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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
RECITATIONS AND LECTURE NOTES
FROM THE CLASSES OF DEAN JOSE R. SUNDIANG
SAN BEDA COLLEGE OF LAW
MENDIOLA, MANILA
I. GENERAL CONSIDERATIONS
Q: What is a negotiable instrument?
A negotiable instrument is a written contract for the payment of
money which complies with the requirements of Section 1, NIL; which by its
form and on its face is intended as a substitute for money and passes from
hand to hand as money so as to give the holder in due course the right to
hold the instrument free from personal defenses available to prior parties.
Q: What are the stages in the life of a negotiable instrument?
BILL OF EXCHANGE PROMISSORY NOTE
1. the mechanical act of writing
2. issuance, first delivery to the payee
3. negotiation, transfer from oneperson to another so as to constitutethe transferee a holder
4. presentment for acceptance, applicable only to CERTAIN TYPES ofbills of exchange, presentment to thedrawee in order for him to signify h isassent to the order of the drawer
5. acceptance or dishonor by non-acceptance*drawee either accepts or dishonorsthe bill
1. preparation and signing (writing)
2. issuance, first delivery to the payee
3. negotiation
4. presentment for payment ordishonor by non-payment
5. notice of dishonor
6. discharge
**presentment for acceptance is notnecessary in promissory notes becausethe drawer already knows that he isliable to pay, and his liability is primaryin character.
6. presentment for payment ordishonor by non-payment*drawee either pays the bill or refusesto pay it
7. notice of dishonor*in case of dishonor, notice ofdishonor is required to be given topersons secondarily liable, informingthem that the maker ordrawer/acceptor refused to pay oraccept the instrument
8. protest (required only for FOREIGNbills of exchange)
9. discharge
Q: What are the primary kinds of negotiable instruments?
1. Promissory Notes
2. Bills of Exchange
3. Checks
PROMISSORY NOTE BILL OF EXCHANGE CHECK
An unconditionalpromise in writing madeby one person toanother, signed by the
maker, engaging to payon demand or at a fixeddeterminable futuretime a sum certain inmoney to order or tobearer
An unconditional orderin writing addressed byone person to another,signed by the person
giving it, requiring theperson to whom it isaddressed to pay ondemand or at a fixeddeterminable futuretime, a sum certain inmoney to order or tobearer
A bill of exchange drawnon a bank, payable ondemand
Q: Are negotiable instruments legal tender?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
No; they are not ‘fully guaranteed’ by the government to be
used for the payment of debts, as required by sec.52 of the new central
bank act. Also, art.1249, NCC specifically states that negotiable papers
and other mercantile documents do not produce the effect of payment
until they are encashed or when through the fault of the creditor, theyhave been impaired. (art.1249, NCC; sec.52,NCBA)
Q: What is the difference between a bill of exchange and a promissory
note?
BILL OF EXCHANGE PROMISSORY NOTE
- is in the nature of an unconditionalORDER
- signed by the DRAWER
- requires ACCEPTANCE beforepresentment for payment
- in the nature of an unconditionalPROMISE
- signed by the MAKER
- acceptance prior to presentment forpayment is not necessary
Q: Differentiate a bill of exchange from a check?
BILL OF EXCHANGE CHECK
-may or may not be drawn on a bank
-payable on demand or at a fixeddeterminable future time
-requires presentment for acceptance
-may or may not be drawn on a depositof funds
-death of the drawer does not revokethe drawee’s authority to pay
-always drawn on a bank
-always payable on demand
-presentment for acceptance is notnecessary in the case of checks
-drawn on a deposit of funds in thecustody of the bank
-death of drawer revokes the bank’sauthority to pay
-must be presented for payment withina reasonable time AFTER ITS LASTNEGOTIATION
-must be presented for payment withina reasonable time AFTER ITS ISSUE
II. NEGOTIABILITY vs. NON-NEGOTIABILITY
Q: What are the essential requisites of a negotiable instrument?
An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing, and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;(c) Must be payable on demand, or at a fixed determinable
future time;
(d) Must be payable to order or to bearer; and
(e)
Where the instrument is addressed to a drawee, he must be
named therein with reasonable certainty
(sec.1, NIL)
Q: How is negotiability determined?
1. By considering only what appears on the face of the
instrument
2. By ascertaining the presence/absence of the requisites
under sec.1, NIL
3. By considering the whole of the instrument
*NB: if what appears on the face of the instrument is
ambiguous, the provisions of Sec.17, NIL should be followed
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: Does the phrase ‘a sum certain in money’ mean the same thing as a
‘certain sum of money’?
No, they don’t mean the same thing. ‘A sum certain in money’
refers to a fixed amount, whereas ‘A certain sum of money’ makes no
reference to a fixed amount.
Q: would an additional fee to the principal amount payable and stated
on the face of the instrument affect negotiability?
No, the instrument is still negotiable as per sec.2, NIL
Q: what are the requirements for the said installments?
1. The number of installments must be stated
2. The maturity dates for each installment must be stated
Q: Suppose the 2nd
installment’s maturity date wasn’t fixed?The instrument is still negotiable, the installment shall be
payable on demand
Q: the instrument says ‘I promise to pay Juan php100,000 from my salary
in san beda college of law’. Is it negotiable>
No, the promise is conditional (on the availability of funds), it
contravenes sec.1, NIL
Q: Is there a difference between the phrase ‘bearer, Juan dela Cruz’ and
‘Juan dela Cruz or bearer’? Yes, the former phrase employs the word ‘bearer’ as an
adjective, the latter, a noun. Consequently, the former phrase would
make an instrument non-negotiable.
Q: What is the difference between a negotiable instrument and one that
is non-negotiable?
*Refer to table contained in the notes on Summary of Doctrines,
pages 1 and 2
Q: What is the effect should the payee fail to give notice of dishonor to
an endorser?
The endorser is discharged
Q: Does sec.1(e) apply to a promissory note?
Obviously not. There is no ‘drawee’ to speak of, in terms of
promissory note
Q: Suppose the instrument gives the holder an option to require
something to be done instead of demanding payment in money, is the
instrument negotiable?
Yes, if the HOLDER is the one given the option. If, on the other
hand, it is the DRAWER/MAKER who can choose to do anything other
than pay the holder in money, the instrument is not negotiable.*see: sec.3(d), NIL
Q: When can we say that the instrument is still negotiable when it states
a source of funds for the payment of the instrument?
The general test is to ascertain whether or not the source of
funds so stated carries the GENERAL CREDIT of the maker or drawer. If
it does, the instrument is negotiable. If it does not, and it merely carries
the credit of a PARTICULAR fund, the instrument is no longer
negotiable.
*Recall: one of the essential requisites of negotiability is thatthe promise or order to pay a sum certain in money must be
UNCONDITIONAL
Q: If an instrument states a particular fund out of which reimbursement
is to be made by the drawee, is it rendered non-negotiable?
No, what renders the instrument non-negotiable is when the
fund for PAYMENT is particularly specified, not one for reimbursement.
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
There is a difference between a fund for payment and a fund for
reimbursement.
*Notice here that negotiability is NOT affected because the
order to pay is still unconditional. The drawee must pay, and then lateron reimburse himself. If there aren’t enough funds for reimbursement,
well that’s between the drawer and the drawee. The important thing is
that the obligation to pay the payee or holder has been met
unconditionally.
Q: When do we say that the sum payable is ‘certain’?
When the amount that is to be paid can be determined on the
face of the instrument in accordance with Sec.2, NIL
Q: when is an instrumentpayable on demand? (Sec.7, NIL)
Q: When is it payable to bearer? (sec.9, NIL)
Q: When the only or last endorsement is one in blank, what is the effect?
As per sec.9(e), NIL, the instrument shall be payable to bearer.
Q: Correlating sec.9(e) and sec.40, NIL, what conclusion can be drawn?
The cardinal rule in negotiable instruments: once a bearer
instrument, always a bearer instrument.
*If the only or last endorsement is an endorsement in blank, theinstrument is payable to bearer under sec.9(e). Sec.40, on the other
hand, states that ‘where an instrument, payable to bearer, is endorsed
specially, it may nevertheless be further negotiated by delivery xxx’. This
means that once an instrument is endorsed in blank, it becomes payable
to bearer, and even if a subsequent endorser endorses it specially, the
instrument is NOT CONVERTED into an order instrument, but remains a
bearer instrument which can ‘be further negotiated by delivery’.
Q: Who is a ‘holder’?
The ‘holder’ is a payee or endorsee in possession of the
instrument. Depending on the TYPE of instrument, the holder is–
1. A payee or endorsee who is IN POSSESSION of the
instrument, if the same is an ORDER instrument; or2.
The one IN POSSESSION of the instrument, if the same is a
BEARER instrument
Q: What is the difference between Negotiability and Assignability?
NEGOTIABILITY ASSIGNABILITY
Re: CONTRACTSINVOLVED
pertains to special kindsof contracts (i.e.: thoseinvolving negotiableinstruments or
documents)
pertains to all manner ofcontracts in general
Re: AVAILABLEDEFENSES
HDC is free frompersonal defenses
assignee is not immunefrom defenses betweenand among prior parties
Re: CAUSE FOR THECONTRACTS
cause is presumed cause is presumed
Re: LIABILITIES OFENDORSER
endorser is not liableunless there bepresentment forpayment/acceptance
Re: WARRANTIES a general endorserwarrants the solvency ofthe principal debtor
assignor does notwarrant the solvency ofthe principal debtor
Re: ACQUISITION OF ABETTER RIGHT BYHOLDER ORASSIGNEE
a holder may acquire abetter right than theprior endorser (i.e. as inthe case of a HDC underthe shelter rule)
acquisition of a betterright by the assignee isprecluded subrogation,the assignee merelysteps into the shoes ofthe assignor
Q: If there is no stipulation as to the time of payment, when is the
instrument payable?
On demand, as per sec.7, NIL
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: If an instrument has a stipulation as to the CURRENCY which would
be used for payment, is it rendered non-negotiable?
No, by ‘sum certain in money’, sec.1 does NOT equate ‘money’
with ‘legal tender’. Parties can therefore validly agree that the ‘money’may be paid in currency other than pesos.
Q: Is the phrase ‘pay to X or order’ the same as ‘pay to the order of X’?
Not quite. ‘pay to X or order’ means that the instrument is to be
paid either to (a) X, the bearer or (b) to whoever X might want to be
paid (i.e.: his order). On the other hand ‘pay to the order of X’ does not,
at face value, include X as a payee but rather the person/s whom X might
order to be paid.
However, it MAY mean the same thing, if X intends to endorse
the instrument to himself, make it payable to himself. In that event, thedistinction between the two phrases disappears.
Q: If the instrument is ambiguous on its face or bears omissions, how do
we construe it?
In accordance with Sec.17, NIL
Q: If it is not clear whether the instrument is a bill or not, what can the
holder do?
The holder can treat the instrument as either one or the other
at his election (sec.17[e])
Q: Suppose there is ambiguity as to whether the instrument is a note or
a bill. What is more advantageous to the holder – to treat it as a note, or
as a bill?
As a promissory note, because of the primary liability of the
maker, and the relatively more expedient steps in obtaining the
discharge of the instrument
Q: May a holder treat a bill as a promissory note, even if there is actually
no ambiguity on the face of the instrument?
Yes, there are 3 instances when, despite the lack of ambiguity,
the holder may elect to treat a bill of exchange as a promissory note:
1.
When drawer and drawee are the same person (i.e.: in thecase of manager’s or cashier’s check);
2. Where the drawee is a fictitious person; or
3. Where the drawee does not have capacity to act
(Sec.130, NIL)
II. TRANSFER AND NEGOTIATION
Q: What is meant by ‘negotiation’?
The transfer of the instrument from one person to another soas to constitute the transferee the holder thereof (Sec.191)
Q: How is negotiation effected?
Depending on the type of instrument involved–
1. An ORDER instrument is negotiated by endorsement,
completed by delivery
2. A BEARER instrument is negotiated by mere delivery
Q: What is an endorsement?
An endorsement is a transaction effected by writing on theinstrument or on an attached paper thereto (i.e.: an allonge) of one’s
own name and signature, specifying to whom or to whose order the
instrument is to be payable (sec.30, NIL)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: What are the types of endorsements?
BASIC TYPES OF ENDORSEMENTS*see: sec.9(e); sec.40; sec.34, sec.35
1. SPECIAL -specifies the person to whom or towhose order the instrument is to be
payable-legal effect: for subsequentnegotiations, the instrument requiresthe endorsement of the person sospecified
2. BLANK -does not specify any person to whomor to whose order the instrument ispayable-legal effect: the instrument is payableto bearer (if it was originally an orderinstrument, it ceases to be payable to
order and becomes payable to bearer.After this, it REMAINS a bearerinstrument, even if a subsequentendorser endorses it specially)
**important:an instrument that STARTED OUT as aBEARER instrument may be convertedto an order instrument andreconverted again to a bearerinstrument; but once this is done i.e.:once an order instrument becomes a
bearer instrument , it stays a bearerinstrument. The only way to simplify itis that a bearer instrument may onlybecome an order instrument ONCE – that is, when it was originally made asa bearer instrument and subsequentlyendorsed specially. If it became abearer instrument because of anendorsement in blank, it can’t beconverted to an order instrument.Point of no return, reached.
OTHER TYPES OF ENDORSEMENTS*see: sec.36, sec.38, sec.39,
3. RESTRICTIVE-the endorsement either (a) prohibitsfurther negotiation; (b) constitutesthe endorsee the agent of theendorser; or (c) constitutes theendorsee a trustee; if it prohibitsfurther negotiation, the instrumentceases to be negotiable
4. CONDITIONAL-payment is conditioned by either thehappening or non-happening of anevent-legal effect: the party required to paymay disregard the condition and goahead and pay, however, the personwho is paid must hold the payment orits proceeds IN TRUST, and wait for
the event to happen or not. It does, ordoesn’t, the endorsee/trustee mustreturn the money or its proceeds.
5. QUALIFIED -the endorser negatives personalliability by writing the words ‘withoutrecourse’ or ‘sans recourse’ or othersof like import on the instrument-legal effect: the endorser becomes amere assignor of the title to theinstrument, but negotiability of thesame is not impaired
Q: Under sec.40, what is meant by a ‘fictitious person’? Is this to be
interpreted literally?
No, there is still a person involved, except that this person does
not have any right to the instrument. This is what is meant ‘fictitious’
Q: what is material in determining whether a person is ‘fictitious’?
The intention of the maker
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: what is a blank endorsement?
*see: sec.34
Q: Under sec.40, why should the special endorsers be held liable, despite
the fact that the instrument remains a bearer instrument anyhow?Because of the accumulation of secondary contracts. The
endorsements made by these people are, in and of themselves,
contracts for which they may be held liable.
Q: Under Sec.38 (ie. qualified endorsement), to whom does the phrase
‘without recourse’ refer to? ‘Without recourse’ against whom?
Against the qualified endorser
Q: Under Sec.39 (i.e.: conditional endorsement), what is the reason that
the person paying may disregard the condition?The relativity of contracts. The payor is not a party to the
principal contract, which is why he may disregard the condition and pay
before it happens.
Q: What is conditional here? (sec.39)
The endorsement
Q: Do all types of restrictive endorsements destroy negotiability?
No, only the one which prohibits further endorsement
III. DUE COURSE HOLDING
Q: Who is a holder in due course?
A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue and
without notice that it has previously been dishonored, if such
was the fact;
(c) That he took it in good faith and for value; and
(d) That at the time it was negotiated to him, he had no noticeof any infirmity in the instrument or defect in the title of the
person negotiating it. (sec.52, NIL
*The prima facie presumption is that every holder of negotiable paper is
a HDC (sec.59), however, the same presumption may be refuted and in
such an event, it becomes incumbent upon the holder to prove that he
or some person under whom he claims acquired the title as HDC.
Q: May a payee be considered a holder in due course, considering that
the instrument was simply issued to him and not endorsed?Yes
*cross refer sec.52 with sec.191 – sec 191 defines a ‘holder’ as the payee
or endorsee of a bill or note who is in possession of the same, or one
who is a bearer of the same. ‘Holder’ under sec.52 must be read in the
light of sec.191’s definition, thus a payee may be a holder, and since a
holder of a negotiable instrument may become a holder in due course, a
payee may logically become a HDC as well. This was the ruling of the SC
in Eulalio Prudencio et.al. c. CA, 143 SCRA 7, 16.
Q: what are the rights of a HDC?
1. To take the instrument free from personal defenses between
prior parties
2. To enforce payment for the full amount against all parties
liable thereon (sec.57)
Q: What is the Shelter Rule?
It is the doctrine which allows a holder who derives his title
through a holder in due course, and who is not himself a party to any
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
fraud or illegality affecting the instrument to have all the rights of the
HDC in respect of all parties prior to the latter. (Sec.58)
*NB: the shelter rule allows an innocent holder to derive his title from a
holder in due course. The scenario contemplated by the law is onewhere the negotiation of an instrument was tainted by fraud or illegality
before it came into the hands of the present holder. The present holder,
therefore, who had nothing to do with the infirmity in the instrument,
may derive his title from the HDC before him, and will himself be
deemed a HDC.
Q: What is the exception to the shelter rule?
A prior party who was NOT a holder in due course may NOT
purchase the instrument from the sheltered holder (who is of course, a
HDC) and gain a clean title thereto.
*NB: suppose a prior party had something to do with the fraud tainting
the negotiation of the instrument. He allows an innocent person to
purchase it. The innocent person, by operation of law, becomes a
sheltered holder, a holder in due course. May the prior party again
purchase the instrument from the sheltered holder and claim to be free
of all personal defenses? Obviously not. The shelter rule cannot be used
to circumvent the law. The rule under sec.58 is not available to the
person repurchasing the instrument, if he was party to the fraud before
the sheltered holder acquired the instrument. Such a person is notallowed to improve his position by reacquiring the instrument from a
HDC. In the event of repurchase, the instrument, as regards him, would
still be subject to both personal and real defenses. This was the ruling in
the case of Fossum v. Hermanos, et. al., 44 Phil 713, 717-718.
*NB: the exception also applies to agents.
Q: Suppose the instrument was defective, but the defect was not
apparent. Does this destroy due course holding?
No, sec.52 requires that the instrument is complete and regular
on its face. If the defect was not apparent, the holder may still be
deemed a HDC.
Q: What are circumstances that destroy due course holding?
1. Irregular and defective instruments
2. Taking the instrument when it was overdue
3. The holder has notice of the infirmity or defect in the
instrument
4. The holder did not take the instrument in good faith
5. The holder did not take the instrument for value
6. The holder ignored circumstances which should have put him
on inquiry (i.e.: the check was crossed)7. The holder was not a HDC, and was a party to an illegality
during negotiation, and he tried to reacquire the instrument
from a subsequent HDC.
IV. LIABILITIES AND ENFORCEMENT THEREOF
Q: Who are the parties primarily and secondarily liable for a negotiable
instrument?
TYPE OF INSTRUMENT PARTIES LIABLE NATURE OF LIABILITY
BILL OF EXCHANGE
Acceptor(see: sec.127)
AccommodationAcceptor(sec.29)
PRIMARY
General Endorsers(see: sec.62)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Endorsers of BearerInstruments(sec.67)
AccommodationEndorsers(sec.29)
Acceptor for Honor(sec.165)
Drawer(sec.61)
SECONDARY
PROMISSORY NOTE
Maker(see: sec.60)
Accommodation Maker(sec.29) PRIMARY
General Endorsers(see: sec.62)
Endorsers of BearerInstruments(see: sec.67)
AccommodationEndorser(sec.29)
SECONDARY
CHECK
Acceptor(sec.127)
AccommodationAcceptor(sec.29)
PRIMARY
Drawer(sec.61)
General Endorsers(sec.66)
Acceptor for Honor(sec.165)
Accommodation Drawer(sec.29)
SECONDARY
IMPORTANT:-An accommodating party’s liability is not strictly primary and secondary, per se.It depends on what capacity the accommodating party signed – either as maker,drawer, endorser or acceptor. This is because the accommodating party, bylending his name, becomes a surety for the accommodated party. Ergo, thecapacity in which he signs determines his liabilities – liabilities that may either beprimary or secondary. The same principle goes for persons signing as agents ifthey fail to sign in accordance with sec.20.
-The NIL has special rules for the liability of IRREGULAR ENDORSERS:1. If the instrument is payable to the order of a 3rd person, an irregularendorser is liable to the payee and all subsequent payees
2. If the instrument is payable to the order of the maker or drawer, or ispayable to bearer, he is liable to all parties subsequent to the maker ordrawer;
3. If he signs for the accommodation of the payee, he is liable to all partiessubsequent to the payee (sec.64)
-An irregular endorser is one who signs in a peculiar manner, whose nameappears on the instrument where one would naturally expect another ’s. (Ogden,Negotiable Instruments, 4th Ed., p. 226)
Q: Are the primary and secondary liabilities the same as the liabilities for
warranties?
No, The primary and secondary liabilities of the parties stem
from their obligations to pay the sum certain in money stated in the
instrument. The liabilities for warranties stem from the warranties made
by the parties to an instrument, which warranties are separate and
ancillary contracts to the principal one involving the sum payable stated
in the instrument.
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
PARTY WARRANTIES
ACCEPTOR
1. The existence of the drawer, thegenuineness of his signature andhis capacity and authority to draw
the instrument;2. The existence of the payee andhis then capacity to endorse
*sec.62
GENERAL ENDORSER
ENDORSER OF A BEARERINSTRUMENT
1. That the instrument is genuineand in all respects what itpurports to be;
2. That he has good title to it;3. That all prior parties h ad capacity
to contract;4. That the instrument is, at the time
of his endorsement, valid and
subsisting*secs.66, 67
QUALIFIED ENDORSER
PERSON NEGOTIATING BY MEREDELIVERY
1. That the instrument is genuineand all respects what it purportsto be;
2. That he has good title to it;3. That all prior parties h ad capacity
to contract;4. That he has no knowledge of any
fact which would impair thevalidity of the instrument orrender it valueless
*sec.65
Q: May a corporation be held liable when one of its officers signs as an
accommodation party?
It depends. If the officer was specifically authorized to do so,
the corporation is liable. If not, the act was one ultra vires for which the
corporation cannot be held liable.
Q: What is the liability of an agent who signs a negotiable instrument on
behalf of another person?
The agent is NOT personally liable if he signs in the manner
prescribed under sec.20, that is if he –
1. Adds to his signature words indicating that he signs for or
on behalf of a principal or in a representative capacity; and
2. Discloses his principal
Failure of an agent to sign in this manner would operate to make him
personally liable, as if he had signed the instrument on his own.
Q: What is the legal effect of a signature per procuration?
It operates as notice that the agent has but a limited authority
to sign and the principal is bound only in case the agent so signing acted
within the actual limits of his authority
*see: sec.21
Q: When is a party deemed an accommodation party?
When the person meets the following requisites –
1. He must be a party to the instrument, signing as maker,
drawer, acceptor or endorser;
2. He must not receive value therefor;
3. He must sign for the purpose of lending his name or credit
to some other person
Q: May a person who does not sign the instrument be held liable?GENERALLY, No. But there are exceptions where a person who
did not actually sign the instrument may be held liable–
1. One who signs in a trade or assumed name (sec.18)
2. One who signs through an agent or authorized person
(sec.19)
3. Incapacitated persons who sign through their legal
guardians
4. Forgers of signatures (sec.23)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
5.
Persons whose signatures were forged but who are
precluded from setting up the defense of forgery (sec.23)
6.
In case of constructive acceptance (sec.137)
7. Endorsers who sign on an allonge
8. Persons who negotiate by mere delivery (sec.65)
Q: What are the steps in holding the secondary parties liable?
PROMISSORY NOTE BILL OF EXCHANGE ACCEPTOR FOR HONORor REFEREE IN CASE OFNEED
1. presentment forpayment within therequired period tothe maker
2.
If the note isdishonored, noticeof dishonor shouldbe given to theendorsers
1. Presentment forAcceptance
2. If the bill isdishonored by non-
acceptance, noticeof dishonor shouldbe given to theendorsers anddrawer; protest fordishonor is requiredif the bill is a foreignbill
3. If the bill isaccepted,Presentment forPayment; if the bill
is dishonored uponpresentment forpayment, notice ofdishonor must begiven to secondarilyliable persons;protest must bemade if the bill is aforeign bill
1. Protest for non-payment
Q: When is presentment for payment unnecessary?
1. As far as the DRAWER goes, when he has no right to expect
or require that the drawee or acceptor will pay the
instrument (sec.79)
2. As regards the ENDORSER, where the instrument was
made or accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
presented (sec.80)
3. Where, after the exercise of reasonable diligence,
presentment cannot be made (sec.82)
4. Where the drawee is a fictitious person (sec.82)
5.
When presentment has been waived, either expressly or
impliedly (sec.82)
Q: Does non-presentment of a bill relieve the drawer of all liability?No, the drawer is only discharged from the liability to the extent
caused by the delay or non-presentment. Failure to present on time
does not totally wipe out all liability.
Q: What is acceptance?
The signification by the drawee of his assent to the order of the
drawer to pay a sum certain in money embodied in a bill of exchange
Q: What are the requisites of acceptance?
1.
It must be in writing;2. Must be signed by the drawee;
3. Drawee must assent to paying a sum certain in money and
not by any other means
Q: When is presentment for acceptance required?
1. Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to
fix the maturity of the instrument;
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
2.
Where the bill expressly stipulates that it shall be presented
for acceptance;
3.
Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee
(sec..145)
Q: How is presentment for acceptance made?
1. By or on behalf of the holder;
2. At a reasonable hour;
3.
On a business day or before the bill is overdue;
4. At the proper place;
5.
To the drawee or the person authorized to accepted or
refuse acceptance on his behalf
6.
If the bill is addressed to 2 or more drawees who are not
partners, presentment must be made to all of them unlessone has the authority to accept or refuse acceptance on
their behalf in which case presentment must be made to
that person only;
7. Where the drawee is dead, presentment may be made to
his personal representative;
8. Where the drawee has been adjudged a bankrupt or an
insolvent, or has made an assignment for the benefit of
creditors, presentment may be made to him or to his
trustee or assignee
(secs.144, 145, 146, 72, 85, 73)
Q: when is presentment for acceptance unnecessary or excused?
1. Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to contract
by bill;
2. Where, after the exercise of reasonable diligence,
presentment cannot be made;
3.
Where, although presentment has been irregular,
acceptance has been refused on some other ground
(sec.149)
Q: What is constructive acceptance?
Acceptance by provision of law, whereby the drawee is deemed
to have accepted the instrument should either of the following
circumstances arise:
1. The bill was delivered to the drawee and he destroys the
same;
2. The bill was delivered to the drawee but he refuses to pay
within 24 hours or within such other period as the holder
may allow to return the bill either as accepted or non-
accepted (i.e.: drawee unduly retains the bill)
(sec.137)
Q: What is a notice of dishonor?
A notice which informs the secondary parties that the
instrument was either dishonored by non-acceptance or non-payment,
and that the holder of the instrument so dishonored intends to enforce
the liabilities of the persons so notified
Q: Does the payee have a legal obligation to inform the drawer that the
instrument was dishonored?
No, the payee is under no obligation to do so. The notice is onlyrequired to preserve the payee’s right to recover on the dishonored
instrument, since failure to give notice to the drawer or endorsers
operates to discharge them of their respective liabilities on the
instrument
Q: If no notice was given, is the drawer completely absolved of liability
to the payee?
No, the contractual liability still subsists
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: When is an instrument considered dishonored by non-payment?
1.
When it is duly presented for payment and payment is
refused or cannot be obtained; or
2. Presentment is excused and the instrument is overdue and
unpaid (sec.83)
Q: When is a bill dishonored by non-acceptance?
1. When it is duly presented for acceptance and such
acceptance is refused or cannot be obtained;
2. When presentment for acceptance is excused and the bill is
not accepted (sec.149)
Q: May a person give notice of dishonor to prior parties, even if he was
not authorized to do so?Yes, sec.91 states that notice of dishonor may be given by any
agent either in his own name or in the name of any party entitled to give
notice, whether that party be his principal or not ; effectively then, a
person may give notice for another even if he was not authorized to do
so
Q: To whom should notice be given to the endorsers, in a case where
the endorsers are partners?
To either of them, pursuant to the principle of mutual agency
between and among partners (Art.1818, NCC)
Q: When is notice of dishonor excused or unnecessary?
DRAWER (sec.114) ENDORSER (sec.115)
1. where the drawer and the draweeare the same person
1. when the drawee is a fictitiousperson or person not havingcapacity to contract, and theendorser was aware of that factat the time he endorsed the
2. when the drawee is a fictitiousperson or a person not havingcapacity to contract
3.
when the drawer is the person towhom the instrument ispresented for payment
4. where the drawer has no right toexpect or require that the draweeor acceptor will honor theinstrument
5. where the drawer hascountermanded payment
instrument;
2. where the endorser is the personto whom the instrument ispresented for payment
3.
where the instrument was madeor accepted for hisaccommodation
*NB:Notice to these persons under these circumstances is no longer necessarybecause they either (a) knew of the dishonor beforehand; or (b) werethemselves responsible for the dishonor
Q: May notice of dishonor be waived?
Yes, it may be waived either before the tine of giving notice has
arrived or after the omission to give due notice, and the waiver may be
either express or implied ( sec.109)
Q: Who are bound by the waiver of notice of dishonor?If the instrument itself contains the waiver, all parties to it are
bound. If on the other hand, the waiver is written above the signature of
a particular endorser only, then only that endorser is bound.(sec.110)
Q: Does the failure to give notice of dishonor affect the rights of a
subsequent HDC?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
No, an omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a HDC subsequent to the omission
(sec.117)
Q: What is protest?
A formal statement in writing made by a notary public at the
instance of the holder declaring that the instrument has been presented
for payment or for acceptance but the same was dishonored. It is
generally indispensable only for foreign bills of exchange, however, the
need for it may also be waived.
Q: May protest be made for inland bills?
Yes, although the NIL only requires protest for foreign bills,
there is no prohibition against making a protest for the dishonor of
inland bills. (sec.152, sec.118)
Q: In what instances is protest necessary?
1.
Where a foreign bill was dishonored by non-acceptance
(sec.152)
2. Where a foreign bill, previously accepted, was subsequently
dishonored by non-payment (sec.152)
3. Where a bill is sought to be accepted for honor (sec.161)
4. Where a bill is to be presented for payment to an acceptor
for honor (sec.167)
5.
where a bill is dishonored by an acceptor for honor(sec.170)
Q: What are the legal effects of a waiver of protest?
1. Protest itself is waived;
2. Presentment for payment or acceptance is also deemed
waived;
3. Notice of dishonor is also deemed waived
Q: when is there an acceptance for honor?
When the original drawee refuses to accept a bill of exchange
and there is a need to save the credit of certain parties. A third person or
stranger to the instrument accepts the instrument for honor thereby
making himself liable to all parties to the bill subsequent to the party for
whose honor he accepted
Q: What is the nature of the liability of the acceptor for honor?
Secondary, because his engagement is to pay only if the bill is
not paid by the drawer and provided that it has been duly presented for
payment and protested for non-payment and that notice of dishonor is
given to him.
*NB: The nature of an acceptor for honor’s liability is different from that
of an ordinary acceptor in this regard, since an ordinary acceptor isprimarily liable the moment he accepts the instrument
Q: What are the requisites of acceptance for honor?
1. The bill of exchange has been protested for dishonor by
non-acceptance (and for better security);
2. The acceptor must be a stranger to the bill
3. The holder must consent to the acceptance for honor
4. The acceptance for honor must be made before the
instrument is overdue
5.
The acceptance for honor must be in writing, must indicatethat it is an acceptance for honor, and must be signed by
the acceptor for honor
( secs.161, 162, 165)
Q: who may make a payment for honor?
Any person, for the honor of any person liable on the
instrument or for the honor of the drawer (sec.171)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
V. THE SHORT-CUT RULE, TRUNCATION OF RIGHT OF RECOURSE IN
FORGED CHECKS
Q: What is the right of recourse of the parties to a forged check where
the signature forged belonged to the payee?
The short-cut rule holds that the payee whose signature was
forged can go directly to the collecting bank, regardless of whether or
not the checks were actually delivered to the payee. (Associated Bank,
et. al. v. CA and Reyes, GR. No 89802, May 7, 1992; Westmont Bank v.
Ong, GR No.132250, January 30, 2002)
Q: Mario issued a check drawn against his checking account with BOC,
the drawee-bank, to Pablo. Tisco stole the check and forged Pablo’s
signature as endorser, thereby making it appear that the check was dulyendorsed to him by the latter. Tisco then deposited the check with RCB,
his bank whom he designated as collecting bank. Determine the
respective rights of recourse of the parties. (NEGO MIDTERMS – AY
2012-2013)
Pablo, as payee whose endorsement was forged by Tisco and
who lost the note to the latter through theft, may proceed against RCB,
the collecting bank, for recovery of the amount. RCB became liable as a
general endorser when it endorsed the check to the drawee-bank, BOC,
thereby warranting that the check was genuine and in all respects what
it purports to be. RCB, the collecting bank, may only recover againstTisco, the forger-depositor, because no privity of contract exists
between the maker and the collecting bank, nor between the payee,
Pablo, and the collecting bank. The collecting bank may hold the
depositor liable because the depositor is its client. Mario, as maker, may
proceed against the drawee-bank and not the collecting bank because
there is no privity between the him as maker and the collecting bank.
Q: what is the rationale behind the short-cut rule?
The collecting bank is ultimately liable. The collecting bank is
liable to the payee and must bear the loss because it is its legal duty to
ascertain that the payee’s endorsement was genuine before cashing the
check. As a general rule, a bank or corporation who has obtained
possession of a check upon an unauthorized or forged endorsement of
the payee’s signature and who collects the amount of the check from
the drawee, is liable for the proceeds thereof to the payee or other
owner, notwithstanding that the amount has been paid to the person
from whom the check was obtained (Westmont Bank v. Ong, cited
above)
*The theory behind the rule is that the possession of the check is
wrongful and when the money had been collected, the collecting bank
can be held liable because it is deemed to have held the money for the
rightful owner in order for the latter to recover them. The position of
the bank taking the check on the forged or unauthorized endorsementis the same as if it had taken it and collected the money without
endorsement at all and the act of the bank amounts to conversion of the
checks.
*The rationale is to expedite the right of recourse of the payee, to reach
by a desirable short-cut, the person who ought to be allowed to recover
directly from the collecting bank, regardless of whether the check was
delivered to the payee or not
*IMPORTANT: -This rule is NOT readily applicable to a case where the signature that
was forged belonged to the DRAWER, or to OTHER SUBSEQUENT
ENDORSERS.
-If the drawer’s signature was forged, the drawer may not be held liable
for the amount on the instrument (although he may certainly be held
liable for the underlying contract).
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
-If the endorser’s signature was forged, the cut -off rule operates to bar
recovery from the parties prior to the forged endorsement. A
subsequent holder may not therefore enforce payment against the
drawee, the drawer, or the payee because parties prior to the forgery
may set it up as a defense (unless of course they are precluded from
doing just that)
-Obviously then, where the facts of any problem do not present a case
where it was the PAYEE’S signature that had been forged, application of
the short-cut rule is not advisable.
VI. DEFENSES
Q: What is a personal defense?
One which involves the relationships of the parties betweenand amongst themselves, wherein there is a true and valid underlying
contract but where, for various reasons (i.e.: fraud, duress, mistake,
prior breach of contract by the holder, etc.), the defendant is excused
from his obligation to perform.
Q: What is a real defense?
One which involves the instrument or the underlying contract
itself, wherein there is an absence of one or more of the essential
elements of a contract or where the admitted contract is vitiated
Q: What defenses may be raised against a HDC?
Only real defenses – those which call into question the
instrument or the underlying contract.
REAL DEFENSES PERSONAL DEFENSES
1. Minority (available only to theminor)
2. Forgery3. Non-delivery of an incomplete
1. Failure or Absence of consideration2. Illegal consideration3. Non-delivery of a complete
instrument
instrument4. Material Alteration5. Ultra Vires act of a corporation6. Fraud in Fact7. Illegality8. Vicious force or violence
9.
Lack of authority10. Prescription11. Discharge in insolvency
4. Conditional delivery of a completeinstrument
5. Fraud in inducement6. Filling up blanks without authority
to do so7. Duress of intimidation
8.
Filling up blanks beyond areasonable time
9. Transfer in breach of faith10. Mistake11. Ante-dating or post-dating forillegal or fraudulent purposes
Q: Does negotiation by a minor operate to pass title to the holder?
Yes
*NB: although the defense is a real one, the negotiation still
passes title to the holder, the same rule also applies to corporationswith regards to an ultra vires act – the corporation may raise it as a
defense but the negotiation still transfers title
Q: What is delivery?
The transfer of possession of the negotiable instrument by one
person to another with the intention to transfer title to the instrument
Q: What is the effect if an instrument which is not complete was
delivered?
The delivery will not effect a valid contract in the hands of anyholder as against any person whose signature was placed thereon prior
to delivery (sec.15)
Q: When may delivery be deemed valid?
When it is made either by or under authority of the person
making, drawing, accepting or endorsing the instrument (sec.16)
Q: What are the rules involving delivery?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
1.
A negotiable instrument must be delivered
2. Delivery must either be by or under authority of the person
making, drawing, accepting or endorsing the instrument
3. Delivery is presumed to have been made if the instrument is
no longer in the hands of the maker or drawer for the
purpose of issuing it, or the endorser for the purpose of
transferring title
4. As between immediate parties and remote parties who are
not holders in due course, the delivery of a complete
instrument may be established to be conditional or for a
special purpose, and not for transferring title
5.
As between immediate parties and remote parties who are
not holders in due course, it may be established that there
was no delivery at all of the complete instrument
6. As to holders in due course, it cannot be established that
there was no delivery because delivery as to the HDC is
conclusive upon his possession of the instrument
7.
As to a HDC, it cannot be established that the delivery was
only conditional or for a special purpose
(sec.16)
Q: What are the rules with regard to filling up blanks in a negotiable
instrument?
1. A person in possession of such an instrument has prima
facie authority to complete the instrument by filling it upstrictly in accordance with the authority given and within a
reasonable time
2. If a person delivers a blank paper which contains his
signature and which he intends to convert into a negotiable
instrument, the person to whom it is delivered has prima
facie authority to fill it up for any amount in accordance
with the authority given and within a reasonable time;
3.
If the holder of the instrument, after it was filled up, is a
HDC, the holder may enforce the instrument as if it were
filled up with the proper authority and within a reasonable
time
(sec.14)
Q: when is fraud a real defense? When is it merely a personal one?
FRAUD IN EXECUTION/FRAUD IN FACTUM
FRAUD IN INDUCEMENT
-person is induced to sign aninstrument without knowing itscharacter as a note or bill
-a REAL defense
-persons who signs the same is awarethat he is signing a negotiableinstrument, and intends to sign it, butwas only induced to do so throughfraud, his consent having been vitiatedby it
-a PERSONAL defense
Q: When may an alteration become a defense?
When it is material (sec.1, 125)
Q: Is material alteration a complete defense?
No, only a partial one. A HDC who is in possession of a
materially altered instrument and who is not a party to the alteration
may enforce payment thereof according to its original tenor (sec.124)
Q: What is the effect of ante-dating or post-dating a negotiable
instrument?
Ante- or post-dating does not per se affect the instrument. A
personal defense only arises when the ante-dating or post-dating was
done for a fraudulent or illegal purpose
Q: what is the effect of forgery?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
A forged signature is wholly inoperative and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under
such signature, unless the party against whom it is sought to be en force
such a right is precluded from setting up the forgery or the want of
authority (sec.23)
TYPE OF INSTRUMENT PARTY WHOSESIGNATURE WAS
FORGED
EFFECTS
PROMISSORY NOTE
Maker
Maker is not liable onthe instrument to allsubsequent partieswhether the instrumentis an order or a bearerinstrument
Endorsers
Still secondarily liablebecause they warrantthat the instrument isgenuine and in allrespects what itpurports to be
If the note is payable toBEARER, the forgedsignatures may not beset up as a defense,because the signature of
the endorser isunnecessary to pass titleto the instrument – themaker is still primarilyliable on the note.
Drawer
Drawer is not liable onthe instrument to allsubsequent partieswhether the bill is anorder or bearer bill
BILL OF EXCHANGE Endorsers
Subsequent holdercannot enforce paymentagainst the drawer,drawee or payee
Endorsers prior to the
forgery may set up thereal defense of forgery
Endorsers subsequent tothe forgery are still liable
Endorsers precludedfrom setting up forgeryas a defense are liable,despite having endorsedthe bill prior to the actof forgery
If the bill is a BEARER billof exchange, the holdermay still recover fromthe drawer because theforged signature isunnecessary for his title.
Q: How does the ‘Cut-ff Rule’ operate?
Parties prior to the forged signature are cut-off from the parties
after the forgery and cannot be held liable for the forgery. These parties
may validly set up the defense of forgery against any holder, including a
HDC.
Q: Are there any exceptions to the cut-off rule?
Yes, prior parties may still be held liable if they are precluded
from setting up the defense of forgery either because of their
warranties, representations of their negligence (i.e.: endorsers who had
anything to do with the forgery prior to its commission may still be held
liable)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: What is the effect of an insertion of a wrong date on an instrument?
The act becomes a personal defense between immediate and
prior parties, and the HDC has the right to regard the wrongfully
inserted date as the true date (sec.13)
Q: Senator Corupto executed a negotiable promissory note payable to
Simpo or the latter’s order, as a reward for the political support and
friendship given by Simpo to the Senator. Later on, the note was
negotiated to Hovo, a holder in due course. May Hovo enforce the note
against Corupto? Would your answer remain the same, if it were Simpo
who would seek to enforce payment against Corupto? (NEGO
MIDTERMS – AY 2012-2013)
1. YES, Hovo may enforce the note against Corupto. Hovo, being
a holder in due course, possesses the right to enforce the instrument for
the full amount stated thereon against the maker, Corupto; and has
taken the instrument free of all personal defenses between prior
parties. Corupto may not set up the defense of want or absence of
consideration against Hovo because the same is merely a personal
defense, and personal defenses may not be raised against a holder in
due course.
2. NO, The same answer above would not apply in the event
that it would be Simpo seeking to enforce the note against Corupto. The
note was issued for ‘support and friendship’ – and as such, Corupto may
set up as a personal defense the want or absence of consideration forthe issuance of the note. ‘Friendship and support’ (in the same manner
as love and affection) do not constitute ‘value’ or consideration under
the ambit of the negotiable instruments law. Absence or lack of
consideration is a defense pro tanto between immediate parties, and
against a holder who is not a holder in due course.
Q: May lack of consent be ratified?
Yes, ratification by the party whose signature was obtained
without valid consent, for example, precludes that party from raising
the defense of lack or vitiation of consent. The principles of estoppel
and ratification may apply in this case.
VII. DISCHARGE OF AN INSTRUMENT
Q: What is discharge?
Release from further liability –
1. AS TO THE PAPER ITSELF: the end of a contractual
obligation
2. AS TO THE PARTIES: the release of some or all of them
from further obligation and liability under the instrument
Q: Is there such a thing as partial discharge?
Yes, as when the instrument (i.e.: the contractual obligation it
represents) is not yet discharged, and only part or some of the obligors
are released.
Q: Suppose all the obligors are released, what happens to the
instrument?
The instrument is deemed released as well
Q: How is an instrument discharged? 1. By payment in due course by or on behalf of the principal
debtor
2. By payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation;
3. By the intentional cancellation thereof by the holder;
4. By any other act which will discharge a simple contract for
the payment of money;
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
5.
When the principal debtor becomes the holder of the
instrument at or after maturity in his own right
(sec.119)
Q: What is meant by payment in due course?
Payment is said to have been made in due course when it is
made at or after maturity date of the instrument to the holder thereof in
good faith and without notice that his title is defective (sec.88)
Q: May payment be made by the delivery of another negotiable
instrument?
No (Art.1249, NCC)
Q: What is the effect of payment by a secondary party?
The instrument is NOT discharged, but such a party is remitted
to his former rights with regards to prior parties (i.e.: he becomes a
holder again and not just an endorser), and he may strike out his own
and all subsequent endorsements (those made by the people he owed)
and re-negotiate the instrument, EXCEPT when (a) the instrument is
payable to the order of third person and the payment was made by the
drawer; and (b) where it was made or accepted for accommodation and
has been paid by the party accommodated. (sec.121)
Q: Why is a prior party who reacquires the instrument permitted to
strike out endorsements?Because the endorsements he strikes out are those which are
not necessary for his title
Q: why does payment by the party accommodated where the
instrument is made or accepted for his accommodation discharge the
instrument?
Because the payment is in effect one made by the principal
party (since the accommodating party acts as surety for the
accommodated party, payment by the latter is actually payment by the
principal debtor which discharges the instrument)
Q: Why does payment by the drawer discharge the instrument under
sec.121(a)?
Because the drawer is the party ultimately liable in case the
instrument is drawn payable to the order of third person.
Q: Suppose the third person who paid actually did so with the intention
of acquiring title over the instrument, is the instrument discharged?
No, in this case, the payor is not considered a ‘third person’
within the contemplation of 119. The payor is either a holder or an
assignee as the case may be.
Q: to whom should payment be made?
To the HOLDER of the instrument
(see notes on ‘who is a holder?’ – pages 4,5 as discussed above)
Q: Is there a possibility that a payor who had already previously made
payment may be made to pay again?
Yes, the rightful holder who may have been unlawfully deprived
of the instrument may still enforce payment against a payor who
previously paid with knowledge of the defect in the previous holder’s
title.
Q: how does cancellation discharge the instrument?
Depends on WHAT KIND of cancellation was effected –
intentional cancellation discharges the instrument, conversely, if the
cancellation was NOT intentional, the instrument is not discharged.
*Intentional cancellation takes place when the holder writes
the word ‘cancelled’ on the instrument or does… something childish to
it (think: tearing it up, burning it, etc) (sec119)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: What are the acts which discharge simple contracts?
1. payment or performance
2.
loss of the thing due
3. condonation or remission of the debt
4. confusion or merger of the rights of creditor and debtor
5.
compensation
6. novation
7. annulment or rescission
8. fulfillment of a resolutory condition
9.
prescription
(see: art.1231, NCC; check notes for oblicon)
Q: how are secondarily liable parties discharged? (sec.120)
1. By any act which discharges theinstrument
(art.1231 + other pertinent provisionsof the NCC)
2. By the intentional cancellation ofhis signature by the holder
An endorser whose endorsement isstruck out and all endorserssubsequent to him are relieved fromliability on the instrument (sec.48)
Discharge here means discharge bysome act of the creditor, it does notinclude discharge by operation of law(i.e. by bankruptcy, insolvency,prescription, failure to give notice ofdishonor)
3. By the discharge of a prior party
4.
By a valid tender of payment It is the fault of the holder under thiscircumstance that he was not paid,thereby discharging the secondaryparties.
5. By a release of the principaldebtor unless the holder’s right ofrecourse against the partysecondarily liable is expresslyreserved
The release of the principal debtordischarges the instrument and personssecondarily liable lose their right ofrecourse against the principal debtor
EXCEPTION: when right of recourseagainst secondary parties was
expressly reserved
6. By any agreement binding uponthe holder to extend the time ofpayment or to postpone theholder’s right to enforce theinstrument unless made with the
consent of the party secondarilyliable or unless the right torecourse against such party isexpressly reserved
Because the assurance of the drawerand the endorsers is to pay accordingto the tenor of the instrument. Anagreement to extend the time ofpayment varies the original
undertaking of the secondary parties(compare art.2079, NCC re: g uaranty;same principle applies)
EXCEPTIONS: (a) the extension wasmade with the consent of thesecondary parties; (b) right ofrecourse against secondary partieswas expressly reserved
VIII. CHECKS AND THE RELATIONSHIPS BETWEEN PAYEE, DRAWEE ANDDRAWER
Q: What is a check?
A bill of exchange drawn on a bank, payable on demand
(sec.185)
Q: When should a check be presented for payment?
Within a reasonable time after its issue (sec.186)
Q: Is a drawee liable upon the issuance of a check?
No, the drawee is not liable just because he happens to be the
drawee. A check does not operate as an assignment of any part of the
funds to the credit of the drawer with the bank, the bank is not l iable to
the holder unless and until he accepts the same, in which case, the
drawee becomes an acceptor (sec.189)
Q: what is a certified check?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
One drawn by a depositor upon funds to his credit in a bank
which a proper officer of the bank certifies will be paid when duly
presented for payment
Q: Is certification completely similar to acceptance?
No, certification is equivalent to acceptance (sec.187) but they
differ in the sense that (a) certification done at the instance of the
HOLDER results in a discharge while ordinary acceptance does NOT
discharge; and (b) in certification, the bank debits the drawer’s account
at the time of certification, not after, as in ordinary acceptance
Q: How does certification operate?
Upon certification, the bank debits the drawer’s account, in
effect setting aside the funds to meet the check if and when it is
presented for payment. The funds that were set apart are no longer
within the control of the drawer but have been precisely segregated for
the purpose of paying the check. This is why certification procured by
the holder discharges the secondary parties – because the certified
check would now operate as an assignment of part of the funds to the
credit of the drawer (sec.189). The theory is that the holder, by
requesting such certification instead of payment, enters into a new
contract with the bank, and not one within the contemplation of the
drawer or a prior endorser. The drawer and the endorsers are expecting
that the check will be presented for payment only and not for
certification, hence they are discharged.
*‘The bank virtually says that the check is good; we have the
money of the drawer here ready to pay it. We will pay it now if you will
receive it. The holder says, No, I will not take the money; you may certify
the check and retain the money for me until this check is presented.’ The
money being due and the check presented, it is his own fault if the holder
declines to receive the pay xxx (1 Morse on Banks and Banking, p.920; cited
in PNB V. National City Bank of New York, 63 Phil 711, 717-720)
Q: What is a crossed check?
A check which bears 2 parallel lines diagonally on the left top
portion. If the crossing of a check is SPECIAL, the name of a bank or
business institution is written between the 2 parallel lines (meaning that
the drawee should pay only with the intervention of that company), if
the crossing is GENERAL, the words written between the 2 parallel lines
are ‘and Co.’ or ‘for payee’s account only’
Q: Does the NIL govern crossed checks?
No, the Code of Commerce under sec.541 does. Sec.541 of the
Code of Commerce was patterned after the Bills of Exchange Act of 1882
(secs.76,77 of the Bills of Exchange Act of 1882)
Q: What is the effect of crossing a check?
Generally, the crossing of a check puts the holder on inquiry
and requires him to ascertain the endorser’s title to the check. Failing in
this respect, the holder is declared guilty of gross negligence amounting
to legal absence of good faith (think: holder can no longer become a
HDC)
Specifically, the effects are –
1. The check may not be encashed but only deposited in a
bank
2. The check may only be negotiated once (to the person with
the account in the bank)3. The act of crossing serves as a warning to the holder that
the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that
purpose
Q: Differentiate a bill of exchange from a check
(see page 2 of these notes for tabular presentation)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Q: What is the relationship between and among the drawer, drawee
and payee of a check?
AVAILABILITY OFRIGHT OF
RECOURSE
PRESENCE OF PRIVITY OF CONTRACT
DRAWER DRAWEE PAYEE
DRAWERX X
DRAWEEX *
PAYEEX
DRAWER:
-has privity of contract with payee
-has privity of contract with drawee
-has right of recourse against drawee bank
DRAWEE:
-has privity of contract with drawer
-has recourse against drawer, in some instances
-no privity of contract with, or right of recourse against, payee
PAYEE:
-privity of contract with drawer
-recourse against drawer
-no privity of contract or right of recourse against drawee
*EXCEPTION: payee has right of recourse against drawee via tort action
under art.19, NCC (abuse of right), if he can prove that (a) drawee has a
legal right or duty toward him; (b) the right or duty was exercised in bad
faith; and (c) for the sole intent of prejudicing or injuring another (HSBC v.
Catalan, GR Nos. 159590 and 159591; October 18, 2004)
Q: What is a collecting bank?
The bank with which a payee-holder of a check deposits the
same. The payee in this case usually has an account with the bank,
known as the depositary bank or collecting bank
Q: What is the relationship between the payee and the collecting bank?
One of agent and principal. The collecting bank acts as the
agent of the depositor when it sends the check for clearing.
*check clearing is done through a ‘clearinghouse’, an
association of banks or other payors for the purpose of settling
accounts with each other on a daily basis. Each member of the
clearinghouse forwards all deposited checks drawn on other members
and receives from the clearinghouse all checks drawn on it. Balances are
adjusted and settled on a daily basis.
Q: Does the collecting bank become the owner of the check deposited
with it?
No, the check is only being collected from the drawee bank for
the principal, the depositor.
Q: If a check was forged prior to the deposit with the collecting bank,
and the check is subsequently paid, is the collecting bank liable?
Yes, because the collecting bank was the last endorser of the
check. It endorsed the check for clearing with the drawee bank, and the
drawee bank relied on the collecting bank’s warranty, given uponendorsement, that the instrument is genuine and in all respects what it
purports to be. The liabilities and warranties of a collecting bank are the
same as those of a general endorser (see: sec.66).
Q: What is the right of recourse of a collecting bank who was forced to
reimburse the drawee for a forged check?
The collecting bank may proceed against its client, the
depositor – because it is only with the depositor that privity of contract
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
exists, and also because the payee-depositor is liable under the same
warranties of a general endorser (sec.66, NIL)
Q: Is the drawer allowed to countermand payment on a check?
It depends. If the drawer has a valid defense against the holder
of the check (i.e.: holder failed to deliver the goods that he promised),
the drawer may countermand payment. If not, the drawer may be held
criminally liable under Batas Pambansa Blg.22 which penalizes the
making, drawing or issui9ng a check to apply on account or for value
knowing that at the time of issue the check is not sufficiently funded.
Q: What is the ‘Iron-Clad Rule’?
The rule which prohibits the countermanding of payment of
certified checks (and by analogy, manager’s or cashier’s checks).
Because of the nature of these checks, they are considered to be as
good as the money they represent, and may not be countermanded by
either the payee or the bank.
CHECK CLEARING, CLEARING REGULATIONS
(Cross-refer with notes on Summary of Doctrines, under the title
‘Checks’)
*IMPORTANT:
- The drawee bank is not only bound by the NIL with regards to thenegotiation or handling of a check, it is also bound by the rules on
clearinghouse regulations enacted by the Central Bank, through the
Philippine Clearing House Corporation (PCHC) and its regional arms.
THE 24-HOUR RULE: the drawee bank must return checks or items
cleared through the PCHC within 24 hours (think: especially applicable to
forged checks where the forged signature belongs to the drawer) to the
collecting bank; failure to do so makes the drawee liable for negligence
and absolves the collecting bank of l iability (sec.20, PCHC Rules)
*the 24-hour rule does NOT apply to checks whose forged
endorsements belong to endorsers, or to check which have been
materially altered. In these cases, the checks should be return within 10
years (yes, YEARS), since sec.21 of the PCHC Rules states that they
should be returned ‘within the period prescribed by law for the filing of
a legal action’ (10 days, pursuant to art.1144, NCC – actions based upon a
written contract or an obligation created by law prescribe in 10 years
from the time the right of action accrues) (see: Aquino, Banking and
Negotiable Instruments Law, vol. I, 2009)
IX. NEGOTIABLE DOCUMENTS OF TITLE
Q: What is a negotiable document of title (NDT)?
A document used in the ordinary course of business in the sale
or transfer of goods as proof of possession or control of the goods, or
authorizing or purporting to authorize the possessor to transfer or
receive either by endorsement or delivery, goods represented by such
document.
Q: What are the features and functions of NDTs?
1.
They serve as a contract2. They serve as receipt of goods
3. They operate as transferable documents of title to the
goods they describe
Q: How are NDTs different from negotiable instruments?
NEGOTIABLEINSTRUMENTS
NEGOTIABLEDOCUMENTS OF TITLE
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild westwhere you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact
Re: GOVERNING LAWS NILCode of Commerce
NCC (Arts.1507-1520)Warehouse ReceiptsLaw (WRL);Trust Receipts Law (TRL)
Re: PURPOSE ANDFUNCTION
Transfer of Credit orMoney
Transfer of Goods
Re: POSSIBILITY OF DUECOURSE HOLDING
Holder may be a HDC Holder is not a holder indue course, but a holderfor value
Re: MODE OF TRANSFER By NegotiationBy Assignment
By NegotiationBy Assignment
Re: CONVERTIBILITYTHROUGHNEGOTIATION
An ORDER instrumentmay be converted to abearer in strument
A BEARER instrumentmay only be convertedto an order instrument
ONCE – if it wasoriginally a bearerinstrument
Once a bearerinstrument, always abearer instrument
Universal Convertibility – An ORDER documentmay be converted into aBEARER document, andback again
Re: WARRANTIES All parties (i.e.: drawers,makers, endorsers) to anegotiable instrumentare bound by theirrespective warranties
only the TRANSFERORof a NDT makeswarranties in favor ofthe transferee
Endorsers are not liable
for failure on the part ofthe bailee to deliver thegoods
Q: What determines the negotiability?
Words of negotiability (art.1507, NCC; Sec.5, WRL)
Q: What is the effect of stamping the words ‘non-negotiable’ on a NDT?
There is no effect, if the document contains words of
negotiability, it remains negotiable despite the stamping on it of the
words ‘non-negotiable’ or others of like import
Q: How is a NDT negotiated?
BEARER DOCUMENT ORDER DOCUMENT
By delivery(Art.1508, NCC)
*POSSESSION is controlling - thewarehouseman’s obligation followsthe possessor
By endorsement – (a) in blank; or(b) to bearer; or(c) to a specified person
If the document is endorsed to aspecified person, he may againnegotiate the document in blank, tobearer or to another specified person(Art.1509, NCC)
*ENDORSEMENT is controlling – thewarehouseman’s obligation followsthe endorsement (if endorsed in blankor to bearer, warehouseman’sobligation follows accordingly)
Q: Does the transfer of a NDT result in the transfer of title to the goods?
Yes, because transfer of the document controls the transfer of
goods. Negotiation of a document has the effect of manual delivery so
as to constitute the transferee the owner of the goods. The direct
obligation of the bailee issuing the document to hold possession of thegoods is owed to the transferee from the moment of negotiation
(Art.1513, NCC)
Q: Suppose the document was not negotiated but merely transferred to
the holder, what are the effects?
The person to whom it has been transferred and not negotiated
acquires as against the transferee the title to the goods, subject to the
terms of any agreement with the transferor (i.e.: person in possession
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becomes an assignee of the goods), and the transferee may convert the
plain transfer to negotiation by compelling the transferor to complete
the negotiation process (Art.1515; secs.42,43, WRL)
Q: what is the effect if there was in fact an intent to negotiate the
document but possession of the same is retained by the transferor?
The interest of the prior transferee may be defeated if the
document is subsequently transferred to a purchaser in good faith
without notice. The subsequent negotiation of the document under any
sale or other disposition to any person receiving the same in good faith
and for value and without notice of the previous sale, mortgage or
pledge, shall have the SAME EFFECT as if the first purchaser had
EXPRESSLY AUTHORIZED the subsequent negotiation (sec.48, WRL)
*No, Art.1544 of the NCC on double sales does NOT apply to the
second sale of a negotiable document like a warehouse receipt. The law
(WRL) practically negates the will of the first purchaser and assumes
that buyer 1 willingly permitted sale number 2.
*Read this together with the right of the purchaser to compel
the transferor to complete the negotiation – this is why.
Q: What are the rights of a person to whom a NDT was duly negotiated?
1. He acquires such title to the goods as the person
negotiating the document to him had or had ability to
convey
2. The direct obligation of the bailee issuing the document to
hold possession of the goods for him as if such bailee had
contracted directly with him
(Art.1513, NCC; Art.41, WRL)
*Think: the goods follow the document of title, BUT notice that
NO ADDITIONAL RIGHTS are conferred over the goods to the
transferee.
*Here lies the crucial distinction between NDTs and NIs. Under
the NIL, a holder in due course may acquire a better right than his
transferor (i.e.: he gets a clean title to the instrument); whereas the
transferee of a NDT acquires merely what the transferor had or could
give