Nego GN 2021
Nego GN 2021
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NOTE: The requirements stated in Sec. 1 must particular fund
appear on the face of the instrument otherwise the The drawee then indicated.
instrument would not be negotiable. The law pays himself from
prohibits relying on extrinsic evidence. the particular fund
indicated.
A NI need not follow the exact language of NIL, as Particular fund Particular fund
long as the terms are sufficient which clearly indicated is not the indicated is the direct
indicate an intention to conform to the direct source of source of payment.
requirements of the law. (Sec. 10, NIL) payment.
Instrument is Instrument is non-
1. The instrument must be in writing negotiable. negotiable. The fund
specified is the direct
It must be reduced in writing or in tangible form. source of payment;
The negotiability or non-negotiability of an therefore, it is subject
instrument is determined from the writing on the to the availability of
face of the instrument itself. (De Leon, 2010) fund, hence
conditional. (Sundiang
The instrument must be signed by the maker or Sr. & Aquino, 2014)
drawer
NOTE: The word “promise” or “order” need not
It is placed at the lower right-hand corner of the appear in the instrument to satisfy the
instrument. Nonetheless, it may appear in any part requirements of Section 1(b) of the NIL. (Sundiang
of the instrument whether at the top, middle or Sr. & Aquino, 2014)
bottom or at the margin. (De Leon, 2010)
The promise or order to pay must not be
NOTE: Where a signature is so placed upon the subject to any condition or contingency.
instrument that it is not clear in what capacity the
person making the same intended to sign, he is to An instrument payable upon a contingency is not
be deemed an indorser. [Sec. 17 (f), NIL] negotiable even if the condition thereon has been
fulfilled.
The signature is valid and binding as long as it
appears that a person intended to make the Certainty as to sum
instrument his own. The signature is prima facie
evidence of a person’s intention to be bound as The sum payable is a sum certain within the
either maker or drawer. meaning of this Act, although it is to be paid:
(ISDA-E)
2. Unconditional promise or order to pay
1. With Interest;
An unqualified order or promise to pay is 2. By Stated installments;
unconditional though coupled with: 3. By stated installments, with a provision upon
Default in payment of any installment or of
1. An indication of a particular fund out of which interest, the whole shall become due
reimbursement is to be made or a particular (acceleration clause);
account to be debited with the amount; or 4. With cost of collection or an Attorney’s fees, in
2. A statement of the transaction which gave rise case payment shall not be made at maturity; or
to the instrument. But an order or promise to 5. With Exchange, whether at a fixed rate or at
pay out of a particular fund is conditional. (Sec the current rate. (Sec. 2, NIL)
3, NIL)
NOTE: A sum is certain within the contemplation
Indication of particular fund for of Section 1(b) of the NIL if the amount that is to be
reimbursement vs. Indication of particular fund unconditionally paid by the maker or drawee can
for payment be determined on the face of the instrument even if
it requires mathematical computation. (Sundiang
FUND FOR FUND FOR PAYMENT Sr. & Aquino, 2014)
REIMBURSEMENT
The drawee pays There is only one act - Payment with interest
the payee from his the drawee pays
own funds. directly from the Interest at a fixed rate or at increased or reduced
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rate will not destroy negotiability because the time of payment is rendered uncertain –
presence of such interest does not make uncertain NON-NEGOTIABLE
the sum payable. In the absence of a date as to
which interest is to run, it shall be from the date of Extension Clause
instrument, or in the absence thereof, at the date of
issue. In the absence of interest rate, it shall be the Extension Clauses are provisions extending the
legal rate. [Sec. 17 (b), NIL] time of payment.
Payment by installment GR: An extension clause does not affect the
negotiability of the instrument.
Payment by installment is certain if the dates of
each installment are fixed and the amount to be XPN: Where a note with a fixed maturity provides
paid for each installment is stated. (Sundiang Sr. & that the maker has the option to extend time of
Aquino, 2009) payment until the happening of a contingency, the
date is uncertain, and the instrument is non-
Q: Discuss the negotiability or non- negotiable. The time for payment may never come
negotiability: at all.
Manila, June 3, 1993 NOTE: If the right is given to the holder, the time of
P10,000.00 payment need not contain a new fixed maturity
date or the length of extension does not have to be
For value received, I promise to pay Sergio Dee specified.
or order the sum of P10,000.00 in five (5)
installments, with the first installment payable The reason is that the holder is free to demand
on October 5, 1993 and the other installments payment at maturity date or any time after said
on or before the fifth day of the succeeding date. On the other hand, if the obligor is the one
month or thereafter. given the right to extend payment, the interest of
the extension must be specified to keep the
(Sgd.) Lito Villa (1993 BAR) instrument negotiable, for of the right to extend is
without limit, it cannot be determined with
A: The instrument is negotiable because it absolute certainty when the holder will have the
complied with the requirements provided by absolute right to be paid. Thus, where the maker of
Section 1 of the NIL. The fact that it is payable in the note is given the right to extend the time of
installments does not make the instrument non- payment “for no longer than a reasonable time”
negotiable as long as the dates of each installment after maturity date, the note is non-negotiable
is fixed or at least determinable and the amount to because the definite time requirement is not met
be paid for each installment is stated. (NIL, Sec. (De Leon, 2010).
2[b])
Sum to be paid with exchange
Payment with an acceleration clause
The exchange is the charge for the expense of
Acceleration clause is a provision, that upon default providing funds at the place where the instrument
in payment of any installment or interest, the is payable to cover such instrument which is issued
whole shall become due. (Sec. 2(c), NIL) at another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills.
NOTE: Negotiability of an instrument with an (De Leon, 2010)
acceleration clause, depends on who has the option
to exercise the same. Payable in Philippine Peso
1. If the option to accelerate the maturity is The “money” referred to may be our legal tender or
on the maker, whether such option is foreign currency. An instrument is still negotiable
absolute or conditional – NEGOTIABLE although the amount to be paid is expressed in
2. Where acceleration is at the option of the currency that is not legal tender so long as it is
holder and can only be exercised upon the expressed in money. (Sec. 2(d); PNB v Zulueta, G.R.
happening of the specified event – No., L-7271, August 30, 1957)
NEGOTIABLE
3. Insecurity Clause - Where the holder’s NOTE: Under RA 8183, an agreement to pay in
right to accelerate is unconditional, the foreign currency is valid.
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Sum to be paid with costs of collection and/or is expressed to be payable: (ATiS)
attorney’s fees a. At a fixed period after date or sight;
b. On or before a fixed or determinable
It does not affect the certainty of the amount future time specified therein; or
payable at maturity since the increase in the c. On or at a fixed period after the occurrence
amount due, even if uncertain, takes place after of a specified event which is certain to
maturity when the instrument ceases to be happen, though the time of happening be
negotiable in the full commercial sense [Sec. 2 (e), uncertain. (Sec. 4, NIL)
NIL; De Leon 2010].
Q: Will an overdue instrument lose its
Effect if a bill or note is payable other than in negotiability?
money A: NO. It retains its negotiable character even if
overdue. An instrument negotiable in its origin
GR: The note or bill must be payable in money. If continues to be negotiable until it has been
payable in goods, wares, or merchandise, or in restrictively indorsed or discharged by payment or
property, the same is not negotiable. otherwise. (Sec. 47, NIL). It only loses its
negotiability in its strict and full commercial
XPNs: Negotiability is not affected if the note sense. (Sec. 52(b), NIL)
contains an additional provision which: (SECo
Law) 4. Payable to order
1. Authorizes the sale of collateral Securities in The instrument is payable to order where it is
case the instrument be not paid at maturity; drawn payable to the order of a specified person or
2. Gives the holder an Election to require to him or to his order. It may be drawn payable to
something to be done in lieu of payment of the order of:
money;
1. A Payee who is not a maker, drawer, or
3. Authorizes a Confession of judgment if the
drawee;
instrument be not paid at maturity; or
2. The Drawer or maker;
4. Waives the benefit of any Law intended for the
3. The Drawee;
advantage or protection of the obligor (Sec. 5,
4. Two or more payees jointly;
NIL).
5. One or some of Several payees; or
6. The Holder of an office for the time being. (Sec.
3. Payable on demand or at a fixed or
8, NIL)
determinable future time
Payable to bearer (ENaF PaLa)
1. Payable on demand – The holder may call for
payment any time, likewise, the maker may
1. When it is Expressed to be so payable; (e.g. I
also pay any time and the refusal of the holder
promise to pay to bearer P10,000.00)
to accept payment shall stop the running of
2. When it is payable to a person Named therein
interest should there be any, but obligation to
or bearer; (e.g. Pay to P or bearer P10,000.00)
pay the note subsists.
3. When it is payable to the order of a Fictitious
person or non-existing person, and such fact
An instrument is payable on demand: (ENO)
was known to the person making it so payable;
a. When it is so expressed to be payable on
(e.g. Pay to John Doe or order)
demand, or at sight, or on presentation; or
4. When the name of the Payee does not purport
b. In which no time for payment is expressed
to be the name of any person; (e.g. Pay to cash)
c. Where an instrument is issued, accepted,
5. When the only or the Last indorsement is an
or indorsed when overdue, it is, as regards
indorsement in blank. (Sec 9, NIL)
the person so issuing, accepting, or
indorsing it, payable on demand (Sec. 7,
NIL).
NOTE: An instrument which is a bearer in its
origin, remains a bearer instrument.
2. At a fixed time – A term or time instrument is
Indorsement of instrument payable to bearer -
payable only upon the arrival of the time for
Where an instrument, payable to bearer, is
payment.
indorsed specially, it may nevertheless be further
negotiated by delivery; but the person indorsing
3. At a determinable future time - An instrument
specially is liable as indorser to only such holders
is payable at a determinable future time which
as make title through his indorsement. (Sec. 40)
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A promissory note which does not have the words check knew that the fictitious payee cannot indorse
"or order" or "or bearer" will render the the instrument so that he must have intended for it
promissory note non-negotiable, and therefore the to be negotiated by mere delivery. (PNB v.
note can still be assigned and the maker made Rodriguez, G.R. No. 170325, September 26, 2008)
liable. (2012 Bar)
GR: In case of controversy, the drawer is liable and
Q: MP bought a used cell phone from JR. JR the drawee bank is absolved from liability.
preferred cash but MP is a friend so JR accepted
MR‘s promissory note for P10,000. JR thought XPN: When there is commercial bad faith,
of converting the note into cash by endorsing it whereby the drawee bank acts dishonestly and is a
to his brother KR. The promissory note is a party to the fraudulent scheme. The check is
piece of paper with the following hand-printed deemed payable to order, and consequently, the
notation: ― MP WILL PAY JR TEN THOUSAND drawee bank bears the loss. (Ibid)
PESOS IN PAYMENT FOR HIS CELLPHONE 1
WEEK FROM TODAY. Below this notation MP‘s When drawee must be named with reasonable
signature with ―8/1/00 next to it, indicating certainty (BJ-Pa)
the date of the promissory note. When JR
presented MP‘s note to KR, the latter said it was 1. In a bill of exchange, the drawee must be
not a negotiable instrument under the law and named or otherwise designated with
so could not be a valid substitute for cash. JR reasonable certainty. (Sec. 1, NIL)
took the opposite view, insisting on the note‘s 2. A bill may be addressed to two or more
negotiability. You are asked to referee. Which drawees jointly, but not to two or more
of the opposing views is correct? (2000 BAR) drawees in the alternative or in succession.
(Sec. 127, NIL) Eg. An instrument may be
A: The view of KR is correct. The note is payable to addressed “to A and B” but not “to A or B”.
a specific person hence it is not negotiable. The law 3. An instrument payable “to the order of the
provides that for an instrument to be negotiable, it bearer” has been held to be an instrument
must comply with the requirements of section 1 of payable to “order.”(10 C.J.S. 575-576)
the NIL pertaining to the part that a note must be
payable to order or bearer. In the given case, there Q: Indicate and explain whether the promissory
were no words of negotiability and it is silent as to note is negotiable or non-negotiable.
whether it is payable to order or bearer. Hence, the a. I promise to pay A or bearer Php100,000.00
instrument is non-negotiable. from my inheritance which I will get after
the death of my father.
Difference between having a check payable to a b. I promise to pay A or bearer Php100,000
fictitious payee and payable to a specified plus the interest rate of ninety (90) – day
payee treasury bills.
c. I promise to pay A or bearer the sum of
1. If a check is payable to a specified payee – it is an Php100,000 if A passes the 2012 bar exams.
order instrument, which requires indorsement d. I promise to pay A or bearer the sum of
from the payee or holder before it may be validly Php100.000 on or before December 30,
negotiated. 2012.
e. I promise to pay A or bearer the sum of
2. If a check is payable to the order of fictitious or Php100,000. (2012 BAR)
non-existing person – it shall be considered as a
bearer instrument, provided such fact is known A:
to the person making it so payable. Thus, checks a. NON-NEGOTIABLE. It is based on a
issued to “Prinsipe Abante” or “Si Malakas at si contingency and not on an unconditional
Maganda”, who are well-known characters in promise or order to pay a sum certain in
Philippine mythology, are bearer instruments. (De money. [Sec. 1 (b), NIL]
Leon, 2010) b. NEGOTIABLE. The instrument is negotiable
despite the inclusion of interest since the sum
Fictitious-Payee rule to be paid with said interest is still certain.
[Sec. 2 (a), NIL]
The fictitious-payee rule contemplates that the c. NON-NEGOTIABLE. The instrument is not an
payee is fictitious or not intended to be the true unconditional promise or order to pay a sum
recipient of the proceeds. The check is considered a certain in money since payment depends upon
bearer instrument negotiable by delivery alone. the happening of an event. [Sec. 1 (b), NIL]
The underlying theory is that the maker of the
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d. NEGOTIABLE. There is certainty in payment Q: TH is an indorsee of a promissory note that
since it is payable on or before a fixed or simply states: ― PAY TO JUAN TAN OR ORDER
determinable future time specified. [Sec. 4 (b), 400 PESOS. The note has no date, no place of
NIL] payment, and no consideration mentioned. It
Note: The inclusion of the phrase “on or was signed by MK and written under his
before” simply means that the maker may letterhead specifying the address, which
choose when he would pay. i.e. either on Dec. happens to be his residence. TH accepted the
30 2019, or before such period. promissory note as payment for services
e. NEGOTIABLE. It is a bearer instrument that is rendered to SH, who in turn received the note
payable upon demand. [Sec. 7 (b) and 9 (b), from Juan Tan as payment for a prepaid cell
NIL] phone card worth 450 pesos. The payee
acknowledged having received the note on
Q: Antonio issued the following instrument: August 1, 2000. A Bar reviewee had told TH,
who happens to be your friend, that TH is not a
August 10, 2013 holder in due course under Article 52 of the
Makati City Negotiable Instruments Law (Act 2031) and
therefore does not enjoy the rights and
P100,000.00 protection under the statute. TH asks for our
advice specifically in connection with the note
Sixty days after date, I promise to pay Bobby or being undated and not mentioning a place of
his designated representative the sum of ONE payment and any consideration. What would
HUNDRED THOUSAND PESOS (P100,000.00) your advice be? (2000 BAR)
from my BPI Acct. No. 1234 if, by this due date,
the sun still sets in the west to usher in the A: The place and date are not essential to the
evening and rises in the east the following negotiability of the instrument except in certain
morning to welcome the day. cases when [a] the date is necessary say to
determine when the note is due; or [b] the
(Sgd.) Antonio Reyes interest is to run when the payment of interest
has been stipulated or whether the holder is barred
Explain each requirement of negotiability by the statute of limitations from enforcing the
present or absent in the instrument. (2013 note. The fact that there is no mention of
BAR) consideration is not essential because it is
presumed.
A: The instrument contains a promise to pay and
was signed by the maker, Antonio Reyes; the Q: Which of the following stipulations or
promise to pay is unconditional insofar as the features of a promissory note (PN) affect or do
reference to the setting of the sun in the west in the not affect its negotiability, assuming that the PN
evening and its rising in the east in the morning are is otherwise negotiable? Indicate your answer
concerned, these are certain to happen; the by writing the paragraph number of the
instrument contains a promise to pay a sum certain stipulation or feature of the PN as shown below
in money, P100,000.00; the money is payable at a and your corresponding answer, either ―
determinable future time, sixty days after August Affected or Not affected. Explain.
10, 2013; the instrument is not payable to order or
to bearer; the promise to pay is conditional a. The date of the PN is ―February 30, 2002.
because the money will be taken from a particular b. The PN bears interest payable on the last
fund, the BPI Account No. 1234. day of each calendar quarter at a rate equal
to five percent (5%) above the then
Provisions that do not affect the negotiability of prevailing 91-day Treasury Bill rate as
an instrument (DaCS-VP) published at the beginning of such calendar
quarter.
1. Omission of Date c. The PN gives the maker the option to make
2. Designation of particular kind of Currency in payment either in money or in quantity of
which payment is to be made palay or equivalent value.
3. Bears a seal d. The PN gives the holder the option either to
4. Non-specification of Value given or that any require payment in money or to require the
value had been given maker to serve as the bodyguard or escort
5. Non-specification of Place where it is drawn or of the holder for 30 days. (2002 Bar)
payable
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A: A: NO, since it contains a promise to do an act in
a. NOT AFFECTED. Date is not one of the addition to the payment of money.
requirements for negotiability therefore it is
not essential except when the date is NOTE: What will not affect the negotiability of the
necessary to determine when the note is due instrument is an additional provision which gives
b. NOT AFFECTED. An instrument payable with an election to require something to be done in lieu
interest determinable at a fixed time is of payment of money.
negotiable. The law provides under section
2(a) of the NIL, a sum is still considered as Q: A writes a promissory note in favor of his
certain although it is to be paid with interest. creditor, B. It says: “Subject to my option, I
c. AFFECTED. An option given to the maker promise to pay B Php1 Million or his order or
makes the promise conditional give Php1 Million worth of cement or to
d. NOT AFFECTED. An option given to the holder authorize him to sell my house worth Php1
does not make the promise conditional Million. Signed, A.” Is the note negotiable?
(2011 BAR)
Q: B borrowed Php1 million from L and offered
to him his BMW car worth Php 1 Million as A: NO because the exercise of the option to pay lies
collateral. B then executed a promissory note with A, the maker and debtor.
that reads: “I, B, promise to pay L or bearer the
amount of Php1 Million and to keep my BMW NOTE: In order not to affect the negotiability of the
car (loan collateral) free from any other instrument, the option must be with the
encumbrance. Signed, B.” Is this note holder/creditor.
negotiable? (2011 BAR)
Q: Distinguish a negotiable document from a negotiable instrument (2005 BAR)
BASIS NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT
A written contract intended as a Held to be non-negotiable in the technical
Substitute for
substitute for money like promissory sense because they do not have the
money
notes and bill of exchange. requisites under the NIL.
It has various forms such as but not
It may either be a bill of exchange or a
Forms limited to bill of lading, stock certificates,
promissory note.
warehouse receipts, and pawn tickets.
The subject matter is a sum certain in
Subject Matter It actually stands for the goods it covers.
money.
Capability of Capable of accumulating secondary Not capable of accumulating secondary
Accumulating contracts resulting from indorsements contracts resulting from indorsements at
Secondary Contracts at the back thereof. the back thereof.
KINDS OF NEGOTIABLE INSTRUMENTS future time a sum certain in money to order or
to bearer. (NIL, Sec. 126)
Kinds of negotiable instruments
3. Check – A bill of exchange drawn on a bank
1. Promissory notes (PN) – An unconditional payable on demand. (NIL, Sec. 185)
promise in writing made by one person to
another, signed by the maker, engaging to pay Promissory note vs. Bill of exchange
on demand, or at a fixed or determinable
future time, a sum certain in money to order or PROMISSORY BILL OF
to bearer. (NIL, Sec. 184) BASIS NOTE EXCHANGE
Undertakin Promise to
2. Bill of exchange (BOE) – An unconditional Order to pay
g pay
order in writing addressed by one person to As to 3 parties
another signed by the person giving it, number of (upon
requiring the person to whom it is addressed 2 parties
original acceptance of
to pay on demand or at a fixed or determinable parties
the drawee
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Sec. 127) d. Warehouse Receipts
As to Maker is Drawer is e. Treasury warrants payable from a specific
liability of primarily secondarily fund
parties liable liable f. Certificate of Indebtedness
2 g. Electronic messages
presentments
Only 1
As to (for A:
presentment
number of acceptance a. Postal money order is not a negotiable
(for
presentmen and for instrument because, as held in Phil. Education
payment) is
ts needed payment) are Co. vs Soriano, there are many restrictions
needed
generally which make them incompatible with concepts
needed of negotiable instruments, thereby making the
order conditional, in contrast to Sec. 1 of the
A bill of exchange itself does not operate as an NIL. Furthermore, such is governed by postal
assignment of the funds in the hands of the drawee rules and regulations and it may only be
available for the payment thereof, and the drawee negotiated once.
is not liable on the bill unless and until he accepts b. The certificate of time deposit is a negotiable
the same. (Sec. 127, NIL) instrument because it is an acknowledgement
in writing by the bank of the amount of deposit
A bill of exchange may be addressed to two or with a promise to repay the same to the
more drawees jointly, whether partners or not; but depositor or bearer thereof at a specific time.
not to two or more drawees in the alternative or in (Caltex Philippines, Inc. vs. Court of Appeals and
succession. (Sec. 128, NIL) Security Bank and Trust Company, G.R. No.
97753, August 10, 1992)
Inland Bill of Exchange vs. Foreign Bill of c. A letter of credit is not negotiable because it is
Exchange generally conditional and has limited
negotiability - it is issued in favor of a specific
An inland bill of exchange is one which is, or on its person. But the Supreme Court held in Lee vs.
face purports to be, both drawn and payable within Court of Appeals, that the drafts issued in
the Philippines. Any other bill is a foreign bill. connection with the letters of credit are
negotiable instruments.
Unless the contrary appears on the face of the bill, d. A warehouse receipt is not a negotiable
the holder may treat it as an inland bill (Sec. 129, instrument because the obligation of a
NIL). warehouseman is not to pay but to deliver the
goods under the warehouse receipt which fails
When a bill of exchange may be treated as to comply with the requirements set forth
promissory note (2015 BAR) (FACS) under Sec. 1 of the NIL. It is merely considered
as a negotiable document that does not result
1. The drawee is a fictitious person; in the accumulation of contracts.
2. When the instrument is so ambiguous that e. A treasury warrant requires appropriations
there is doubt whether it is a bill or a note, the from the national government which means
holder may treat it either at his election; that the particular fund may or may not exists
3. The drawee does not have the capacity to which renders it conditional, thereby non-
contract ; negotiable.
4. Where in a bill the drawer and the drawee are f. Not negotiable. A certificate of indebtedness
the same person. (Sec. 130; Sec. 17(e), NIL) merely acknowledges an obligation to pay a
sum of money to a specified persons or entity.
Q: State and explain whether the following are Since a certificate of indebtedness which is
negotiable instruments under the Negotiable not payable to order or bearer but is payable
Instruments Law: to a specific person is not negotiable, the
assignee takes it subject to the defect in the
a. Postal Money Order title of the assignor. Thus, when the person
b. A certificate of time deposit which states who signed the deed of assignment was not
“This is to certify that bearer has deposited authorized by the board of directors, the
in this bank the sum of FOUR THOUSAND assignor had no title to convey to the assignee.
PESOS (P4,000) only, repayable to the (Traders Royal Bank vs. Court of Appeals,
depositor 200 days after date.” Filriters Guaranty Assurance Corporation and
c. Letters of Credit
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Central Bank of the Philippines, G.R. No. 93397, investor-clients; and, they are not payable to
March 3, 1997) order or bearer but to a specifically
g. The electronic messages are not signed by the designated third party. Thus, the electronic
investor-clients as supposed drawers of a bill messages are not bills of exchange.
of exchange; they do not contain an (Hongkong & Shanghai Banking Corp. v. CIR,
unconditional order to pay a sum certain in G.R. Nos. 166018 & 167728, June 4, 2014)
money as the payment is supposed to come
from a specific fund or account of the
Parties to a negotiable instrument and their liabilities
BASIS PARTIES FUNCTION LIABILITY
One who makes the promise and signs Primarily liable; cannot limit his
Maker
the instrument. liability.
PN
The party to whom payment is
Payee
originally payable.
Secondarily liable, except when
drawee refused to accept; may insert
The person who issues and draws the
Drawer in the instrument an express
bill.
stipulation negativing or limiting his
own liability to the holder. (Sec. 61)
BOE The party upon whom the bill is
Drawee Not liable until he becomes acceptor.
drawn.
The party to whom payment is The party to whom payment is
Payee
originally payable. originally payable.
The acceptor is the drawee who
Acceptor Primarily liable.
accepts the bill.
NOTE: Drawee does not assume automatic liability Steps in the issuance of a negotiable instrument
unless he “accepts” the command of the drawer.
Acceptance signifies the assent by writing the word 1. The mechanical act of writing the instrument
“accepted” and signing his name on the face of the completely and in accordance with Sec. 1 of
instrument. NIL.
2. Delivery - The transfer of possession, actual or
Q: What is the remedy in case the drawee does constructive, from one person to another (NIL,
not accept? Sec. 191), with the intent to transfer title to
payee and recognize him as holder thereof.
A: Payee cannot file a suit against the drawee. The
remedy is to go after the drawer. Payee has no INSERTION OF DATE
cause of action against the drawee if no acceptance
has been made. GR: The date is not essential to the negotiability of
the instrument (not one of the requirements under
Importance of acceptance of the bill of Sec. 1).
exchange by the drawee
XPNs: Date is important to determine maturity:
The acceptance of a BOE is not important in the (FiDeI)
determination of its negotiability. The nature of
acceptance is important only in the determination 1. Where the instrument is payable within a fixed
of the kind of liabilities of the parties involved. period after date is issued undated, or the
(Philippine Bank of Commerce v. Aruego, G.R. Nos. L- acceptance of the instrument payable at a fixed
25836-37, January 31, 1981) period after sight is undated. (Sec. 13, NIL)
2. When the instrument is payable on demand,
date is necessary to determine whether the
COMPLETION AND DELIVERY instrument was presented within a reasonable
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time from issue, or from the last negotiation. COMPLETION OF BLANKS
[Secs. 71 and 143 (a), NIL]
3. When the instrument is an interest-bearing Meaning of a “Material particular”
one, to determine when the interest starts to
run. It is any particular that may be properly be
inserted in a negotiable instrument to make it
Insertion of a wrong date complete.
The insertion of a wrong date does not avoid the Various situations involving negotiable
instrument in the hands of a subsequent holder in instruments
due course, but as to a HIDC, the date so inserted is
to be regarded as the true date. With respect to the 1. Incomplete instrument
person who inserted the wrong date, however, the a. Delivered
instrument is avoided. (Bank of Houston v. Day, 145 i. With forgery and alteration
Mo. Appl. 410, 122 SW 756) ii. Without forgery and alteration
b. Not delivered
Ante-dating or post-dating an instrument i. With forgery and alteration
ii. Without forgery and alteration
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, 2. Complete instrument
provided it is not done for illegal or fraudulent a. Delivered
purpose. (Sec. 12, NIL) i. With forgery and alteration
ii. Without forgery and alteration
Q: Can a bill of exchange or a promissory note b. Not delivered
qualify as a negotiable instrument if: i. With forgery and alteration
ii. Without forgery and alteration
a. it is not dated;
b. or the day and the month, but not the year NOTE: If an instrument is complete and delivered
of its maturity, is given; or without forgery and alteration, all parties are
c. it is payable to ―cash bound.
d. it names two alternative drawees (1997
BAR) INCOMPLETE BUT
DELIVERED INSTRUMENTS Sec. 14
A:
a. YES. Date is not an essential requirement for Prima facie authority to fill up the blanks
the negotiability of an instrument as provided
for in Section 1 of the NIL XPN: (FiDeI) A signature on a blank paper delivered by the
b. NO. Since the year is not determined, the time person making the signature in order that the
for payment is not determinable. paper may be converted into a negotiable
c. YES. When the name of the payee does not instrument operates as a prima facie authority to
purport to be the name of any person, the law fill it up as such for any amount.
provides in Section 9(d) of the NIL that the
maker or drawer intends the same to be In order, however, that any such instrument when
payable to bearer, hence the instrument completed may be enforced against any person
qualifies as a negotiable instrument. who became a party thereto prior to its
d. NO. When the bill is addressed to two or more completion, it must be filled up strictly in
payees in the alternative, the law provides in accordance with the authority given and within a
section Section 128 of the NIL that it is reasonable time. (Sec. 14, NIL
conditional and therefore non-negotiable.
NOTE: While under the law, the one in possession
Holder may insert the date in an instrument in had a prima facie authority to complete the check,
the following instances (EA) such prima facie authority does not extend to its
use (i.e., subsequent transfer or negotiation) once
1. Where an instrument expressed to be payable the check is completed. (Patrimonio v. Gutierrez,
at a fixed period after date is issued undated G.R. No. 187769, June 4, 2014)
2. Where the acceptance of an instrument
payable at a fixed period after sight is undated. Q: To secure certain advances from the bank, X
(Sec. 13, NIL) and Y executed several promissory notes. When
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the obligation became due, X and Y failed to pay reasonable time as if it had been filled up strictly in
the same despite repeated demands. To evade accordance with the authority given.
their liability, they claimed that they signed the
promissory notes in blank and they had not INCOMPLETE
received the value of said notes. Is their defense AND UNDELIVERED INSTRUMENTS
tenable? (2006 BAR)
Where an incomplete instrument has not been
A: NO. It is no defense that the promissory notes delivered, it will not, if completed and negotiated
were signed in blank as Section 14 of the without authority, be a valid contract in the hands
Negotiable Instruments Law concedes the prima of any holder, as against any person whose
facie authority of the person in possession of signature was placed thereon before delivery. (Sec.
negotiable instruments to fill in the blanks. 15, NIL)
(Quirino Gonzales Logging Concessionaire vs. CA,
G.R. No. 126568, April 30, 2003) NOTE: Non-delivery of an incomplete instrument is
a real defense which may be set up even against a
Enforcement of an incomplete but delivered holder in due course.
instrument; effect if a completed instrument
was negotiated to a holder in due course Q: Jun was about to leave for a business trip. As
his usual practice, he signed several blank
In order that any such instrument when completed checks. He instructed Ruth, his secretary, to fill
may be enforced against any person who became a them as payment for his obligations. Ruth
party thereto prior to its completion, it must be filled one check with her name as payee,
filled up strictly in accordance with the authority placed P30,000.00 thereon, endorsed and
given and within reasonable time. delivered it to Marie. She accepted the check in
good faith as payment for goods she delivered
However, if such instrument, after completion, is to Ruth. Eventually, Ruth regretted what she
negotiated to a holder in due course, it is valid and did and apologized to Jun. Immediately he
effectual for all purposes in his hands, and he may directed the drawee bank to dishonor the
enforce it as if it had been filled up strictly in check. When Marie encashed the check it was
accordance with the authority given and within dishonored.
reasonable time. Hence, the defense that the blanks
were filled up beyond the authority given and/ or Supposing the check was stolen while in Ruth's
beyond the reasonable time, is not available possession and a thief filled the blank check,
against a HIDC endorsed and delivered it to Marie in payment
for the goods he purchased from her, is Jun
NOTE: Non-delivery of complete instrument is a liable to Marie if the check is dishonored?
personal defense. (2006 BAR)
Q: Lorenzo signed several blank checks A: NO. The check is an incomplete instrument not
instructing Nicky, his secretary, to fill them as delivered in contemplation of law. An incomplete
payment for his obligations. Nicky filled one instrument not delivered is not a valid contract in
check with her name as payee, placed the hands of any holder as against any person
P30,000.00 thereon, endorsed and delivered it whose signature was placed thereon before
to Evelyn as payment for goods the latter delivery. As such, Jun is not liable to Marie since
delivered to the former. When Lorenzo found he does not assume any responsibility whatsoever
out about the transaction, he directed the upon the said check. He is a party prior to the
drawee bank to dishonor the check. When unauthorized completion and delivery. (Sec. 15,
Evelyn encashed the check, it was dishonored. NIL)
Is Lorenzo liable to Evelyn? (2004, 2006 Bar)
NOTE: Delivery is not conclusively presumed
A: YES. This covers the delivery of an incomplete where the instrument is incomplete
instrument under Section 14 of the Negotiable
Instruments Law, which provides that there was Q: PN makes a promissory note for P5,000.00,
prima facie authority on the part of Nicky to fill-up but leaves the name of the payee in blank
any of the material particulars thereof. Having because he wanted to verify its correct spelling
done so, and when it is first completed before it is first. He mindlessly left the note on top of his
negotiated to a HIDC like Evelyn, it is valid for all desk at the end of the workday. When he
purposes, and she may enforce it within a returned the following morning, the note was
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missing. It turned up later when X presented it The instrument is deemed issued upon the first
to PN for payment. Before X, T who turned out delivery of the instrument, complete in form, to a
to have filched the note from PN’s office, had person who takes it as holder. (Sec. 191, NIL)
endorsed the note after inserting his own name
in the blank space as the payee. PN dishonored Conditional delivery or delivery for a special
the note, contending that he did not authorize purpose
its completion and delivery. But X said he had
no participation in, or knowledge about the The delivery is made conditional or for a special
pilferage and alteration of the note and purpose if it was made not for the purpose of
therefore he enjoys the rights of a holder in due transferring the property (title) to the instrument.
course under the Negotiable Instruments Law. In such case, if the instrument lands in the hands of
Who is correct and why? (2000 BAR) an HIDC (one who does not know of the conditional
delivery or of its special purpose), the instrument
A: PN is correct. Since the negotiable instrument is is treated as if there is no condition. If such
still incomplete and has not yet been delivered, PN delivery was made to a holder not in due course,
is correct in dishonoring the said instrument. Sec. prior parties are not bound by the instrument. (Sec.
15 provides that where an incomplete instrument 16, NIL)
has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in NOTE: The law contemplates that the condition is
the hands of any holder, as against any person orally or verbally conveyed to the holder upon
whose signature was placed thereon before delivery, because of the rule that the negotiability
delivery. Thus, under this section, it is a real is determined only upon the face of the instrument.
defense that can even be interposed against a
holder in due course. Imposing a verbal condition is a personal defense.
NOTE: Personal defense can only be interposed by Presumption as to delivery
parties prior to completion. Those parties after
completion cannot assert personal defense. If the instrument is in the possession of a HIDC,
valid delivery is conclusively presumed.
COMPLETE
BUT UNDELIVERED INSTRUMENTS Sec. 16 If the instrument is in the possession of a party
other than a HIDC, possession of such party
It is incomplete and revocable until delivery of the constitutes only prima facie presumption of
instrument for the purpose of giving it effect (Sec. delivery.
16, NIL). Delivery is essential to the validity of any
negotiable instrument. (Sundiang Sr. & Aquino, Immediate Parties
2009)
Immediate parties are persons having knowledge
Where a debtor who drew two checks payable to of the conditions or limitations placed upon the
his creditor never delivered the checks to his delivery of an instrument. It means privity, and not
creditor and a third party was able to collect the proximity.
proceeds of the checks by forging the endorsement
of the creditor as payee, the creditor has no cause A payee who is a holder in due course is not an
of action against anyone on the basis of the checks, immediate party in the sense of Section 16. (Liberty
since the payee acquires no interest in the check Trust Co. v. Tilton, 105 N.E. 05.)
until its delivery to him. (Development Bank of Rizal
v. Sim Wei, G.R. No. 85419, March 9, 1993) Remote Parties
NOTE: The defense of want of delivery of a Persons without knowledge as to the conditions or
complete instrument is only a personal defense limitations placed upon the delivery of an
which means that it is only available against a instrument, even if he is the next party physically
holder NOT in due course. or parties who are not in direct contractual relation
to each other, but if they are chargeable, for
NOTE: Delivery with the intent to transfer is a pre- example, with knowledge or notice of any
requisite to liability. infirmities in the instrument or defect in the title of
the person negotiating the same, they will be
Issuance of an instrument considered as immediate parties for purposes of
Section16.
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that the signature is the usual signature of the
maker.
SIGNATURE
SIGNING IN TRADE NAME
Validity of signature in a negotiable instrument As a general rule, only persons whose signatures
appear on an instrument are liable thereon. But
A party may use his full name, surname, initials or one who signs in a trade or assumed name is liable
even any mark in signing a negotiable instrument as if he signed his own name. (Sec. 18, NIL)
to indicate his intention to bind himself.
NOTE: It is necessary that the party who signs in a
NOTE: A signature may be made in any manner as trade name intended to be bound by his signature.
long as the person signing has the intention to be
bound. SIGNATURE OF AGENT
Persons liable on an instrument Requisites for an agent to be exempt from
liability (DADi)
GR: Only persons whose signatures appear on an
instrument are liable thereon. (Sec. 18, NIL) 1. He is Duly Authorized
2. He Adds words to his signature indicating that
XPNs: Notwithstanding the absence of their he signs as an agent/representative and
signatures in their own names, the following 3. He Discloses the name of his principal. (Sec. 20,
persons are deemed liable: (TraP FAP) NIL)
1. Person who signs in Trade or assumed name Legal effects of an agent’s signature
(Sec. 18, NIL)
2. Principal who signs through a duly authorized The agent’s signature, provided that the above
agent and such agent discloses the name of his requisites are complied with, will bind his principal
principal and adding words to show he is and he will be exempt from personal liability.
merely signing in a representative capacity
(Sec. 19, 20, NIL) Procuration
3. Forger (Sec. 23, NIL)
4. Acceptor, who makes his acceptance of a bill It is the act by which a principal gives power to
on a separate paper (Sec. 134, NIL) another to act in his place as he could himself. (Fink
5. Person, who makes a written Promise to v. Scott, 143 S.E. 305)
accept the bill before it is drawn (Sec. 135, NIL)
It operates as notice or a warning that the agent
Where a signature is so placed upon the has but a limited authority to sign and the principal
instrument that it is not clear in what capacity the is bound only in case the agent in so signing acted
person signed, he is deemed to be an indorser, not a within the actual limits of his authority. (Sec. 21,
maker or drawer. (Sec. 17(f), NIL) NIL)
Q: Juan borrowed P10,000.00 from Joe as INDORSEMENT BY MINOR OR A CORPORATION
evidenced by a promissory note. All other
requisites of negotiability are present except 1. Minor
that Juan did not affix his usual signature GR: A contract entered into by a minor is
thereon as he was ailing at that time and was voidable, at the option of the minor. It is a real
only able to put “X” in the blank space meant defense that can be invoked only by the minor,
for the signature of the maker. Is the requisite even against a holder in due course, and cannot
that the instrument must be signed by the be invoked by the other parties.
maker complied with?
XPN: Where a minor committed actual fraud
A: YES. The letter “X” is sufficient to comply with by specifically stating that he is of legal age, a
the requirement. It appears from the problem that minor can be bound by his signature in an
such letter was adopted by Juan with the intent to instrument. (PNB v. CA, G.R. No. L-34404, June
authenticate the instrument. It is not necessary 25, 1980)
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NOTE: While a minor is not bound by his NOTE: Section 23 applies only to forged signatures
indorsement for lack of capacity, he is however or signatures made without authority.
not incapacitated to transfer his rights.
Burden of proof in proving forgery
Q: A executed a promissory note in favor of M Forgery, as any other mechanism of fraud must be
which reads: proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery. (Chiang Yia
I promise to pay P (16 years old) or order Min v. CA, G.R. No. 137932, March 28, 2001)
P10,000. Illustration
Sgd. M
Pay to P or order P10,000 30 days after sight.
P indorsed it to A.
(Sgd)D, (forged by P)
a. May A collect from M notwithstanding that To X
P, the indorser is a minor?
b. In case that A cannot collect from M, can he P presented the instrument for acceptance. X
collect from P? accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
A: the present holder. In this case, if after 30 days the
a. YES. A can collect from M. Notwithstanding the holder presented the instrument to X for payment
fact that P is a minor, the indorsement of P (the the latter is liable despite the forgery, because by
minor) passes title to A. The holder. M cannot preclusion, the acceptor admits the genuineness of
invoke the defense of minority because such the drawer’s signature. (Sec. 62, NIL)
defense would only be available to P.
b. NO. A cannot collect from P, as he has a real NOTE: Forged signature of a maker or drawer is
defense of minority on his part. different and has a different effect from/against
forged indorsements.
2. Incapacitated person – An incapacitated person
may also use as a real defense his incapacity A payee may sue the collecting bank for the
to enter into a contract. Contract entered into amount of the checks it paid under a forged
by the incapacitated are voidable. indorsement even when the instrument has not
been delivered to the payee
Incapacitated persons include:
a) insane or demented persons; and The collecting bank is liable to the payee and must
b) deaf and blind who does not know how to bear the loss because it is its legal duty to ascertain
write. that the payee’s indorsement (signature), its
customer, was genuine before cashing the check.
3. Corporation - Issuance or indorsement of an That there was no delivery yet and therefore he
instrument by a corporation acting beyond its never became the owner of the check is immaterial
powers (ultra vires) is a real defense. since the payee merely used one action to reach, by
desirable shortcut, the person who ought in any
GR: Infants and corporations (ultra vires) incur no event to be ultimately liable as among the innocent
liability by their indorsement or assignment of an persons. The payee is allowed to directly recover
instrument. (Sec. 22, NIL) from the collecting bank to simplify proceedings.
(Westmont Bank v. Ong, 373 SCRA 212)
Effects: No liability attached to the infant or the
corporation. The instrument is still valid and the Effects of forgery
indorsee acquires title.
It does not avoid the instrument but only the
FORGERY forged signature. In other words, rights may still
exist and be enforced by virtue of such instrument
It is the counterfeit making or fraudulent alteration as to those signatures thereto are found to be
of any writing. It happens when a signature is genuine.
affixed by one who does not claim to act as an
agent and who has no authority to bind the person GR: As regard the signature that is forged, the same
whose signature he has forged. (Sec. 23, NIL) shall be wholly inoperative.
XPNs:
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1. If the party against whom it is sought to employees. And if the drawer (depositor) learns
enforce such right is precluded from setting up that a check drawn by him has been paid under a
forgery or want of authority; (Sec. 23, NIL) forged indorsement, the drawer is under duty
2. Where the forged signature is not necessary to promptly to report such fact to the drawee bank.
the holder’s title, in which case, the forgery For his negligence or failure either to discover or to
may be disregarded. (Sec. 48, NIL) report promptly the fact of such forgery to the
drawee, the drawer loses his right against the
Persons precluded from setting up the defense drawee who has debited his account under a
of forgery (2010 BAR) (SEA) [E – asin] forged indorsement. In other words, he is
precluded from using forgery as a basis for his
1. Those who Admit or warrant the genuineness claim for re-crediting of his account. (Gempesaw v.
of the signature such as indorsers, persons CA G.R. No. 92244, February 9, 1993)
negotiating by delivery and acceptor
2. Those who by their acts, silence, or negligence Rules on liabilities of parties on a forged
(asin), are Estopped from claiming forgery instrument
3. A holder of a bearer instrument who
Subsequently negotiates such instrument with In a Promissory Note:
a prior forged indorsement, because in bearer
instrument, the forged signature is not 1. A party whose indorsement is forged on a note
necessary to the holder’s title it being payable to order and all parties prior to him
negotiably by mere delivery. including the maker cannot be held liable by
any holder.
Cut-off Principle 2. A party whose indorsement is forged on a note
originally payable to bearer and all parties
Although rights may exist between and among prior to him including the maker may be held
parties subsequent to the forged indorsement, not liable by a holder in due course provided that
one of them can acquire rights against parties prior it was mechanically complete before the
to the forgery. Such forged indorsement cuts off the forgery.
rights of all subsequent parties as against parties 3. A maker whose signature was forged cannot be
prior to the forgery. However, the law makes an held liable by any holder.
exception to these rules where a party is precluded
from setting up forgery as a defense [SEA]. In a Bill of Exchange:
Problems arising from forged indorsements of 1. The drawer’s account cannot be charged by the
checks drawee where the drawee paid.
2. The drawer has no right to recover from the
As a matter of practical significance, problems collecting bank
arising from forged indorsements of checks may 3. The drawee bank can recover from the
generally be broken into two types of cases: collecting bank
4. The payee can recover from the drawer
1. Where forgery was accomplished by a person 5. The payee can recover from the recipient of
not associated with the drawer — for example, the payment, such as the collecting bank
a mail robbery; and 6. The payee cannot collect from the drawee
2. Where the indorsement was forged by an bank
agent of the drawer. 7. The collecting bank bears the loss but can
recover from the person to whom it paid
This difference in situations would determine the 8. If payable to bearer, the rules are the same as
effect of the drawer's negligence with respect to in PN.
forged indorsements. 9. If the drawee has accepted the bill, the drawee
bears the loss and his remedy is to go after the
While there is no duty resting on the depositor to forger
look for forged indorsements on his cancelled 10. If the drawee has not accepted the bill but has
checks in contrast to a duty imposed upon him to paid it, the drawee cannot recover from the
look for forgeries of his own name, a depositor is drawer or the recipient of the proceeds,
under a duty to set up an accounting system and a absence any act of negligence on their part.
business procedure as are reasonably calculated to
prevent or render difficult the forgery of Liabilities of the parties to a negotiable
indorsements, particularly by the depositor's own instrument where an indorsement is forged
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2. When the payee’s signature is forged
Illustration Drawee bank is liable because it owes to the
drawer-depositor an absolute and contractual
duty to pay the check only to the person to
whom it is made payable. Drawee bank, in such
case, should credit back and restore to
drawer’s account the value of the check
wrongfully encashed.
3. When the indorser’s signature is forged
Drawee bank bears the loss as it is under
strict liability to pay the check to the order of
1. If the instrument is payable to order and the the payee. Payment under forged indorsement
indorsement of one of the indorsers is forged, is not to the drawer’s order. Ensuingly, if the
C can enforce the note against X and B but not drawee bank pays a check bearing forged
against M, P or A, because were it not for the signature of indorser, it does so at its own peril.
forgery of X the instrument will not reach the
possession of C (Cut Off Rule). However, the drawee bank may pass the
2. If the instrument is payable to bearer, the liability to the collecting bank who cannot
indorsement of X is not necessary to vest title interpose the defense of forgery. Under Sec. 16
to C because negotiation on bearer instrument of NIL the collecting bank is an indorser who
requires only delivery. warrants that the instrument is genuine and in
all respect what it purports to be. The
Q: After securing a Pl million loan from B, A collecting bank had no right to be paid by the
drew in B's favor a bill of exchange with C as drawee bank since the forged indorsement is
drawee. The bill reads: "October 1, 2016. Pay to inoperative. The collecting bank may
the order of B the sum of P1 million. To: C ultimately recover from the forger.
(drawee). Signed, ”A." A then delivered the bill
to B who, however, lost it. It turned out that it NOTE: In all three cases, when the drawer is guilty
was stolen by D, B's brother. D lost no time in of negligence, he should bear the loss. He is
forging B's signature and negotiated it to E who precluded from setting up forgery because the
acquired it for value and in good faith. proximate cause of the loss is his own negligence.
(Pre-Week Reviewer in Commercial Law,
May E recover on the bill from C, the drawee? Dimaampao and Escalante)
Explain. (2016 BAR)
Responsibility of Drawee Bank
A: NO, E cannot recover from C, the drawee. The
forged endorsement of B did not result in If Forged Signature
transfer of title in favor of E as no right can be
acquired under such forged endorsement. GR: Bank assumes the responsibility of seeing that
the money gets to the party authorized to receive
Legal consequences when a bank honors a it. Hence, if it pays money out on forged signature,
forged check the depositor being free from blame/negligence, it
must bear the loss.
1. When drawer's signature is forged
Drawee bank is liable because the bank is XPN: Payee was not a client of the bank (did not
bound to know the signature of its customers maintain an account in the said bank) and latter
and if it pays a forged check, it must be therefore had no way of ascertaining the
considered as making the payment out of its authenticity of payee’s indorsements on all checks
own funds and cannot ordinarily charge the which were deposited in the account. The bank
amount so paid to the account of the depositor cannot be held negligent where it caused checks to
whose name was forged. It is also in a superior pass thru the clearing house before proceeds were
position to detect the forgery because it has a withdrawn.
specimen of the signature of the maker. Lastly,
by accepting the instrument, it becomes an If Forged Indorsement
acceptor who admits the genuineness of the
drawer’s signature. GR: The Drawee bank who has paid the check on
which an indorsement has been forged cannot
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debit or charge upon drawer’s account for the account cannot be charged because the
amount of said check. It is not entitled to indorsement of the payee is a forgery.
indemnification from the drawer. Risk of loss falls Hence, it is wholly inoperative and
on the drawee bank therefore, ABC Bank has no right to ask the
drawer for its payment.
XPN: If drawer is guilty of negligence which causes b. XYZ Bank is, however, liable to the drawee
the bank to honor such checks, he shall bear the bank because of its warranty as an
loss. indorser. (Sec. 66, NIL)
c. D, the drawer, is not liable on the check
Q: X Corporation opened an account with Y because his order is to pay P or his order
Bank with its President and and not to any other person.
Secretary/Treasurer as signatories. While they
are abroad, several checks bearing their 2. If the instrument is payable to bearer:
signatures were presented to and approved by
the bank. The amount of these checks was then a. ABC Bank, the drawee-bank, may charge
debited against the account of the corporation. the amount thereof to the account of the
Upon noticing the deductions in their account, drawer because the forged indorsement
they requested the bank to credit back the did not prevent the transfer of title. The
same amount, claiming that the deductions remedy of the drawer is against the forger.
were unauthorized and fraudulently made. The b. Drawer has no cause of action against
bank refused to restore the amount. Who collecting bank, since the duty of
should bear the loss? collecting bank is only to the payee
(Manila Lighter Transportation, Inc. v. CA,
A: As between a bank and its depositor, where the G.R. No. L-50373 February 15, 1990). The
bank’s negligence is the proximate cause of the loss drawee-bank can recover from the
and the depositor is guilty of contributory collecting bank because even if the
negligence, the greater proportion of the loss shall indorsement on the check deposited by the
be borne by the bank. The bank was negligent bank's client is forged, collecting bank is
because it did not properly verify the genuineness bound by its warranties as an indorser and
of the signatures in the applications for manager’s cannot set up defense of forgery as against
checks while the depositor was negligent because drawee bank. (Associated Bank v. CA, G.R.
it clothed its accountant/bookkeeper with No. 107382, January 31, 1996)
apparent authority to transact business with the
Bank and it did not examine its monthly statement Q: X entrusted his check books, credit cards,
of account and report the discrepancy to the Bank. passbooks, bank statements and cancelled
(PNB vs. FF Cruz and Company, G.R. No. 173259, July checks to his secretary. He also introduced the
25, 2011) secretary to the bank for purposes of
reconciliation of his accounts. Subsequently, X’s
Q: X fraudulently obtained possession of the secretary forged his signature on the checks
check and forged P’s signature and then and was able to withdraw his money. Is the
indorsed and deposited the check with XYZ drawee bank liable for the amounts withdrawn
bank which honored the check and placed the by the secretary?
amount thereof to his credit. Thereafter, XYZ
Bank indorsed the check to the drawee bank- A: Yes. However, there is contributory negligence
ABC bank which paid it and charged the on the part of X in clothing his secretary with such
account of the drawer. authority, consequently making him partly liable.
Furthermore, he is precluded from setting up the
Illustrate the liability of a drawer and a forgery due to his own negligence in entrusting to
drawee-bank in an 1) instrument payable to his secretary his credit cards and check book
order and in an 2) instrument payable to including the verification of his statements of
bearer in case of a forgery on payee’s signature. account. (Ilusorio v. CA, G.R. No. 139130, November
27, 2002)
A:
1. If the instrument is payable to order:
Q: The drawer’s signature was forged. There is,
a. The drawee bank is liable to the drawer however, a provision in the monthly bank
for the amount of the check and his statement that if the drawer’s signature was
forged, the drawer should report it within 10
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days from receipt of the statement to the then negotiated the bill to her sister, Elena, who
drawee. The drawer, however, failed to do so. paid for it for value, and who did not know who
What will be its effect insofar as the drawer’s Lorenzo was. On due date, Elena presented the
right is concerned? bill to Diana for payment, but the latter
promptly dishonored the instrument because,
A: The failure of the drawer to report the forgery by then, Diana had already learned of her
within ten days from receipt of the monthly bank husband’s dalliance. Does the illicit cause or
statement from the drawee bank does not preclude consideration adversely affect the negotiability
the drawer from questioning the mistake of the of the bill? Explain. (2009 BAR)
drawee bank despite the provision. (BPI v. CASA
Montessori Internationale, G.R. No. 149454, May 28, A: NO. The illicit cause or consideration does not
2004) adversely affect the negotiability of the bill,
especially in the hands of a holder in due course.
Q: If forgery was committed by an employee of Under Sec. 1 of the Negotiable Instruments Law,
the drawer whose signature was forged, does the bill of exchange is a negotiable instrument.
the relationship amount to estoppel such that Every negotiable instrument is deemed prima facie
the drawer is precluded in recovering from the to have been issued for valuable consideration, and
drawee bank? every person whose signature appears thereon is
deemed to have become a party thereto for value.
A: The bare fact that the forgery was committed by (Sec. 24, NIL)
an employee of the party whose signature was
forged can not necessarily imply that such party’s Q: R issued a check for P1M which he used to
negligence was the cause of the forgery in the pay S for killing his political enemy. Can the
absence of some circumstances raising estoppel check be considered a negotiable instrument?
against the drawer. (Samsung Construction Co. v. (2007 BAR)
FEBTC, G.R. No. 129015, August 13, 2004)
A: YES. The check can be considered as a
negotiable instrument since it complied with the
CONSIDERATION requirements of negotiability under Sec. 1 of the
Negotiable Instruments Law. The unlawful
consideration for the issuance of the check is of no
It is an inducement to a contract that is the cause, moment and will not affect the negotiability of the
price or impelling influence, which induces a party check as it merely constitutes a defect of title under
to enter into a contract. Sec. 55 of the NIL.
NOTE: Every negotiable instrument is deemed Holder for value
prima facie to have been issued for a valuable
consideration. (Sec. 24, NIL) A holder for value is one who has given a valuable
consideration for the instrument. A holder for
Effect: Every person whose signature appears value is deemed as such not only as regards the
thereon is a party for value. (Sec.24) This party to whom the value has been given to by him
presumption is disputable. but also in respect to all those who became parties
prior to the time when value was given. (Sec.26,
A check constitutes an evidence of indebtedness NIL)
and is a veritable proof of an obligation. Thus,
based on Sec. 24 of the NIL, checks complete and NOTE: Where the holder has a lien on the
delivered to a person by another are sufficient by instrument, arising either from contract or by
themselves to prove the existence of the loan implication of law, he is deemed a holder for value
obligation obtained by the latter from the former. to the extent of his lien. (Sec. 27, NIL)
(Ting Ting Pua v. Spouses Tiong and Caroline Teng,
G.R. No. 198660, October 23, 2013, in Divina, 2014) Value
Q: Lorenzo drew a bill of exchange in the It is any consideration sufficient to support a
amount of P100,000.00 payable to Barbara or simple contract. An antecedent or pre-existing
order, with his wife, Diana, as drawee. At the debt constitutes value; and is deemed such
time the bill was drawn, Diana was unaware whether the instrument is payable on demand or at
that Barbara is Lorenzo’s paramour. Barbara a future time. (Sec. 25, NIL)
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Note: Liberality can be considered as valuable the time of taking the instrument, knew him to be
consideration. only an accommodation party. (Sec. 29, NIL)
Want or absence of consideration vs. Failure of Requisites to be an accommodation party
consideration (1996, 2007 BAR) (SiNoLe)
WANT OR ABSENCE FAILURE OF 1. Accommodation party must Sign as maker,
OF CONSIDERATION CONSIDERATION acceptor, indorser or drawer
Total lack of any valid Failure or refusal of one 2. No value is received by the accommodation
consideration for the of the parties to do, party from the accommodated party
contract perform or comply with 3. The purpose is to Lend the name
the consideration agreed
upon NOTE: It does not mean, however, that one cannot
be an accommodation party merely because he has
Effect of want of consideration received some consideration for the use of his
name. The phrase “without receiving value
It is a matter of defense as against any person not a therefor” only means that no value has been
holder in due course, thus, a personal defense. received “for the instrument” and not “for lending
(Sec. 28, NIL) his name.”
Partial failure of consideration Q: Susan Kawada borrowed P500,000 from XYZ
Bank which required her, together with Rose
Partial failure of consideration is a defense pro Reyes who did not receive any amount from the
tanto, whether the failure is an ascertained and bank, to execute a promissory note payable to
liquidated amount or otherwise. (Ibid.) the bank, or its order on stated maturities. The
note was executed as so agreed. What kind of
Inadequacy of consideration liability was incurred by Rose, that of an
accommodation party or that of a solidary
GR: Inadequacy of consideration does not debtor? Explain. (2003 BAR)
invalidate the instrument.
A: Rose incurs the liability of an accommodation
XPN: There has been fraud, mistake or undue party since she executed the promissory without
influence. (Art. 1355, NIL) receiving value therefor and for the purpose of
lending his name to Susan Kawada, the
NOTE: accommodated party. Nonetheless, as an
1. Absence of consideration is where no accommodation maker, Rose is primarily and
consideration was intended to pass. unconditionally liable on the promissory note to
2. Failure of consideration implies that a holder for value, regardless of whether she
consideration was intended by that it stands as a surety or solidary co-debtor since such
failed to pass. distinction would be entirely immaterial and
3. The defense of want of consideration is inconsequential as far as a holder for value is
ineffective against a holder in due course. concerned.
4. A drawee who accepts the bill cannot
allege want of consideration against the Q: Juan Sy purchased from “A” Appliance Center
drawer. one generator set on installment with chattel
mortgage in favor of the vendor. After getting
hold of the generator set, Juan Sy immediately
ACCOMODATION PARTY sold it without consent of the vendor. Juan Sy
was criminally charged with estafa. To settle
the case extra judicially, Juan Sy paid the sum of
P20,000 and for the balance of P5,000.00 he
An accommodation party is one who has signed the
instrument as maker, acceptor, indorser or executed a promissory note for said amount
drawer, without receiving value therefor, and with Ben Lopez as an accommodation party.
Juan Sy failed to pay the balance.
for the purpose of lending his name to some other
person. Such a person is liable on the instrument to
a holder for value, notwithstanding such holder, at a. What is the liability of Ben Lopez as an
accommodation party? Explain.
b. What is the liability of Juan Sy? (2003 BAR)
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A: holder not in due
a. Section 29 of the Negotiable Instruments Law course
provides that an accommodation party is liable May sue
on the instrument to a holder for value, reimbursement after
notwithstanding that such holder at the time of paying the May not sue
taking the instrument knew him to be only an holder/subsequent
accommodation party. As an accommodation party
party, Ben Lopez is primarily and
unconditionally liable on the promissory note Q: PCIB granted a credit line to Gonzales
to a holder for value as if the contract was not through the execution of the Credit-On-Hand
for accommodation. Loan Agreement (COHLA). Gonzales drew from
b. Under Section 14 of the NIL, Juan Sy is said credit line through the issuance of check.
primarily liable to the extent of P5,000 in the Gonzales issued a check in favor of Rene Unson,
hands of a holder in due course. However, if
drawn against the credit line. However, upon
Ben Lopez paid the note, Juan Sy has the presentment for payment by Unson of said
obligation to reimburse the former to the check, it was dishonored by PCIB due to the
extent of the amount paid. termination by PCIB of the credit line under
COHLA for the unpaid periodic interest dues
Q: Dagul has a business arrangement with
from the loans of Gonzales and the spouses
Facundo. The latter would lend money to
Panlilio. Gonzales, through counsel, wrote PCIB
another, through Dagul, whose name would
insisting that the check he issued had been fully
appear in the promissory note as the lender. funded, and demanded the return of the
Dagul would then immediately indorse the note proceeds of his FCD as well as damages for the
to Facundo. Is Dagul an accommodation party?
unjust dishonor of the check. Was it proper for
Explain. (2005 BAR) PCIB to dishonor the check issued by Gonzales
against the credit line under the COHLA?
A: NO. An accommodation note is one to which the
accommodation party has put his name, without A: NO. While a maker who signed a promissory
consideration, for the purpose of accommodating note for the benefit of his co-maker (who received
some other party who is to use it and is expected to
the loan proceeds) is considered as an
pay it. The accommodation is not one to the
accommodation party, he is, nevertheless, entitled
person who takes the note — that is, the payee or
to a written notice on the default and the
indorsee, but one to the maker or indorser of the
outstanding obligation of the party accommodated.
note. In this case, the indorser, Dagul, in making the
There being no such written notice, the Bank is
indorsement to the lender, Facundo, was merely grossly negligent in terminating the credit line of
acting as agent for the latter or, as a mere vehicle the accommodation party for the unpaid interest
for the transference of the naked title from the dues from the loans of the party accommodated
borrower or maker of the note and was not acting
and in dishonoring a check drawn against such
as an accommodation party.
credit line. (Eusebio Gonzales v. Philippine
Commercial and International Bank, Edna Ocampo,
Accommodation party vs. Regular party and Roberto Noceda, G.R. No. 180257, February 23,
2011)
ACCOMMODATION
REGULAR PARTY
PARTY Extent of liability of an accommodation party
Signs an instrument Signs the instrument (Re2Con)
without receiving value for value (Sec. 24,
therefor NIL) 1. Right to Revoke accommodation – before the
Purpose of signing is to instrument has been negotiated for value.
lend his name to Not for that purpose 2. Right to Reimbursement from the
another person accommodated party – the accommodated
May always show, by Cannot disclaim party is the real debtor. Hence, the cause of
parol evidence, that he personal liability by action is not on the instrument but on an
is only such parol evidence implied contract of reimbursement.
Cannot avail of the 3. Right to Contribution from other solidary
defense of May avail of such accommodation maker. (Sadaya v. Sevilla, G.R.
absence/failure of defense No. L-17845, April 27, 1967)
consideration against a
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Note: Since the relationship of the accommodation holder of the note, he has the right to sue the
party and the accommodated party is considered accommodated party for reimbursement, since
as that of a surety – principal debtor, they are the relation between them is in effect that of
solidarily liable. Hence, the payee can run after the principal and surety, the accommodation
surety for the entire amount. party being the surety. Thus, after paying the
holder, Pedro may seek reimbursement from X,
The surety can seek reimbursement from principal the accommodated party.
debtor.
Q: As a rule, under the NIL, a subsequent party
Accommodation party cannot raise the defense may hold a prior party liable but not vice-versa.
of absence or want of consideration Give 2 instances where a prior party may hold a
subsequent party liable. (2008 BAR)
An accommodation party who lends his name to
enable the accommodated party to obtain credit or A: A party may hold a subsequent party liable in
raise money is liable on the instrument to a holder the following instances: (1) in case of an
for value even if he receives no part of the accommodated party; and (2) in case of an
consideration. He assumes the obligation to the acceptor for honor. An accommodation party may
other party and binds himself to pay the note on its hold the party accommodated liable to him, even if
due date. By signing the note, the accommodation the party accommodated is a subsequent party.
party thus became liable for the debt even if he had The relation between them is that of principal and
no direct personal interest in the obligation or did surety. For the same reason, an acceptor for honor
not receive any benefit therefrom. (Dela Rama v. may hold the party for whose honor he accepted a
Admiral United Savings Bank, G.R. No. 154740, April bill of exchange liable to him. A payer for honor is
16, 2008) subrogated to the rights of the holder as regards
the party for whose honor he paid and all parties
Holder for value may recover from an liable to the latter.
accommodation party notwithstanding his
knowledge that the accommodation party is Accommodation made by a corporation
only signing as such
Q: On June 1, 1990, A obtained a loan of
Q: For the purpose of lending his name without ₱100,000 from B, payable not later than
receiving value therefor, Pedro makes a note December 20, 1990. B required A to issue him a
for P20,000 payable to the order of X, who in check for that amount to be dated December
turn negotiates it to Y, the latter knowing that 20, 1990. Since he does not have any checking
Pedro is not a party for value. account, A, with the knowledge of B, requested
a. May Y recover from Pedro if the latter his friend, C, President of Saad Banking
interposes the absence of consideration? Corporation (Saad) to accommodate him. C
b. Supposing under the same facts, Pedro pays agreed, he signed a check for the aforesaid
the said Php20,000.00, may he recover the amount dated December 20, 1990, drawn
same amount from X? (1990, 1996, 1998 against Saad’s account with the ABC
BAR) Commercial Banking Co. The By-laws of Saad
requires that checks issued by it must be signed
A: by the President and the Treasurer or the Vice-
a. YES, Y may recover from Pedro. Section 29 of President. Since the Treasurer was absent, C
the NIL provides that a person who has signed requested the Vice-President to co-sign the
the instrument as maker, drawer, acceptor, or check, which the latter reluctantly did. The
indorser, without receiving value therefor, and check was delivered to B. The check was
for the purpose of lending his name to some dishonoured upon presentment on due date for
other person is liable on the instrument to a insufficiency of funds.
holder for value, notwithstanding the fact that a. Is Saad liable on the check as an
such holder at the time of taking the accommodation party?
instrument knew him to be only an b. If it is not, who then, under the above facts,
accommodation party. Pedro, being an is/are liable? (1991 BAR)
accommodation maker of a note, may thus be
held primarily and unconditionally liable A:
therefor. a. NO. Saad is not liable as an accommodation
b. YES, Pedro may recover from X. When the party. This is because the issue or indorsement
accommodation party makes payment to the of
negotiable paper by a corporation without
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consideration and for the accommodation of assignment written on
another is ultra vires. Hence, one who has its face.
taken the instrument with knowledge of the As to right acquired
accommodation nature thereof cannot recover The transferee does
against a corporation where it is only an The transferee, if he is not become a holder
accommodation party. While it may be legally a HIDC may acquire and can have no better
possible for a corporation whose business is to better rights than his right than his
provide financial accommodations in the transferor. transferor; he merely
ordinary course of business, such as one given steps into the shoes of
by a financing company, to be an the assignor.
accommodation party, this situation, however, As to liability and right of recourse
is not the case at bar. The holder can hold
b. Considering that both the President and the The transferee has no
the drawer and the
Vice-President were signatories to the right of recourse for
indorsers liable if the
accommodation, they themselves can be payment against
party primarily liable
subject to the liabilities of accommodation immediate parties.
does not pay.
parties to the instrument in their personal As to defenses available
capacity. (Crisologo-Jose v. CA, G.R. No. 80499, Any defense available
September 15, 1989) A personal defense is
against the transferor
not available against
is available against the
an HIDC.
transferee
NEGOTIATION As to the notice requirement
Notice of negotiation
is not necessary. The
Negotiation is the transfer of an instrument from Notice of assignment
maker or drawer need
is required.
one person to another so as to constitute the not be informed of the
transferee the holder thereof. (Sec. 30, NIL) negotiation.
As to warranty
NOTE: A holder is the payee or indorsee of a bill or The indorser
note, who is in possession of it, or the bearer warrants the solvency The assignor does not
thereof. (Sec. 191, NIL) of the maker or warrant the solvency
drawer as the case of the obligor.
Methods of transferring an instrument (INA) may be.
1. Issuance – first delivery of the instrument MODES OF NEGOTIATION
complete in form to a person who takes it as a
holder. Modes of negotiation (Sec. 30, NIL)
2. Negotiation
3. Assignment – transfer of the title to the Negotiated by mere
instrument, with the assignee generally taking If Payable to bearer
delivery
only such title as his assignor has, subject to all Negotiated by the
defenses available against the assignor. indorsement of the
If Payable to order
holder, completed by
DISTINGUISHED FROM ASSIGNMENT delivery
NEGOTIATION ASSIGNMENT Q: Ligaray charged Wagas with estafa, alleging
As to governing law that Wagas placed an order of 200 bags of rice
Assignment is over the telephone with a post-dated check
governed by the law payable to cash as payment. The seller Ligaray
Negotiation is
on assignment of delivered the rice to Cañada, brother-in-law of
governed by the NIL
credit under the Civil Wagas. In turn Ligaray received a post-dated
Code check issued by Wagas, which was later on
As to the subject instrument dishonored due to insufficiency of funds.
Non-negotiable
Only a negotiable During trial, Wagas averred that he issued the
instrument may be
instrument may be check to Cañada, and that it was the latter who
assigned absent any
negotiated. had transacted with Ligaray. While admitting
prohibition against
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that he signed a letter acknowledging his debt Later, C, without indorsing the promissory note,
to Ligaray, Wagas insisted that he signed the transfers and delivers the same to D. The note
same just to accommodate the pleas of his is subsequently dishonored by A. May D
sister and her husband Cañada. proceed against A for the note? (1998 BAR)
Is Wagas guilty of estafa? A: YES. D may collect from A. The note made by A
is a bearer instrument. Where an instrument,
A: NO. Under the NIL (Sec. 9 and Sec. 30), a check payable to bearer is indorsed, it may nevertheless
made payable to cash is payable to the bearer and be further negotiated by delivery. Despite the
could be negotiated by mere delivery without the special indorsement made by B, the note remained
need of indorsement. This rendered it highly a bearer instrument and can be negotiated by mere
probable that Wagas had issued the check not to delivery. When C delivered and transferred the
Ligaray, but to somebody else like Cañada, his note to D, the latter became a holder thereof. As
brother-in-law, who then negotiated it to Ligaray. such, D can proceed against A.
It bears stressing that the accused, to be guilty of NOTE: Once a bearer instrument, always a bearer
estafa as charged, must have used the check in instrument.
order to defraud the complainant. What the law
punishes is the fraud or deceit, not the mere Q: X executed a promissory note with a face
issuance of the worthless check. The proof of guilt value of Php 50,000.00 payable to the order of
must still clearly show that it had been Wagas as Y. Y indorsed the note to Z, to whom Y owed
the drawer who had defrauded Ligaray by means Php 30,000.00. If X has no defense at all against
of the check. (People v. Gilbert Wagas, G.R. No. Y, for how much may Z collect from X? (2011
157943, September 4, 2013) BAR)
Delivery of negotiable instrument A: Php 50,000.00, but with the obligation to hold
Php 20,000.00 for Y's benefit.
Delivery means transfer of possession, actual or
constructive, from one person or another. (Sec. 191, Delivery of an order instrument without
NIL) indorsement
NOTE: Where the instrument is no longer in the If an order instrument is not indorsed, the
possession of the party whose signature appears negotiation is incomplete, and the instrument is in
thereon, there is a prima facie presumption of a effect merely assigned. The transferee acquires the
valid and intentional delivery by him. (Sec. 16, NIL) right to have the indorsement of the transferor. It
is only at the time of indorsement that negotiation
Bearer instrument is negotiated by takes effect and the transferee acquires the rights
indorsement and delivery (“Once a bearer, of a holder. (Sec. 49, NIL)
always a bearer” rule)
Negotiation by a prior party
A bearer instrument, when indorsed specially, may
nevertheless be further negotiated by delivery; but Where an instrument is negotiated back to a prior
the person indorsing specially is liable as indorser party, such party may reissue and further negotiate
only to such holders who acquired title through his the same. However, he is not entitled to enforce
indorsement (Sec. 40, NIL). This spawns the rule payment thereof against any intervening party to
that A BEARER INSTRUMENT IS ALWAYS A whom he was personally liable. (Sec. 50, NIL)
BEARER INSTRUMENT.
NOTE: Notwithstanding the limitation under Sec.
Q: A makes a promissory note payable to 50, a prior party may strike out the intervening
bearer and delivers the same to B. B, however, indorsements not necessary for his title. The
endorses it to C in this manner: indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved
“Payable to C. from liability on the instrument. (Sec. 48, NIL)
Signed: B.” e.g. “A”, the payee indorsed the instrument to B,
then B indorsed it to C, C to D, then D to B. B can
further negotiate the instrument. He may also
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strike out the indorsement of C and D. (Sundiang XPN: Sec. 40, NIL. If the instrument is originally a
Sr. & Aquino, 2014) bearer and it was indorsed specially, it may further
be negotiated by mere delivery.
Limitations on re-negotiation
2. Blank – Specifies no indorsee. (BS)
In the following cases, a prior party cannot further a. Instrument is payable to bearer and may
negotiate the instrument: (TAP) be negotiated by delivery; (Sec. 34, NIL)
b. May be converted to special indorsement
1. Where it is payable to the order of a third by writing over the signature of the
person, and it has been paid by the drawer. indorser in blank any contract consistent
[Sec. 121 (a), NIL] with the character of indorsement. (Sec.
2. Where it was made or accepted for 35, NIL)
accommodation and has been paid by the
party accommodated. [Sec. 121 (b), NIL] NOTE: The indorsement need not follow the
3. In other cases, where the instrument is words of negotiability. What should follow the
discharged when acquired by a prior party. words of negotiability is the promissory note
[Sec. 119 (e), NIL] or the bill of exchange but not the
indorsmement.
KINDS OF INDORSEMENT
Example: The indorsement may simply be
Indorsement written as “Pay to X” with the payee’s signature
instead of “Pay to the order of A.”
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the 3. Restrictive - When the instrument: (PAT)
same. a. Prohibits further negotiation of the
instrument (it destroys the negotiability
GR: Indorsement must be of the entire instrument. of the instrument);
It must be in the instrument itself or in a paper
attached to the instrument called allonge.. (Sec. 32, Example: Pay to Z only. Sgd P.
NIL)
b. Constitutes the indorsee the agent of the
XPN: When the instrument has been paid in part. indorser; or
Indorsement to two or more indorsees severally Example: Pay to K for collection only. Sgd
does NOT operate as a negotiation of the P.
instrument.
c. Vests the title in the indorsee in trust for
Indorsement should be placed: or to the use of some persons.
1. On the instrument itself; or
2. On a separate piece of paper attached to the Example: Pay to A in trust for X.
instrument called “allonge” (Sec. 31, NIL)
NOTE: Mere absence of words implying power
Kinds of indorsement (SB-ReQuACo-JIFS) to negotiate does not make an instrument
restrictive. (Sec. 36, NIL)
1. Special – Specifies the person to whom, or to
whose order, the instrument is to be payable. It 4. Qualified– Constitutes the indorser a mere
is also known as specific indorsement, or assignor of the title to the instrument made by
indorsement in full. (Sec. 34, NIL) adding to the indorser’s signature words like,
“without recourse”, “sans recourse” or “at the
NOTE: An instrument payable to bearer indorsee’s own risk”. The indorsement serves as
indorsed specially may nevertheless be an ordinary equitable assignment.
negotiated by delivery (once a bearer always a
bearer). (Sec. 40, NIL) NOTE: Qualified indorsement does not impair
the negotiable character of an instrument. (Sec.
GR: An order instrument needs indorsement for 38, NIL)
further negotiation.
5. Absolute – The indorser binds himself to pay:
(FaNot)
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a. Upon no other condition than failure of for dishonor is not one of those provided under
prior parties to do so; Sec. 65. A qualified indorser is liable only if the
b. Upon due notice to him of such failure. instrument is dishonored by non-acceptance or
non-payment due to: (ForGo-CaVa)
6. Conditional - Right of the indorsee is made to
depend on the happening of a contingent 1. Forgery;
event. The party required to pay may disregard 2. Lack of good title on the part of the indorser;
the conditions. (Sec. 39, NIL) 3. Lack of capacity to indorse on the part of the
prior parties; or
NOTE: The condition refers to the indorsement 4. The fact that at the time of the indorsement,
not on the instrument itself. the instrument was valueless or not valid at
the time of the indorsement which fact was
The condition is only between the conditional known to him.
indorser and conditional indorsee.
NOTE: Always consider first the reason behind non
7. Joint – Indorsement made payable to two or –payment:
more persons who are not partners.
If the ground is bankruptcy or insolvency, the
8. Irregular – A person who, not otherwise a holder has no recourse, hence, the indorser is not
party to an instrument, places thereon his liable.
signature in blank before delivery. (Sec. 64,
NIL) If the ground is breach of warranties under Sec. 65,
NIL, the indorser can be held liable.
9. Facultative –Indorser waives presentment and
notice of dishonor, enlarging his liability and Instances when the indorsement is considered
his indorsement. only as equitable assignment (Pa-QT)
10. Successive – Indorsement to two persons or 1. Indorsement of only a part of the amount of
more in succession. Any of them can indorse to the instrument (Sec. 32, NIL)
effect negotiation of the instrument. 2. In cases of qualified indorsement (Sec. 38, NIL)
3. Transfer of an instrument payable to order by
Restrictive Indorsement mere delivery (Sec. 49, NIL)
Indorsee has the following rights in a restrictive Joint indorsement
indorsement: (RATS)
GR: All must indorse in order for the transaction to
1. To receive payment of the instrument; operate as a negotiation. (Sec. 41, NIL)
2. To bring any action thereon that the indorser
could bring; and XPN: Only one of them may indorse in case the:
3. To transfer his rights as such indorsee, where (PaA)
the form of the indorsement authorizes him to
do so 1. Payees or indorsees are partners; and
4. All subsequent indorsees acquire only the title 2. Payee or indorsee indorsing has authority to
of the 1st indorsee under the restrictive indorse for the others.
indorsement. (Sec. 37, NIL)
Indorsing an instrument as cashier or other
An instrument negotiable in origin is always officers of a corporation
negotiable until paid, which is still true even if the
NI was dishonored or is already overdue, unless The negotiable instrument is deemed prima facie
the instrument has been restrictively indorsed or payable to the corporation of which said person is
when discharged by payment or otherwise. (Sec. such an officer. It may be negotiated further by
47, NIL) either indorsement of the corporation or
indorsement of the officer. (Sec. 42, NIL)
Qualified indorsement
Date of indorsement
A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that
the qualified indorser is NOT liable when reason
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GR: Every negotiation is deemed prima facie to in case of non-payment, but not all the rights of a
have been effected before the instrument was holder in due course under Sec. 52. (Caltex v. CA,
overdue. G.R. No. 97753 August 10, 1992)
XPN: Except where an indorsement bears date 1. Complete and regular on its face
after the maturity of the instrument. (Sec. 45, NIL)
An instrument is complete when it is not wanting in
Striking out of an indorsement any material particular and regular when there is
no alteration apparent on the face of the
The holder may, at any time, strike out any instrument.
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out and all
Q: R issued a check for P1M which he used to
indorsers subsequent to him are relieved from
pay S for killing his political enemy.
liability on the instrument. (Sec. 48, NIL)
a. Does S have a cause of action against R in
case of dishonor by the drawee bank?
RIGHTS OF A HOLDER b. If S negotiated the check to T, who accepted
it in good faith and for value, may R be held
secondarily liable by T? (2007 BAR)
Holder
A:
A holder is the payee or indorsee of a bill or note a. NO. S does not have a cause of action against R
who is in possession of it or the bearer thereof. in case of dishonor by the drawee bank. S is not
(Sec. 191, NIL) a holder in due course; thus, R can raise the
defense that the check was issued for an illegal
In general, a holder has the right to sue and to consideration.
receive payment. (Sec. 51, NIL) b. YES. R may be held liable by T since T is a
holder in due course of the instrument. The
Classes of holders unlawful consideration of the check is only a
(G-VaD) personal defense that cannot be interposed to a
holder in due course who receives the check
1. Holders in general (Simple Holders) (Sec. 51, free from the defect of title of S.
NIL)
2. Holders for value (Sec. 26, NIL) Q: Larry issued a negotiable promissory note to
3. Holders in due course (Secs. 52, 57, NIL) Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the
HOLDER IN DUE COURSE (HIDC) sum of P1,000. However, Evelyn inserted
P5,000 in violation of the instruction. She
To be considered as a HIDC, the holder must have negotiated the note to Julie who had no
taken the instrument: (COFI) knowledge of the infirmity. Julie in turn
negotiated said note to Devi for value and who
1. That is Complete and regular upon its face; had no knowledge of the infirmity. Can Devi
2. Became the holder before it was Overdue, and enforce the note against Larry and if she can,
without notice that it has been previously for how much? Explain. (1993 BAR)
dishonored, if such was the fact;
3. Took it in good Faith and for value; and A: YES, Devi can enforce the note against Larry
4. At the time it was negotiated to him, he had no since she is a holder in due course. Since the
notice of any Infirmity in the instrument or document delivered to Evelyn is in blank and she
defect in the title of the person negotiating it. was authorized to fill up the amount in the
(Sec. 52, NIL) promissory note, Devi can enforce against Larry
the amount of P5,000.00 as this case falls squarely
Q: Does a pledgee qualify as a holder in due under Sec 14 of the Negotiable Instruments Law.
course? As against a holder in due course, the instrument is
always valid and enforceable to the full extent. The
A: NO. A pledgee is only a holder for value to the defense of filing-up contrary to authorization is a
extent of his lien. His rights as a pledgee will be mere personal or equitable defense. (Villanueva,
governed by the provisions under the Civil Code. 2009)
The right of the pledgee is to foreclose the pledge
U N I V E R S I T Y O F S A N T O T O M A S 623
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2. That he became the holder before it was the person negotiating the same before he had paid
overdue the full amount agreed to be paid, he will be
deemed a holder in due course only to the extent of
An overdue instrument is still negotiable although the amount paid by him. (Sec. 54, NIL)
it is subject to defenses existing at the time of
transfer. A negotiable instrument in circulation Infirmity vs. Defect
past its maturity date carries strong indication that
it has been dishonored. An overdue instrument INFIRMITY DEFECT
puts all persons on notice that it might not have Refers to those Refers to how he obtained
been paid because of a valid defense to such that vitiate the the instrument or the
payment. (De Leon, 2010) instrument signature thereto, as by
itself fraud, duress, or force and
3. That he took it in good faith and for value fear, or other unlawful
means, or for an illegal
Good faith is the holder’s well founded or honest consideration or when he
belief that the person from whom he received the negotiates it in breach of
instrument was the owner thereof, with the right faith, or under any other
to transfer it. (Duran v IAC, G.R. No. L-64159, circumstances as amount to
September 10, 1985) a fraud. (Sec. 55, NIL)
Value may be some right, interest, profit or benefit Defect of title:
to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc. to 1. In its acquisition – When he obtained the
the other. (BPI v. Roxas, G.R. No. 157833, October 15, instrument, or any signature thereto, by fraud,
2007) duress, or force and fear, or other unlawful
means, or for an illegal consideration.
Q: X borrowed money from Y in the amount of
Php 1 Million and as payment, issued a check. Y 2. In the negotiation – When he negotiates it in
then indorsed the check to his sister Z for no breach of faith, or under such circumstances as
consideration. When Z deposited the check to amount to a fraud. (Sec. 55, NIL)
her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due Q: A drawer issued a check for the payment of a
course? Explain your answer. (2012 BAR) car, which check was delivered to the agent of
the owner of the car for safekeeping. The check
A: NO. A holder in due course is a holder who has was then used by the agent to pay the medical
taken the instrument under the following bills of his wife in a clinic. The projected
conditions: xxx ; (c) That he took it in good faith and purchase did not materialize. Is the clinic
for value; xxx. All of the four conditions must considered a holder in due course?
concur in order for a holder to qualify as a holder
in due course. In the case at hand, Z did not acquire A: NO. The rule that a possessor of the instrument
the instrument for value. As such she cannot be is prima facie a HIDC does not apply to the clinic
considered as a holder in due course. because it cannot be said to have acquired the
negotiable instrument in good faith for there was a
4. At the time it was negotiated to him, he had defect in the title of the holder (agent), since the
no notice of any infirmity in the instrument or instrument was not payable “to the agent or to
defect in the title of the person negotiating it bearer;” also the drawer had no account with the
clinic, the agent did not show or tell the payee why
The person to whom it is negotiated must have had he had the check in his possession and why he was
actual knowledge of such facts or knowledge of using it for the payment of his own account.
other facts that his action in taking the instrument
amounted to bad faith. (Sec. 56, NIL) As the holder’s title was defective or suspicious, it
cannot be stated that the payee acquired the check
Presence or absence of defect or infirmity must be without knowledge of said defect in holder’s title,
determined at the time the instrument was the presumption that the clinic is a HIDC does not
negotiated to the holder. exist. (De Ocampo & Co. v. Gatchalian, G.R. No. L-
15126, November 30, 1961)
NOTE: Where the transferee receives notice of any
infirmity in the instrument or defect in the title of
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Commercial Law
A holder is presumed to be an HIDC (1993, note, who is in possession of it, or the bearer
2007 BAR) thereof. (Yang v. CA, G.R. No. 138074, August 15,
2003)
GR: Every holder is deemed prima facie to be an
HIDC. There can be no doubt that a proper interpretation
of Negotiable Instruments Law as a whole, leads to
XPN: When it is shown that the title of any person the conclusion that a payee may be a holder in due
who has negotiated the instrument was defective. course under the circumstances in which he meets
But this is only as regards a party who became such the requirements of Sec. 52. (De Ocampo v.
after the acquisition of the defective title. (Sec.59, Gatchalian, supra)
NIL)
Drawee as holder in due course
Specifically, a HIDC is entitled to the following
rights (1998, 2007, 2009 BAR) A drawee does not become a HIDC by simply
paying a bill. A holder refers to one who has taken
(Ho2RSE) the instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance
1. Hold the instrument free from defenses and payment, strips the instrument of negotiability
available to parties among themselves; and reduces it to a mere voucher or proof of
2. Hold the instrument free from any defect of payment.
title of prior parties;
3. Receive payment; Persons not deemed a holder in due course
4. Sue; and (MUA)
5. Enforce payment of the instrument for the full
amount thereof against all parties liable; 1. A holder who acquires the instrument after its
date of maturity.
Possession of a negotiable instrument after
presentment and dishonor 2. Where an instrument payable on demand is
negotiated for an unreasonable length of time
It does not make the possessor a holder for value after its issue. (Sec. 53, NIL)
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or NOTE: A note payable on demand is due when
indorsers. (STELCO Marketing Corp. vs. CA, G.R. No. payment is demanded. A check becomes
96160, June 17, 1992) overdue when it is not presented for payment
within a reasonable time, usually 6 months
Q: Is a corporation to which four crossed checks from date the thereof, afterwards, it becomes a
were indorsed by the payee corporation a stale check.
holder in due course and hence entitled to
recover the amount of the checks when the 3. Where the instrument contains an acceleration
same had been dishonored for the reason of clause, knowledge of the holder at the time of
“payment stopped”? acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
A: NO. The checks were crossed checks and overdue.
specifically indorsed for deposit to payee’s account
only. From the beginning, the corporation was Rights of a holder not a holder in due course
aware of the fact that the checks were all for
deposit only to payee’s account. Clearly then, it The rights of a holder not an HIDC are similar to an
could not be considered an HIDC. (Atrium assignee. The other rights are: (ReDS)
Management Corp. v. CA, G.R. No. 109491, February
28, 2001) 1. He may receive payment and if the payment is
in due course, the instrument is discharged;
Payee as holder in due course 2. He is entitled to the instrument but holds it
subject to the same defenses as if it were non-
Every holder of a negotiable instrument is negotiable;
deemed prima facie a holder in due course. 3. He may sue on the instrument in his own
However, this presumption arises only in favor of a name. (Sec. 51, NIL)
person who is a “holder” as defined in Section 191
of the NIL, meaning a payee or indorsee of a bill or
U N I V E R S I T Y O F S A N T O T O M A S 625
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NOTE: Even if the holder is not HIDC, he/she can could interpose the real and personal defenses to
still collect or receive payment. defeat the claim of Baby. However, because of the
shelter principle in Negotiable Instruments Law,
Shelter principle or Holder in Due Course by Baby could be elevated to a status of a holder in
Subrogation due course since a person not holder in due course
steps in the shoes of the prior party. Therefore,
Under the "shelter principle," the HIDC, by Baby could enforce the note against Larry the same
negotiating the instrument, to a party not an HIDC, way as Devi could enforce it.
transfers all his rights as such holder to the latter
and acquires the right to enforce the instrument as DEFENSES AGAINST THE HOLDER
if he was an HIDC. The principle applies to a
"sheltered" holder who is not a party to any fraud Defenses against the holder
or illegality impairing the validity of the
instrument. The defenses available against the holder are
classified as follows:
Q: Larry issued a negotiable promissory note to
Evelyn and authorized the latter to fill up the 1. Real or Absolute Defenses – those that are
amount in blank with his loan account in the attached to the instrument itself and are
sum of P1,000. However, Evelyn inserted available against all parties, both immediate
P5,000 in violation of the instruction. She and remote, including holders in due course.
negotiated the note to Julie who had no
knowledge of the infirmity. Julie in turn 2. Personal or Equitable Defenses –defenses which
negotiated said note to Devi for value and who are only available against a holder not in due
had no knowledge of the infirmity. Supposing course. Those which grow out of the
Devi endorses the note to Baby for value but agreement or conduct of a particular person
who has knowledge of the infirmity, can the which renders it inequitable for him, though
latter enforce the note against Larry? (1993 holding the legal title, to enforce it against the
BAR) party sought to be made liable.
A: Baby cannot enforce the note against Larry since
she is not a holder in due course because Larry
Real defenses available against a holder vs. Personal defenses
REAL DEFENSES PERSONAL DEFENSES
(IM In Ultra. AFForD PODIF) (InnocentS2 ADD FUn In Fraud)
1. Incomplete and undelivered instrument 1. Innocent alteration or spoliation
2. Minority (available only to the minor) 2. Discharge of party Secondarily liable by
3. Incapacity as far as incapacitated persons are discharge of prior party.
concerned 3. Set-off between immediate parties
4. Ultra –vires acts of a corporation 4. Filling up of blanks not in accordance with the
5. Want of Authority, apparent and real Authority given
6. Fraudulent alteration 5. Acquisition of instrument by Duress or force
7. Forgery and fear; unlawful means or for an illegal
8. Duress amounting to Forgery consideration
9. Prescription 6. Discharge by payment or renunciation or
10. Other infirmities appearing on the face of the release before maturity
instrument 7. Failure or absence of consideration.
11. Discharge in insolvency 8. Undelivered complete instrument
12. Illegal Contract 9. Insertion of a wrong date
13. Fraud in Factum or Esse Contractus 10. Fraud in inducement or simple fraud
NOTE: Fraud in factum exists in those cases in NOTE: Fraud in inducement relates to the
which a person, without negligence, has signed an quality, quantity, value or character of the
instrument, but was deceived as to the character of consideration of the instrument. Here, deceit is
the instrument and without knowledge of it, as not in the character of the instrument but in its
where a note was signed by one under the belief amount or terms. This exists when a person is
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Commercial Law
that he was signing as a witness to a deed. This kind induced to sign a note for the price of a worthless
of fraud is a real defense because there is no stock which was fraudulently represented by the
contract, since the person did not know what he payee as to its value. Such type of fraud is only a
was signing. (De Leon, 2010) personal defense because it does not prevent a
contract. (De Leon, 2010)
Q: Eva issued to Imelda a check in the amount delivered the same to Pete who accepted the
of P50,000 post-dated Sept. 30, 1995, as note as payment of the debt.
security for a diamond ring to be sold on
commission. On Sept. 15, 1995, Imelda What defense or defenses can Señorita Isobel
negotiated the check to MT investment which set up against Pete? Explain. (2005 BAR)
paid the amount of P40,000 to her.
A: Señorita Isobel may set up the defenses of:
Eva failed to sell the ring, so she returned it to
Imelda on Sept. 19, 1995. Unable to retrieve her a. Incomplete but delivered instrument. The
check, Eva withdrew her funds from the drawee authority she gave Brad was to fill up the note for
bank. Thus, when MT Investment presented the P10,000.00 only and not P100,000.00. This is a
check for payment, the drawee bank personal defense that may be raised against Pete
dishonored it. Later on, when MT Investment who is clearly not a holder in due course.
sued her, Eva raised the defense of absence of
consideration, the check having been issued b. Force and intimidation. Señorita Isobel was
merely as security for the ring that she could forced and intimidated into writing and issuing the
not sell. Does Eva have a valid defense? Explain. note as she was threatened that Pete would kill
(1996 BAR) Brad, her cousin if the debt is not paid.
A: NO. Eva does not have a valid defense. First, MT Q: X makes a promissory note for P10,000
Investment is a holder in due course and, as such, payable to A, a minor, to help him buy school
holds the post-dated check free from any defect of books. A endorses the note to B for value, who
title of prior parties and from defenses available to in turn endorses the note to C. C knows A is a
prior parties among themselves. Eva can invoke minor. If C sues X on the note, can X set up the
the defense of absence of consideration against MT defenses of minority and lack of consideration?
only if the latter was a privy to the purpose for (1998 BAR)
which the checks were issued and, therefore, not a
holder in due course. Second, it is not a ground for A: No. X cannot set up the defense of the minority
the discharge of the post-dated check as against a of A. Defense of minority is available to the minor
holder in due course that it was issued merely as only. Such defense is not available to X. Also, X
security. The only grounds for the discharge of a cannot set up the defense of lack of consideration
negotiable instrument is enumerated in the against C, because lack of consideration is a
Negotiable Instruments Law and none of those personal defense which is only available between
grounds are available to Eva. The latter may not the immediate parties or against parties who are
unilaterally discharge herself from her liability by not holders in due course. C’s knowledge that A is a
mere expediency of withdrawing her funds from minor does not prevent C from being a holder in
the drawee bank. course. C took the promissory note from a holder
for value.
Q: Brad was in desperate need of money to pay
his debt to Pete, a loan shark. Pete threatened Q: A bill of exchange has T for its drawee, U as
to take Brad’s life if he failed to pay. Brad and drawer, and F as holder. When F went to T for
Pete went to see Señorita Isobel, Brad’s rich presentment, F learned that T is only 15 years
cousin, and asked her if she could sign a old. F wants to recover from U but the latter
promissory note in his favor in the amount of insists that a notice of dishonor must first be
P10,000.00 to pay Pete. Fearing that Pete would made, the instrument being a bill of exchange.
kill Brad, Señorita Isobel acceded to the Is he correct? (2011 BAR)
request. She affixed her signature on a piece of
paper with the assurance of Brad that he will A: NO, since F can treat U as maker due to the
just fill it up later. Brad then filled up the blank minority of T, the drawee.
paper, making a promissory note for the
amount of P100,000.00. He then indorsed and
U N I V E R S I T Y O F S A N T O T O M A S 627
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1. Engages that he will pay it according to its
LIABILITIES OF PARTIES tenor, and
2. Admits the existence of the payee and his then
capacity to indorse. (Sec. 60, NIL; 1995, 2001
Parties primarily liable (MAC) Bar)
3. The maker is liable the moment he makes the
1. Maker – of a promissory note; NI. His liability is primary and unconditional.
2. Acceptor – of a bill of exchange; and
3. Certifier of a check Q: A issued a promissory note payable to B or
bearer. A delivered the note to B. B indorsed
Parties secondarily liable (DraIn) the note to C. C placed the note in his drawer,
which was stolen by the janitor X. X indorsed
1. Drawer of a bill the note to D by forging C’s signature. D
2. Indorser of a note or a bill indorsed the note to E who in turn delivered
the note to F, a holder in due course, without
Negotiable instrument should be presented for indorsement. Discuss the individual liabilities
payment to the party primarily liable (Sec. 72[d], to F of A, B and C. (2001, 1997 BAR)
NIL).
A: A is primarily and unconditionally liable to F as
SECONDARILY the maker of the promissory note. Section 60
PRIMARILY LIABLE provides that, by making the instrument, the maker
LIABLE
Unconditionally Conditionally obliges himself to pay according to the tenor of the
bound bound instrument. He is liable to both payee and
Undertakes to pay subsequent holder in due course. Despite the
presence of the special indorsements on the note,
only after the ff.
these do not detract from the fact that a bearer
conditions have been
instrument, like the promissory note in question, is
fulfilled: (Pre-DiD)
always negotiable by mere delivery, until it is
1. Due indorsed restrictively “For Deposit Only.”
presentment for
payment or B as a general indorser is secondarily liable to F. By
Absolutely required placing his signature on the bearer instrument, he
acceptance to
to pay the instrument warrants that the instrument is genuine and in all
primary party;
upon maturity respects what it purports to be; that he has good
(Sec. 143, NIL)
title to it; that all prior parties had capacity to
2. Dishonor by
such party; contract; that he has no knowledge of any fact
(Sec.184, 151, which would impair the validity of the instrument
or render it valueless; that at the time of
NIL)
indorsement, the instrument is valid and
3. Send notice of
dishonor. (Sec. subsisting; and that on due presentment, it shall be
89, NIL) accepted or paid, or both, according to its tenor,
and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay
The drawee is not liable for payment of a bill of
the amount thereof to the holder, or to any
exchange
subsequent indorser who may be compelled to pay.
The mere issuance of a bill of exchange does not
C, however, cannot be held liable because the
operate as an assignment of the funds in the hands
signature purporting to be his is a product of
of a drawee. The drawee must accept the
forgery. C can raise the defense of forgery since it
instrument (thus, becomes an acceptor) in order
his signature that was forged.
that he may be primarily liable for the payment of a
bill of exchange.
Q: On the right bottom margin of a PN appeared
the signature of the corporation’s president
MAKER
and treasurer above their printed names with
the phrase “and in his personal capacity.” The
The maker of a negotiable instrument, by making
corporation failed to pay its obligation. Are the
such instrument: (TEP)
officers liable?
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Commercial Law
A: YES, persons who sign their names on the face of The drawer is secondarily liable to the holder or to
promissory notes are makers and liable as such. As any subsequent indorser who may be compelled to
the promissory notes are stereotype ones issued by pay. But the drawer may insert in the NI an express
the bank in printed form with blank spaces filled stipulation negating or limiting his own liability to
up as per agreed terms of the loan, following the holder. (Sec. 61, NIL)
customary procedures, leaving the debtors to do
nothing but read the terms and conditions therein Q: A delivers a bearer instrument to B. B then
and to sign as makers or co-makers. The officers specially indorses it to C and C later indorses it
are co-makers and as such, they cannot escape in blank to D. E steals the instrument from D
liability arising therefrom. (Republic Planters Bank and, forging the instrument of D, succeeds in
v. CA, G.R. No. 93073, December 21, 1992) "negotiating" it to F who acquires the
instrument in good faith and for value.
Q: Richard Clinton makes a promissory note
a. If for any reason, the drawee bank refuses
payable to bearer and delivers the same to
to honor the check, can F enforce the
Aurora Page. Aurora Page, however, endorses it
instrument against the drawer?
to X in this manner: "Payable to X. Signed:
b. In case of the dishonor of the check by both
Aurora Page."
the drawee and the drawer, can F hold any
Later, X, without endorsing the promissory
of B, C and D liable secondarily on the
note, transfers and delivers the same to
instrument? (1997 BAR)
Napoleon. The note is subsequently dishonored
by Richard Clinton. May Napoleon proceed
A:
against Richard Clinton for the note? (1998
a. YES. F can proceed against the drawer, A, in
BAR)
case of dishonor by the drawee bank. Section
61 of the NIL provides that by drawing the
A: YES. Richard Clinton is liable for the promissory
instrument, the drawer engages that the
note. Under Section 60 of the NIL, the maker of a
instrument will be accepted or paid or both
negotiable instrument, by making the same,
according to its tenor. Not only is the drawer
engages that he will pay according to its tenor, and
obliged to pay the amount of the instrument to
admits the existence of the payee and his then
the holder, but he shall likewise be liable to the
capacity to indorse. The liability of the maker is
subsequent indorser who was compelled to
primary which means he is absolutely and
pay it. The forged signature is unnecessary to
unconditionally required to pay. He engages to pay
presume the juridical relation between or
the instrument according to its terms without any
among the parties prior to the forgery and the
condition. He is not only liable to the payee but also
parties after the forgery. Moreover, the only
to the subsequent holder in due course. Since the
party who can raise the defense of forgery
instrument is a bearer instrument (which nature
against a holder in due course is the person
was not changed even if it was specially indorsed
whose signature is forged.
by Aurora), Napoleon became a legal holder
thereof by mere delivery from X to him. Thus, as a
b. Only B and C can be held liable by F. According
legal holder of the promissory note, he is entitled
to Section 67, when a person puts his signature
to proceed against the maker thereof, Richard
on a bearer instrument as a form of
Clinton.
indorsement, he becomes subject to all
liabilities of an indorser. D cannot be held
DRAWER
liable as an indorser because his signature is
forged by E, hence, there was no consent from
The drawer, by drawing the instrument: (EDPa)
D. The forged signature is deemed inoperative
1. Admits the existence of the payee and his then
and no right can arise out of it. However, the
capacity to indorse;
effect of being inoperative affects only the
2. Engages that on due presentment the
signature which is the product of forgery. It
instrument will be accepted or dishonored;
will not deem to affect other signatures
and
subscribed with knowledge and voluntariness.
3. That if necessary proceedings on dishonor be
Therefore, B and C are liable as indorsers.
duly taken, he will pay the amount thereof to
the holder, or to any subsequent indorser who
Q: D draws a bill of exchange that states: “One
may be compelled to pay it. (Sec. 61, NIL; 1991
month from date, pay to B or his order
Bar)
Php100,000.00. Signed, D.” The drawee named
in the bill is E. B negotiated the bill to M, M to N,
U N I V E R S I T Y O F S A N T O T O M A S 629
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N to O, and O to P. Due to non-acceptance and does not have sufficient funds, the bank honors
after proceedings for dishonor were made, P the check when it is presented for payment.
asked O to pay, which O did. From whom may O Apparently, X has conspired with the bank's
recover? (2011 BAR) bookkeeper so that his ledger card would show
that he still has sufficient funds. The bank files
A: D, being the drawer. an action for recovery of the amount paid to B
because the check presented has no sufficient
ACCEPTOR funds. Decide the case (1998 BAR).
The acceptor, by accepting the instrument: (AGE) A: The bank cannot recover the amount paid to B
for the check. When the bank honored the check, it
1. Engages that he will pay the NI according to became an acceptor. As acceptor, the bank became
the tenor of his acceptance; primarily and directly liable to the payee/holder B.
2. Admits the existence of the drawer, the
genuineness of his signature and his capacity The recourse of the bank should be against X and
and authority to draw the instrument; and its bookkeeper who conspired to make X's ledger
3. Admits the existence of the payee and his then show that he has sufficient funds.
capacity to indorse. (Sec. 62, NIL; 1992; 1998
Bar) INDORSER
Party who can accept the bill of exchange A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to
GR: Only the drawee may accept. A stranger or be an indorser, unless he clearly indicates by
volunteer is not bound by the acceptance. appropriate words his intention to be bound in
some other capacity. (Sec. 63, NIL)
XPN: In case of a bill which is accepted for honor
supra protest. (Sec. 161, NIL) NOTE: A person who places his indorsement on a
bearer instrument incurs all liabilities of an
Honor supra protest or acceptance for honor is indorser. (Sec. 67, NIL)
an undertaking by a stranger to a bill after
protest for the benefit of any party liable Drawer vs. Indorser
thereon or for the honor of the person for
whose account the bill is drawn which DRAWER INDORSER
acceptance inures also to the benefit of all Party either a bill or
parties subsequent to the person for whose Party only to a bill
note
honor it is accepted, and conditioned to pay the Makes admission as to
bill when it becomes due if the original drawee the existence of the
does not pay it. (De Leon, 2010) No such admission
payee and his capacity
to indorse
NOTE: Drawee does not become liable until he Makes no warranties,
accepts the instrument, in which case he becomes but engages to pay
an acceptor. An acceptor engages to pay according after certain Has warranties
to the tenor of his acceptance, which may not be conditions are
the same as the tenor of the bill itself because the complied with
acceptance may be qualified.
Q: P sold to M 10 grams of shabu worth
Difference between the liability of an acceptor Php5,000.00. As he had no money at the time of
or drawee-acceptor and a maker the sale, M wrote a promissory note promising
to pay P or his order Php5,000.00. P then
While both are primarily liable, the acceptor indorsed the note to X (who did not know about
engages to pay the negotiable instrument the shabu), and X to Y. Unable to collect from P,
according to the tenor of his acceptance. On the Y then sued X on the note. X set up the defense
other hand, the maker engages to pay the of illegality of consideration. Is he correct?
negotiable instrument according to the tenor of the (2011 BAR)
bill itself.
A: NO, since X, a general indorser, warrants that
Q: X draws a check against his current account the note is valid and subsisting.
with Bonifacio Bank in favor of B. Although X
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General indorser vs. Irregular indorser (2005
BAR) NOTE: Parol evidence is NOT admissible to relieve
an agent or broker whose endorsement brings him
IRREGULAR within the above liability.
GENERAL INDORSER
INDORSER
A regular party to the Not a party to the Q: Can a collecting bank debit the account of the
instrument and signs instrument but he depositor when the checks indorsed to it
upon delivery of the becomes one because of (bank) were forged?
document. his signature in the
instrument. A: YES, because the depositor of a check as
Makes either a blank or Always makes a blank indorser warrants that it is genuine and in all
special indorsement indorsement respects what it purports to be. Thus, when the
Indorses the instrument Indorses before its checks deposited had forged indorsements and the
after its delivery to the delivery to the payee collecting bank, as a consequence of such forgery,
payee was made to pay the drawee bank, the collecting
Liable only to parties Liable to the payee and bank can debit the account of the depositor for his
subsequent to him subsequent parties breach of warranty. (Jai-Alai Corporation of The
unless he signs for the Philippines v. BPI, G.R. No. L-29432, August 6, 1975)
accommodation of the
payee in which case he Q: Phebean, the drawer issued a check to James.
is liable only to all James, subsequently indorsed it to Trude.
parties subsequent to When Trude is about to encash the check, the
the payee drawee Union Bank refused to encash it due to
(Secs. 64, 66, NIL; De Leon, supra) insufficiency of funds. Trude sued James for
payment of money. James alleged that the suit
NOTE: The holder or subsequent indorser who should be dismissed because Phebean is an
tries to claim under the instrument which had been indispensable party. Does James’ argument
dishonored for "irregular indorsement" must not hold water?
be the irregular indorser himself who gave cause
for the dishonor. (Gonzales v. Rizal Commercial A: NO. There is no privity between the drawer and
Banking Corporation, G.R. No. 156294, November 29, the holder. The drawer is merely secondarily liable.
2006) As indorser, he warranted that upon due
presentment, the checks were to be accepted or
Qualified indorser paid, or both, according to their tenor, and that in
case they were dishonored, she would pay the
A qualified indorser is a person who indorses corresponding amount. After an instrument is
without recourse. (Sec. 65, NIL) dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal
Order of liability among the indorsers debtors whose liability becomes identical to that of
the original obligor. (Tuazon v. Heirs of Bartolome
1. Among themselves – Liable prima facie in the Ramos, G.R. No. 156262, July 14, 2005)
order in which they indorse. (Sec. 68, NIL)
2. To the holder – In any order Q: X is the holder of an instrument payable to
him (X) or his order, with Y as maker. X then
Every indorser is liable prima facie to all indorsers indorsed it as follows: “Subject to no recourse,
subsequent to him, but not those indorsers prior to pay to Z. Signed, X.” When Z went to collect from
him. (Sec. 68, NIL) Y, it turned out that Y's signature was forged. Z
now sues X for collection. Will it prosper?
Liability of an agent or broker who negotiates (2011 BAR)
an instrument without indorsement
A: YES, because X, irrespective of his qualified
He incurs all the liabilities prescribed to a general indorsement, is an indorser who warrants that the
indorser unless he discloses the name of his note is genuine.
principal and the fact that he is acting only as an
agent. (Sec. 69, NIL)
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Warranties and liabilities of parties who are secondarily liable
ABSOLUTE LIABILITY LIMITED LIABILITY
Drawerof a BOE Qualified Indorser
Warrants: (EDPa) Warrants that the: (GeGoCK)
a. The existence of payee and his then capacity a. Instrument is genuine;
to indorse; b. He has good title to it;
b. That the instrument will be accepted or paid c. Capacity to contract of all prior parties; and
upon due presentment by the party primarily d. No knowledge of any fact which would
liable according to its tenor; and impair the validity of the instrument.
c. That if dishonored, he will pay the party (Sec.65, NIL)
entitled to be paid. (Sec. 61, NIL)
NOTE: He is liable to all parties who derive
their title through his indorsement.
General indorser Person negotiating by delivery
a. Warrants that: (GeGoCaVs) Same warranties as a qualified indorser. But
i. Instrument is genuine unlike a qualified indorser, a person negotiating
ii. He had good title to it by mere delivery is liable only to his immediate
iii. All prior parties had capacity to contract transferee. (par. 2, Sec. 65, NIL)
iv. Instrument, at the time of indorsement,
was valid and subsisting; NOTE: Person negotiating by mere delivery and
a qualified indorser’s secondary liability is
b. On due presentment, it shall be accepted or limited, namely, to their warranties.
paid, or both according to its tenor
c. If the instrument is dishonored and the
necessary proceedings on dishonor be duly
taken, he will pay the holder. (Sec. 66, NIL)
Irregular indorser
a. In an order instrument, liable to the payee and
all subsequent parties
b. If bearer instrument or payable to order of
maker or drawer, liable to all parties
subsequent to the maker or drawer
c. If he signs for accommodation of the payee,
liable to all parties subsequent to payee. (Sec.
64, NIL)
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said CD gave him the note in payment for two and suit thereon may be maintained
cavans of rice. AB therefore paid GH P1,000 on though no demand has been made. (Sec.
the same date. On September 15, 2002, EF 70, NIL)
discovered that the note of AB was not in his
possession and he went to AB. It was then that NOTE: Ability and willingness on the part
EF found out that AB had already made of the primary party to pay at maturity
payment on the note. are equivalent to a tender or offer of
payment.
a. Can EF still claim payment from AB? Why?
b. As a sequel to the same facts narrated Requisites for a sufficient presentment for
above, EF, out of pity for AB who had payment (1994, 2002 BAR)
already paid P1,000 to GH, decided to
forgive AB and instead go after CD who Presentment for payment, to be sufficient, must be
indorsed the note in blank to him. Is CD made: (HoRe-PP)
still liable to EF by virtue of the
indorsement in blank? Why? (2002 BAR) 1. By the holder, or his agent authorized to
receive payment on his behalf;
A: 2. At a reasonable hour on a business day;
a. Since the instrument became a bearer 3. At a proper place; and
instrument, EF could no longer claim payment 4. To the person primarily liable, or if he is
from AB. EF is not a holder of the promissory absent or inaccessible, to any person found at
note. To make the presentment for payment, the place where the presentment is made.
it is necessary to exhibit the instrument, (Sec. 72, NIL)
which EF cannot do because he is not in
possession thereof. NOTE: Demand for payment must first be made
b. NO because CD negotiated the instrument by upon the person primarily liable, if the instrument
delivery. is not presented to the person primarily liable, the
drawer or the indorsers are discharged from their
NECESSITY OF PRESENTMENT FOR secondary liability unless such presentment is
PAYMENT excused or dispensed with. (Sec 79, 80, NIL)
Presentment for payment is not necessary in Time for presentment for payment
order to charge the person primarily liable on the
instrument. It is only necessary to charge persons INSTRUMENT TIME FOR PRESENTMENT
secondarily liable—drawer and indorsers. (Sec. 70, GR: On the day it falls due. (Sec.
NIL) 85, NIL)
Presentation for payment to person primarily XPN: If the due date falls on a
liable NOT necessary: Payable at a Saturday, presentment must be
fixed or made on the next Monday.
1. Liability absolute on date for payment – determinable
maker or the acceptor may be sued by the future time NOTE: If presentment for
holder even without demand from the payment is made before
latter as soon as date of payment has maturity, it will not result to a
passed without the instrument being discharge of the instrument.
paid. (Sec. 50, NIL)
2. Where the instrument is payable at a Promissory
special place (e.g., at a bank, at an office Within a reasonable time after
note payable
but not at an UNSPECIFIED PLACE e.g., its issue.
on demand
CITY OF MANILA Within a reasonable time after
3. Not necessary even if it is required Bill of the last negotiation thereof.
according to the terms of the instrument exchange (Sec. 71, NIL)
4. Presentment for payment is not necessary payable on
to charge the person primarily liable is demand NOTE: “Last negotiation”
applicable to notes payable on demand, means the last transfer for
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Commercial Law
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XPNs: Where the person/s primarily liable is/are: and acceptance of the initial premium or first
installment . Section 78 of the Insurance Code in
1. Dead – presentment for payment must be effect allows waiver by the insurer of the
made to his personal representative. (Sec. 76, condition of prepayment by making an
NIL) acknowledgment in the insurance policy of receipt
2. Liable as partners and no place of payment of premium as conclusive evidence of payment so
specified – presentment for payment may be far as to make the policy binding despite the fact
made to any of them though there has been that premium is actually unpaid. Section 77
dissolution of the firm. (Sec. 77, NIL) merely precludes the parties from stipulating that
(If a party dies before the maturity of a the policy is valid even if premiums are not paid,
partnership note, a demand on the surviving but does not expressly prohibit an agreement
partner will be sufficient) granting credit extension, and such an agreement
3. Several persons, not partners, and no place of is not contrary to morals, good customs, public
payment is specified – presentment for order or public policy. (GSIS v. Prudential
payment must be made to all of them. (Sec. 78, Guarantee, G.R. No. 165585, November 20, 2013)
NIL)
4. If the person primarily liable is absent or DISPENSATION WITH PRESENTMENT FOR
inaccessible - presentment for payment must PAYMENT
be made to any person of sufficient discretion
at the proper place of presentment. (Sec. 72[d] GR: Drawer and the indorsers are discharged
, NIL) from their secondary liability when presentment
is not made.
Q: While GSIS remitted to PGAI the reinsurance
premiums for the first three quarters, it, XPNs:
however, failed to pay the fourth and last 1. Presentment for payment is not required to
reinsurance premium due despite demands. charge drawer and indorser when:
PGAI to file a complaint for sum of money a. Drawer- when he has no right to expect or
against GSIS. PGAI alleged that the first three require that the drawee or acceptor will
reinsurance premiums were paid to PGAI by pay the instrument. (Sec. 79, NIL)
GSIS and, in the same vein, NEA paid the first b. Indorser – When the NI was made or
three reinsurance premiums due to GSIS. accepted for his accommodation and he
Further, that GSIS failed to pay PGAI the fourth has no reason to expect that the
and last reinsurance premium. On the other instrument will be paid if presented. (Sec.
hand, GSIS admitted that it remitted to PGAI 80, NIL)
the first three reinsurance premiums which
were paid by NEA but it failed to remit the 2. When presentment for payment is dispensed
fourth and last reinsurance premium to PGAI. with (Sec. 82, NIL) (WaRF)
GSIS, however, denied that it had a. Where, after the exercise of reasonable
acknowledged its obligation to pay the last diligence, presentment for payment
quarter’s reinsurance premium to PGAI. cannot be made;
Further, GSIS avers that the complaint states b. Where the drawee is fictitious person;
no cause of action against it because the non- or
payment of the last reinsurance premium only c. By waiver of presentment, express or
renders the reinsurance contract ineffective, implied.
and does not give PGAI a right of action to
collect. Does GSIS have to pay PGAI the amount 3. When the BOE has been dishonored by non-
of the fourth and last reinsurance premium? acceptance, since no Presentment for
Payment for is necessary. (Sec. 151, NIL)
A: YES. While the import of Section 77 is that
prepayment of premiums is strictly required as a Q: Gemma drew a check on September 13,
condition to the validity of the contract, We are 2010. The holder presented the check to the
not prepared to rule that the request to make drawee bank only on March 5, 2012. The bank
installment payments duly approved by the dishonored the check on the same date. After
insurer, would prevent the entire contract of dishonor by the drawee bank, the holder gave
insurance from going into effect despite payment a formal notice of dishonor.
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which the notice was deposited) the day 3. His agent (Sec. 97, NIL)
following the day of dishonor. 4. Where party is dead – to a personal
b. If no mail – At a convenient hour (of the representative, if there be one, and if with
sender) on that day, by the next mail reasonable diligence he can be found. If there
thereafter be no personal representative, notice may be
c. Other than by post office (e.g. personal sent to the last residence or last place of
messenger) – Within the time that notice business of the deceased (Sec. 98, NIL)
would have been received in due course 5. When the parties to be notified are partners –
of mail, if it has been deposited in the post notice to any one partner though there has
office within the time specified in Sec. been a dissolution (Sec. 99, NIL)
104(a). 6. Notice to joint parties who are not partners
must be given to each of them, unless one of
3. Time of notice to antecedent parties – Same them has authority to receive such notice for
time for giving notice that the holder has after the others (Sec. 100, NIL)
the dishonor. (Sec. 107, NIL) 7. Where a party has been adjudged a bankrupt
– either to the party himself or to his trustee
NOTE: Actual receipt of the party within the time or assignee (Sec. 101, NIL)
specified by law is sufficient though not sent in the
places specified above. (Sec. 108, NIL) In case the instrument was dishonored in the
hands of the agent, notice of dishonor should be
Instances when a negotiable instrument is given:
considered dishonored
1. To the parties secondarily liable – Within the
For BOE: time fixed by Secs. 102-104, and 107,
otherwise, they are discharged for lack of
1. If not accepted when presented for notice, unless the principal himself notifies
acceptance; or them within the same time
2. If presentment for acceptance is excused and 2. To his principal – The principal must give
the bill is not accepted. (Sec. 149, NIL) notice to parties secondarily liable as if his
agent were an independent holder (Sec. 94,
For PN: NIL).
1. Not paid (that is, payment is refused or not A party who receives notice of dishonor is entitled
obtained) when presented for payment at to give notice of such dishonor to prior parties
maturity; or within the same period of time that the holder has
2. Where presentment is excused or waived and after the dishonor, as if he were the said holder.
the instrument is overdue and unpaid. (Sec. (Sec. 107, NIL)
83, NIL)
PARTIES WHO MAY GIVE NOTICE OF
Liability of a person secondarily liable when DISHONOR
the instrument is dishonored
The parties who may give notice of dishonor
After the necessary proceedings for dishonor had (HARe)
been duly taken, an immediate right of recourse to
all parties secondarily liable thereon accrues to 1. Holder
the holder. (Sec. 84, NIL) 2. Another in behalf of the holder (Agent)
3. Any party to the instrument, who may be
PARTIES TO BE NOTIFIED compelled to pay and who, upon taking it up,
would have a right to reimbursement from
Parties to whom notice must be given the party to whom notice is given. (Sec. 90,
NIL)
Notice of dishonor should be given to: (DIA-ReP-
JoB) EFFECTS OF NOTICE OF DISHONOR
1. The drawer
2. Indorser
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Instances when a notice of dishonor to the 2. Indorser is person to whom the instrument is
Drawer may be dispensed with (SaF-PEC) presented for payment
3. Instrument was made or accepted for his
1. Where the drawer and drawee are the same accommodation. (Sec. 115, NIL)
person
2. Drawee is fictitious or does not have the EFFECT OF FAILURE TO GIVE NOTICE
capacity to contract
3. Drawer is the person to whom the instrument GR: Any person to whom such notice is not given
is presented for payment (he is the one who is discharged, but he will still be liable for breach
dishonored the instrument) of warranties pertaining to the instrument.
4. Drawer has no right to expect or require that
the drawee or acceptor will honor the XPNs:
instrument. 1. Waiver (Sec. 109, NIL)
5. Drawer has countermanded the payment (e.g. 2. Notice is dispensed with (Sec. 112, NIL)
stop payment order). (Sec. 114, NIL) 3. Notice not necessary to drawer (Sec. 114, NIL)
4. Notice not necessary to indorser (Sec. 115,
NOTE: The holder of two checks which were NIL)
dishonored because the drawer withdrew her
funds from the bank can hold the drawer liable NOTE: Holder is not required to notify all
even if no notice of dishonor was given to the indorsers, he may select to hold only one or more
drawer, since the drawer had no right to expect indorsers. Indorsers who are discharged from
that the drawee bank would honor the checks. liability by reason that no notice of dishonor was
(SIHI vs. CA, G.R. No. 101163, January 11, 1993) given to them is still liable for breach of
warranties as to the NI.
Q: P authorized A to sign a negotiable
instrument in his (P’s) name. It reads: “Pay to Effect of the omission of a previous holder to
B or order the sum of Php1 million. Signed, A give notice of dishonor by non-acceptance
(for and in behalf of P).” The instrument shows
that it was drawn on P. B then indorsed to C, C It does not prejudice the rights of a holder in due
to D, and D to E. E then treated it as a bill of course subsequent to the omission to present the
exchange. Is presentment for acceptance instrument to the drawee for acceptance and
necessary in this case? (2011 BAR) notify the drawer and indorsers if acceptance is
refused. (Sec. 117, NIL)
A: NO since the drawer and drawee are the same
person. Effect of lack of notice of dishonor on the
instrument which is payable in installments
Q: Juben issued to Y two post-dated checks as
security for pieces of jewelry to be sold. Y 1. No acceleration clause – Failure to give notice
negotiated the check to S. When Juben failed to of dishonor on a previous installment does
sell the jewelry, he withdrew all his funds from not discharge drawers and indorsers as to
the drawee bank. After dishonor, Juben succeeding installments.
contends that the holder failed to give him a 2. With acceleration clause – It depends upon
notice of dishonor. Is notice of dishonor whether the clause is automatic or optional.
necessary?
a. Automatic – failure to give notice of
A: NO, Juben was responsible for the dishonor of dishonor as to a previous installment will
his checks, hence, there was no need to serve him discharge the persons secondarily liable
notice of dishonor. (SIHI v. CA, supra.) as to the succeeding installments;
b. Optional – if not exercised, the rule would
Instances when it is not necessary to give a be the same as if there is no acceleration
notice of dishonor to the Indorser (FiPA) clause. If exercised, the rule would be the
same as if the installment contains an
1. Drawee is fictitious or has no capacity to automatic acceleration clause. (Town
contract, and indorser was aware of these Savings Bank v. CA, G.R. No. 106011, June
facts at the time he indorsed the instrument 17, 1993)
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A manager's check as a check drawn by the bank's 5. Release of the principal debtor, unless the
manager upon the bank itself and accepted in holder’s right of recourse against the party
advance by the bank by the act of its issuance. It is secondarily liable is expressly reserved
really the bank's own check and may be treated as 6. Extension of time of payment, unless:
a promissory note with the bank as its maker. a. Extension is consented to by party
Consequently, upon its purchase, the check secondarily liable
becomes the primary obligation of the bank and b. Holder expressly reserves his right of
constitutes its written promise to pay the holder recourse against such party (Sec. 120,
upon demand. It is similar to a cashier's check NIL)
both as to effect and use in that the bank
represents that the check is drawn against Q: The rule is that the intentional cancellation
sufficient funds. The drawee bank of a manager's of a person secondarily liable results in the
check may interpose personal defenses of the discharge of the latter. With respect to an
purchaser of the manager's check if the holder is indorser, the holder's right to cancel his
not a holder in due course. In short, the purchaser signature is: (2011 BAR)
of a manager's check may validly countermand
payment to a holder who is not a holder in due A: Limited to the case where the indorsement is
course. Accordingly, the drawee bank may refuse not necessary to his title.
to pay the manager's check by interposing a
personal defense of the purchaser. (RCBC v. Effects of payment by persons secondarily
Odrada, G.R. No. 219037, October 19, 2016) liable (DiCReF)
A manager’s check, like a cashier’s check, is an 1. Instrument is not discharged
order of the bank to pay, drawn upon itself, 2. It only cancels his own liability and that of the
committing in effect its total resources, integrity, parties subsequent to him
and honor behind its issuance. By its peculiar 3. Instrument may be renegotiated
character and general use in commerce, a 4. Person paying is remitted to his former rights
manager’s check or a cashier’s check is regarded (as regards prior parties) and he may strike
substantially to be as good as the money it out his own and all subsequent indorsements.
represents. While manager’s and cashier’s checks (Sec. 121, NIL)
are still subject to clearing, they cannot be
countermanded for being drawn against a closed RIGHT OF THE PARTY WHO DISCHARGED
account, for being drawn against insufficient INSTRUMENT
funds, or for similar reasons such as a condition
not appearing on the face of the check. Long GR: The party (secondarily liable) so discharging
standing and accepted banking practices do not the instrument is remitted to his former rights as
countenance the countermanding of manager’s regards all prior parties, and he may strike out his
and cashier’s checks on the basis of a mere own and all subsequent indorsements, and again
allegation of failure of the payee to comply with its negotiate the instrument.
obligations towards the purchaser. (Metrobank v.
Chiok, GR No. 172652, Nov. 26, 2014) XPNs:
DISCHARGE OF PARTIES SECONDARILIY 1. Where it is payable to the order of a third
LIABLE person, and has been paid by the drawee; and
2. It was made or accepted for accommodation,
Methods of discharge of secondary parties and has been paid by the party
(ACS TReE) accommodated.
1. Any Act which discharges the instrument; NOTE: The above exceptions have the same effect
2. Intentional Cancellation of his signature by as payment by the party primarily liable.
the holder
3. Discharge of prior party which may be made RENUNCIATION BY THE HOLDER
when signature is Stricken out
4. Valid Tender of payment by a prior party; Renunciation
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Commercial Law
It is the act of surrendering a claim or right with Instances that constitute material alteration
or without recompense. (De Leon, 2014)
Any alteration which changes:
Manner of making renunciation by the holder
1. Date
1. Must be written
2. If oral, the instrument must be surrendered to NOTE: The change in the date of indorsement
the person primarily liable. (Sec. 122, NIL) is not material where the date is not
necessary to fix the maturity of the
Effects of renunciation instrument.
1. Made in favor of principal debtor made at or 2. Sum payable, either for principal or interest
after the maturity (made absolutely and 3. The time or place of payment
unconditionally) of the instrument – 4. Number or the relations of the parties
discharges the instrument, and all parties 5. Currency in which payment is to be made
thereto (Sec. 122, NIL). 6. Adds a place of payment where no place is
2. Made in favor of a secondary party may be specified
made by the holder before, at or after maturity 7. Any other change or addition which alters the
– discharges only the secondary parties and effect of the instrument. (Sec. 125, NIL)
all subsequent to him, but the instrument
itself remains in force. (Sec. 122, NIL) NOTE: There is no material alteration when the
3. Renunciation does not affect the rights of a serial number of a check had been altered. The
holder in due course without notice. (Sec. 120 , alteration of the serial number of a check did not
NIL) change the relations between the parties nor the
effect of the instrument. Hence, the alteration on
Rule regarding the cancellation of an the serial number of a check is not a material
instrument alteration. (International Corporate Bank v. CA,
G.R. No. 141968, February 12, 2001)
It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the Spoliation
authority of the holder. But where an instrument
or any signature appears to have been cancelled, It refers to material alteration of an instrument
the burden of proof lies on the party alleging that done by a stranger. It has the same effect as
the cancellation was made unintentionally, or alteration.
under a mistake or without authority. (Sec. 123,
NIL) EFFECT OF MATERIAL ALTERATION
Material alteration of a negotiable instrument,
MATERIAL ALTERATION without the assent of all parties liable thereon, has
the following effects:
CONCEPT 1. Avoids the instrument except against:
a. A party who has made the alteration;
Material alteration b. A party who authorized or assented to the
alteration; or
It is any change in the instrument which affects or c. The indorsers who indorsed subsequent
changes the liability of the parties in any way. to the alteration because of their
It means an unauthorized change in an instrument warranties (2001 BAR)
that purports to modify in any respect the
obligation of a party or an unauthorized addition 2. If negotiated to an HIDC:
of words or numbers or other change to an a. He may enforce the payment thereof
incomplete instrument relating to the obligation according to its original tenor against the
of a party. person not a party to the alteration.
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b. He may also enforce payment thereof another state (unless the other state requires
against the party responsible for the for written acceptance)
alteration for the altered amount. 2. Must express a promise to pay money
3. Signed by the drawee
3. If negotiated to a holder not an HIDC: 4. Delivered to the holder.
a. He cannot enforce payment against the NOTE: Before delivery or notification,
person not a party prior to the acceptor may revoke or cancel his acceptance.
alteration.
b. He may, however, enforce payment Upon acceptance, the bill, in effect becomes a note.
according to the altered tenor from the The drawee who thereby becomes an acceptor
person who caused the alteration and assumes the liability of the maker (who has
from the indorsers. (Sec. 12, NIL) primary liability) and the drawer, that of the first
indorser.
A drawee who accepts a materially altered check
cannot recover from the holder and the drawer. MANNER
(2011 BAR)
Manner of making an acceptance
A material alteration avoids an instrument except
as against an assenting party and subsequent Acceptance may be made
indorsers, but a holder in due course may enforce
payment according to its original tenor. Thus, 1. On the bill itself
when the drawee bank pays a materially altered 2. On a separate paper:
check, it violates the terms of the check, as well as a. It may be acceptance as to an existing bill;
its duty to charge its client’s account only for bona or
fide disbursements he had made. If the drawee did b. It may be acceptance as to a non-existing
not pay according to the original tenor of the bill.
instrument, as directed by the drawer, then it has
no right to claim reimbursement from the drawer, NOTE: If the bill is non-existent, the acceptance on
much less, the right to deduct the erroneous a separate paper must comply with following
payment it made from the drawer’s account which requirements: (DReC)
it was expected to treat with utmost fidelity. The
drawee, however, still has recourse to recover its 1. The contemplated drawee shall describe the
loss. It may pass the liability back to the collecting bill to be drawn and promise to accept it;
bank which is what the drawee bank exactly did in 2. Bill shall be drawn within a reasonable time
this case. It debited the account of Equitable-PCI after such promise is written; and
Bank for the altered amount of the checks. (Areza 3. The holder shall take the bill upon the credit
v. Express Savings Bank, G.R. No. 176697 September of the promise.
10, 2014)
Kinds of acceptance
ACCEPTANCE 1. General Acceptance -It assents without
qualification to the order of the drawer. (Sec.
139, NIL)
DEFINITION 2. Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as
Acceptance of a bill drawn. (ibid.)
It is a signification by the drawee of his assent to NOTE: A holder may refuse to accept a qualified
the order of the drawer. (Sec. 132, NIL) acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill as
Requisites for acceptance (WESH) dishonored by non-acceptance. (Sec. 142, NIL)
1. It must be in writing, except constructive Kinds of qualified acceptance (CoPaL-QuaD)
acceptance and to a foreign bill payable in
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1. Conditional – makes payment by the acceptor b. Such person must take the bill for value
dependent on the fulfillment of a condition on the faith of such acceptance. (Sec. 134,
therein stated. NIL)
2. Partial – an acceptance to pay part only of the
amount for which the bill is drawn. 3. Virtual
3. Local – an acceptance to pay only at a a. Unconditional promise in writing to
particular place. accept a bill
4. Qualified as to time– a bill is accepted to be b. Promise made before it is drawn
paid on or after a specified date. c. Any person who, upon faith thereof,
5. As to drawee - acceptance of some one or receives the bill for value. (Sec. 135, NIL)
more of the drawees but not of all. (Sec. 141,
NIL) TIME FOR ACCEPTANCE
Q: A bill of exchange states on its face: “One (1) The drawer has 24 hours after presentment to
month after sight, pay to the order of Mr. R the decide whether or not he will accept the bill. The
amount of Php 50,000.00, chargeable to the acceptance, if given, dates as of the day of
account of Mr. S. Signed, Mr. T.” Mr. S, the presentation. (Sec. 136, NIL)
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay Php NOTE: Drawee bank is not entitled to 24 hours to
30,000.00 three (3) months after sight.” May decide whether or not to pay a check since a check
he accept under such terms, which varies the is presented for payment, not acceptance.
command in the bill of exchange? (2011 BAR)
RULES GOVERNING ACCEPTANCE
A: YES, since a drawee is allowed to effect a
qualified acceptance in which case he shall be Effect of accepting an instrument with a
liable according to the tenor of his acceptance. qualified acceptance
Q: X, drawee of a bill of exchange, wrote the GR: When the holder takes a qualified acceptance
words: “Accepted, with promise to make the drawer and indorsers are discharged from
payment within two days. Signed, X.” The liability on the bill.
drawer questioned the acceptance as invalid.
Is the acceptance valid? XPNs: (AsAR)
A: YES, because the acceptance is in reality a clear 1. When they have expressly or impliedly
assent to the order of the drawer to pay. Qualified authorized the holder to take a qualified
acceptance as to time is allowed. [Sec. 141 (d , NIL] acceptance;
2. Subsequently assent thereto; or
Other kinds of acceptance 3. Implied assent - when they did not express
their dissent to the holder within a reasonable
1. Constructive/implied time when they received a notice of qualified
a. Drawee to whom the bill is delivered for acceptance.
acceptance destroys it
b. Drawee refuses, within 24 hours after NOTE: The holder may refuse to take a qualified
such delivery, or within such time as is acceptance and if he does not obtain an
given him, to return the bill accepted or unqualified acceptance, he may treat the bill as
non-accepted. (Sec. 137, NIL) dishonored by non-acceptance. (Sec. 142, NIL)
2. Extrinsic Acceptance of an incomplete bill
The acceptance is written on a paper other
than the bill itself. To be binding upon the Acceptance may be made before the bill has been
acceptor: signed by the drawer or while otherwise
a. Acceptance must be shown to the person incomplete, or after it is overdue, or even after it
to whom the instrument is negotiated; has been dishonored by non-acceptance or non-
and payment. (Sec. 138, NIL)
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money. It runs for a longer period of time than be discharged from liability thereon to the extent
a PN. of the loss caused by the delay.
3. Registered Bond – one payable only to the
person whose name appears on the face of the Essential characteristics of checks
certificate and in the books of the company.
4. Coupon Bond – one to which are attached 1. They are drawn on a bank
coupons which entitle the holder to interest 2. Payable instantly on demand
when due.
5. Bank Note – instrument issued by a bank for Checks, completed and delivered, are sufficient by
circulation as money payable to bearer on themselves to prove the existence of loan
demand. obligation. The Court has expressly recognized
6. Due Bill - PN which shows on its face that one that a check constitutes an evidence of
person acknowledges his indebtedness to indebtedness and is a veritable proof of an
another. The word “due” is commonly used. obligation. This is the very same principle
7. Mortgage Note – an instrument secured by underpin Section 24 of the NIL which provides
either a real (REM) or personal property that “every negotiable instrument is deemed
(Chattel). prima facie to have been issued for a valuable
8. Title-Retaining Note – an instrument used to consideration; and every person whose signature
secure the purchase price of goods. It appears thereon to have become a party for
ordinarily provides that title to the goods value.” (2014 BAR; Pacheco v. CA G.R. No. 126670
shall remain in payee’s name until the note is December 2, 1999)
paid in full.
9. Collateral Note – it is used when the maker Q: Tan maintained a current and savings
pledges securities to the payee to secure the account with PCIB, now EPCIB, with a balance
payment of the amount of the note. of P35,147.59. He issued a post-dated PCIB
10. Judgment Note – this is a note to which a check in favor of SLI in the amount of
power of attorney is added enabling the payee P34,588.72. After clearing, the amount of the
to take judgment against the maker without check was immediately debited by EPCIB from
the formality of a trial if the note is not paid Tan’s account thereby leaving him with a
on its due date. (De Leon, supra) balance of only P558.87. He thereafter issued
three (3) checks payable to ASELCO, ANECO,
Instances when a bill of exchange may be and the other payable in cash. When the latter
treated as a promissory note (2015 BAR) were presented for payment, the three (3)
checks were dishonored for being drawn
1. The drawer and the drawee are the same against insufficient funds. As a result, the
person electric power supply for the two mini-
2. The drawee is a fictitious person sawmills owned and operated by Tan, was cut
3. The drawee has no capacity to contract off and it was restored only after sometime.
4. The instrument is so ambiguous that there is After trial, the RTC ruled in favor of EPCIB and
doubt whether it is a bill or a note. (Sundiang dismissed the complaint. On appeal the CA
Sr. & Aquino, 2014, citing NIL, Secs. 17[e] and reversed the decision of the RTC. Is EPCIB
130) liable due to its premature debiting of the
post-dated check, thereby affecting Tan’s
business operations?
CHECK
A: YES. The premature debiting of the postdated
check by the bank which resulted to insufficiency
DEFINITION of funds that brought about the dishonor of two
checks causing the electric supply to be cut-off and
It is a bill of exchange drawn on a bank and affected business operations indicates the
payable on demand. (Sec. 185, NIL) negligence of the bank. For its failure to exercise
extra-ordinary diligence, it should be made liable
A check must be presented for payment within a in the case. (Equitable PCI Bank v. Arcelito B. Tan,
reasonable time after its issue or the drawer will G.R. No. 165339, August 23, 2010, in Divina, 2014)
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NOTE: A check by itself does not operate as an from the proper authorities to investigate on
assignment of any part of the funds to the credit of the matter.
the drawer with the bank, and the bank is not
liable to the holder, unless and until it accepts or The results of the investigation disclosed that
certifies the check. (Sec. 189, NIL) unknown then to Company X, its chief
accountant Bonifacio Santos is part of a
Mere issuance of a worthless check holds the syndicate that devised a scheme to syphon its
person liable under BP 22 irrespective of funds. It was discovered that though
intent (2014 BAR) deposited, the check was never paid to the BIR
but was passed on by Santos to Winston Reyes,
The rule is that every act or omission punishable Bank B's branch manager and Santos' co-
by law has its accompanying civil liability. If the conspirator. Instead of bringing the check to
accused, however, is not found to be criminally the clearing house, Reyes replaced Check No.
liable, it does not necessarily mean that he/she 12345 with a worthless check bearing the
will not likewise be held civilly liable because same amount, and tampered documents to
extinction of the penal action does not carry with cover his tracks. No amount was then credited
it extinction of civil action. In cases of violation of to the BIR. Meanwhile, Check No. 12345 was
BP 22, a special law, the intent in issuing a check is subsequently cleared and the amount therein
immaterial. Thus, regardless of intent, the accused credited into the accounts of fictitious persons,
remains civilly liable because the act or omission, to be later withdrawn by Santos and Reyes.
the making and issuing of the subject check, from
which his/her civil liability arises. Company X then sued Bank B for the amount of
P500,000.00 representing the amount
Effect of erasure or alteration on checks deducted from its account. Bank B interposed
the defense that Company X was guilty of
Pursuant to Philippine Clearing House Corporation contributory negligence since its confidential
Memorandum Circular No. 15-460A effective employee Santos was an integral part of the
January 4, 2016, the following shall no longer be scheme to divert the proceeds of Check No.
eligible or acceptable for clearing: 12345. Is Company X entitled to
reimbursement from Bank B, the collecting
a. Any check that shows or indicates on its face bank? Explain. (2016 BAR)
erasure or alteration regardless of any
signature or initials that appear to indicate A: Yes, Company X is entitled to reimbursement
authorization of the alteration or erasure; or from the collecting bank. In a similar case, the
b. Does not indicate the date, payee, amount Supreme Court ruled that the drawer could
payable in figures, amount payable in words, recover the amount deducted from its account
or signature of the drawer because it failed to ensure that the check be paid
to the designated payee while the collecting bank
should share ½ of the loss because its branch
Effect of contributory negligence between the manager conspired in the fraud. (PCIB v. CA, 350
drawer and collecting bank SCRA 446 [2001])
Q: Company X issued a Bank A Check No. KINDS
12345 in the amount of P500,000.00 payable
to the Bureau of Internal Revenue (BIR) for the Special types of checks
company's taxes for the third quarter of 1997.
The check was deposited with Bank B, the 1. Cashier’s Check – a BOE drawn by the bank
collecting bank with which the BIR has an upon itself and is accepted at its issuance. It is
account. The check was subsequently cleared usually signed by the cashier of the bank. It
and the amount of P500,000.00 was deducted has the same legal effects of a manager’s
from the company's balance. Thereafter, check and a certified check.
Company X was notified by the BIR of its non- 2. Manager’s Check – a BOE drawn by the bank
payment of its unpaid taxes despite the upon itself and is accepted at its issuance and
P500,000.00 debit from its account. This signed by a manager on behalf of a bank.
prompted the company to seek assistance
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Commercial Law
NOTE: A manager’s check is as good as cash. It The effects of crossing a check are: (DOW)
is a check drawn by the bank against itself. It 1. That the check may not be encashed but only
is deemed pre-accepted by the bank from the deposited in the bank;
moment of issuance. The check becomes the 2. That the check may be negotiated only once-
primary obligation of the bank which issues it to one who has an account with a bank; and
and constitutes its written promise to pay. By 3. That the act of crossing the check serves as a
issuing it, the bank in effect commits its total warning to the holder that the check has been
resources, integrity and honor behind the issued for definite purpose so that he must
check (Metrobank and Trust Company vs inquire if he has received the check pursuant
Chiok, GR No. 172652, November 26, 2014). to the purpose. Otherwise, he is not an HIDC.
(2015 Bar) (SIHI v. IAC, G.R. No. 72764, July 13, 1989)
NOTE: Differentiate cashier’s from manager’s
check in the headoffice, it is the cashier who Q: Po Press issued in favor of Jose a postdated
signs it because it is where the cashier holds crossed check, in payment of newsprint which
office. However, in branches, it is the manager Jose promised to deliver. Jose sold and
who signs the check. The process for both is negotiated the check to Excel Inc. at a discount.
the same. Excel did not ask Jose the purpose of crossing
the check. Since Jose failed to deliver the
3. Certified Check – Drawn by a depositor upon newsprint, Po ordered the drawee bank to
funds to his credit in a bank which an officer stop payment on the check. Efforts of Excel to
of a bank certifies will be paid on collect from Po failed. Excel wants to know
presentation. from you as counsel:
4. Crossed Check – Done by writing 2 parallel
lines on the left top portion of the check. The a. Whether as second indorser and holder of
marking signifies that the bank should pay the crossed check, is it a holder in due
only with the intervention of the company course?
only. b. Whether Po’s defense of lack of
5. Memorandum Check – A check with consideration as against Jose is also
“Memorandum” written on its face. The available as against Excel? (1994, 1995,
writing signifies that the drawer engages to 2005 BAR)
pay the bona fide holder absolutely, without
any condition concerning its presentment. A:
6. Traveler’s Checks – Instruments purchased a. Excel Inc. is not a holder in due course. The
from banks or express companies which can act of crossing the check imposes upon the
be used like cash upon the second signature by holder thereof the duty to ascertain the
the purchaser. (De Leon, supra) indorser’s, title to the check or the nature of
his possession or the purpose for which it was
Crossed check issued. Excel is guilty of gross negligence
amounting to legal absence of good faith for
A crossed check is a check with two (2) parallel its failure to inquire from Jose the purpose for
lines, written diagonally on the upper right corner which the three checks were crossed despite
thereof. It is a warning to the drawee bank that such warning, hence, it is not deemed a holder
payment must be made to the right party; in due course.
otherwise, the bank has no authority to use the b. YES, the defense of lack of consideration as
drawer's funds deposited with the bank. against Jose is also available as against Excel.
For not being a holder in due course, Excel is
The purpose is to insure payment to the payee. It subject to personal defenses as if the check
can only be deposited but may not be converted were non-negotiable, such as lack of
into cash by the drawer. Crossing a check does not consideration between Po Press and Jose. In
destroy its negotiability but the check may be this case, Jose’s failure to deliver the
negotiated only once – to one who has an account newsprint resulted in the absence of
with the bank. (De Ocampo v. Gatchalian, G.R. No. consideration for the issuance of the check.
L-15126, November 30, 1961) Consequently, Po Press cannot be made liable
to pay the face value of the check.
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Q: PCIB filed an action against Balmaceda, it is Q: Three crossed checks payable to the order
alleging that between 1991 and 1993, by of SPPI were issued by Interco as payment for
taking advantage of his position as branch the welding electrodes bought by the latter
manager, he fraudulently obtained and from the former. Each check was crossed with
encashed 31 Managers checks in the the notation “account payee only” and was
P10,782,150.00. PCIB moved to be allowed to drawn against Equitable. Due to Uy’s,
file an amended complaint to implead Rolando fraudulent representations and Equitable’s
Ramos as one of the recipients of a portion of reliance on Uy’s words that he had good title
the proceeds from Balmacedas alleged fraud. thereto, the three checks were deposited in
Since Balmaceda did not file an Answer, he was Uy’s account. Hence, SSPI filed a complaint for
declared in default. On the other hand, Ramos damages against Uy and Equitable for payment
filed an Answer denying any knowledge of of damages in the form of interest
Balmacedas scheme. The RTC issued a decision incomewhich it failed to realize. Equitable
in favor of PCIB. On appeal, the CA dismissed moved for the dismissal of the complaint for
the complaint against Ramos. According to the lack of cause of action. It argued that SSPI
CA, the mere fact that Balmaceda made Ramos cannot assert a right against the bank based on
the payee in some of the Managers checks does the undelivered checks because a payee, who
not suffice to prove that Ramos was complicit did not receive the check, cannot require the
in Balmacedas fraudulent scheme. Is PCIB drawee bank to pay it the sum stated on the
itself at fault as employer? checks.
a. Does SSPI has a cause of action against
A: YES. While its manager forged the signature of Equitable?
the authorized signatories of clients in the b. Is Equitable guilty of gross negligence?
application for manager’s checks and forged the
signatures of the payees thereof, the drawee bank A:
also failed to exercise the highest degree of a. YES. SSPI’s cause of action is not based on the
diligence required of banks in the case at bar. It three checks. SSPI does not ask Equitable or Uy to
allowed its manager to encash the manager’s deliver to it the proceeds of the checks as the
checks that were plainly crossed checks. A crossed rightful payee. SSPI does not assert a right based
check is one where two parallel lines are drawn on the undelivered checks or for breach of
across its face or across its corner. Based on contract. Instead, it asserts a cause of action based
jurisprudence, the crossing of a check has the on quasi-delict. SSPI claims damages in the form of
following effects: (a) the check may not be interest income from the parties who willfully or
encashed but only deposited in the bank; (b) the negligently withheld its money from it.
check may be negotiated only once — to the one
who has an account with the bank; and (c) the act b. YES. The checks that Interco issued in favor of
of crossing the check serves as a warning to the SSPI were all crossed, made payable to SSPI’s
holder that the check has been issued for a order, and contained the notation account payee
definite purpose and he must inquire if he only. This creates a reasonable expectation that
received the check pursuant to this purpose; the payee alone would receive the proceeds of the
otherwise, he is not a holder in due course. In checks and that diversion of the checks would be
other words, the crossing of a check is a warning averted. At the very least, the nature of crossed
that the check should be deposited only in the checks should place a bank on notice that it should
account of the payee. When a check is crossed, it is exercise more caution or expend more than a
the duty of the collecting bank to ascertain that cursory inquiry, to ascertain whether the payee on
the check is only deposited to the payee’s account. the check has authorized the holder to deposit the
In complete disregard of this duty, PCIB’s systems same in a different account. Since the banking
allowed Balmaceda to encash 26 manager’s checks business is impressed with public interest, the
which were all crossed checks, or checks payable trust and confidence of the public in it is of
to the “payee’s account only.” (PCIB v. Balmaceda paramount importance. Consequently, the highest
and Ramos, G.R. No. 158143 September 21, 2011, in degree of diligence is expected, and high
Divina, 2014) standards of integrity and performance are
required of it. Equitable did not observe the
Crossed check with notation “Account Payee required degree of diligence expected of a banking
Only” institution under the existing factual
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circumstances. The fact that a person, other than the check, Chelsea cannot thus be made liable to
the named payee of the crossed check, was pay the face value of the check and this constitutes
presenting it for deposit should have put the bank a defense not only against Moises but even against
on guard. Misplaced reliance on empty words is Dragon who is not a holder in due course.
tantamount to gross negligence, which is the
absence of or failure to exercise even slight care or Q: On March 1, 1996, Pentium Company
diligence, or the entire absence of care, evincing a ordered a computer from CD Bytes, and issued
thoughtless disregard of consequences without a crossed check in the amount of P30,000 post-
exerting any effort to avoid them. (Equitable dated Mar 31, 1996. Upon receipt of the check,
Banking Corporation v. Special Steel Products, Inc. CD Bytes discounted the check with Fund
and Augusto Pardo, G.R. No. 175350, June 13, 2012, House. On April 1, 1996, Pentium stopped
Del Castillo, J.) payment of the check for failure of CD Bytes to
deliver the computer. Thus, when Fund House
Q: Distinguish clearly crossed checks from deposited the check, the drawee bank
cancelled checks (2004 BAR) dishonored it. If Fund House files a complaint
against Pentium and CD Bytes for the payment
A: A crossed check is one with two parallel lines of the dishonored check, will the complaint
drawn diagonally on the left portion of the check. prosper? Explain (1996 BAR)
On the other hand, a cancelled check is one
marked or stamped "paid" and/or "cancelled" by A: The case will prosper as against the CD Bytes,
or on behalf of a drawee bank to indicate payment the immediate indorser but not as against
thereof. A crossed check may not be encashed but Pentium Company. The effect of crossing a check
only deposited in the bank. While the payee or relates to the mode of its presentment for
bearer of a cancelled check may be refused payment which must be made by the holder, or by
encashment. some person authorized to receive payment on his
behalf. Thus, in the absence of due presentment,
Q: On Oct 12, 1993, Chelsea Straights, a as in this case where the check was not presented
corporation engaged in the manufacture of by the payee (CD Bytes) or the proper party
cigarettes, ordered from Moises 2,000 bales of authorized to make presentment of the checks, the
tobacco. Chelsea issued to Moises two crossed drawer (Pentium Company) cannot be held liable.
checks postdated 15 Mar 94 and 15 Apr 94 in However, Fund House may recover from the
full payment therefor. On 19 Jan 94 Moises immediate indorser, if the latter has no valid
sold to Dragon Investment House at a discount excuse for refusing payment.
the two checks drawn by Chelsea in his favor.
Moises failed to deliver the bales of tobacco as Stale check
agreed despite Chelsea’s demand.
Consequently, on 1 Mar 94 Chelsea issued a A check which has not been presented for
“stop payment” order on the 2 checks issued to payment within a reasonable time after its issue. It
Moises. Dragon, claiming to be a holder in due is valueless and thus, should not be paid. A check
course, filed a complaint for collection against becomes stale 6 months from date of issue.
Chelsea for the value of the checks. Rule on the
complaint of Dragon. Give your legal basis. Memorandum check
(1995 BAR)
A memorandum check is an evidence of debt
A: The complaint should be dismissed. The act of against the drawer and although may not be
crossing the check imposes upon the holder intended to be presented, has the same effect as
thereof the duty to ascertain the indorser’s, in this an ordinary check and if passed on to a third
case Moises’ title to the check or the nature of his person, will be valid in his hands like any other
possession. Failing in this respect, Dragon cannot check. (People v. Nitafan, G.R. No. 75954, October
be deemed a holder in due course and as such, 22, 1992)
Moises is subject to personal defenses as if the
check were non-negotiable, such as lack of When drawer of check discharged from
consideration between Chelsea and Moises for liability (ReSA)
Moises’ failure to deliver the bales of tobacco.
There being no consideration for the issuance of
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1. The check is not presented within a 2. The indorser shall be discharged from
reasonable time after its issue; liability. (PNB vs. Seeto, G.R. No. L-4388, August
2. The drawer suffers loss; and 13, 1952)
3. The loss suffered by the drawer is attributable
to the delay. (De Leon, 2010) Q: X and Y are disputing over a property. To
settle the dispute, they entered into a
PRESENTMENT FOR PAYMENT compromise agreement by which they agreed
to have the property in dispute be sold. X
TIME bought the property and delivered a
manager’s check to Y. Y refused to accept the
A check must be presented for payment within a same, hence it was consigned with the court. Y
reasonable time after its issue or the drawer will later accepted the check and three years after
be discharged from liability thereon to the extent acceptance, he filed an action alleging that the
of the loss caused by the delay. (Sec. 186, NIL) check payment did not amount to legal tender
and that he never even encashed the check. Is
Effect when a bank allows the withdrawal of the contention of Y tenable?
the value of a check prior to its clearing
A: NO. It is true that a check is not a legal tender
Q: Ofelia Camacho Cheah accommodated a and while delivery of a check produces the effect
friend’s friend to deposit and encash a check of payment only when it is encashed, the rule is
issued by the Bank of America. The check was otherwise if the debtor (X) was prejudiced by the
deposited to Ofelia’s account in PNB. A US creditor’s (Y) unreasonable delay in presentment.
dollar denominated check is normally subject Acceptance of a check implies an undertaking of
to a 15-day clearing period. However, 12 days due diligence in presenting it for payment. If no
after the check’s deposit, the bank informed such presentment was made, the drawer cannot
Ofelia that the check was cleared and credited be held liable irrespective of loss or injury
to her account. Hence, Ofelia immediately sustained by the payee. Payment will be deemed
withdrew the check’s amount and the effected and the obligation for which the check
accommodated friend was able to take entire was given as conditional payment will be
amount. It was only days after said withdrawal discharged. (Pio Barretto Realty Development Corp.
that PNB was informed by its correspondent vs. CA, G.R. No. 132362, June 28, 2001)
bank of the insufficiency of funds to which the
check was drawn. At that time, it was too late Q: To ensure payment and as a business
to recover the money withdrawn. Is PNB liable practice, SMC required Puzon to issue
for the money lost on the said transaction? postdated checks equivalent to the value of the
products purchased on credit before the same
A: Yes. The payment of the amounts of checks were released to him. Said checks were
without previously clearing them with the drawee returned to Puzon when the transactions
bank especially so where the drawee bank is a covered by these checks were paid or settled
foreign bank and the amounts involved were large in full. Puzon purchased products on credit
is contrary to normal or ordinary banking and issued to SMC, two (2) BPI checks to cover
practice. Jurisprudence provides that when the the said transaction. During one of his visits to
bank allowed the withdrawal of the value of a the SMC Paranaque Sales Office, he allegedly
check prior to its clearing, before the check shall requested to see BPI Check No. 17657.
have been cleared for deposit, the collecting bank However, when he got hold of BPI Check No.
can only ‘assume’ at its own risk that the check 27903 which was attached to a bond paper
would be cleared and paid out. (PNB v. Spouses together with BPI Check No. 17657, he
Cheah, G.R. No. 170895 & 170892, April 25, 2012) allegedly immediately left the office with his
accountant, bringing the checks with them.
EFFECT OF DELAY SMC sent a letter to Puzon, demanding the
return of the said checks. Puzon ignored the
1. The drawer will be discharged from liability demand hence SMC filed a complaint against
thereon to the extent of the loss caused by the him for theft. The investigating prosecutor
delay. (Ibid.) recommended the dismissal of the case for
lack of evidence. On appeal, the CA agreed with
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Commercial Law
U N I V E R S I T Y O F S A N T O T O M A S 655
2 0 2 1 G O L D E N N O T E S