarrantiesMaker Pay according to tenor 1. Existence of payee
2. Capacity of payee to indorse
Drawer If dishonored, and process of dishonor completed: 1. He will pay the amount to holder, 2. Or to a subsequent indorser who pays for it<But drawer may express stipulation limiting his liability>
1. Existence of payee2. Capacity of payee to indorse3. On due presentment, it will be accepted/paid according to its tenor
Acceptor Pay according to tenor of acceptance
1. Existence of drawer, 2. Genuineness of drawer’s signature3. Drawer’s capacity and authority to draw4. Existence of payee and capacity to indorse
Qualified indorser or indorser by delivery
1. Instrument is genuine and is what it purports to be2. He has good title3. All prior parties had capacity to contract
4. Has no knowledge of any fact that would impair the instrument<IF BY DELIVERY – warranties only extend to immediate transferee>
General indorser Either:1. Upon due presentment he will accept/pay according to tenor2. Or if DH, he will pay the amount to the holder, or to a subsequent indorser compelled to pay it
1. Instrument is genuine and is what it purports to be2. He has good title3. All prior parties had capacity to contract4. The instrument is valid and subsisting at the time of his indorsement
Liability of Makero Araneta: X issued a PN to Y. Y collected, by X failed to pay.
He lodged the defense that he used the money to pay for his sick daughter’s expenses, and his daughter is a beneficiary of a trust administered by Y.
o HELD: X must pay. He made an unconditional promise to pay. What he did with the money is none of the court’s business.
Liability of drawero Is merely secondary – liable only if the instrument is
dishonored.o He can put “without recourse” to limit his liability.o Cebu International Finance v. CA:
D issued a check to P, drawn against BPI. P presented for payment, and BPI debited D’s account. However, P was unable to receive the money because BPI withheld payment [pending investigation of some anomalies]. P sought to collect from D.
HELD: D must pay, even if his account has already been debited. He warranted that P will be paid, and if not, he will make good the check.
Liability of acceptor
o X issued a check for P4000 to Y. Y indorsed it to Z. Z altered the amount to P40000, and negotiated to H. H presented it for acceptance to E. E accepted it. For how much can the check be enforced against the acceptor?
View 1: P40000 because that is the tenor of the acceptance.
View 2 (better view): Acceptance is assent to the order of the drawer (132), which is just P4000. He did not consent to P40000, since there must be knowledge. (124) In fact, for a HDC, even if there is alteration, he can enforce payment according to the original tenor.
o Acceptor admits existence of drawer because without the drawer, the BOE cannot exist. He admits authority of the drawer to draw.
o Acceptor admits existence and capacity of payee to indorse, because the instrument is meant to circulate.
o Acceptor does not admit signature of indorser. Far East Bank:
o Someone wanted to buy jewelry in the amount of 200k. He had a draft for 300+K from Land bank. The jewelry store accepted the draft but set aside the jewelry. Deposited the check with account in FEB. Landbank paid. Being cleared, the jewelry store guy delivered the jewelry to the buyer, and even paid the buyer change for the 100K difference. Later, Landbank told FEB that the amount was altered from 30 pesos to 300K. FEB returned the 300K to Landbank and debited the account of the jewelry store. FEB sued for the difference against Landbank.
o HELD: FEB cannot collect. The provision on acceptance applies to payment. Since the tenor is that it is for 300K pesos, Landbank bound itself to pay that amount. FEB should not have returned the money to Landbank and debited the account of the jewelry store. [Huh? Read again.]
o JJ: the better view might be that a drawee who pays/accepts a draft must be bound to pay the higher amount –
Acceptance is always inseparably linked to the order.
Sec 61. Sec 139 – acceptance assents to the order of the drawer. There is nothing said that the acceptor warrants that the amount accepted is the same tenor of the bill, as drawn. Consent should imply knowledge.
If the acceptor was deceived, it should not be bound to an amount not in the original tenor.
“The acceptor cannot recover the amount from the payee on the ground that the drawer’s signature is forged.”
Sec 64 – irregular indorsero He signs in blank before delivery. Is actually an
accommodation party Must be an additional party (not a regular party –
signing again will not increase the credit value of the check)
o A – (X irregular indorser) – B – C – D – E: X is liable to B, C, D and E. RULE: liable to all subsequent parties. (If payable to
the maker or drawer or bearer, he is liable to all parties subsequent to the maker or drawer)
What if X indorsed for the accommodation of B? X is liable to C, D, and E. If for the accommodation of the PAYEE
(example if here, for the accommodation of B), he is liable to all parties subsequent to the payee.
o He is called such because you would normally expect the payee as the first signature there. But here, the irregular indorser’s signature is found there first.
o P v. Maniego: accused had his sister indorse a stolen check before the payee did. The law says…
Sec 65 – warranty where negotiation by deliveryo See the list of warranties in the law [see table]o Person negotiating by delivery – only liable to the person to
whom he delivered the instrument. Not liable to subsequent parties
o Unlike a general indorser, a qualified indorser does not warrant that the instrument will be paid. He is liable only if the maker or acceptor is insolvent and he is aware of that fact (since here, there is a breach of warranty).
o NOTE: SO IN GENERAL, a qualified indorser or one negotiating by delivery DOES NOT ANSWER FOR SOLVENCY. It only warrants the four listed warranties and is liable for breach of such. Examples:
Breach of warranty 1: the instrument is forged Breach of W2: He stole the NI Breach of W3: Prior party is a minor Breach of W4: Knew that M/D was insolvent; or that
there was failure of considerationo Underlying this principle same as Statute of Frauds. An
undertaking to answer for the debt of another must be in writing to be enforceable. He must be only liable to the person he dealt with
Sec 66 – liability of general indorsero Same as first 3 warranties of qualified indorsero Last – he warrants that the instrument is valid and subsistingo If maker is insolvent, even if the indorser was not aware, he is
liable.o Chartered Bank:
X deposited (through indorsement) a check with ABC bank, drawn against DEF bank. X was able to withdraw money although not cleared. Eventually, the check bounced. ABC asked for return of money.
HELD: X must pay. When you indorsed, you warranted. If for any reason (whatever reason) the drawee does not pay, you are liable.
o BPI v. CA: Somebody had a manager’s check purportedly issued by American bank payable to cash. But he did not have a dollar account. Asked a friend if he could accommodate him – have the check deposited in the friend’s dollar account. Deposited the check there. They agreed that after clearance, the first friend would withdraw. The friend gave the first guy a withdrawal slip duly signed. When the first guy returned,
although the check had not been cleared, BPI (deposit bank) paid. But American bank dishonored it. BPI sued.
HELD: The proximate cause of the loss is the bank itself. Why did it allow the first guy to withdraw when the bank was not cleared. The depositor even kept the passbook: did not give it to his friend.
o RCBC: There is a 45-day holding period if the check deposited is drawn abroad. But RCBC accommodates employees, allowing them to withdraw right away. The employee, a mother, received a check, and deposited. Bank required the employee to indorse the check as an irregular indorser. She was then allowed to withdraw. Some employee placed below the indorsement: “valid up 75,000 pesos only.” The drawee bank dishonored the check, since the indorsement was irregular. RCBC asked the employee to return the immediately withdrawn money.
HELD: RCBC cannot collect. The check was dishonored because of the partial indorsement made by its employee. This is why the American bank dishonored.
o Far East Bank: (see the details above) It is actually a case of restrictive indorsement (only for
collection). Sec 66 (general indorsement) is not applicable.
o Signature of indorser was forged. Payee presented the check for payment to the drawee. It was paid. Payee signed at the back. Then the forgery was discovered. Must payee reimburse drawee?
No. It did not indorse the check. The signature is to acknowledge payment.
o The law mentions that warranties of general indorser apply only to HDC. Should we follow this?
JJ doesn’t think so. Sec 67 – indorsed when not required incurs liabilities of an indorser
o Whether general or qualified Sec 68 – indorsers are presumed to be liable in the manner in which
they indorsedo Parole evidence however may be accepted to prove otherwise
o For example A B C, C can prove that while B’s signature appears first, C indorsed it to him
Sec 69 – indorsement by agento If he fails to disclose that he is just an agent, or fails to disclose
his principal, he will be liable as an indorser
Quiz up to section 69
Presentment for payment
Sec 70 –o Presentment for payment not necessary to charge the primarily
liable person Maker and acceptor If the instrument is payable in special place and he is
able and willing to pay there at maturity = such willingness is equivalent to tender of payment
What does this imply?o If the person primarily liable is there
on the place where it is payable on the stated time, holder loses right to recover interest due subsequent to maturity + costs of collection
o BUT he does not lose the right to get paid
o But for those secondarily liable (indorsers and drawer) – there is need for presentment for payment
What if the holder does not make presentment to the person primarily liable?
Those secondarily liable are discharged But he can still go after the person primarily
liable So, the bottomline: the instrument must be
presented for payment on date it is due to charge the secondarily liable persons – see Sec. 71 for special rules on when an instrument must be presented
o What is presentment?
Production of BOE to drawee for acceptance or payment, or acceptor for payment, or of a PN to the maker for payment
o What constitutes presentment? 1. Personal demand for payment 2. Readiness to present the note and surrender it if
paid [Step-by-step guide on presentment for payment]
o Step 1: Presentment for acceptance required if – 1. BOE is payable after sight, or acceptance is
needed to fix the maturity of the instrument 2. BOE expressly requires presentment for
acceptance 3. BOE payable elsewhere apart from residence or
place of business of draweeo OTHER OPTION – May choose to negotiate it within a
reasonable timeo Consequence: will discharge drawer and all other indorserso EXCEPTIONS – no need to present if/or treated as dishonored
if: 1. Drawee is dead, has absconded, fictitious, or lacks
capacity to contract 2. Presentment cannot be made even after
reasonable diligence 3. Although presentment is irregular, acceptance was
refused on some other groundo Step 2: Give notice of dishonor by non-acceptance to
secondarily liable persons EXCEPT, no need to give notice: if instrument was
made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented
AND will not prejudice rights of HIDC after omission to give notice of dishonor
IF foreign bill, Protest for non-acceptance or protest for
non-payment needed Except –
o 1. If instrument was made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented
o 2. Delay is excused for fortuitous circumstances
Except: will not prejudice rights of HIDC after omission to protest
o Step 3: Give notice of dishonor by non-payment to secondarily liable persons (if dishonored by non-payment)
See notes above EXCEPT: When presentment for payment is excused
– 1. Drawee is fictitious person 2. Presentment cannot be made even after
reasonable diligence 3. Waiver of presentment, express or implied
Sec 71 –o Instrument not payable on demand
Make presentment on date dueo instrument payable on demand
Must be presented within reasonable time from issue If it’s a BOE, you make it after a reasonable time after
last negotiation What does “negotiation” here cover?
o Negotiation for value, not negotiation for collection between banks
Sec 72 – when presentment is sufficiento REQUISITES:
1. Made by holder or agent 2. Reasonable hour on business day 3. At proper place defined 4. To person primarily liable
Is absent/inaccessible – to any person found in place where presentment is made
o There is a wife who presented a negotiable certificate of time deposit. Bank refused to pay her because they paid the
husband. HELD: it was not presented by the husband, but the wife. Bank should pay the wife.
Sec 73 – proper place for presentmento If there is a stipulation where presentment must be made, it
must be made there. o If none provided, but address of maker is stated, go thereo If none provided, to usual place of business/residenceo Wherever he may be found/last known place of
business/residence Sec 74
o NI must be exhibited to the person from whom payment is demanded
o So he can check genuinenesso This is why telephone as demand is not allowed o First Pacific (?) – Check negotiated by car dealer to financing
company. When the instrument not paid, company sued maker and indorser. Indorser said he was discharged because there was no proper presentment for payment. HELD: Letter of demand is not sufficient. Law requires that the instrument be shown to the maker. Therefore, presentment not valid and indorsement is discharged.
o Failure excused on two grounds: 1) Instrument was lost 2) payment refused on some other ground
Ex. no funds, and not because it was not shown
Sec 75o Presentment where instrument payable at bank – must be
made during banking hours. Law assumes that the bank will be the source of the funds.
o But if presentment is made beyond banking hours, it is valid if the funds will not come from the bank, as long as it falls on the date of maturity.
Sec 76-78o Applies when principal debtors is:
Dead Liable as partners Liable as Joint debtors
o If there is an address stipulated, pay there.o If dead, give to executor/admin
If there is one, and he can be found with reasonable diligence
o If partners, to any of the partners Even if dissolved already
o If joint debtors, to all of them When presentment is not required to charge those secondarily liable:
o DRAWER – presentment not required to charge the drawer when there is no reasonable expectation that the drawee or acceptor will pay the instrument
Ex. knows there are no funds or there is stoppage of payment
o INDORSER – when instrument was made/accepted for indorser’s accommodation, and indorser has no reason to expect it will be paid if presented
Fortuitous event – excuses delay in presentment Presentment for PAYMENT excused if:
o 1. Cannot be done even after reasonable diligenceo 2. Drawee is fictitious persono 3. Waiver of presentment – express or implied
When is an instrument dishonored by non-payment?o 1. Duly presented for payment and payment is refused or
cannot be obtainedo 2. Presentment is excused and it is overdue and unpaid
What is the effect of dishonor by non-payment?o Under the law, the moment it is dishonored, there is
immediately a right of recourse against those secondarily liable. NO NEED to go to the primarily liable.
Sec 85o If payable in a fixed period, it must be paid on that dayo If on a Sunday or holiday, then go to next business dayo If on a Saturday
On next business day. Because even if some offices hold business on Saturday, they are usually half day. The law wants a whole business day
Except instruments payable on demand can present before 12 noon, Saturday, if it is not a holiday
o Contrast: Ex. Payable on Friday. But it was declared a public
holiday. So it becomes Saturday. But the law says present it on next business day. So Monday.
Ex. BUT if it is payable on demand – then the maker/acceptor MUST pay provided it is presented on working hours of Saturday.
Sec 86o Time – exclude first day, include last day
Sec 87 – when instrument is payable at a banko Implied: that it is an order to the bank to pay for account of the
principal debtoro First National bank: PN payable at FNB. Maker had sufficient
funds. But holder did not show up at day of maturity. Dilly-dallied – then the maker became insolvent. Had he shown up by then, he would have been paid. HELD: No. The fact remains that he is the maker, so he is primarily liable, and should pay.
o N.B. Remember, failure to make proper presentment only discharges those secondarily liable. The primarily liable person is still liable, although the holder may not claim interest subsequent to maturity and costs of collection.
Sec 88 – Payment in due courseo 1. At or after maturityo 2. To the holdero 3. By the debtor, in GF and w/o notice that the holder’s title is
defective
Notice of dishonor
Sec 89 – dishonoro Give notice of dishonoro Any party may be compelled to pay it to the holder with right of
reimbursemento A B C D E
D giving notice to B will benefit E
o Notice given by a holder benefits all subsequent holders and prior parties that have right of recourse against the one given notice against
o Notice may be given by holder himself or agent of the holder. Sec 90 – Who can give notice of dishonor
o 1. Holdero 2. Agent of holdero 3. Party to the instrument who may be compelled to pay the
holder, but only to those other parties he may seek reimbursement from
o 4. Agent of such partyo What about strangers?
Cannot give notice, except as agentso Who is considered a stranger?
Party discharged from the instrument Person primarily liable who dishonored the instrument
Sec 91 – o Notice may be given by a party or an agento Agent need not be authorized by the party
Because this is beneficialo If the agent wants to give notice, on a instrument dishonored
on Monday, two options: A) notify principal
On Tuesday Principal has until Wednesday to notify
secondarily liable parties B) notify parties who are secondarily liable
o If agent receives notice of dishonor, he must be authorized Because this is prejudicial
Form of notice:o In writing or oral
As long as it sufficiently describes the instrument and indicates that it has been dishonored
Misdescription does not vitiate notice unless the party to whom it is given is in fact misled
o Personal or through mailo If written, need not be signed
In sufficient written notice may be supplemented by verbal/oral communication
Rule as to jointly liable parties:o If partners?
Notice to one is notice to allo If joint payees or joint indorsees who indorse?
Sec 68 treats them as solidarily liableo If joint drawers or joint accommodation indorsers, and
others not covered by 68? Give notice to all
Sec 103 and 104 – time within which notice must giveno Know the difference in rules where parties reside in the same
place (103) or different places (104)o SAME PLACE:
1. If given at place of business – before close of business hours the next day
2. If given at residence – before usual hours of rest the next day
3. If by mail – sufficient to reach him the next dayo DIFF PLACES:
1. If by post office – in time to go by mail the next day; if no mail at a convenient hour that day, the next mail
2. If not by post office – within the time it would have been received in due course had it been sent by post office
o N.B. This same time is counted again, after a party receives notice of dishonor, to give that party a chance to give notice to antecedent parties
What is the effect of miscarriage in mails?o Sec 105 – if notice was duly addressed and deposited in the
post-office, due notice is deemed giveno What is “deposit in the post office”?
Deposited in any branch of the P.O. Deposited in any P.O. box
Sec 108: WHERE notice must be sent – o 1. Post office nearest to residence or where he is accustomed
to receiving letterso 2. To place of business or residence
o 3. Place where he is sojourningo If notice is actually received, although not according to
these provisions, what happens? It is still valid
When can there be waiver of notice of dishonor?o 1. Before actual time for giving it comeso 2. Or after failure to give ito Can waiver be implied?
Yes. Who is affected by a waiver in an instrument?
o If written on the instrument – all the partieso If written over a signature – just that person
Waiver of protesto Includes presentment and notice of dishonor (steps to hold a
person secondarily liable) Sec 114 – when notice need not be given
o When the drawer and drawee is the same person Ex. manager’s check
o Drawee is fictitious person When is notice of DH not needed to be given to drawer?
o 1. Drawer and drawee are the same persono 2. Drawee is fictitious person or has no capacity to contracto 3. Drawer is the person to whom instrument was presented for
payment Ex. C went to the office of X, the drawee, but he was
not there. But R, the drawer, who was the office manager, was there. And the drawer dishonored.
o 4. Drawer has no right to expect that drawee or acceptor will honor
Ex. X withdrew her money from her bank account and issued a check to cover for expected proceeds of jewelry she had to sell. She failed to sell the jewelry. The check was in the hands of Y who had ABC investment house rediscount it. The check bounced. HELD: X had no right to expect the bank will pay because she withdrew all her funds.
o 5. Drawer countermanded payment Meaning, drawer stopped payment.
o N.B. In all these cases, the drawer KNEW that there was or would be dishonor.
When is notice of DH not needed to be given to indorser?o 1. Drawee is fictitious person or has no capacity to contract
and the indorser is aware of this fact upon indorsemento 2. Indorser is the person to whom presentment for payment
was madeo 3. Instrument was made or accepted for his
accommodation
Drawer IndorserDrawer and drawee same personDrawee fictitious or no capacity Drawee is fictitious or no capacity,
and indorser knowsDrawer is to whom instrument was presented for payment
Indorser is to whom instrument was presented for payment
Drawer has no right to expect it will be paid by drawee
Made or accepted for indorser’s accommodation (same principle: no right to expect it will be paid)
Drawer countermanded
If an instrument was not accepted, and notice of dishonor by non-acceptance is given, is there need to give notice of dishonor by non-payment?
o No.o What is the exception?
If it was accepted in the meantime. Failure to give notice of dishonor by non-acceptance does not prejudice
rights of a HIDC subsequent to the omission.o Ex. A drew a BOE payable to B. B indorsed to C. C presented
the BOE for acceptance to X. X dishonored the instrument. C did not give notice of dishonor to A or B. C indorsed the instrument to D, a HIDC. D will not be precluded by C’s failure to give notice of DH to A and B.
Discharge
How a negotiable instrument is discharged:o 1. Payment in due course by holdero 2. Payment in due course by accommodated party
o 3. Intentional cancellation by holdero 4. Any other act that discharges simple contract for moneyo 5. Principal debtor becomes holder of instrument in his own
right When person secondarily liable is discharged:
o 1. Discharge of instrumento 2. Intentional cancellation of his signature by the holdero 3. Discharge of a prior partyo 4. Valid tender of payment by prior partyo 5. Release of principal debtor, unless holder’s right of recourse
against secondarily liable party is expressly reservedo 6. By extension of time of payment or right to enforce
instrument Except if secondarily liable party assents Or right to recourse is expressly reserved
What is the effect of an absolute and unconditional renunciation?o A holder renouncing against prior parties terminates
recourse to that partyo If against primarily liable person discharges the instrumento But it does not affect subsequent HIDC . So if C renounces all
claims against A and B, then negotiates it to D, who is a HIDC, D is not prejudiced by the prior renunciation.
What is the form of renunciation?o It must be absolute and unconditionalo If it is merely oral and the instrument is not surrendered, the
renunciation is not effective.o It is not effective if not unintentionally, by mistake, etc.
What is the effect of a material alteration?o Discharges all parties not party to the alterationo Binds the one who made the alteration, those who assented,
and subsequent indorserso What is the right of a HIDC?
If he is not party to the alteration, he may enforce it according to the instrument’s original tenor
o What is a material alteration? 1. Date goes into the obligation 2. Sum payable, principal or interest into amount 3. Time or place of payment into enforcement
4. Number or relations of parties into obligation 5. Medium or currency of payment into amount
o A issued a PN to B for 4K. B indorsed to C. C changed the amount to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is E’s right?
Enforce the instrument for 4K against A or B Enforce the instrument for 40K against C (made the
alteration) or D (indorsed and warranted) Sections 48. 89. 122. 142. 186. 188. OTHER methods of discharge
o 48 – striking out indorsements (relieves that person and all those subsequent to him)
o 89 – those secondarily liable to whom notice was not giveno 122 – renunciation by holdero 142 – qualified acceptance by drawee discharges those
secondarily liable Unless they assent to it. Failure to dissent within
reasonable time is an assento 186 – stale checko 188 – holder of a check procures it to be accepted or certified
Acceptance
Acceptance – assent to order of drawero Must be in writing and signed by drawee
What if the drawee refuses to sign? If drawee refused to write and sign, holder
may treat it as dishonored What if the acceptance is written on a different
sheet of paper? It does not bind the drawee, except to
someone to whom it is shown and receives the bill for value upon faith thereof
NB: this applies when the bill exists as of time of acceptance
What if there is a promise to accept in writing? Deemed an actual acceptance in favor of
those who receive the bill for value upon faith thereof
NB: this applies for bills that do not exist yet when the promise is made (Ex. BOE pursuant to a LOC)
o Cannot be other than payment of money Must accept within 24 hours from presentment
o Acceptance deemed done on date of presentmento When is a bill deemed accepted?
Failed to act on it within 24 hours Does the drawee have a right to retain the
bill for the whole 24 hours?o No. The holder can ask for it back.
But the drawee will still have the rest of the 24 hours to decide.
Destroys the bill NB: destruction must be on purpose
o What are the special situations when can the drawee accept pa rin?
1. Before it is signed by the drawer 2. Even when it is incomplete 3. When it is overdue 4. Dishonored by prior non-acceptance or non-
payment What is the special rule if the bill was dishonored
by prior non-acceptance, but it was accepted thereafter?
The holder can consider the date of first presentment as date of acceptance
Kinds of acceptance:o 1. General
Includes local but not confined only at a particular place
o 2. Qualified Conditional Partial Local (ONLY at a particular place) As to time Only some of drawees, but not all
What is the right of parties as to qualified acceptance?
o Holder can deem it DH by non-acceptanceo If holder allows qualified acceptance, indorser and drawer
discharged Unless they assent Failure to dissent is assent
Presentment for acceptance
When is presentment for acceptance needed?o 1. Bill payable after sight or acceptance needed to fix maturity
of instrumento 2. Bill expressly requires acceptanceo 3. Bill is payable elsewhere than residence or place of
business of draweeo What about other cases?
No need for presentment for acceptance to render any party to the bill liable
What is the option of the holder?o Must present the bill for acceptance within reasonable timeo Or negotiate the bill within reasonable time
What is the consequence of failure to present for acceptance?o Discharges those secondarily liable
Time for presentment – same as presentment for payment Special rule when there is little time to present for acceptance
before presenting for payment, where presentment for acceptance is needed?
o Delay caused by prior presentment for acceptance is excused and does not discharge those secondarily liable
When is presentment for acceptance excused?o 1. Drawee is dead, has absconded, fictitious, lacks capacityo 2. Cannot make presentment even after reasonable diligenceo 3. Although presentment is irregular, acceptance refused on
some other ground What if a bill is DH by non-acceptance?
o Immediate recourse to secondarily liable parties avail; no need for presentment for payment
BOE
Can a BOE be addressed to more than one drawee?o Depends. If joint drawees, yes.o If alternative or successive, no.
When can a BOE be considered a PN?o 1. Drawer and drawee are the same persono 2. Drawee is fictitious person or has no capacity to contracto But can the holder treat it as a BOE still?
Yes.
Protest
Protest necessary for DH of a bill that on its face appears to be a foreign bill
Made by Notary Public or respectable resident + two or more credible witnesses
When must it be done?o Day of DHo If bill is noted in the notarial register, protest may be made
anytime Where?
o Place of DHo Except when expressly payable at the residence/business of
another person apart from the drawee What is protest for better security?
o If the drawee was adjudged bankrupt or insolvent, or made assignment for benefit of creditors – even before the bill matures
o Is this mandatory? Nope
o What is the purpose? To inform the drawer/indorsers that the drawee is
insolvent and therefore they should prepare to pay When is protest excused or dispensed with?
o Dispensed with – for same grounds notice of DH is dispensed with
o Excused – for fortuitous event When is protest also done?
o When bill is lost, destroyed, wrongly detained – protest made on copy/written particulars of the bill
Bills in set
Main Principle: each part of the bill, numbered and referring to the other parts, the whole of the parts constitute one bill
o [usually, it is done to ensure that bills can be collected from even if one part is lost in the mail or so]
o [So usually bills in a set are several copies of the same thing, sent separately]
What if different parts are negotiated to different HIDCs?o The one whose title accrues first is the true ownero But the one who gets acceptance or payment first is the one
who will be able to collect Indorser of two different parts is liable on every such part How should the drawee accept?
o Accept on any part, and on one part ONLY. If he accepts on multiple parts and these are severed, he is liable on all parts.
o If he pays and did not get back the part with the acceptance, and it once again falls in the hands of an HIDC, he can still be liable
Discharge of one part is discharge of all
Promissory notes and checks
Check – special kind of BOEo No need to present for acceptance – you can present them for
payment immediatelyo Rules on BOE apply to checks too, such as the 24 hour
acceptance rule. If you don’t return it in 24 hours, it is deemed accepted
Cashier’s and manager’s checks drawer and drawee is the same Memorandum checks just usually used as evidence of credit, by the
drawer who got goods. He usually redeems it for cash Traveler’s check you sign it twice (first as a specimen signature, and
second when paying. You present your passport too) Crossing a check has three consequences:
o 1. Can be negotiated only once
o 2. Cannot be encashed; must be deposited General – can be deposited in any bank Special – must be deposited only in that bank
o 3. To be a HIDC, the holder must inquire as to what purpose the check was issued for
STILL negotiable though If you attempt to encash it, and it is obviously denied, you cannot run
after the drawer because there is no proper presentment for payment Sec. 185 – provisions applicable to BOE are applicable to checks Case: Payee of a check presented a check in the morning, the bank
said the drawer had insufficient funds. Presented again in the afternoon, but the computers are offline, so the bank accepted it. Bank found out after and chased after the payee to recover. HELD: Sec 62 – by accepting, the bank admitted authority of drawer to draw.
Case: Customer bought manager’s check and asked that his account be debited to purchase it. The bank realized that it made a mistake because the account was actually closed. The customer already used the check to buy goods. HELD: It was a manager’s check so the store owner was a HIDC.
Certified checks:o Banks usually do not do this anymore
Check must be presented for payment within reasonable amount of timeo Banking practice: 6 months, or else staleo What happens when the check goes stale?
View one (2 cases): the obligation is discharged. Payment of an obligation with an NI – the obligation is discharged when there is encashment or the value is impaired due to the fault of the holder.
View two: the obligation remains because the drawer’s bank account was not prejudiced. And there was no loss caused by the delay. This will only happen if the bank becomes insolvent, that if the payee didn’t dilly-dally, he would have received money.
Sito: When the payee delays in presenting a check for payment, the indorsers are discharged, because they have an interest to discharge their potential secondary liability. Unreasonable delay will discharge them.
o So contrast the rules: the drawer will not be discharged; the indorsers will bes discharged
Letters of credit
Letter of credit – instrument issued by banks on behalf of a customer authorizing a beneficiary to draw a draft/drafts which will be honored upon presentation to the bank
o Must be drawn in accordance with the terms and conditions specified in the letter of credit
Purpose : to ensure certainty of payment Ex. ABC Company wants to buy chemicals from Dupont. But Dupont
has no assurance that when it ships chemicals, it will be paid. So ABC gets a letter of credit (LOC) with PBC. PBC then corresponds with a bank in the US (ex. Citibank) – PBC will transmit to Citibank the text of the LOC, through SWIFT. Dupont then finds out that when it delivers the chemicals, the bank will pay him. Since the bank is more trustworthy, Dupont is now willing to sell the materials.
o Dupont ships the chemicals to PBC. So when the bill of lading arrives, PBC will tell ABC Company that the goods arrived. PBC tells ABC Company that it will release the goods if there is a trust receipt arrangement between them. So the proceeds of the goods can be used to pay PBC if ABC does not pay.
o Dupont will not collect directly from PBC. Dupont will issue a BOE addressed to PBC, to pay it. Dupont then submits the bill of lading, delivery receipt, etc. to PBC as proof of delivery so that Dupont will be paid.
Transphil: Two types of LOCo Commercial LOC – issued as payment pursuant to contract of
sale The seller will be paid if the seller gives proof that he
complied with obligation to delivero Stand-by LOC
Governed now by UCP 600 (Uniform Customs and Practice for Documentary Credits). This is revised every 10 years or so.
There are 3 underlying contracts in a LOC:o COMMERCIAL
1. Application of customer for LOC – where customer undertakes that he will reimburse the bank when it pays the draft, and pays for bank charged
2. LOC – bank tells beneficiary that if it draws the draft, it will pay him after submitting documents
3. Underlying contract Independence principle (always asked in Bar)
o A bank which issued a LOC is obliged to pay the draft so long as the beneficiary submits the documents required by the LOC, without verifying if he actually complied with the obligation in the underlying contract
o “Banks deal with documents only!” They do not deal with goods nor are they required to examine them.
Something Fabric case: The beneficiary submitted the documents required, so the bank must pay. This, even if the goods delivered turned out to be fake.
o PBC v. Chua Tiep Seng: The bank does not guarantee the genuineness of the documents submitted to it. All that is required is the bank act in good faith.
o Distinguish between out and out fraud vis-à-vis failure to meet specifications:
In a landmark case by the CA of New York, instead of the seller delivering goods, he delivered rubbish. The court allowed the buyer to have a preliminary injunction to stop payment be issued because this involves out-and-out fraud.
However, if there is mere failure to meet specifications, you cannot enjoin payment.
o There was a case (Feati Bank) where somebody shipped timber to someone abroad. There was an agreement that payment is by LOC. Among the documents is a certification of the buyer that the goods delivered were the proper goods. The buyer collected the goods but refused to send the certification! HELD: The LOC requires buyer’s certification, so the bank need not pay. (This is a stupid move by the seller, because he is at the mercy of the buyer.)
o A seller can commit fraud by submitted forged or false documents. To combat this, the buyer may require a
surveyor’s certificate to examine the goods. But the seller may always give a fake one if he really wanted to defraud the buyer.
Interpretation of Letters of Credit – MUST BE STRICTo 1. Particular genus – If the LOC requires that the seller
submit an invoice for pine lumber, but the invoice states “pine timber,” the bank may refuse to pay
o 2. Quality specifications – If the LOC requires Italian marble and the document just says “marble,” the bank may refuse to pay
o 3. Misspellings – If the LOC requires noodles but the document says “woodles” the Bank may refuse to pay – who knows what a woodle is or could be.
When the bank discovers a discrepancy, what does it do?o It forwards the documents to the buyer and notifies the latter of
discrepancies it discovered. If the buyer agrees to waive the discrepancy, then the bank pays. If the buyer does not waive, the bank does not pay.
o Cojack: Buyer is a con artist, so it ordered 3M worth of bags from Cojac company. It opened a letter of credit, and the condition is that an invoice from “Cojack” be submitted. Cojac submitted an invoice, of course, without the misspelled K. The bank asked the buyer if he waives the discrepancy; the buyer refused. The bank did not pay. Later, the buyer just paid 1M to Cojac.
“Red clause”o A clause, usually written in red ink, where the beneficiary/seller
may get payment in advance, meaning, even if the beneficiary/seller has not yet delivered the goods to the buyer. This is usually because the beneficiary will purchase goods from a thirty party producer that does not accept anything but cash (hunters, lumberjacks, etc.). If the beneficiary does not deliver the goods, too bad. The buyer still bears the risk.
“Evergreen clause”o A provision that allows an expiring LOC to be automatically
extended for indefinite number of periods until the issuing bank informs the beneficiary of its termination.
o Ex. A foreign company not doing business here sues and asks for a provisional remedy. The court requires a bond, so the
company obtains one from a surety firm. The surety firm requires that the company open a stand-by LOC with a bank, which will pay the surety firm if the company is held liable. This LOC will most likely contain an evergreen clause, to keep renewing it until the case is over.
May the seller in the Feati bank case (where the buyer refused to issue a certification so the seller was not paid) sue the correspondent bank when it failed or advance funds?
o No. The correspondent bank cannot be sued unless it confirmed the letter of credit. It becomes solidarily liable.
Revocable, irrevocable –o Revocable: no need to notify the beneficiary, can be done
anytimeo Usually it’s irrevocable, for certainty of payment
Revolving letter of credito Automatically replenishes, whether per month, when the
amount is finished, or cumulative, etc. Nature of LOC – a contract between the customer who applied for it and
the bank, with a stipulation in favor of a third person An LOC is a primary, absolute, and unconditional obligation
o It cannot be affected by defects in the underlying obligationo Philamlife: X took a loan from ABC. ABC required X to open
a standby LOC from Z bank. Z bank issued the LOC, payable when ABC shows documents proving that X defaulted on the loan. ABC gave this document. Z bank, however, refused to pay the whole amount stating that X informed it that X had already made some payments, so these have to be deducted. HELD: Cannot do this! The LOC is a primary, absolute, and unconditional obligation. It is not an accessory obligation, so the defect in the underlying contract cannot affect it. If there really was overpayment, X just has to run after ABC.
Bank lien over applicant’s propertyo Usual stipulation in a LOC if the applicant has a deposit there,
too. In a case, where the depositor/applicant owed the bank for a LOC, but he also assigned the certificate of time deposit to a third party, who has the better right? HELD: The bank. It had a lien on the deposit.
Can there be enjoinment of payment in a stand-by LOC?
o 1) Proof of fraud is strong, 2) fraud must involve abuse of independence principle, 3) irreparable injury
Metro v. Daway: Case for corporate rehabilitation does not suspend payment from a stand-by LOC. It is a solidary obligation, there is no need to exhaust the resources of the applicant corporation that applied for the stand-by LOC.
Trust receipts
Trust receipt transaction (TRT) – transaction where;o The entruster, who has absolute title over the goods, releases
these to the entrustee (bank)o The entrustee executes and delivers a trust receipt, where:
(buyer) 1. He holds the goods in trust for the entruster 2. Sell or otherwise dispose of the goods 3. Turn over to the bank/entruster the proceeds of the
sale to the extent he is indebted 4. Or turn over the goods to the bank, in case unsold
Note: if the entrustee returns the goods, he does not incur any further liability. The entruster/bank then sells the goods
Allied Banking: X imported goods, and opened a LOC with ABC bank. When the equipment arrived, X took the goods from ABC and issued a trust receipt in ABC’s favor. X installed the goods in his factory. X failed to pay. ABC sued X for violation of PD 115. X claimed the goods were not covered because he did not sell nor manufacture/process them. HELD: The goods were covered. It says “sell or otherwise dispose.” “Otherwise dispose” covers the installed goods.
o “Otherwise dispose” can cover giving goods to a sister company
For estafa, there has to be misappropriationo Meralco/steel towers case: X fabricated steel towers (hired
by Meralco). X imported materials, which X received and gave a trust receipt to ABC bank for. X used the materials to build the steel towers. But Meralco hasn’t paid X yet, so X couldn’t pay ABC bank. ABC sued X for estafa. HELD: No estafa, no misappropriation.
o Another case: X could not sell the goods covered by the TR. X tried returning the goods to ABC, but it refused. HELD: X did not commit estafa.
Can the trustee execute a Chattel Mortgage over the goods covered by the TR?
o No. He does not have free disposition of the property. X purchased goods. Independent of this purchase, X applied for a
credit facility with ABC bank. ABC bank required X to sign a trust receipt for the goods he just purchased. HELD: This is invalid. The bank did not have any lien or title to the goods; they were purchased separately from the credit application.
TR can apply even in domestic transactions Nature of ownership/security interest – Vintola:
o X imported puka shells, covered by a trust receipt with ABC bank. X failed to sell the puka shells. X decided to return the shells and claim he is not liable anymore because X claimed ABC was the real ownership of the shells and X just held it in trust. HELD: X is wrong. ABC can still recover the money. A TRT is a security transaction, and the buyer is still really the owner of the goods; it just relies on a legal fiction to create a lien. ABC still has the right to recover the money; or it can sell the goods.
o PNB Case: The bank getting back the goods does not terminate the obligation. It just has a lien, and to realize it, the bank must foreclose – otherwise, it is pactum comissorium. The bank then returns the excess or runs after the deficiency.
Warehouse Receipts Law
When is a WHR negotiable?o If payable to order or bearero If payable to order or bearer, can one insert a stipulation
that it is non-negotiable? No. The stipulation is void.
When is it non-negotiable?o Not payable to order or bearer AND there is a large print,
usually in red, that it is non-negotiable
o What is the consequence of not doing so? If someone relied in GF that it is negotiable and acted
upon it, it will be treated as negotiable. What is the rule on duplicate WHR?
o Same as non-negotiable – if the holder though in GF that it was the original, he could sue the WHM for damages
What are the obligations of the WHM?o 1. Safeguard the goodso 2. Deliver the goods
To deliver
What are the conditions before the WHM delivers the goods?o 1. Holder pays the WHM’s lienso 2. If the WHR is negotiable, to surrender the receipto 3. Readiness and willingness to sign an acknowledgment of
receipt of the goods To whom must the WHM deliver the goods to discharge his
liability?o 1. Person lawfully entitled to the goods or his agento 2. Person entitled to delivery under non-negotiable WHR or
who has authority from the person entitled to delivery (SPA)o 3. For negotiable WHR, the person in possession
Rules on refusal to deliver:o 1. WHM cannot refuse to deliver the goods just because of a
third party claim But he may submit the situation for interpleader
o 2. WHM is excused for failure to deliver if he sold the goods to satisfy an unpaid lien
o 3. WHM is excused for selling perishable or hazardous goods What is the effect of alteration?
o Unlike in NIL, it does not discharge the WHM. The WHM is liable under the original tenor of the WHR.
What is the effect of loss of the receipt?o The claimant has to file a case in court and get a court order
telling the WHM to deliver the goods, after proof of loss. He also has to post a bond, in case the WHR falls in the hands of
a person who took it in GF and for value. The latter goes against the bond.
How does a creditor go about attaching/levying the goods covered by a negotiable WHR?
o Ask for enjoinment of indorsement or renegotiation of the receipt – have the WHR frozen or surrendered, so it doesn’t end up in the hands of someone who takes it for value and in GF. Until this is done, the WHM cannot be compelled to deliver.
The WHM in general, as a bailee, cannot claim ownership over the goods. What are the exceptions?
o 1. WHR negotiated to him, so takes the goods in his own righto 2. Has unpaid lien, so he foreclosed it and bought the goods
during auction What if the WHM delivers the goods without asking for surrender
of the WHR?o He is liable for damages to any person who takes the WHR in
GF and for value.o What if the WHM makes partial delivery of the goods?
He must cancel the WHR and issue a new one reflecting the balance of the goods, or indicate partial delivery on the receipt.
Again, failure to do so makes him liable to one who takes the WHR in GF and for value.
To safeguard
If the goods are lost, he is presumed to be at fault But not for fortuitous events What is the duty in keeping goods?
o He must segregate the goods belonging to different depositorso But he is allowed to commingle if:
It is stipulated It is customary to do so
What are the rules on commingled goods?o Each depositor gets a pro rata portion of the common mass
upon claimo What happens if there is partial loss?
INSURANCE
In general
Elementso 1. Insured possesses interest susceptible of pecuniary
estimationo 2. Insured is subject to risk of losso 3. As consideration, the insured pays premium
Someone organized a jeepney association. You give membership fees and if a driver gets into an accident, the association pays indemnity. Sued by Insurance Commission for not having license to do Insurance Business.
o Held: Was conducting insurance business without license. Al requisites concurred.
o Contra Maxicare: Even if all elements are present, but if primary purpose of contract is to provide services, then it is not an insurance contract. In Maxicare there is no insurance contract because physicians pay for the first six sessions of therapy after injury or loss, but the main purpose is to give medical services. But here, even if you did not get injured or sick, you can avail of medical checkup.
It is an aleatory contract.o If you don’t lose what was insured, there is no indemnity.
It is a personal contract.o It does not adhere to the property insured because the
personality of both parties is crucial and is the primary consideration for the contract.
Ex. teenagers will be charged higher insurance over cars.
o The buyer of a car, for instance, will only be insured if the insurance company allows for an endorsement of the seller’s insurance contract.
It is unilateralo It is only the insurer that has an obligation to perform (the
insured already paid). It is conditional What is the structure of the insurance code?
o Parties, elements of contract, form of the contract, performance of the contract (for what losses), special types of contract (marine, fire, etc.), regulation of insurance companies
You cannot insure the winning of the lottery. This is wagering.
Parties
Who can be the insurer?o One authorized by the Insurance Commission
Who can be insured?o Anyone except a public enemy
Citizen of a country with which the Philippines is at war with.
o Wenfeld: German company filed claim with Insurance Company, and the Philippines was under US at that time. The Germany and USA were at war (WWII) so the company cannot collect.
Sec. 8 – The mortgagor can sue the insurance company if it does not pay. If the mortgagor performs an act that prejudices, the mortgagee cannot collect.
o Ex. The Mortgagor brought fireworks to the building and it exploded. The mortgagee cannot collect.
o The mortgagor can have the mortgagee perform acts that benefit the contract
Insurable interest
Insurable interest over lifeo 1. Over own life, spouse and childreno 2. Over any person on whom he depends solely or in part for
education or support, or in whom he has pecuniary interest Ex. a key basketball player you signed for your team;
a concert impresario in an opera you organizedo 3. Any person with legal obligation to pay money to him, or
respecting property or services – whose death might delay or prevent performance
o 4. Any person upon whose life any estate or interest vested in him depends
Ex. You are a married couple allowed to stay in the family home as usufruct. They have interest to continue the life of their parents
Over propertyo MAIN DIFFERENCE: there must be a valid legal interesto The insurance cannot go beyond the value of the property
Whereas in life, you cannot put value over life of a person
EXCEPT: if there is a way to place pecuniary value in the life of the person.
o The interest must exist when the policy takes effect AND when loss occurs.
In life, need only exist when the policy takes effecto In life insurance, one can name anyone to be the beneficiary.
Only exception: you cannot name one to whom you are prohibited to make donations to
Ex. co-guilty party of adultery/concubinage You can insure anyone’s life, but you have to get his
consent + you must have insurable interesto Case: There was a couple that hatched a diabolical scheme
with an insurance company (in cahoots). Picked up a boy from the straits and adopted him, promised to raise him well. Then they insured his life, with themselves as beneficiary. But they were planning to kill him. The first boy disappeared. They did the same for a second boy and killed him. The second boy’s fingerprints did not match the first boy’s prints, so the insurance company did not pay. Then they were found out.
Insured can change the beneficiary UNLESS it was made irrevocable in the policy.
o If the beneficiary is irrevocable, can it still be changed? Yes. But if irrevocable, can only change beneficiary
with the latter’s consent.o Case: The father made the child an irrevocable beneficiary of
an insurance contract. The father wanted to revoke. The company said the child must consent. The father said he is the legal guardian anyway. HELD: father is wrong. He must go through guardianship proceedings to have another one make
the decision for the child. But how does he prove that revoking is for the best interest of the child?
When does the beneficiary forfeit?o If he causes the insured’s death.o EXCEPTIONS?
When the killing is lawful (ex. self-defense, the beneficiary is the executioner in death penalty)
o If killing is unlawful the benefits go to the estate of the insured (the beneficiary cannot benefit)
Insurable interest over property: o Filipino Merchant: The importer has insurable interest in
goods he is buying even if undelivered, because he can compel delivery. The seller also has insurable interest because he has legal title.
o Contractor: has insurable interest over the buildingo Mortgagee has insurable interesto Also, under the law, he bears the risk of loss prior to
completiono Lessor and lessee both have insurable interesto Mere possessor.
Harvardian Colleges was allowed to use a building by the owner, as a school. It insured the building. It caught fire. HELD: There was insurable interest.
o Inchoate interest founded upon existing interest Ex. stocks, which is based on subscription contract
o Partners, over the property of a partnershipo Carrier, over goods it is transporting since he will be liableo WH man, over goods for safekeeping since he will be liable
A mere contingent interest over something: - NOT insurableo Creditor with no collateral over properties of buyero Expectant heiro Fictitious contract of sale (completely simulated)
A person leases property. In the contract, it said that the lessor may shares of stock of a lessee… [See “chuck” case in transcript]
o Smuggled property – against public policy When must interest exist?
o When the policy takes effect and when loss occurs
o Need not exist in the meantime Ex. Owned a car, insured, then sold it. Then
repurchased, and then loss in fire.o A person mortgaged his building. The property had been sold
in foreclosure. Then it was lost by fire. He had no more right to redemption. HELD: Lost insurable interest.
o What if he still possessed the right of redemption? He still has insurable interest
For life: interest need only exist upon taking effect.o X insured his wife’s life. They annulled their marriage. But the
wife failed to revoke the insurance. X can collect. If you sold your car, if the buyer wants insurance, you have to endorse
the policy. Change in interest after the loss does not change indemnity. It is
already an accrued liability at this time. It is a chose in action. Change in interest in one or more listed things:
o Taxi company insured 20 units. Sold 4 of them. The insurance over 16 is still valid.
Change of interest in will or succession does not avoid insurance.o X insured Family Home against fire. X died and children
inherited. The house burned. The children can collect.o What if the children bought the house from the father
when he was still alive? Insurance does not transfer.
o X Y and Z co-owned a house. X bought Y and Z’s shares and became sole owner. The house burned. Insurance company must pay because X was part of the original insured.
Stipulation that there need not be an insurance interest for an insurance contract – NULL AND VOID.
Title IV – concealment
Failure to communicate what a party knows and ought to communicate Consequence: injured party can rescind Need not be intentional Requisites:
o 1. Party must have known the fact concealed Ex. he did not know he had cancer
o 2. Must be material to the policy
Test: the other party would not have entered into the contract had he known of the fact concealed
Or the conditions in the K would have been different Life insurance: usually involves failure to disclose
serious ailments Case: Couple got an insurance policy for their
mongoloid baby, but they did not say he was a mongoloid. HELD: concealment
There is a law prohibiting insurance companies from refusing to issue insurance to someone with AIDS, as long as he discloses that he has AIDS
Need not disclose very minor sickness/injuryo 3. Party must make no warranty of the fact concealed
In this case, if there was a warranty, the violation is not a concealment but a breach of contract
o 4. Other party has no means to ascertain the fact concealed Case; If a party discloses that he has been
hospitalized and gave the contact # of the hospital, the insurer’s failure to look into his records – there were means to ascertain the fact
If the agent commits a concealment, the applicant will be bound by that, the insured made the agent his own agent for the purpose of filling up the application form
There are matters the party need not indicate:o The inspectors went to the place and found that it was near a
squatter’s area. But the company issued a fire insurance policy anyway. A fire broke out. The insurance company cannot use the defense that it was near a squatter’s area, because it sent inspectors.
o Insured an oil tanker. Cannot use the defense, “why did you not disclose that there was a war in Afghanistan.” They should have known.
o Nurse with a personal accident policy. Insurance refused, saying that she did not disclose there was a problem with peace and order in Pampanga. HELD: Insurance company should have known it was the center of the HUK movement before.
Even if you die from another reason apart from the fact concealed, the company is still not liable because it wouldn’t have issued a policy.
Not required to disclose information of one’s own judgment. Can there be waiver?
o Yes. Either express (in the terms of insurance) or implied (as when there is failure to make follow up inquiries as to facts already communicated0.
Is there need to disclose nature or amount of one’s interest?o No. EXCEPT if one is not the absolute owner of the insured
property. Need not disclose matters which pertain to excluded or excepted risks.
o Ex. need not disclose that members of NPA are burning houses in their neighborhood if the fire insurance policy exempts rebellion/coup/etc.-related destruction
Misrepresentation
Statements made to induce the other party to enter into the contracto 1. Untrue statemento 2. With knowledge and intent to deceive; or stated as true
without knowing it to be true and which tends to misleado 3. Fact is material
Consequence – voidable at option of insurero But waived for acceptance of premium payments despite
knowledge of ground for rescission Misrepresentation as to the future is deemed a promise Can be written or oral Misrepresentation is not part of the contract. It is a collateral
inducement.o But it may qualify as an implied warranty
As a rule, parole evidence is not allowed to vary the terms and conditions of the contract. It may qualify an implied warranty. It is imposed by law.
A representation is presumed to refer to the date on which the policy goes into effect.
o If somebody applied to insure his vessel. Ex. voyage from Manila to Cebu. “Where is the vessel?” “It is anchored in Manila Yacht Club.” But it is actually in Curimao. However, when the policy takes effect and the vessel is in Manila already, there is no misrepresentation.
If the insured has no personal knowledge of a fact, he may repeat the information he has on the subject which he believes to be true
o There is a question in life insurance about medical history of the family. If one thinks his father died as a soldier, in action, when he actually died of AIDS, and he says the former.
o But if the info came from the insured’s agent, and exercise of due diligence was possible, he is liable for the truth of the statement
Representation is false if facts do not coincide with what was assertedo Test for defense: “substantially true” in every particular material
to the risko EXCEPT: Marine insurance – where what is required is the
exact and whole truth Ng Gan Zee:
o There is no misrepresentation because he relied on what the physician told him.
o “Have you ever applied for a life insurance policy and the application was rejected?” He said no. But before, he had an application denied, but then accepted on reconsideration. HELD: No misrepresentation.
Insured filled up the application form, the Insurance company said that they will only accept if the applicant is not more than 60 years old. He was more than 60 years old. Held: he wrote on the application form his date of birth, but the company still issued a policy. There was no misrepresentation.
“Do you take alcoholic beverages?” Applicant said no. But he has been drinking since he was 16. He died of liver failure – Misrep. But if he only drank small amounts on cocktail parties, it is not material. There is no misrep.
Application did not disclose incidents of defalcation by clients. There was another such case. Insurance company found out. Applicant claimed that the question asked whether there was criminal conviction. Insurer said that the application did not require that. The bank threatened to sue, but never did. [JJ’s stories]
Test of materiality – SAME AS CONCEALMENT.o If the other party would not have entered into the contract, or
under different conditions
Sec48(a) – action to rescind
If insurer has right to rescind, insurer must rescind prior to commencement of action on the contract
Tender of premiums and notice that the policy is cancelled before suit is deemed a rescission
Sec 48(b) – incontestability clause
If a life insurance policy has been in force for at least 2 years since first effect or last reinstatement – insurer is BARRED from questioning it or alleging misrepresentation or concealment, or deceit/fraud
o N.B. Really, what you are barring are defenses against fraudulent misrepresentation or concealment, but not anything else
Requisiteso 1. Life insuranceo 2. Payable proceeds upon deatho 3. In force for 2 years since issuance or reinstatement
In old days, there was no such clause. If the policy lapsed and was reinstated, the 2 year period will run again. BUT there are still defenses that can be invoked even in this period:
o 1. Claimant has no insurable interesto 2. Uncovered risks (ex. insured engaged in car racing)o 3. Policy lapsed and insured did not payo 4. Policy was entered into pursuant to scheme to kill insured
(“vicious fraud”)o 5. Someone substituted for the insured during medical test
This fraud is not barred by the clause – there is NO perfected contract with the insured because it was another person
o 6. If insured is riding in a plane and it is not a commercial flight (ex. 8-seater plane)
o 7. Entered into military without consento 8. Failure to furnish proof of deatho 9. Action not filed on time
If there is concealment or misrepresentation, insurance company is still liable even if the cause was not due to the cause concealed or misrepresented.
In one case, the insured died within two year clause. This was invoked by the insurance company. Beneficiary delayed claim after two years have lapsed. SC said that when the person died, there is no more policy; liability has accrued. So count from death.
o JJ agrees with the result, but not the interpretationo JJ: If the insured did not disclose that he had tuberculosis and
he died after, the beneficiary CANNOT delay claim to beyond two years and invoke the incontestability clause. THE LAPSE OF THE TWO YEAR PERIOD MUST HAVE LAPSED WHILE THE INSURED IS ALIVE. This is the proper meaning.
The Policy
Preliminary policy/cover noteo Has terms and conditions of policy that would have been
issued. Insurance company cannot collect separate premium on preliminary policy and actual policy.
o Common in car insurance and marine insurance But there is still some delay or information to be
determined (ex. looking for third-party liability in car insurance first [give to LTO the cover note] or looking for adequate carrier for goods for marine goods – since the policy depends on the state of the boat]
Law requires that policies are in printed form. It can’t be handwriting anymore. Before you issue a new policy, the terms and conditions have to be approved by insurance commission.
What is the rule on riders and additional attached clauses?o Does not bind insured UNLESS the descriptive name/title of
the rider or clause is mentioned and written on the blank spaces in the policy
What is the rule on additional riders or clauses issued after the original?
o Must be countersigned by the insured or ownero N.B. No need for signature of insured otherwise
If a cover note was issued within 60 days, the policy must be issued.o In marine insurance, this is a problem because 60 days have
lapsed but no vessel has been found by the exporter.o The law says if the cover note extends beyond 60 days, written
agreement of insured must be obtained.
NOW: there is a circular that allows cover notes to extend beyond 60 days.
Insurance proceeds applied exclusively to person in whose name or for whose benefit the policy is made
o Aboitiz: One vessel got burned in shipyard. Asked Cebu Shipyard to pay. Held; policy clearly mentions Aboitiz as sole insured. Cannot claim Cebu Shipyard is also insured. [?]
o If description is so general that it may comprehend any class or persons, only he who can show it was intended to include him can claim the benefit.
When does insurance taken by one partner or part-owner apply to the interest of his co-partners or co-owners?
o The terms of the policy must be applicable to the joint or common interest
Rules on interpretation: o If the provision is clear, there is no room to interpreto [SPACED OUT]o Tantoco Terminal: had two mills. Old mill was insured. When
the new mill was finished it was insured. The policy however mentioned the old mill. Burned. Insurer refused. HELD: Clearly they intended the new mill to be insured, not the old one even if the policy says otherwise.
o Fortune: HELD: Security guard and driver of armored van had possession of the money. They stole money. Insurance company refused to pay because it claimed they were not employees of the company, but the agency. HELD: The insurance company lost. The very purpose of the insurance is to insure against acts of those holding the money, which in this case are the two.
Open policy –o There must be a maximum amount mentioned. It is a
maximum liability of the insurer.o So there can be an amount mentioned, but you still have to
quantify the value within this amount. Valued policy –
o One expressing a policy that the thing be valued at a specified sum
o Marine policies are usually this
Running policy –o Successive insuranceso Ex. Goodyear, instead of getting insurance whenever it ships
tires to distributors, it gets a running policy that covers all of these
o In any case, it would have to notify the insurance company which would issue an indorsement, for it to be covered
What is the rule on validity of agreements limiting times for commencing action?
o In general, a clause in an insurance policy that action upon the policy must be brought upon by the insured within a certain period is valid
o But if the period fixed is less than one year from the time cause of action accrues, the stipulation is void (the period becomes the default 10 years, from a written contract)
In industrial life insurance – period cannot be less than 6 months from accrual of cause of action
o When does cause of action accrue? From rejection of the claim by the insurer, because
prior to this, there is no necessity to bring suit yet What if the clause says that action must be
brought one year from loss? It’s void, because you have to submit your
claim to the insurer first, and this takes time. The insurer might decide beyond one year sometimes. In this case, the action given to the insured will be less than 1 year from the time cause of action accrues.
o N.B. One year period to file a case is not like period for appeal. Asking for reconsideration from the company does not suspend running of the period.
(64) Non-life policies cannot be cancelled without prior notice and only for the grounds stated in law here
o 1. Non-payment of premiumo 2. Conviction of crime from acts increasing hazard insured
againsto 3. Discovery of fraud/material misrepresentation
o 4. Discovery of willful or reckless acts increasing hazard insured against
Ex. a bus company that always gets into accidents every week
o 5. Physical changes in property that makes it uninsurableo 6. Determination by Commissioner that continuation of policy
will place the insurer in violation of the code Ex. Maximum risk it can insure is 20% of its net worth
(Ex. 100M net worth, so they can issue up to 20M). It can issue policies beyond that but it must be reinsured.
Notice of cancellation:o Must be in writingo State ground for cancellationo State that if the insured asks for the facts as basis, the insurer
will discloseo * Prudent thing: to send by registered mail
(66) Insured in a non-life policy can automatically renew the policy as long as he is willing to pay the premium
o Unless 45 days before expiration of policy, the insurer informs him that it will not renew
If insurer does not do this, insured can renew as a matter of right
Policy written for term longer than 1 year, it will be treated as written for successive terms of 1 year
o Ex. construction contract requires policy covering the building as it is completed. There were 2 fires, and 3 years. It will be treated as if it is expiring at every anniversary of the policy.
Warranties
Express or impliedo Express – found in terms and conditionso Implied – imposed by law
Usually embodied in a ridero These riders, issued with the policy, need not be signed
What is the difference of warranties from representations?o Warranties are express and placed in the contract
o Representations are not written and are but collateral inducements
May relate to:o Past – ex. warranty that insured was never confinedo Present – ex. warranty that insured is in good healtho Future – ex. warranty in fire insurance that owner of property
will not store flammable materials When does non-compliance with a future warranty not avoid the
policy?o 1. Loss occurso 2. Performance becomes unlawfulo 3. Performance becomes impossible
Give an exampleo Somebody tried to insure his house for fire. Inspectors said his
neighborhood is not nice. Insurer said that it will insure, but insured must put up a firewall within 30 days. A fire razed his house in 10 days. HELD: the insurer is liable.
o Same if there is no cement availableo Or if it becomes unlawful
Violation of warranty allows the other party to rescind.o Can the insured argue that it is not material?
No. The fact that it is in the policy entitles the insurer to rescind. The basis is not materiality but breach of contract.
If there is a breach of warranty, and loss occurs EVEN IF not related to the breach of warranty, the insurer is not liable.
o Ex. cannot bring explosive materials into his house. He brought fireworks inside. His kitchen caught fire without relation to the fireworks. Insurer not liable.
o Because the risk increased regardless.o What is the exception?
When it is merely incidental to the business. For instance, placing alcohol to retouch the varnish of one’s insured furniture store does not breach the warranty against placing inflammable materials.
Another example, Qua Chee Gan, where there was gasoline in the warehouse for consumption of the owner’s car within 2 days.
Or mothballs in a drug store. Double insurance not just to those he acquired before but also the
future. Failure to give information is a breach of warranty.o X obtained fire insurance over his house with Insurer A.
He warranted against past and future double insurance. Then he obtained fire insurance over his house with Insurer B. The same clause is included. The house burns down. Is Insurer A liable? Is insurer B liable?
Both are not liable. There was breach of future double insurance warranty for contract A and breach of past double insurance for contract B.
Geagonia case: X insured his stocks in trade. Mortgaged them, and insured them again, where there is loss proceeds go to mortgagee. Fire destroyed the things. Insurer said X did not disclose second insurance. HELD: No need to disclose. Different interests involved. First goes to the mortgagor. Second goes to the mortgagee. It is not double insurance.
When is there a waiver by the insurer?o When despite knowledge of the breach, it accepts the renewal
premium Case on motor vehicle policies. X was issued an ordinary driver’s
license. Can only drive 4 wheeled vehicles. He drove a 10 wheeler. Vehicle involved in accident. Insurer not liable because X is not authorized to drive the 10 wheeled vehicle.
o Palermo case: ASKED IN BAR. Insurance contains provision that the driver must be owner or the third party authorized with valid driver license. Brought car to repair shop, and it was driven for a road test. Employees drove it for a road test. If it’s a third party driving [check?]
o Stokes [?] case: European driving with his own license (which is valid for a period, but not after).
…[spaced out] “Under influence of liquor” clause – no need to actually be drunk, as
long as he is under the influence Violation of material warrant entitles the other to rescind. Even if not
rescinded, it can be launched as defense by the insurer. When there is breach of warranty, it is presumed to be material. When there is breach of warranty without fraud, what is the rule?
o It only exempts the insurer from the time the breach occurred.
o Give an example. X obtained fire insurance over his house. Warranted
against storage of inflammable materials. On Sept 31, a fire broke out. On December 31 he stored inflammable materials (fireworks), then a fire broke out. The insurer is not liable for the Dec 31 fire, but is liable for the Sept fire.
o What if there was fraud, i.e. there were inflammable materials inside the house?
The policy doesn’t attach in the first place. [I give up. Not listening today. Just read transcript on breach of
warranty. Page 17-18 transcript] [The next day…] The insurer is not liable for loss caused by connivance of insured
o Ex. told someone to steal his car, sell parts, and claim insurance
Loss from unlawful act – not liableo Ex. committed arson
Loss in which peril insured against is only a remote causeo Ex. fire insurance policy covers store and stocks in trade. The
house across the street caught fire. Everyone congregated. While distracted, robbers broke into the store and stole the stocks in trade. Fire is just a remote cause.
Loss, the proximate cause of which is an excepted risko Fire insurance policies say that they do not cover loss due to
coup d’etat, rebellion, riots, etc. Loss where the insured is guilty of gross negligence
o SMC hired a shipping company to transport thousand cases of beer. Loaded on a barge. Towed by a tug boat. When the tug boat arrived, the SMC rep met the captain and told the latter that the boat should be moved to a safer place since there is a typhoon brewing. The captain ignored it and tied the barge to the wharf. During the typhoon the rope broke, the barge was cut loose. Claim against insurance – the captain was grossly negligent. There insurer is not liable.
Burden is on the insurer to prove that it is an excepted risko But for fire insurance, the burden is on the insured to prove
that it is not under an exempted risk
o Ratio: because the thing is in possession of the insured, so he can best give an explanation for the loss
o Radio Mindanao Case: [wrong interpretation of this rule] Fire insurance – notice must be given without unnecessary delay
o If reported an unreasonable time later – ex. 6 months – opportunity is gone
o Usually fire policies have a provision that claims must be filed within a certain time. Beyond that, barred.
o Look at purpose to give the insurer a chance to investigate the claim
When proof is required, insured is not required to give proof that stands in court
o Noda: police report should be sufficient Defects in the notice or substantiation thereof which the insurer didn’t
specify waivedo Because the insured is usually a layman
Delay in presentation of a claim/proof of loss is waived if the insurance company did not invoke that as a reason to deny the claim
If the policy requires a certificate, and the insured cannot produce it, it is enough to say that he cannot produce it not because … [eh] check section 92
o “I cannot submit the report not because the contents of the report are prejudicial, but because the investigator is abroad and cannot be found”
Double insurance
Requisites:o 1. Insured must be the same
Ex. mortgagor mortgagee – not the sameo 2. Several insurerso 3. Same subject matter
Ex. factory and stocks in trade – not the sameo 4. Same interesto 5. Risk is the same
Learn the rules on reimbursement
Reinsurance
Two types:o Treatyo Facultative – case by case
A reinsurer cannot intervene in the case of insurer and insured because the reinsurer has his own interest anyway
After first layer, the subsequent layers are called reprocession … Insurance is covered by the rule of blah blah blah fides Take note of the cut-through clause
o Insured can go straight to the reinsurero Ok in California, invalid in England
Marine insurance
Perils of the sea:o 1. Connected with navigationo 2. Unusual movement of the sea/windso Cathay: pipes arrived in rusty condition because it was stored
in the hull of sea. The insurer was liable because it was perils of the sea. WRONG! Because nothing was unusual
Barratryo Willful misconduct, not mere wrong judgment
Answers for general averageo Those who were saved will contribute to the general averageo Insurance policy will cover share in general averageo DOES NOT cover particular average
Ex. fruits became rotten due to nature of the fruits “Arrest of the vessel” covers order by administrative officials, and
does not cover arrest order of court DOESN’T ANSWER for perils of the ship
o Ship is unseaworthy Rule on concealment is stricter, because the ship is usually in the high
seas so the insurer is at a disadvantage – harder to inspect. Marine insurance – belief of a third person as regards what is material
o Ex. surveyor saying that the ship is not seaworthy MUST BE DISCLOSED – it is material
[On flag of the ship, etc. spaced outo Use of simulated papers, etc.]
o If the loss was not due to these, even if these were committed, the insurer is STILLLL liable
IMPLIED WARRANTIESo 1. Sea worthyo 2. will not deviateo 3. Will not engage in illegal ventureso 4. It will carry necessary papers if nationality was stipulated
Warranty of seaworthiness extends from the hull also that it is properly laden, and the complement of the vessel (master, etc.) is
If there are different portions of the voyage, it must be seaworthy in all such portions
Deviation o Check the three types of deviationso Check when it is proper to make deviations
Any other deviation is not proper Once the vessel deviates, even if it returns to the original route, the
insurer is exonerated. Loss is either total or partial
o Actual total loss actual loss of the thing Renders it valueless
o Constructive total loss is unique in marine insurance Abandonment is act of insured after constructive total
loss. He relinquishes his share to the insurer If damage is more than ¾ of value of property
insured, insured can declare constructive total loss Insurer is liable for those acts of insured in good faith
o Ex. salvor’s fee, repairs in GF If abandonment is proper but insurer refuses unjustly, Silence for unreasonable period of time = acceptance Marine insurer liable for all expenses (repairs, labor for recovery of
property, etc.) <READ TRANSCRIPT ON MARINE AND FIRE … no changes in the
law>
Motor vehicle liability insurance
“Third party” excludeso Driver, etc.
o Relative by affinity/consanguinity within 2nd degreeo Employee [see qualification]
Intellectual Property
Rights of intellectual creator exists from moment of creationo Even if you haven’t registered yet with the National Libraryo Unilever: Came out with an advertisement that is similar to
PNG’s prior commercial. Unilever said that PNG’s commercial is not yet registered with the National Library. But the law is clear – no need to register to have rights over intellectual creation.
Are email and letters also covered?o Yes. Any form of text is covered.
Even choreography, musical compositions, drawings, paintings, architecture, sculptures, computer etc.
Paglinawan: A dictionary can be copyrighted. He came up with a Spanish-English dictionary where he borrowed 87% of the entries. He argued that you cannot have a monopoly on words. Court held that the original writer used his judgment in selecting which words will be used.
Pilita Corales adopted A Million Thanks To You as her final song in concerts. In response, someone printed the word “thanks” a million times and it was not allowed to be registered because it is not an intellectual creation.
Are derivative works also created?o Yes, but you have to get the consent of the original creator.o Examples of these are dramatizations of novels, or
translations.o Or adaptations (ex. Miss Saigon, from Madame Buttefly)
What about compilations?o This involves judgment of, for instance, the best Filipino short
stories. So he has to get the consent of those whose stories he included in the compilation.
o And if someone else wants to make another compilation, he cannot use the same set of stories since these were chosen by the first compiler; unless, of course, he gets permission.
To be protected it must be original. This is the main principle. Plagiarism is different from infringement.
If the writer is anonymous, then it is the publisher that represents. But if the writer can still be identified (ex. Nick Joaquin as Quijano de Manila), then the writer still gives consent.
o If there are several writers and the parts are distinct, they only have copyright over the parts they prepare.
For DVDs?o The producer, music composer, director of photography,
screenwriter, author of the work on which the movie is based, etc.
o But for collecting, the producer has the right. If the work is done for hire or is part of his duties, then the employer will
own the copyright. Torrens system.
o If you sell, mortgage, convey your copyright, you must register it with the National Library to bind third parties.
Owner can object to the distortion of his work. Transfer of the work to new media will not violate… [?] How long do these rights last?
o Modern rights last up to 50 years after the death of the author.o They are not assignable.
The economic rights of author – need permission:o Reproduction or substantial reproduction (ex. photocopying an
entire book)o Derivative workso Public distribution or exhibition
Businesses started playing certain songs to drum up business. Technically, this is economic exploitation of the work.
The character Charlie Brown is copyrighted. So sporting goods cannot use Charlie Brown on their goods. Or a bakery cannot use Cookie Monster.
Some artist connoisseurs bought X’s paintings for a cheap price. Then they sold the paintings for a fortune when he became famous. What is X’s right?
o He must get 5% of the selling price.