Negotiable Instrument Sundiang Notes 2k

8/20/2019 Negotiable Instrument Sundiang Notes 2k

1/32

1 | N E G O T I A B L E I N S T R U M E N T S –

S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o

‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact

RECITATIONS AND LECTURE NOTES

FROM THE CLASSES OF DEAN JOSE R. SUNDIANG

SAN BEDA COLLEGE OF LAW

MENDIOLA, MANILA

I. GENERAL CONSIDERATIONS

Q: What is a negotiable instrument?

A negotiable instrument is a written contract for the payment of

money which complies with the requirements of Section 1, NIL; which by its

form and on its face is intended as a substitute for money and passes from

hand to hand as money so as to give the holder in due course the right to

hold the instrument free from personal defenses available to prior parties.

Q: What are the stages in the life of a negotiable instrument?

BILL OF EXCHANGE PROMISSORY NOTE

1. the mechanical act of writing

2. issuance, first delivery to the payee

3. negotiation, transfer from oneperson to another so as to constitutethe transferee a holder

4. presentment for acceptance, applicable only to CERTAIN TYPES ofbills of exchange, presentment to thedrawee in order for him to signify h isassent to the order of the drawer

5. acceptance or dishonor by non-acceptance*drawee either accepts or dishonorsthe bill

1. preparation and signing (writing)

2. issuance, first delivery to the payee

3. negotiation

4. presentment for payment ordishonor by non-payment

5. notice of dishonor

6. discharge

**presentment for acceptance is notnecessary in promissory notes becausethe drawer already knows that he isliable to pay, and his liability is primaryin character.

6. presentment for payment ordishonor by non-payment*drawee either pays the bill or refusesto pay it

7. notice of dishonor*in case of dishonor, notice ofdishonor is required to be given topersons secondarily liable, informingthem that the maker ordrawer/acceptor refused to pay oraccept the instrument

8. protest (required only for FOREIGNbills of exchange)

9. discharge

Q: What are the primary kinds of negotiable instruments?

1. Promissory Notes

2. Bills of Exchange

3. Checks

PROMISSORY NOTE BILL OF EXCHANGE CHECK

An unconditionalpromise in writing madeby one person toanother, signed by the

maker, engaging to payon demand or at a fixeddeterminable futuretime a sum certain inmoney to order or tobearer

An unconditional orderin writing addressed byone person to another,signed by the person

giving it, requiring theperson to whom it isaddressed to pay ondemand or at a fixeddeterminable futuretime, a sum certain inmoney to order or tobearer

A bill of exchange drawnon a bank, payable ondemand

Q: Are negotiable instruments legal tender?


2/32




No; they are not ‘fully guaranteed’ by the government to be

used for the payment of debts, as required by sec.52 of the new central

bank act. Also, art.1249, NCC specifically states that negotiable papers

and other mercantile documents do not produce the effect of payment

until they are encashed or when through the fault of the creditor, theyhave been impaired. (art.1249, NCC; sec.52,NCBA)

Q: What is the difference between a bill of exchange and a promissory

note?

BILL OF EXCHANGE PROMISSORY NOTE

- is in the nature of an unconditionalORDER

- signed by the DRAWER

- requires ACCEPTANCE beforepresentment for payment

- in the nature of an unconditionalPROMISE

- signed by the MAKER

- acceptance prior to presentment forpayment is not necessary

Q: Differentiate a bill of exchange from a check?

BILL OF EXCHANGE CHECK

-may or may not be drawn on a bank

-payable on demand or at a fixeddeterminable future time

-requires presentment for acceptance

-may or may not be drawn on a depositof funds

-death of the drawer does not revokethe drawee’s authority to pay

-always drawn on a bank

-always payable on demand

-presentment for acceptance is notnecessary in the case of checks

-drawn on a deposit of funds in thecustody of the bank

-death of drawer revokes the bank’sauthority to pay

-must be presented for payment withina reasonable time AFTER ITS LASTNEGOTIATION

-must be presented for payment withina reasonable time AFTER ITS ISSUE

II. NEGOTIABILITY vs. NON-NEGOTIABILITY

Q: What are the essential requisites of a negotiable instrument?

An instrument to be negotiable must conform to the following

requirements:

(a) It must be in writing, and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a

sum certain in money;(c) Must be payable on demand, or at a fixed determinable

future time;

(d) Must be payable to order or to bearer; and

(e)

Where the instrument is addressed to a drawee, he must be

named therein with reasonable certainty

(sec.1, NIL)

Q: How is negotiability determined?

1. By considering only what appears on the face of the

instrument

2. By ascertaining the presence/absence of the requisites

under sec.1, NIL

3. By considering the whole of the instrument

*NB: if what appears on the face of the instrument is

ambiguous, the provisions of Sec.17, NIL should be followed


3/32




Q: Does the phrase ‘a sum certain in money’ mean the same thing as a

‘certain sum of money’?

No, they don’t mean the same thing. ‘A sum certain in money’

refers to a fixed amount, whereas ‘A certain sum of money’ makes no

reference to a fixed amount.

Q: would an additional fee to the principal amount payable and stated

on the face of the instrument affect negotiability?

No, the instrument is still negotiable as per sec.2, NIL

Q: what are the requirements for the said installments?

1. The number of installments must be stated

2. The maturity dates for each installment must be stated

Q: Suppose the 2nd

installment’s maturity date wasn’t fixed?The instrument is still negotiable, the installment shall be

payable on demand

Q: the instrument says ‘I promise to pay Juan php100,000 from my salary

in san beda college of law’. Is it negotiable>

No, the promise is conditional (on the availability of funds), it

contravenes sec.1, NIL

Q: Is there a difference between the phrase ‘bearer, Juan dela Cruz’ and

‘Juan dela Cruz or bearer’? Yes, the former phrase employs the word ‘bearer’ as an

adjective, the latter, a noun. Consequently, the former phrase would

make an instrument non-negotiable.

Q: What is the difference between a negotiable instrument and one that

is non-negotiable?

*Refer to table contained in the notes on Summary of Doctrines,

pages 1 and 2

Q: What is the effect should the payee fail to give notice of dishonor to

an endorser?

The endorser is discharged

Q: Does sec.1(e) apply to a promissory note?

Obviously not. There is no ‘drawee’ to speak of, in terms of

promissory note

Q: Suppose the instrument gives the holder an option to require

something to be done instead of demanding payment in money, is the

instrument negotiable?

Yes, if the HOLDER is the one given the option. If, on the other

hand, it is the DRAWER/MAKER who can choose to do anything other

than pay the holder in money, the instrument is not negotiable.*see: sec.3(d), NIL

Q: When can we say that the instrument is still negotiable when it states

a source of funds for the payment of the instrument?

The general test is to ascertain whether or not the source of

funds so stated carries the GENERAL CREDIT of the maker or drawer. If

it does, the instrument is negotiable. If it does not, and it merely carries

the credit of a PARTICULAR fund, the instrument is no longer

negotiable.

*Recall: one of the essential requisites of negotiability is thatthe promise or order to pay a sum certain in money must be

UNCONDITIONAL

Q: If an instrument states a particular fund out of which reimbursement

is to be made by the drawee, is it rendered non-negotiable?

No, what renders the instrument non-negotiable is when the

fund for PAYMENT is particularly specified, not one for reimbursement.


4/32




There is a difference between a fund for payment and a fund for

reimbursement.

*Notice here that negotiability is NOT affected because the

order to pay is still unconditional. The drawee must pay, and then lateron reimburse himself. If there aren’t enough funds for reimbursement,

well that’s between the drawer and the drawee. The important thing is

that the obligation to pay the payee or holder has been met

unconditionally.

Q: When do we say that the sum payable is ‘certain’?

When the amount that is to be paid can be determined on the

face of the instrument in accordance with Sec.2, NIL

Q: when is an instrumentpayable on demand? (Sec.7, NIL)

Q: When is it payable to bearer? (sec.9, NIL)

Q: When the only or last endorsement is one in blank, what is the effect?

As per sec.9(e), NIL, the instrument shall be payable to bearer.

Q: Correlating sec.9(e) and sec.40, NIL, what conclusion can be drawn?

The cardinal rule in negotiable instruments: once a bearer

instrument, always a bearer instrument.

*If the only or last endorsement is an endorsement in blank, theinstrument is payable to bearer under sec.9(e). Sec.40, on the other

hand, states that ‘where an instrument, payable to bearer, is endorsed

specially, it may nevertheless be further negotiated by delivery xxx’. This

means that once an instrument is endorsed in blank, it becomes payable

to bearer, and even if a subsequent endorser endorses it specially, the

instrument is NOT CONVERTED into an order instrument, but remains a

bearer instrument which can ‘be further negotiated by delivery’.

Q: Who is a ‘holder’?

The ‘holder’ is a payee or endorsee in possession of the

instrument. Depending on the TYPE of instrument, the holder is–

1. A payee or endorsee who is IN POSSESSION of the

instrument, if the same is an ORDER instrument; or2.

The one IN POSSESSION of the instrument, if the same is a

BEARER instrument

Q: What is the difference between Negotiability and Assignability?

NEGOTIABILITY ASSIGNABILITY

Re: CONTRACTSINVOLVED

pertains to special kindsof contracts (i.e.: thoseinvolving negotiableinstruments or

documents)

pertains to all manner ofcontracts in general

Re: AVAILABLEDEFENSES

HDC is free frompersonal defenses

assignee is not immunefrom defenses betweenand among prior parties

Re: CAUSE FOR THECONTRACTS

cause is presumed cause is presumed

Re: LIABILITIES OFENDORSER

endorser is not liableunless there bepresentment forpayment/acceptance

Re: WARRANTIES a general endorserwarrants the solvency ofthe principal debtor

assignor does notwarrant the solvency ofthe principal debtor

Re: ACQUISITION OF ABETTER RIGHT BYHOLDER ORASSIGNEE

a holder may acquire abetter right than theprior endorser (i.e. as inthe case of a HDC underthe shelter rule)

acquisition of a betterright by the assignee isprecluded subrogation,the assignee merelysteps into the shoes ofthe assignor

Q: If there is no stipulation as to the time of payment, when is the

instrument payable?

On demand, as per sec.7, NIL


5/32




Q: If an instrument has a stipulation as to the CURRENCY which would

be used for payment, is it rendered non-negotiable?

No, by ‘sum certain in money’, sec.1 does NOT equate ‘money’

with ‘legal tender’. Parties can therefore validly agree that the ‘money’may be paid in currency other than pesos.

Q: Is the phrase ‘pay to X or order’ the same as ‘pay to the order of X’?

Not quite. ‘pay to X or order’ means that the instrument is to be

paid either to (a) X, the bearer or (b) to whoever X might want to be

paid (i.e.: his order). On the other hand ‘pay to the order of X’ does not,

at face value, include X as a payee but rather the person/s whom X might

order to be paid.

However, it MAY mean the same thing, if X intends to endorse

the instrument to himself, make it payable to himself. In that event, thedistinction between the two phrases disappears.

Q: If the instrument is ambiguous on its face or bears omissions, how do

we construe it?

In accordance with Sec.17, NIL

Q: If it is not clear whether the instrument is a bill or not, what can the

holder do?

The holder can treat the instrument as either one or the other

at his election (sec.17[e])

Q: Suppose there is ambiguity as to whether the instrument is a note or

a bill. What is more advantageous to the holder – to treat it as a note, or

as a bill?

As a promissory note, because of the primary liability of the

maker, and the relatively more expedient steps in obtaining the

discharge of the instrument

Q: May a holder treat a bill as a promissory note, even if there is actually

no ambiguity on the face of the instrument?

Yes, there are 3 instances when, despite the lack of ambiguity,

the holder may elect to treat a bill of exchange as a promissory note:

1.

When drawer and drawee are the same person (i.e.: in thecase of manager’s or cashier’s check);

2. Where the drawee is a fictitious person; or

3. Where the drawee does not have capacity to act

(Sec.130, NIL)

II. TRANSFER AND NEGOTIATION

Q: What is meant by ‘negotiation’?

The transfer of the instrument from one person to another soas to constitute the transferee the holder thereof (Sec.191)

Q: How is negotiation effected?

Depending on the type of instrument involved–

1. An ORDER instrument is negotiated by endorsement,

completed by delivery

2. A BEARER instrument is negotiated by mere delivery

Q: What is an endorsement?

An endorsement is a transaction effected by writing on theinstrument or on an attached paper thereto (i.e.: an allonge) of one’s

own name and signature, specifying to whom or to whose order the

instrument is to be payable (sec.30, NIL)


6/32




Q: What are the types of endorsements?

BASIC TYPES OF ENDORSEMENTS*see: sec.9(e); sec.40; sec.34, sec.35

1. SPECIAL -specifies the person to whom or towhose order the instrument is to be

payable-legal effect: for subsequentnegotiations, the instrument requiresthe endorsement of the person sospecified

2. BLANK -does not specify any person to whomor to whose order the instrument ispayable-legal effect: the instrument is payableto bearer (if it was originally an orderinstrument, it ceases to be payable to

order and becomes payable to bearer.After this, it REMAINS a bearerinstrument, even if a subsequentendorser endorses it specially)

**important:an instrument that STARTED OUT as aBEARER instrument may be convertedto an order instrument andreconverted again to a bearerinstrument; but once this is done i.e.:once an order instrument becomes a

bearer instrument , it stays a bearerinstrument. The only way to simplify itis that a bearer instrument may onlybecome an order instrument ONCE – that is, when it was originally made asa bearer instrument and subsequentlyendorsed specially. If it became abearer instrument because of anendorsement in blank, it can’t beconverted to an order instrument.Point of no return, reached.

OTHER TYPES OF ENDORSEMENTS*see: sec.36, sec.38, sec.39,

3. RESTRICTIVE-the endorsement either (a) prohibitsfurther negotiation; (b) constitutesthe endorsee the agent of theendorser; or (c) constitutes theendorsee a trustee; if it prohibitsfurther negotiation, the instrumentceases to be negotiable

4. CONDITIONAL-payment is conditioned by either thehappening or non-happening of anevent-legal effect: the party required to paymay disregard the condition and goahead and pay, however, the personwho is paid must hold the payment orits proceeds IN TRUST, and wait for

the event to happen or not. It does, ordoesn’t, the endorsee/trustee mustreturn the money or its proceeds.

5. QUALIFIED -the endorser negatives personalliability by writing the words ‘withoutrecourse’ or ‘sans recourse’ or othersof like import on the instrument-legal effect: the endorser becomes amere assignor of the title to theinstrument, but negotiability of thesame is not impaired

Q: Under sec.40, what is meant by a ‘fictitious person’? Is this to be

interpreted literally?

No, there is still a person involved, except that this person does

not have any right to the instrument. This is what is meant ‘fictitious’

Q: what is material in determining whether a person is ‘fictitious’?

The intention of the maker


7/32




Q: what is a blank endorsement?

*see: sec.34

Q: Under sec.40, why should the special endorsers be held liable, despite

the fact that the instrument remains a bearer instrument anyhow?Because of the accumulation of secondary contracts. The

endorsements made by these people are, in and of themselves,

contracts for which they may be held liable.

Q: Under Sec.38 (ie. qualified endorsement), to whom does the phrase

‘without recourse’ refer to? ‘Without recourse’ against whom?

Against the qualified endorser

Q: Under Sec.39 (i.e.: conditional endorsement), what is the reason that

the person paying may disregard the condition?The relativity of contracts. The payor is not a party to the

principal contract, which is why he may disregard the condition and pay

before it happens.

Q: What is conditional here? (sec.39)

The endorsement

Q: Do all types of restrictive endorsements destroy negotiability?

No, only the one which prohibits further endorsement

III. DUE COURSE HOLDING

Q: Who is a holder in due course?

A holder in due course is a holder who has taken the instrument

under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue and

without notice that it has previously been dishonored, if such

was the fact;

(c) That he took it in good faith and for value; and

(d) That at the time it was negotiated to him, he had no noticeof any infirmity in the instrument or defect in the title of the

person negotiating it. (sec.52, NIL

*The prima facie presumption is that every holder of negotiable paper is

a HDC (sec.59), however, the same presumption may be refuted and in

such an event, it becomes incumbent upon the holder to prove that he

or some person under whom he claims acquired the title as HDC.

Q: May a payee be considered a holder in due course, considering that

the instrument was simply issued to him and not endorsed?Yes

*cross refer sec.52 with sec.191 – sec 191 defines a ‘holder’ as the payee

or endorsee of a bill or note who is in possession of the same, or one

who is a bearer of the same. ‘Holder’ under sec.52 must be read in the

light of sec.191’s definition, thus a payee may be a holder, and since a

holder of a negotiable instrument may become a holder in due course, a

payee may logically become a HDC as well. This was the ruling of the SC

in Eulalio Prudencio et.al. c. CA, 143 SCRA 7, 16.

Q: what are the rights of a HDC?

1. To take the instrument free from personal defenses between

prior parties

2. To enforce payment for the full amount against all parties

liable thereon (sec.57)

Q: What is the Shelter Rule?

It is the doctrine which allows a holder who derives his title

through a holder in due course, and who is not himself a party to any


8/32




fraud or illegality affecting the instrument to have all the rights of the

HDC in respect of all parties prior to the latter. (Sec.58)

*NB: the shelter rule allows an innocent holder to derive his title from a

holder in due course. The scenario contemplated by the law is onewhere the negotiation of an instrument was tainted by fraud or illegality

before it came into the hands of the present holder. The present holder,

therefore, who had nothing to do with the infirmity in the instrument,

may derive his title from the HDC before him, and will himself be

deemed a HDC.

Q: What is the exception to the shelter rule?

A prior party who was NOT a holder in due course may NOT

purchase the instrument from the sheltered holder (who is of course, a

HDC) and gain a clean title thereto.

*NB: suppose a prior party had something to do with the fraud tainting

the negotiation of the instrument. He allows an innocent person to

purchase it. The innocent person, by operation of law, becomes a

sheltered holder, a holder in due course. May the prior party again

purchase the instrument from the sheltered holder and claim to be free

of all personal defenses? Obviously not. The shelter rule cannot be used

to circumvent the law. The rule under sec.58 is not available to the

person repurchasing the instrument, if he was party to the fraud before

the sheltered holder acquired the instrument. Such a person is notallowed to improve his position by reacquiring the instrument from a

HDC. In the event of repurchase, the instrument, as regards him, would

still be subject to both personal and real defenses. This was the ruling in

the case of Fossum v. Hermanos, et. al., 44 Phil 713, 717-718.

*NB: the exception also applies to agents.

Q: Suppose the instrument was defective, but the defect was not

apparent. Does this destroy due course holding?

No, sec.52 requires that the instrument is complete and regular

on its face. If the defect was not apparent, the holder may still be

deemed a HDC.

Q: What are circumstances that destroy due course holding?

1. Irregular and defective instruments

2. Taking the instrument when it was overdue

3. The holder has notice of the infirmity or defect in the

instrument

4. The holder did not take the instrument in good faith

5. The holder did not take the instrument for value

6. The holder ignored circumstances which should have put him

on inquiry (i.e.: the check was crossed)7. The holder was not a HDC, and was a party to an illegality

during negotiation, and he tried to reacquire the instrument

from a subsequent HDC.

IV. LIABILITIES AND ENFORCEMENT THEREOF

Q: Who are the parties primarily and secondarily liable for a negotiable

instrument?

TYPE OF INSTRUMENT PARTIES LIABLE NATURE OF LIABILITY

BILL OF EXCHANGE

Acceptor(see: sec.127)

AccommodationAcceptor(sec.29)

PRIMARY

General Endorsers(see: sec.62)


9/32




Endorsers of BearerInstruments(sec.67)

AccommodationEndorsers(sec.29)

Acceptor for Honor(sec.165)

Drawer(sec.61)

SECONDARY

PROMISSORY NOTE

Maker(see: sec.60)

Accommodation Maker(sec.29) PRIMARY

General Endorsers(see: sec.62)

Endorsers of BearerInstruments(see: sec.67)

AccommodationEndorser(sec.29)

SECONDARY

CHECK

Acceptor(sec.127)

AccommodationAcceptor(sec.29)

PRIMARY

Drawer(sec.61)

General Endorsers(sec.66)

Acceptor for Honor(sec.165)

Accommodation Drawer(sec.29)

SECONDARY

IMPORTANT:-An accommodating party’s liability is not strictly primary and secondary, per se.It depends on what capacity the accommodating party signed – either as maker,drawer, endorser or acceptor. This is because the accommodating party, bylending his name, becomes a surety for the accommodated party. Ergo, thecapacity in which he signs determines his liabilities – liabilities that may either beprimary or secondary. The same principle goes for persons signing as agents ifthey fail to sign in accordance with sec.20.

-The NIL has special rules for the liability of IRREGULAR ENDORSERS:1. If the instrument is payable to the order of a 3rd person, an irregularendorser is liable to the payee and all subsequent payees

2. If the instrument is payable to the order of the maker or drawer, or ispayable to bearer, he is liable to all parties subsequent to the maker ordrawer;

3. If he signs for the accommodation of the payee, he is liable to all partiessubsequent to the payee (sec.64)

-An irregular endorser is one who signs in a peculiar manner, whose nameappears on the instrument where one would naturally expect another ’s. (Ogden,Negotiable Instruments, 4th Ed., p. 226)

Q: Are the primary and secondary liabilities the same as the liabilities for

warranties?

No, The primary and secondary liabilities of the parties stem

from their obligations to pay the sum certain in money stated in the

instrument. The liabilities for warranties stem from the warranties made

by the parties to an instrument, which warranties are separate and

ancillary contracts to the principal one involving the sum payable stated

in the instrument.


10/32




PARTY WARRANTIES

ACCEPTOR

1. The existence of the drawer, thegenuineness of his signature andhis capacity and authority to draw

the instrument;2. The existence of the payee andhis then capacity to endorse

*sec.62

GENERAL ENDORSER

ENDORSER OF A BEARERINSTRUMENT

1. That the instrument is genuineand in all respects what itpurports to be;

2. That he has good title to it;3. That all prior parties h ad capacity

to contract;4. That the instrument is, at the time

of his endorsement, valid and

subsisting*secs.66, 67

QUALIFIED ENDORSER

PERSON NEGOTIATING BY MEREDELIVERY

1. That the instrument is genuineand all respects what it purportsto be;

2. That he has good title to it;3. That all prior parties h ad capacity

to contract;4. That he has no knowledge of any

fact which would impair thevalidity of the instrument orrender it valueless

*sec.65

Q: May a corporation be held liable when one of its officers signs as an

accommodation party?

It depends. If the officer was specifically authorized to do so,

the corporation is liable. If not, the act was one ultra vires for which the

corporation cannot be held liable.

Q: What is the liability of an agent who signs a negotiable instrument on

behalf of another person?

The agent is NOT personally liable if he signs in the manner

prescribed under sec.20, that is if he –

1. Adds to his signature words indicating that he signs for or

on behalf of a principal or in a representative capacity; and

2. Discloses his principal

Failure of an agent to sign in this manner would operate to make him

personally liable, as if he had signed the instrument on his own.

Q: What is the legal effect of a signature per procuration?

It operates as notice that the agent has but a limited authority

to sign and the principal is bound only in case the agent so signing acted

within the actual limits of his authority

*see: sec.21

Q: When is a party deemed an accommodation party?

When the person meets the following requisites –

1. He must be a party to the instrument, signing as maker,

drawer, acceptor or endorser;

2. He must not receive value therefor;

3. He must sign for the purpose of lending his name or credit

to some other person

Q: May a person who does not sign the instrument be held liable?GENERALLY, No. But there are exceptions where a person who

did not actually sign the instrument may be held liable–

1. One who signs in a trade or assumed name (sec.18)

2. One who signs through an agent or authorized person

(sec.19)

3. Incapacitated persons who sign through their legal

guardians

4. Forgers of signatures (sec.23)


11/32




5.

Persons whose signatures were forged but who are

precluded from setting up the defense of forgery (sec.23)

6.

In case of constructive acceptance (sec.137)

7. Endorsers who sign on an allonge

8. Persons who negotiate by mere delivery (sec.65)

Q: What are the steps in holding the secondary parties liable?

PROMISSORY NOTE BILL OF EXCHANGE ACCEPTOR FOR HONORor REFEREE IN CASE OFNEED

1. presentment forpayment within therequired period tothe maker

2.

If the note isdishonored, noticeof dishonor shouldbe given to theendorsers

1. Presentment forAcceptance

2. If the bill isdishonored by non-

acceptance, noticeof dishonor shouldbe given to theendorsers anddrawer; protest fordishonor is requiredif the bill is a foreignbill

3. If the bill isaccepted,Presentment forPayment; if the bill

is dishonored uponpresentment forpayment, notice ofdishonor must begiven to secondarilyliable persons;protest must bemade if the bill is aforeign bill

1. Protest for non-payment

Q: When is presentment for payment unnecessary?

1. As far as the DRAWER goes, when he has no right to expect

or require that the drawee or acceptor will pay the

instrument (sec.79)

2. As regards the ENDORSER, where the instrument was

made or accepted for his accommodation and he has no

reason to expect that the instrument will be paid if

presented (sec.80)

3. Where, after the exercise of reasonable diligence,

presentment cannot be made (sec.82)

4. Where the drawee is a fictitious person (sec.82)

5.

When presentment has been waived, either expressly or

impliedly (sec.82)

Q: Does non-presentment of a bill relieve the drawer of all liability?No, the drawer is only discharged from the liability to the extent

caused by the delay or non-presentment. Failure to present on time

does not totally wipe out all liability.

Q: What is acceptance?

The signification by the drawee of his assent to the order of the

drawer to pay a sum certain in money embodied in a bill of exchange

Q: What are the requisites of acceptance?

1.

It must be in writing;2. Must be signed by the drawee;

3. Drawee must assent to paying a sum certain in money and

not by any other means

Q: When is presentment for acceptance required?

1. Where the bill is payable after sight, or in any other case,

where presentment for acceptance is necessary in order to

fix the maturity of the instrument;


12/32




2.

Where the bill expressly stipulates that it shall be presented

for acceptance;

3.

Where the bill is drawn payable elsewhere than at the

residence or place of business of the drawee

(sec..145)

Q: How is presentment for acceptance made?

1. By or on behalf of the holder;

2. At a reasonable hour;

3.

On a business day or before the bill is overdue;

4. At the proper place;

5.

To the drawee or the person authorized to accepted or

refuse acceptance on his behalf

6.

If the bill is addressed to 2 or more drawees who are not

partners, presentment must be made to all of them unlessone has the authority to accept or refuse acceptance on

their behalf in which case presentment must be made to

that person only;

7. Where the drawee is dead, presentment may be made to

his personal representative;

8. Where the drawee has been adjudged a bankrupt or an

insolvent, or has made an assignment for the benefit of

creditors, presentment may be made to him or to his

trustee or assignee

(secs.144, 145, 146, 72, 85, 73)

Q: when is presentment for acceptance unnecessary or excused?

1. Where the drawee is dead, or has absconded, or is a

fictitious person or a person not having capacity to contract

by bill;

2. Where, after the exercise of reasonable diligence,

presentment cannot be made;

3.

Where, although presentment has been irregular,

acceptance has been refused on some other ground

(sec.149)

Q: What is constructive acceptance?

Acceptance by provision of law, whereby the drawee is deemed

to have accepted the instrument should either of the following

circumstances arise:

1. The bill was delivered to the drawee and he destroys the

same;

2. The bill was delivered to the drawee but he refuses to pay

within 24 hours or within such other period as the holder

may allow to return the bill either as accepted or non-

accepted (i.e.: drawee unduly retains the bill)

(sec.137)

Q: What is a notice of dishonor?

A notice which informs the secondary parties that the

instrument was either dishonored by non-acceptance or non-payment,

and that the holder of the instrument so dishonored intends to enforce

the liabilities of the persons so notified

Q: Does the payee have a legal obligation to inform the drawer that the

instrument was dishonored?

No, the payee is under no obligation to do so. The notice is onlyrequired to preserve the payee’s right to recover on the dishonored

instrument, since failure to give notice to the drawer or endorsers

operates to discharge them of their respective liabilities on the

instrument

Q: If no notice was given, is the drawer completely absolved of liability

to the payee?

No, the contractual liability still subsists


13/32




Q: When is an instrument considered dishonored by non-payment?

1.

When it is duly presented for payment and payment is

refused or cannot be obtained; or

2. Presentment is excused and the instrument is overdue and

unpaid (sec.83)

Q: When is a bill dishonored by non-acceptance?

1. When it is duly presented for acceptance and such

acceptance is refused or cannot be obtained;

2. When presentment for acceptance is excused and the bill is

not accepted (sec.149)

Q: May a person give notice of dishonor to prior parties, even if he was

not authorized to do so?Yes, sec.91 states that notice of dishonor may be given by any

agent either in his own name or in the name of any party entitled to give

notice, whether that party be his principal or not ; effectively then, a

person may give notice for another even if he was not authorized to do

so

Q: To whom should notice be given to the endorsers, in a case where

the endorsers are partners?

To either of them, pursuant to the principle of mutual agency

between and among partners (Art.1818, NCC)

Q: When is notice of dishonor excused or unnecessary?

DRAWER (sec.114) ENDORSER (sec.115)

1. where the drawer and the draweeare the same person

1. when the drawee is a fictitiousperson or person not havingcapacity to contract, and theendorser was aware of that factat the time he endorsed the

2. when the drawee is a fictitiousperson or a person not havingcapacity to contract

3.

when the drawer is the person towhom the instrument ispresented for payment

4. where the drawer has no right toexpect or require that the draweeor acceptor will honor theinstrument

5. where the drawer hascountermanded payment

instrument;

2. where the endorser is the personto whom the instrument ispresented for payment

3.

where the instrument was madeor accepted for hisaccommodation

*NB:Notice to these persons under these circumstances is no longer necessarybecause they either (a) knew of the dishonor beforehand; or (b) werethemselves responsible for the dishonor

Q: May notice of dishonor be waived?

Yes, it may be waived either before the tine of giving notice has

arrived or after the omission to give due notice, and the waiver may be

either express or implied ( sec.109)

Q: Who are bound by the waiver of notice of dishonor?If the instrument itself contains the waiver, all parties to it are

bound. If on the other hand, the waiver is written above the signature of

a particular endorser only, then only that endorser is bound.(sec.110)

Q: Does the failure to give notice of dishonor affect the rights of a

subsequent HDC?


14/32




No, an omission to give notice of dishonor by non-acceptance

does not prejudice the rights of a HDC subsequent to the omission

(sec.117)

Q: What is protest?

A formal statement in writing made by a notary public at the

instance of the holder declaring that the instrument has been presented

for payment or for acceptance but the same was dishonored. It is

generally indispensable only for foreign bills of exchange, however, the

need for it may also be waived.

Q: May protest be made for inland bills?

Yes, although the NIL only requires protest for foreign bills,

there is no prohibition against making a protest for the dishonor of

inland bills. (sec.152, sec.118)

Q: In what instances is protest necessary?

1.

Where a foreign bill was dishonored by non-acceptance

(sec.152)

2. Where a foreign bill, previously accepted, was subsequently

dishonored by non-payment (sec.152)

3. Where a bill is sought to be accepted for honor (sec.161)

4. Where a bill is to be presented for payment to an acceptor

for honor (sec.167)

5.

where a bill is dishonored by an acceptor for honor(sec.170)

Q: What are the legal effects of a waiver of protest?

1. Protest itself is waived;

2. Presentment for payment or acceptance is also deemed

waived;

3. Notice of dishonor is also deemed waived

Q: when is there an acceptance for honor?

When the original drawee refuses to accept a bill of exchange

and there is a need to save the credit of certain parties. A third person or

stranger to the instrument accepts the instrument for honor thereby

making himself liable to all parties to the bill subsequent to the party for

whose honor he accepted

Q: What is the nature of the liability of the acceptor for honor?

Secondary, because his engagement is to pay only if the bill is

not paid by the drawer and provided that it has been duly presented for

payment and protested for non-payment and that notice of dishonor is

given to him.

*NB: The nature of an acceptor for honor’s liability is different from that

of an ordinary acceptor in this regard, since an ordinary acceptor isprimarily liable the moment he accepts the instrument

Q: What are the requisites of acceptance for honor?

1. The bill of exchange has been protested for dishonor by

non-acceptance (and for better security);

2. The acceptor must be a stranger to the bill

3. The holder must consent to the acceptance for honor

4. The acceptance for honor must be made before the

instrument is overdue

5.

The acceptance for honor must be in writing, must indicatethat it is an acceptance for honor, and must be signed by

the acceptor for honor

( secs.161, 162, 165)

Q: who may make a payment for honor?

Any person, for the honor of any person liable on the

instrument or for the honor of the drawer (sec.171)


15/32




V. THE SHORT-CUT RULE, TRUNCATION OF RIGHT OF RECOURSE IN

FORGED CHECKS

Q: What is the right of recourse of the parties to a forged check where

the signature forged belonged to the payee?

The short-cut rule holds that the payee whose signature was

forged can go directly to the collecting bank, regardless of whether or

not the checks were actually delivered to the payee. (Associated Bank,

et. al. v. CA and Reyes, GR. No 89802, May 7, 1992; Westmont Bank v.

Ong, GR No.132250, January 30, 2002)

Q: Mario issued a check drawn against his checking account with BOC,

the drawee-bank, to Pablo. Tisco stole the check and forged Pablo’s

signature as endorser, thereby making it appear that the check was dulyendorsed to him by the latter. Tisco then deposited the check with RCB,

his bank whom he designated as collecting bank. Determine the

respective rights of recourse of the parties. (NEGO MIDTERMS – AY

2012-2013)

Pablo, as payee whose endorsement was forged by Tisco and

who lost the note to the latter through theft, may proceed against RCB,

the collecting bank, for recovery of the amount. RCB became liable as a

general endorser when it endorsed the check to the drawee-bank, BOC,

thereby warranting that the check was genuine and in all respects what

it purports to be. RCB, the collecting bank, may only recover againstTisco, the forger-depositor, because no privity of contract exists

between the maker and the collecting bank, nor between the payee,

Pablo, and the collecting bank. The collecting bank may hold the

depositor liable because the depositor is its client. Mario, as maker, may

proceed against the drawee-bank and not the collecting bank because

there is no privity between the him as maker and the collecting bank.

Q: what is the rationale behind the short-cut rule?

The collecting bank is ultimately liable. The collecting bank is

liable to the payee and must bear the loss because it is its legal duty to

ascertain that the payee’s endorsement was genuine before cashing the

check. As a general rule, a bank or corporation who has obtained

possession of a check upon an unauthorized or forged endorsement of

the payee’s signature and who collects the amount of the check from

the drawee, is liable for the proceeds thereof to the payee or other

owner, notwithstanding that the amount has been paid to the person

from whom the check was obtained (Westmont Bank v. Ong, cited

above)

*The theory behind the rule is that the possession of the check is

wrongful and when the money had been collected, the collecting bank

can be held liable because it is deemed to have held the money for the

rightful owner in order for the latter to recover them. The position of

the bank taking the check on the forged or unauthorized endorsementis the same as if it had taken it and collected the money without

endorsement at all and the act of the bank amounts to conversion of the

checks.

*The rationale is to expedite the right of recourse of the payee, to reach

by a desirable short-cut, the person who ought to be allowed to recover

directly from the collecting bank, regardless of whether the check was

delivered to the payee or not

*IMPORTANT: -This rule is NOT readily applicable to a case where the signature that

was forged belonged to the DRAWER, or to OTHER SUBSEQUENT

ENDORSERS.

-If the drawer’s signature was forged, the drawer may not be held liable

for the amount on the instrument (although he may certainly be held

liable for the underlying contract).


16/32




-If the endorser’s signature was forged, the cut -off rule operates to bar

recovery from the parties prior to the forged endorsement. A

subsequent holder may not therefore enforce payment against the

drawee, the drawer, or the payee because parties prior to the forgery

may set it up as a defense (unless of course they are precluded from

doing just that)

-Obviously then, where the facts of any problem do not present a case

where it was the PAYEE’S signature that had been forged, application of

the short-cut rule is not advisable.

VI. DEFENSES

Q: What is a personal defense?

One which involves the relationships of the parties betweenand amongst themselves, wherein there is a true and valid underlying

contract but where, for various reasons (i.e.: fraud, duress, mistake,

prior breach of contract by the holder, etc.), the defendant is excused

from his obligation to perform.

Q: What is a real defense?

One which involves the instrument or the underlying contract

itself, wherein there is an absence of one or more of the essential

elements of a contract or where the admitted contract is vitiated

Q: What defenses may be raised against a HDC?

Only real defenses – those which call into question the

instrument or the underlying contract.

REAL DEFENSES PERSONAL DEFENSES

1. Minority (available only to theminor)

2. Forgery3. Non-delivery of an incomplete

1. Failure or Absence of consideration2. Illegal consideration3. Non-delivery of a complete

instrument

instrument4. Material Alteration5. Ultra Vires act of a corporation6. Fraud in Fact7. Illegality8. Vicious force or violence

9.

Lack of authority10. Prescription11. Discharge in insolvency

4. Conditional delivery of a completeinstrument

5. Fraud in inducement6. Filling up blanks without authority

to do so7. Duress of intimidation

8.

Filling up blanks beyond areasonable time

9. Transfer in breach of faith10. Mistake11. Ante-dating or post-dating forillegal or fraudulent purposes

Q: Does negotiation by a minor operate to pass title to the holder?

Yes

*NB: although the defense is a real one, the negotiation still

passes title to the holder, the same rule also applies to corporationswith regards to an ultra vires act – the corporation may raise it as a

defense but the negotiation still transfers title

Q: What is delivery?

The transfer of possession of the negotiable instrument by one

person to another with the intention to transfer title to the instrument

Q: What is the effect if an instrument which is not complete was

delivered?

The delivery will not effect a valid contract in the hands of anyholder as against any person whose signature was placed thereon prior

to delivery (sec.15)

Q: When may delivery be deemed valid?

When it is made either by or under authority of the person

making, drawing, accepting or endorsing the instrument (sec.16)

Q: What are the rules involving delivery?


17/32




1.

A negotiable instrument must be delivered

2. Delivery must either be by or under authority of the person

making, drawing, accepting or endorsing the instrument

3. Delivery is presumed to have been made if the instrument is

no longer in the hands of the maker or drawer for the

purpose of issuing it, or the endorser for the purpose of

transferring title

4. As between immediate parties and remote parties who are

not holders in due course, the delivery of a complete

instrument may be established to be conditional or for a

special purpose, and not for transferring title

5.

As between immediate parties and remote parties who are

not holders in due course, it may be established that there

was no delivery at all of the complete instrument

6. As to holders in due course, it cannot be established that

there was no delivery because delivery as to the HDC is

conclusive upon his possession of the instrument

7.

As to a HDC, it cannot be established that the delivery was

only conditional or for a special purpose

(sec.16)

Q: What are the rules with regard to filling up blanks in a negotiable

instrument?

1. A person in possession of such an instrument has prima

facie authority to complete the instrument by filling it upstrictly in accordance with the authority given and within a

reasonable time

2. If a person delivers a blank paper which contains his

signature and which he intends to convert into a negotiable

instrument, the person to whom it is delivered has prima

facie authority to fill it up for any amount in accordance

with the authority given and within a reasonable time;

3.

If the holder of the instrument, after it was filled up, is a

HDC, the holder may enforce the instrument as if it were

filled up with the proper authority and within a reasonable

time

(sec.14)

Q: when is fraud a real defense? When is it merely a personal one?

FRAUD IN EXECUTION/FRAUD IN FACTUM

FRAUD IN INDUCEMENT

-person is induced to sign aninstrument without knowing itscharacter as a note or bill

-a REAL defense

-persons who signs the same is awarethat he is signing a negotiableinstrument, and intends to sign it, butwas only induced to do so throughfraud, his consent having been vitiatedby it

-a PERSONAL defense

Q: When may an alteration become a defense?

When it is material (sec.1, 125)

Q: Is material alteration a complete defense?

No, only a partial one. A HDC who is in possession of a

materially altered instrument and who is not a party to the alteration

may enforce payment thereof according to its original tenor (sec.124)

Q: What is the effect of ante-dating or post-dating a negotiable

instrument?

Ante- or post-dating does not per se affect the instrument. A

personal defense only arises when the ante-dating or post-dating was

done for a fraudulent or illegal purpose

Q: what is the effect of forgery?


18/32




A forged signature is wholly inoperative and no right to retain

the instrument, or to give a discharge therefor, or to enforce payment

thereof against any party thereto, can be acquired through or under

such signature, unless the party against whom it is sought to be en force

such a right is precluded from setting up the forgery or the want of

authority (sec.23)

TYPE OF INSTRUMENT PARTY WHOSESIGNATURE WAS

FORGED

EFFECTS

PROMISSORY NOTE

Maker

Maker is not liable onthe instrument to allsubsequent partieswhether the instrumentis an order or a bearerinstrument

Endorsers

Still secondarily liablebecause they warrantthat the instrument isgenuine and in allrespects what itpurports to be

If the note is payable toBEARER, the forgedsignatures may not beset up as a defense,because the signature of

the endorser isunnecessary to pass titleto the instrument – themaker is still primarilyliable on the note.

Drawer

Drawer is not liable onthe instrument to allsubsequent partieswhether the bill is anorder or bearer bill

BILL OF EXCHANGE Endorsers

Subsequent holdercannot enforce paymentagainst the drawer,drawee or payee

Endorsers prior to the

forgery may set up thereal defense of forgery

Endorsers subsequent tothe forgery are still liable

Endorsers precludedfrom setting up forgeryas a defense are liable,despite having endorsedthe bill prior to the actof forgery

If the bill is a BEARER billof exchange, the holdermay still recover fromthe drawer because theforged signature isunnecessary for his title.

Q: How does the ‘Cut-ff Rule’ operate?

Parties prior to the forged signature are cut-off from the parties

after the forgery and cannot be held liable for the forgery. These parties

may validly set up the defense of forgery against any holder, including a

HDC.

Q: Are there any exceptions to the cut-off rule?

Yes, prior parties may still be held liable if they are precluded

from setting up the defense of forgery either because of their

warranties, representations of their negligence (i.e.: endorsers who had

anything to do with the forgery prior to its commission may still be held

liable)


19/32




Q: What is the effect of an insertion of a wrong date on an instrument?

The act becomes a personal defense between immediate and

prior parties, and the HDC has the right to regard the wrongfully

inserted date as the true date (sec.13)

Q: Senator Corupto executed a negotiable promissory note payable to

Simpo or the latter’s order, as a reward for the political support and

friendship given by Simpo to the Senator. Later on, the note was

negotiated to Hovo, a holder in due course. May Hovo enforce the note

against Corupto? Would your answer remain the same, if it were Simpo

who would seek to enforce payment against Corupto? (NEGO

MIDTERMS – AY 2012-2013)

1. YES, Hovo may enforce the note against Corupto. Hovo, being

a holder in due course, possesses the right to enforce the instrument for

the full amount stated thereon against the maker, Corupto; and has

taken the instrument free of all personal defenses between prior

parties. Corupto may not set up the defense of want or absence of

consideration against Hovo because the same is merely a personal

defense, and personal defenses may not be raised against a holder in

due course.

2. NO, The same answer above would not apply in the event

that it would be Simpo seeking to enforce the note against Corupto. The

note was issued for ‘support and friendship’ – and as such, Corupto may

set up as a personal defense the want or absence of consideration forthe issuance of the note. ‘Friendship and support’ (in the same manner

as love and affection) do not constitute ‘value’ or consideration under

the ambit of the negotiable instruments law. Absence or lack of

consideration is a defense pro tanto between immediate parties, and

against a holder who is not a holder in due course.

Q: May lack of consent be ratified?

Yes, ratification by the party whose signature was obtained

without valid consent, for example, precludes that party from raising

the defense of lack or vitiation of consent. The principles of estoppel

and ratification may apply in this case.

VII. DISCHARGE OF AN INSTRUMENT

Q: What is discharge?

Release from further liability –

1. AS TO THE PAPER ITSELF: the end of a contractual

obligation

2. AS TO THE PARTIES: the release of some or all of them

from further obligation and liability under the instrument

Q: Is there such a thing as partial discharge?

Yes, as when the instrument (i.e.: the contractual obligation it

represents) is not yet discharged, and only part or some of the obligors

are released.

Q: Suppose all the obligors are released, what happens to the

instrument?

The instrument is deemed released as well

Q: How is an instrument discharged? 1. By payment in due course by or on behalf of the principal

debtor

2. By payment in due course by the party accommodated,

where the instrument is made or accepted for his

accommodation;

3. By the intentional cancellation thereof by the holder;

4. By any other act which will discharge a simple contract for

the payment of money;


20/32




5.

When the principal debtor becomes the holder of the

instrument at or after maturity in his own right

(sec.119)

Q: What is meant by payment in due course?

Payment is said to have been made in due course when it is

made at or after maturity date of the instrument to the holder thereof in

good faith and without notice that his title is defective (sec.88)

Q: May payment be made by the delivery of another negotiable

instrument?

No (Art.1249, NCC)

Q: What is the effect of payment by a secondary party?

The instrument is NOT discharged, but such a party is remitted

to his former rights with regards to prior parties (i.e.: he becomes a

holder again and not just an endorser), and he may strike out his own

and all subsequent endorsements (those made by the people he owed)

and re-negotiate the instrument, EXCEPT when (a) the instrument is

payable to the order of third person and the payment was made by the

drawer; and (b) where it was made or accepted for accommodation and

has been paid by the party accommodated. (sec.121)

Q: Why is a prior party who reacquires the instrument permitted to

strike out endorsements?Because the endorsements he strikes out are those which are

not necessary for his title

Q: why does payment by the party accommodated where the

instrument is made or accepted for his accommodation discharge the

instrument?

Because the payment is in effect one made by the principal

party (since the accommodating party acts as surety for the

accommodated party, payment by the latter is actually payment by the

principal debtor which discharges the instrument)

Q: Why does payment by the drawer discharge the instrument under

sec.121(a)?

Because the drawer is the party ultimately liable in case the

instrument is drawn payable to the order of third person.

Q: Suppose the third person who paid actually did so with the intention

of acquiring title over the instrument, is the instrument discharged?

No, in this case, the payor is not considered a ‘third person’

within the contemplation of 119. The payor is either a holder or an

assignee as the case may be.

Q: to whom should payment be made?

To the HOLDER of the instrument

(see notes on ‘who is a holder?’ – pages 4,5 as discussed above)

Q: Is there a possibility that a payor who had already previously made

payment may be made to pay again?

Yes, the rightful holder who may have been unlawfully deprived

of the instrument may still enforce payment against a payor who

previously paid with knowledge of the defect in the previous holder’s

title.

Q: how does cancellation discharge the instrument?

Depends on WHAT KIND of cancellation was effected –

intentional cancellation discharges the instrument, conversely, if the

cancellation was NOT intentional, the instrument is not discharged.

*Intentional cancellation takes place when the holder writes

the word ‘cancelled’ on the instrument or does… something childish to

it (think: tearing it up, burning it, etc) (sec119)


21/32




Q: What are the acts which discharge simple contracts?

1. payment or performance

2.

loss of the thing due

3. condonation or remission of the debt

4. confusion or merger of the rights of creditor and debtor

5.

compensation

6. novation

7. annulment or rescission

8. fulfillment of a resolutory condition

9.

prescription

(see: art.1231, NCC; check notes for oblicon)

Q: how are secondarily liable parties discharged? (sec.120)

1. By any act which discharges theinstrument

(art.1231 + other pertinent provisionsof the NCC)

2. By the intentional cancellation ofhis signature by the holder

An endorser whose endorsement isstruck out and all endorserssubsequent to him are relieved fromliability on the instrument (sec.48)

Discharge here means discharge bysome act of the creditor, it does notinclude discharge by operation of law(i.e. by bankruptcy, insolvency,prescription, failure to give notice ofdishonor)

3. By the discharge of a prior party

4.

By a valid tender of payment It is the fault of the holder under thiscircumstance that he was not paid,thereby discharging the secondaryparties.

5. By a release of the principaldebtor unless the holder’s right ofrecourse against the partysecondarily liable is expresslyreserved

The release of the principal debtordischarges the instrument and personssecondarily liable lose their right ofrecourse against the principal debtor

EXCEPTION: when right of recourseagainst secondary parties was

expressly reserved

6. By any agreement binding uponthe holder to extend the time ofpayment or to postpone theholder’s right to enforce theinstrument unless made with the

consent of the party secondarilyliable or unless the right torecourse against such party isexpressly reserved

Because the assurance of the drawerand the endorsers is to pay accordingto the tenor of the instrument. Anagreement to extend the time ofpayment varies the original

undertaking of the secondary parties(compare art.2079, NCC re: g uaranty;same principle applies)

EXCEPTIONS: (a) the extension wasmade with the consent of thesecondary parties; (b) right ofrecourse against secondary partieswas expressly reserved

VIII. CHECKS AND THE RELATIONSHIPS BETWEEN PAYEE, DRAWEE ANDDRAWER

Q: What is a check?

A bill of exchange drawn on a bank, payable on demand

(sec.185)

Q: When should a check be presented for payment?

Within a reasonable time after its issue (sec.186)

Q: Is a drawee liable upon the issuance of a check?

No, the drawee is not liable just because he happens to be the

drawee. A check does not operate as an assignment of any part of the

funds to the credit of the drawer with the bank, the bank is not l iable to

the holder unless and until he accepts the same, in which case, the

drawee becomes an acceptor (sec.189)

Q: what is a certified check?


22/32




One drawn by a depositor upon funds to his credit in a bank

which a proper officer of the bank certifies will be paid when duly

presented for payment

Q: Is certification completely similar to acceptance?

No, certification is equivalent to acceptance (sec.187) but they

differ in the sense that (a) certification done at the instance of the

HOLDER results in a discharge while ordinary acceptance does NOT

discharge; and (b) in certification, the bank debits the drawer’s account

at the time of certification, not after, as in ordinary acceptance

Q: How does certification operate?

Upon certification, the bank debits the drawer’s account, in

effect setting aside the funds to meet the check if and when it is

presented for payment. The funds that were set apart are no longer

within the control of the drawer but have been precisely segregated for

the purpose of paying the check. This is why certification procured by

the holder discharges the secondary parties – because the certified

check would now operate as an assignment of part of the funds to the

credit of the drawer (sec.189). The theory is that the holder, by

requesting such certification instead of payment, enters into a new

contract with the bank, and not one within the contemplation of the

drawer or a prior endorser. The drawer and the endorsers are expecting

that the check will be presented for payment only and not for

certification, hence they are discharged.

*‘The bank virtually says that the check is good; we have the

money of the drawer here ready to pay it. We will pay it now if you will

receive it. The holder says, No, I will not take the money; you may certify

the check and retain the money for me until this check is presented.’ The

money being due and the check presented, it is his own fault if the holder

declines to receive the pay xxx (1 Morse on Banks and Banking, p.920; cited

in PNB V. National City Bank of New York, 63 Phil 711, 717-720)

Q: What is a crossed check?

A check which bears 2 parallel lines diagonally on the left top

portion. If the crossing of a check is SPECIAL, the name of a bank or

business institution is written between the 2 parallel lines (meaning that

the drawee should pay only with the intervention of that company), if

the crossing is GENERAL, the words written between the 2 parallel lines

are ‘and Co.’ or ‘for payee’s account only’

Q: Does the NIL govern crossed checks?

No, the Code of Commerce under sec.541 does. Sec.541 of the

Code of Commerce was patterned after the Bills of Exchange Act of 1882

(secs.76,77 of the Bills of Exchange Act of 1882)

Q: What is the effect of crossing a check?

Generally, the crossing of a check puts the holder on inquiry

and requires him to ascertain the endorser’s title to the check. Failing in

this respect, the holder is declared guilty of gross negligence amounting

to legal absence of good faith (think: holder can no longer become a

HDC)

Specifically, the effects are –

1. The check may not be encashed but only deposited in a

bank

2. The check may only be negotiated once (to the person with

the account in the bank)3. The act of crossing serves as a warning to the holder that

the check has been issued for a definite purpose so that he

must inquire if he has received the check pursuant to that

purpose

Q: Differentiate a bill of exchange from a check

(see page 2 of these notes for tabular presentation)


23/32




Q: What is the relationship between and among the drawer, drawee

and payee of a check?

AVAILABILITY OFRIGHT OF

RECOURSE

PRESENCE OF PRIVITY OF CONTRACT

DRAWER DRAWEE PAYEE

DRAWERX X

DRAWEEX *

PAYEEX

DRAWER:

-has privity of contract with payee

-has privity of contract with drawee

-has right of recourse against drawee bank

DRAWEE:

-has privity of contract with drawer

-has recourse against drawer, in some instances

-no privity of contract with, or right of recourse against, payee

PAYEE:

-privity of contract with drawer

-recourse against drawer

-no privity of contract or right of recourse against drawee

*EXCEPTION: payee has right of recourse against drawee via tort action

under art.19, NCC (abuse of right), if he can prove that (a) drawee has a

legal right or duty toward him; (b) the right or duty was exercised in bad

faith; and (c) for the sole intent of prejudicing or injuring another (HSBC v.

Catalan, GR Nos. 159590 and 159591; October 18, 2004)

Q: What is a collecting bank?

The bank with which a payee-holder of a check deposits the

same. The payee in this case usually has an account with the bank,

known as the depositary bank or collecting bank

Q: What is the relationship between the payee and the collecting bank?

One of agent and principal. The collecting bank acts as the

agent of the depositor when it sends the check for clearing.

*check clearing is done through a ‘clearinghouse’, an

association of banks or other payors for the purpose of settling

accounts with each other on a daily basis. Each member of the

clearinghouse forwards all deposited checks drawn on other members

and receives from the clearinghouse all checks drawn on it. Balances are

adjusted and settled on a daily basis.

Q: Does the collecting bank become the owner of the check deposited

with it?

No, the check is only being collected from the drawee bank for

the principal, the depositor.

Q: If a check was forged prior to the deposit with the collecting bank,

and the check is subsequently paid, is the collecting bank liable?

Yes, because the collecting bank was the last endorser of the

check. It endorsed the check for clearing with the drawee bank, and the

drawee bank relied on the collecting bank’s warranty, given uponendorsement, that the instrument is genuine and in all respects what it

purports to be. The liabilities and warranties of a collecting bank are the

same as those of a general endorser (see: sec.66).

Q: What is the right of recourse of a collecting bank who was forced to

reimburse the drawee for a forged check?

The collecting bank may proceed against its client, the

depositor – because it is only with the depositor that privity of contract


24/32




exists, and also because the payee-depositor is liable under the same

warranties of a general endorser (sec.66, NIL)

Q: Is the drawer allowed to countermand payment on a check?

It depends. If the drawer has a valid defense against the holder

of the check (i.e.: holder failed to deliver the goods that he promised),

the drawer may countermand payment. If not, the drawer may be held

criminally liable under Batas Pambansa Blg.22 which penalizes the

making, drawing or issui9ng a check to apply on account or for value

knowing that at the time of issue the check is not sufficiently funded.

Q: What is the ‘Iron-Clad Rule’?

The rule which prohibits the countermanding of payment of

certified checks (and by analogy, manager’s or cashier’s checks).

Because of the nature of these checks, they are considered to be as

good as the money they represent, and may not be countermanded by

either the payee or the bank.

CHECK CLEARING, CLEARING REGULATIONS

(Cross-refer with notes on Summary of Doctrines, under the title

‘Checks’)

*IMPORTANT:

- The drawee bank is not only bound by the NIL with regards to thenegotiation or handling of a check, it is also bound by the rules on

clearinghouse regulations enacted by the Central Bank, through the

Philippine Clearing House Corporation (PCHC) and its regional arms.

THE 24-HOUR RULE: the drawee bank must return checks or items

cleared through the PCHC within 24 hours (think: especially applicable to

forged checks where the forged signature belongs to the drawer) to the

collecting bank; failure to do so makes the drawee liable for negligence

and absolves the collecting bank of l iability (sec.20, PCHC Rules)

*the 24-hour rule does NOT apply to checks whose forged

endorsements belong to endorsers, or to check which have been

materially altered. In these cases, the checks should be return within 10

years (yes, YEARS), since sec.21 of the PCHC Rules states that they

should be returned ‘within the period prescribed by law for the filing of

a legal action’ (10 days, pursuant to art.1144, NCC – actions based upon a

written contract or an obligation created by law prescribe in 10 years

from the time the right of action accrues) (see: Aquino, Banking and

Negotiable Instruments Law, vol. I, 2009)

IX. NEGOTIABLE DOCUMENTS OF TITLE

Q: What is a negotiable document of title (NDT)?

A document used in the ordinary course of business in the sale

or transfer of goods as proof of possession or control of the goods, or

authorizing or purporting to authorize the possessor to transfer or

receive either by endorsement or delivery, goods represented by such

document.

Q: What are the features and functions of NDTs?

1.

They serve as a contract2. They serve as receipt of goods

3. They operate as transferable documents of title to the

goods they describe

Q: How are NDTs different from negotiable instruments?

NEGOTIABLEINSTRUMENTS

NEGOTIABLEDOCUMENTS OF TITLE


25/32




Re: GOVERNING LAWS NILCode of Commerce

NCC (Arts.1507-1520)Warehouse ReceiptsLaw (WRL);Trust Receipts Law (TRL)

Re: PURPOSE ANDFUNCTION

Transfer of Credit orMoney

Transfer of Goods

Re: POSSIBILITY OF DUECOURSE HOLDING

Holder may be a HDC Holder is not a holder indue course, but a holderfor value

Re: MODE OF TRANSFER By NegotiationBy Assignment

By NegotiationBy Assignment

Re: CONVERTIBILITYTHROUGHNEGOTIATION

An ORDER instrumentmay be converted to abearer in strument

A BEARER instrumentmay only be convertedto an order instrument

ONCE – if it wasoriginally a bearerinstrument

Once a bearerinstrument, always abearer instrument

Universal Convertibility – An ORDER documentmay be converted into aBEARER document, andback again

Re: WARRANTIES All parties (i.e.: drawers,makers, endorsers) to anegotiable instrumentare bound by theirrespective warranties

only the TRANSFERORof a NDT makeswarranties in favor ofthe transferee

Endorsers are not liable

for failure on the part ofthe bailee to deliver thegoods

Q: What determines the negotiability?

Words of negotiability (art.1507, NCC; Sec.5, WRL)

Q: What is the effect of stamping the words ‘non-negotiable’ on a NDT?

There is no effect, if the document contains words of

negotiability, it remains negotiable despite the stamping on it of the

words ‘non-negotiable’ or others of like import

Q: How is a NDT negotiated?

BEARER DOCUMENT ORDER DOCUMENT

By delivery(Art.1508, NCC)

*POSSESSION is controlling - thewarehouseman’s obligation followsthe possessor

By endorsement – (a) in blank; or(b) to bearer; or(c) to a specified person

If the document is endorsed to aspecified person, he may againnegotiate the document in blank, tobearer or to another specified person(Art.1509, NCC)

*ENDORSEMENT is controlling – thewarehouseman’s obligation followsthe endorsement (if endorsed in blankor to bearer, warehouseman’sobligation follows accordingly)

Q: Does the transfer of a NDT result in the transfer of title to the goods?

Yes, because transfer of the document controls the transfer of

goods. Negotiation of a document has the effect of manual delivery so

as to constitute the transferee the owner of the goods. The direct

obligation of the bailee issuing the document to hold possession of thegoods is owed to the transferee from the moment of negotiation

(Art.1513, NCC)

Q: Suppose the document was not negotiated but merely transferred to

the holder, what are the effects?

The person to whom it has been transferred and not negotiated

acquires as against the transferee the title to the goods, subject to the

terms of any agreement with the transferor (i.e.: person in possession


26/32




becomes an assignee of the goods), and the transferee may convert the

plain transfer to negotiation by compelling the transferor to complete

the negotiation process (Art.1515; secs.42,43, WRL)

Q: what is the effect if there was in fact an intent to negotiate the

document but possession of the same is retained by the transferor?

The interest of the prior transferee may be defeated if the

document is subsequently transferred to a purchaser in good faith

without notice. The subsequent negotiation of the document under any

sale or other disposition to any person receiving the same in good faith

and for value and without notice of the previous sale, mortgage or

pledge, shall have the SAME EFFECT as if the first purchaser had

EXPRESSLY AUTHORIZED the subsequent negotiation (sec.48, WRL)

*No, Art.1544 of the NCC on double sales does NOT apply to the

second sale of a negotiable document like a warehouse receipt. The law

(WRL) practically negates the will of the first purchaser and assumes

that buyer 1 willingly permitted sale number 2.

*Read this together with the right of the purchaser to compel

the transferor to complete the negotiation – this is why.

Q: What are the rights of a person to whom a NDT was duly negotiated?

1. He acquires such title to the goods as the person

negotiating the document to him had or had ability to

convey

2. The direct obligation of the bailee issuing the document to

hold possession of the goods for him as if such bailee had

contracted directly with him

(Art.1513, NCC; Art.41, WRL)

*Think: the goods follow the document of title, BUT notice that

NO ADDITIONAL RIGHTS are conferred over the goods to the

transferee.

*Here lies the crucial distinction between NDTs and NIs. Under

the NIL, a holder in due course may acquire a better right than his

transferor (i.e.: he gets a clean title to the instrument); whereas the

transferee of a NDT acquires merely what the transferor had or could

give

Documents

Negotiable Instrument Sundiang Notes 2k