Commercial Law Review

Glenn Tuazon, 4-A

Atty. Jack Jimenez
SY 2010-11
4 Quizzes (50 each) + MT (100) + Finals (100) divided by 4 = Final Grade

1. Making
2. Drawing
3. Negotiating
4. Accepting

To show consent
o N.B. But for all, there must be delivery
Basic principles: NIL is for justice.
o 1. Bad faith: So if a person is in BF, he cannot invoke
o
o
o
o

defenses. (Ex. Issued a negotiable instrument to pay for a car

that is defective. The indorsee knows that the car is defective,

Part 1: Negotiable Instruments Law

HISTORY: contrast a negotiable instrument with a non-negotiable PN:

o First objection: a person stepping into the shoes of the seller is

exposed otherwise to the defenses that the buyer may launch

against the seller

Laws solution exempt from personal defenses

Second objection: I dont know the maker, I just know the one

bank is considered negligent too

But if the negligence of the drawer outweighs the
negligence of the bank, the law shifts the fault to the

regardless (Accumulation of secondary contracts)

The more indorsers, the more you can sue

Two general parts in the law:
o 1 what makes an instrument negotiable
o 2 rights and obligations of parties
Two basic forms:
o Promise to pay (PN)
o Order to pay (bill of exchange)
If it does not comply with the requisites of negotiability, it is still a
contract, but not covered by the NIL.
Either:
o Payable to order negotiated by indorsement, and delivery
o Payable to bearer delivery is sufficient
o N.B. If payable to a specific person, it is not negotiable
Four basic contracts involved:

forge his signature is estopped from denying it

3. Comparative fault

If a bank honors a check with a forged signature, the

negotiating it to me. How will I know hes solvent?

Laws solution will make the indorser liable

he is in bad faith.)
2. Estoppel ex. A father allowing a son to steal a check and

drawer
4. The law will only protect you from personal defenses if you

are a holder in due course (Sec. 52)

Good faith

With value

Before overdue (see below)

With no notice of defenses

5. General rule: there must be demand , before an instrument
becomes overdue. Exception: If time is of the essence.

Ex. Reserve requirements of banks must be kept

afloat, so overnight, banks sometimes transact with

each other
An overdue instrument is shouting to the high
heavens I have been dishonored!

Requirements found in Sec 1. 2-9 are elaborations of such.

o
o

1a. It must be in writing

1b. It must be signed symbol of consent

If one signed another name or a symbol, it will bind

him if he intended for it to bind him

Location is immaterial
2a. Must contain a promise or order to pay

Need not use exact words, even equivalent words are

fine
Creates a NEW obligation to pay, not a mere
acknowledgement of an old debt

Exception 1: date of payment is mentioned,

or at least, a date of maturity

Exception 2: insertion of or order (words of

uncertain

events

and

certain

o
o

o
o

number.
3. Payable on demand or on a determinable future time
4. Payable to order or bearer

Need not use exact words

But there must be reasonable certainty so people

know from whom they could demand payment

writing.
The stipulated rate controls there is no more ceiling on
reduced to 12% (in circular 416).
If there is stipulated interest, without a rate, 12% as well.
If payment is by installment, for the instrument to be valid, the
maturity of each installment is specified.

Promise to pay Jose Cruz or order P100,000 in 10

although indeterminate (ex. Moment of death of

o

or possessor
5. Where the instrument is addressed to a drawee, he must be

amount of installments must be indicated and the date of

events,

mother-in-law)
2c. Sum certain, and payable in money

Because it is meant to be a substitute for money

Also, specify the denomination. Cannot just be a

to X or his assigns
Ex. instead of bearer pay to X or holder; pay to X

interest rate. But it is unconscionable, it is void, and the rate is

deem whether it is absolute.

Fall back on obligations and contracts distinguish
between

instrument which can be filled up as a remedy

Most cases involve fraud, by taking advantage of the features of the law.
Sec 2: when a sum is certain
o Even when there is a stipulation of interest. It must be in

yourself within the four corners of the instrument to

Ex. instead of order pay to X or his indorsees; pay

named or otherwise indicated with reasonable certainty

If name of the drawee is left blank, it is an incomplete

negotiability) in the old terms

Authorization to pay or a mere request does not

create a binding obligation to pay.

2b. The promise to pay or order must be unconditional

Do not look into evidence aliunde. You must confine

installments. not negotiable

You have to specify both AMOUNT and WHEN EACH
is due. You cannot just give the starting point (ex.

Nov 2005)
If there is an acceleration clause failure to pay an installment

o
o

will make the entire balance due and demandable.

It is now valid to stipulate payment in foreign currency.
If you talk about an exchange rate, you have to talk about at

least 2 currencies. It cannot be just one.

Under Civil Code, general rule is attorneys fees are not
recoverable,

except

when

there

is

written

Stipulating such makes the NI more attractive.

stipulation.

Ex. I will pay reasonable attorneys fees in case there

money should be paid out of the Treasury without an

is failure to pay is this a sum certain?

appropriation for that purpose (Constitution).

FACTS here: X deposited treasury warrants with a

Yes.

Because you know how much is due at the date of

rural bank. The rural bank deposited with Metrobank.

maturity (it doesnt matter what you pay after

Even before the treasury warrants were cleared by the

maturity). This is the reckoning point at the date of

clearing house, Metrobank allowed withdrawal. The

maturity, is the sum certain? ALSO, stipulations on

attorneys fees is always subject to court control

warrants were spurious. Metrobank is suing the rural

anyway.
Sec 3: promise is unconditional
o Instructions on how payment will be entered into the books of

treasury warrants by negotiating it to Metrobank.

bank to recover, since the rural bank warranted the

HELD:

account does not affect unconditional nature

Neither does reimburse yourself affect

TEST: it must indicate the source of reimbursement,

o

not source of payment. The latter is not negotiable.

Statement of how the original obligation came about does not
affect conditionality

But it will become non-negotiable if mention of the

warrants are not negotiable instruments.

BUT a reference from which fund the obligation would be paid
does not destroy negotiability if payment is not limited to come

from such fund.

Sec 4; payable at determinable future time
o 1st situation: Pay Jose Cruz or order if the holder feels
insecure, he may demand that I post reasonable securities,

prior contract (ex. deed of sale) makes the NI subject

to the terms and conditions of the contract.

and if I fail to do so, he can declare the entire balance due and

This

demandable.

One view: non-negotiable because date of maturity

makes it conditional.
Elizalde: Person bought cars. He issued a PN, secured with a

becomes uncertain because holder can accelerate

CM over vehicles. The PN said that the payment is secured by

the CM.

It was negotiated to Elizalde by the car selling

company.

Elizalde sought to collect.

payment, and there is an additional undertaking other

Issue is whether the

statement of security (CM) made it non-negotiable.

Metrobank is wrong, because the treasury

than payment of money.

Other view: negotiable because the undertaking to

HELD:

put up a security is merely an accessory obligation.

Negotiable, because the promise to pay is still conditional, and

The date of maturity is not uncertain because

is not dependent to the CM. Test: does the promise to pay rely

acceleration is within control of the maker; he can

on the terms and conditions of the security? If so, it is not

prevent it by complying with the additional security.

negotiable. Else, it is negotiable.

Abubakar: A Treasury Warrant is not negotiable. It is payable
out of a particular fund, so you do not apply Sec. 66. No

(better view)
2nd situation: same if the holder feels unsecure, he can
declare the entire balance due and demandable.

It is not negotiable, because here, the holder has the

absolute option to make the obligation due and

demandable.
Differentiate:

When the maker may choose to pay before a certain

date, it is still negotiable (ex. on or before June 15
maker can pay before June 15 at his option)

Effect: all other secondary contracts are

it is still negotiable because the holder can ALWAYS

discharged. It benefits everybody.

When the holder may absolutely choose to have the
obligation due, it is not

Effect: everybody becomes secondarily liable

by ripening their obligation. Thus, this is not

valid.
If hinged upon a contingency, non-negotiable even if the event

or condition happens.
Philippine Education v. Soriano: A money order is not

negotiable, because although it says pay to the order of,

under Postal Regulations, obligation to pay is conditional,
depending on different grounds where the post office can

refuse to pay. Also, it can only be indorsed once.

Sec 5: additional provisions that do not affect negotiability
o GENERAL RULE: Other obligation or undertaking aside from

Waiver of venue

Waiver of exemption from execution

Holder can require something other than payment of money

If option is upon holder to demand either cash or rice,

demand money
Sec 6: omissions which do not affect
o 1. Not dated
o 2. Failure to mention consideration

It is presumed in this contract

o 3. Does not specify place where it is drawn or payable
o 4. Bears a seal
o 5. Designates currency in which payment will be made
Sec 7: When it is payable on demand
o Upon sight or presentation
o Instrument is silent on when payment is made
o When it is overdue

As to the maker, he is discharged

BUT as to the indorser, it is upon demand

Sec 8: When it is payable to order
o [It may be upon order of]
o 1. Order of payee who is not maker, drawer, or drawee
o 2. Drawer

Ex. Jose Cruz writing a check saying Pay to the order

of Jose Cruz this is better than making a check

payment of money makes it non-negotiable (secured by CM

o
o

over my car, which I will keep in good condition)

EXCEPTIONS:
Authority for holder to foreclose pledge/CM or collateral

securities
Authorizes confession of judgment if instrument not paid upon

maturity

N.B. the SC said, however, this is a void stipulation

Waiver of benefit of law

Waiver of notice of dishonor

paid to cash, which anyone can encash if lost and

found
In this example, it is not complete until Jose indorses
it, because there has to be delivery (at least two

o
o
o

parties to a contract)
3. Drawee
4. Two or more payees jointly

Ex. Pay to the order of Jose Cruz AND Manuel Santos

5. One or some of several payees

Ex. Pay to the order of Jose Cruz OR Manuel Santos

6. Holder of an office for the time being (ex. Treasurer of the

city of Makati)
If the drawee is not indicated with reasonable certainty, then it

checks.

He was just the corp. sec., and was not authorized to

indorse; but he indorsed the check to himself
nonetheless.
bearer.

IF the payee actually existed or not. It fell under this

disappeared. Caltex and Security bank are in dispute.

provision.

Assume same facts.

It says that the deposit is payable to the

depositor, and the depositor is bearer. It is a bearer

negotiable

instruments.

checks, and X signed it with intent to steal,

and Y signed it not knowing Xs intent, then it

The

does not become payable to bearer. For the

documents provide that the amounts deposited shall

payee to be fictitious, both must have same

be repayable to the depositor. And who, according to

the document, is the depositor? It is the "bearer." The
documents do not say that the depositor is Angel de la
Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be
repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of
o
o

presentment. (Caltex)
2. To person or bearer
3. Order of fictitious person

GENERAL RULE of the following three cases: there

must be intent by the maker or drawer of the NI that
the instrument be issued to a fictitious person
(knowledge is paramount)

If, however, the

company required two signatories to all

instrument.
[As explained by Phil. Law Library]: The Certificates of
are

The Drawer did not intend the payee (the

Corporation) to get the proceeds of the check, EVEN

Bottomline, requestor maxed his credit line and

Deposit

Y, his partner, sued the bank for

restoration of the amount. HELD: it is payable to

(Security Bank). Caltex accepted it. [yada yada yada]

Time

He drew a check payable to a

corporation where he was just the corporate secretary.

credit line. Requestor had as security a time deposit

X wanted to steal money from the

partnership.

is not negotiable.
Sec 9: When it is payable to bearer
o 1. Expressed as such

Caltex: [unclear facts] Caltex required collateral for a

HELD:

Weller and Martin: Either partner can sign or issue

intent.
American Sash: Had a payroll clerk, who prepares
checks payable to employees.

He then makes the

officers sign the checks. Clerk padded payroll with

ghost employees, had the officers sign the checks
(the officers did not know that the employees didnt
exist), and the clerk collected money. Issue: is this
payable to fictitious persons. These ghost employees
did not actually exist. HELD: [N.B. first, the court
found that there was forgery because the drawer did
not know the payees were fictitious.] It was not a
bearer instrument. The DRAWERS were the officers
who signed the checks. Their intent controls. So the

checks DID NOT become payable to bearer because

Rodriguez spouses won.

they DID NOT KNOW that the ghost employees were

considered as payable to fictitious persons, the fact

not part of the payroll.

Rodriguez v. PNB: Employees of PNB formed a

must be known to the person issuing the negotiable

savings and loan association (SLA).

Rodriguez

know that the supposed payees were not the real

spouses meanwhile, had current accounts with PNB.

borrowers (when it fact it was the officers). PNB must

instrument.

Whenever the SLA lends to members, it issues postdated checks. But most of the time, the SLA does not

have enough money. The borrowers thus endorse the

o

checks to Rodriguez; in turn, Rodriguez rediscounts

For the checks to be

Here, the Rodriguez spouses did not

reinstate the amounts to the Rodriguez spouses.

4. Name of payee is not name of existing person

Classic example: payable to cash

5. Last indorsement is in blank

the checks (issuing checks lower than face value).

The SLA has a policy: when a member has an
outstanding loan, they cannot get another loan. So
the officers who wanted to borrow more, to circumvent
this, they made it appear that it is the other members

Sec 12: Ante-dating or post-dating does not affect negotiability

Sec 13:
o When the date of acceptance is not inserted by the drawee, the

who are borrowing. The SLA, in accordance with the

usual procedure, issued post-dated checks to the

supposed borrowers (but really for the officers). The

holder may insert date of issue or date of acceptance

What if he places the wrong date?

If negotiated to a holder in due course, that is the

correct date as far as the holder in due course is

officers indorsed the checks to Rodriguez. Rodriguez

issued discounted checks. PNB found out about this

and closed the SLA account. Meanwhile, the checks

issued to Rodriguez, which bounced because the SLA
account was shut down since the checks they

issued were cleared, and the checks issued to them

were from a closed account. Contention of spouses:
How can PNB accept the indorsement of those

concerned even if it is not

Purpose: the law protects a holder in due course, who

is relying on that date in good faith

But what if the one who put the wrong date presented it for
payment to the acceptor/drawee?

Not valid. Cannot claim.

SAMPLE QUESTION:

A check drawn by X says Pay to the order of Y

checks, when the ones who indorsed were the

P10000 thirty days after sight. It was accepted by E

officers and not the supposed borrowers. Contention

on Sept. 15, but did not date the instrument.

of PNB: it is intended for fictitious persons, since there

negotiated it to Z, telling the latter that the instrument

was no intent that they actually get the money (even if

was accepted November 1.

the supposed borrowers really exist).

instrument this date.

HELD:

Z placed in the

(retired lawyer) however withdraws money from that account for

Can he collect from E?

o Yes, even if it is more than 30 days

his own support, to Xs ire. X asked her inaanak to hire a

from acceptance. Z is a HIDC and

lawyer for this purpose.

subsequently terminated the services so she asked for a return

did not indorse it to Z, can he collect from

fee in installments. X asked the inaanak to sign a piece of

of the acceptance fee. The lawyer said that he will return the

E?
o

paper claiming that it was a witness signature that the lawyer

No. He is not a HIDC.

will pay X back. But X actually made it appear that it was a PN

Sec 14:
o When it is wanting of a material particular the person

where the inaanak promised to pay money to her five years

prior, corresponding to the attorneys fees.

possessing it has prima facie authority to fill up the blanks

CONTROLLING FACTOR: The blank or incomplete

the holder turn it into a negotiable instrument
In a case, a person signed an instrument in blank and left

signature to be for a PN. There must be intent to leave a

it with the bank. The bank filled it up with an amount.

signature to make a PN.

Sec 15: incomplete and undelivered instrument
o Will not be a valid contract in the hands of any holder, as
against the person whose signature was placed on the

What happens?

The amount inserted by the bank controls.

What are the two requirements for this instrument to be
enforceable?

1. It must be filled up in accordance with the authority

HELD: The court

believed the contention that the inaanak never intended for the

instrument must have been delivered with intent that

o

The inaanak hired a lawyer but

the Nov 2 date is true as to him.

If Y inserted the wrong date instead and

given to him

2. It must be filled up within reasonable time

X gave a check with a blank amount to Y, telling Y that he

instrument prior to delivery (real defense)

BUT indorsers are liable

Ex. Left signed checks, and an employee took them and filled

up amounts. Incomplete and undelivered instrument.

Ex. Officers of country club went abroad and left signed
checks for payment of checks. Abusive employees put their
own names and signed their own names.

HELD:

By pre-

should fill it up according to what X ultimately owes Y, but not

signing checks and leaving them with employees, it became

over P50000. X owes Y P30000, but Y put P60000.

Can Y collect P60000 from X?

No. It was beyond the authority given him.

Y indorsed the check to Z, a HIDC. Can Z collect

possible for them to do this. The officers were negligent and

P60000 from X?

Yes. The defense does not apply to him.

Case: X works abroad, but allows property to be rented out,
and the payments are deposited in an account. The husband

shared in the loss (60-40).

Sec 16: Complete but undelivered instruments.
o NI is incomplete until delivered
o Ex. You cannot sue if you hold checks that were not delivered
to you. You never acquired a right over them.

BUT a HIDC will not be subject to this defense (Like

Sec. 14)

BPI Family Savings:

BPI issued a check payable to City

Treasurer of Iloilo to pay for local taxes. They did not deliver it
to the treasurer, and just gave it to the employee.

o
o
o

The

employee used it to pay for somebody elses local taxes.

HELD: There was no payment because BPI never delivered it
o

to the city treasurer, so BPI cannot claim to have paid.

Associated Bank: Somebody was selling RTW clothes, and
shopping malls (buyers) issued crossed checks.

Somehow,

the checks fell into the hands of someone else, who indorsed it

to someone else, and were deposited to Associated Bank. The

seller was wondering why she wasnt being paid. [If you are
legalistic, the RTW seller must sue the shopping malls, etc.,

shopping malls, etc. must sue the drawee banks, and then the

The SC allowed the RTW seller to sue Associated

(Same in

Westmont Bank case)

It may be showed that delivery between immediate parties is

conditional, or for a special purpose.

Ex. A godson is taking the CPA test, but X is not in the
Philippines. He gave P10,000 check on the condition that he
pass the test.

The godson cannot enforce payment on the

due course, the law will protect the HDC.

Sec 17: Rule of interpretation
o Words prevail over figures

Romero: Amount indicated in words is One Million

the instrument is not liable

EXCEPTIONS:

1. Duly authorized agent signing for principal

2. Forger liable for signature he forges

3. Signature in separate paper (allonge) because the

check. BUT if the godson negotiates the check to a holder in

characters in a NI
If I promise to pay note is signed by two or more persons

Sec 18
o GENERAL RULE: person whose signature does not appear on

drawee banks sue Associated Bank why it cleared the checks.

Bank directly because it cleared the checks.

treat it as either
Ambiguous role of signature deemed an indorser

Because the indorser has the least liability among all

deemed solidarily liable

because the checks were not delivered to her. In turn, the

HELD:

Runs from date from instrument

Or if none, date of issue

Not dated assumed to be dated from time of issue
Written > printed provisions
If ambiguous whether a bill or note, the holder has the option to

instrument has no more space

4. Estoppel
5. Signing under trade/assumed name
6. Instrument can be negotiated by mere delivery

Sec 19/20
o To avoid liability as signing agent:

A) agent must disclose he is an agent

B) disclose his principal

C) he has authority
Minority/incapacity of corporation
o Maker of a PN cannot refuse to pay to a holder on the ground
that the indorser is a minor. Neither can he raise the defense

Two Hundred Pesos. Amount in figures: 1,200,000.

that the prior indorsee is a minor. ONLY the minor can raise

Balance in the account is 1,100,000.

the defense of minority, no one else.

Can apply this principle by analogy to other incapacitated

bounced. The words prevailed.

Payment of interest

The check
o

persons (Ex. corporation action ultra vires)

Exceptions:

1. The minor actively misrepresented his age and it

appears that he is physically of such age

2. Minor kept fruits/benefits
3. Minor spent the money in good faith

Sec 23 Forgery
o

(warranted the instrument)

EVEN if it is a bearer instrument, then A (signature

indorsed leads to a warrant of such

[ORDER INSTRUMENT] A-B-C (signature forged by
D)-D-E
o E cannot collect from A or B (since it is an

The person whose signature is forged did not give consent to the
contract

Except when he is estopped

There are different instances of forgery:

1. Signature is copied

May be done by tracing.

Practices imitating a specimen signature

2. Fraud in esse contractus

Fraud in factum.

Misled to signing instrument, not knowing it was a

order instrument, there is a cut-off to A and

B, since Cs signature is forged)

o E cannot collect from C (no consent)
o E can collect from D as indorser
A B or bearer-C (signature forged by D)-D-E
o NOTE: This is an instrument payable to
bearer; delivery is sufficient, no need for
o

something else.
3. Duress amounting to forgery

It must be duress in the execution (ex. Grab the hand

the intended payee)

Different situations:

1. Promissory note

A (signature forged by B)-B-C-D-E

o E cannot collect from A
o E can collect from B (forger)

indorsement.
Can E collect from A?

Depends. If E is not a holder in due

course, A will claim that there was
no delivery of complete instrument

of the intimidated), NOT duress in inducement

4. Fraudulent impersonation

In this case, in general, it is NOT a forgery

The person to whom the note was given is presumed

to be intended to receive the note (because he knew

E can collect from C, D as indorsers

forged by B)-B-C-D-E
o Indorsing an instrument that need not be

negotiable instrument, when he thought it was

by B since C stole it from him

If E is a holder in due course, he
may collect from A since it is

payable to bearer
Can E run after C?

No, Cs indorsement was forged.

Neither can he run after A or B,

because he cannot trace his right to

them [cut off by the forgery].

He can run after D, because by
indorsing the instrument (even if
bearer), he warranted it.

NOTE: if a bearer instrument is indorsed

collect from A (because he just promised to pay the

even if it is not needed, the indorser warrants

bearer). Remedy of the acceptor is to just run after

the instrument as what it purports to be.

2. Bill of Exchange

A. Drawer
o 1. Order

Accepted

Unaccepted
o 2. Bearer

Accepted

Unaccepted

As signature on an order instrument was forged

Cs signature D E. X accepted and paid.

X cannot debit As account, because A ordered to pay

B or order. C did not order X to pay D. Bs order was

drawee. Can E collect from A?

o No. No consent.
Can E run after X?
o Yes.
o Sec. 62, the acceptor admits the instrument

is genuine when he accepts and pays.

o What is Xs remedy?

To sue B, the forger.

Can E run after B?
o Yes. Forger
o Can E run after C and D?

Yes. Warranted by indorsement

NOTE: If X did not accept, then he cannot be

recovered from, because he did not accept.

o But the same answers apply for the others.
NOTE: Apply the same rules on indorsement of a

genuineness of the instrument by the indorsers.

NOTE: If its a bearer instrument, even if Cs
indorsement to D is forged, then the payee can still

indorsers.
E cannot run after A (cut off) or B or C. He can run

after D, who forged.

A issued BOE payable to B or bearer. Indorsed to C. Cs
signature was forged, indorsed to D, then E. X accepted
the BOE. What happens?

X can debit As account because A promised to pay

bearer.

X cannot get back the money from E. E is the bearer.

C can run after D, the forger.

A issued BOE payable to B or bearer. Indorsed to C. Cs
signature was forged, indorsed to D, then E. X did not
accept the BOE. What happens to Es claim?

Cannot go after X, did not accept.

Cannot go after C, no consent.

Can go after D, indorsed (warranted)

Cannot go after B, cannot trace title to him since Cs

bearer instrument if there was indorsement even if

there is no need to do so, there is warrant of the

cut off by forgery.

X can get money back from E because X only admits
As signature is genuine (which it is), and not the

by B and then indorsed to C-D-E. X accepted as

the thief.
A issued a BOE payable to B or order. B C. D forged

signature is forged.
Can go after A if E is a HDC. Cannot go after A if E is

not HDC.
EXCEPTIONS to general rules:
o 1. When there is estoppel (ex. father saying that his sons
forgery of his signature was genuine)

2. When there is unreasonable delay by the drawer in informing

signatures of the officers of MWSS were forged. PNB paid

the drawee about the forgery

Drawer can check the statements sent by the bank to

them. HELD: MWSS must bear the loss for failing to exercise

him
Test:

account for spoilage, and MWSS did not examine the

If the drawer had acted quickly, would the

drawee have been able to stop or freeze payment?

caution did not ask printing press to surrender plates,

PNB v Quimpo:
o Left check book with his friend, who was in the car. The friend

his secretary, who he asked to reconcile bank statements.

forged his signature in a check book left lying there. HELD:

Not negligent; no reason to suspect friend of bad faith.

BPI v. Casa Montessori:
o An external auditor was hired to reconcile records.

He

Secretary forged his signature. HELD: Ilusorio should bear the

managed to forge the signatures of the officers of Casa

Montessori over a long time.
reinstate the amounts.
HELD:

the checks, and Gempesaw signed the checks without

Bank argued Casa was negligent.

verifying the statements. The bookkeeper was able to steal

It is an

more than P1M. HELD: Negligent; did not confirm or examine

independent contractor, so you cannot blame Casa for

o

the invoices, receipts, etc. before signing the checks used to

negligence in hiring an employee.

Estoppel does not apply, because Casa had no way to know
the auditor was stealing money, because he was precisely the

one tasked with safeguarding the school records and

forge when he picked up the checks. HELD: Province was

negligent, for allowing the cashier to pick up the checks even
when he was retired, so he was able to indorse the checks

cash checks. HELD: Triumph was negligent for not reporting

for authenticating the checks.

MWSS v. CA:
o MWSS did not have their checks printed by the central bank.
They had a private printing press print their checks.

The

Province issues

retired, but he was still hanging around. Cashier was able to

but triumph did not report it to the bank. Robbers were able to

pay the suppliers.

o Split accountability 50-50
Province of Tarlac:
o Province of Tarlac had account with PNB.

checks to the physician/head of the clinic. The cashier already

comparing with bank records.

Cases on Comparative fault principle
Security Bank v. Triumph Lumber:
o Robbers broke into Triumph Lumber. Check book was stolen,

the theft.
But JJ believes that the bank should have been held negligent

loss for his negligence. He trusted his secretary.

Gempesaw:
o Gempesaw owes several groceries. She trusted a bookkeeper
blindly. When she ordered supplies, the bookkeeper prepared

Sued bank, which refused to

An external auditor is not an employee.

signatures in the bank returns.

Ilusorio:
o Ilusorio was leaving for abroad and he left his checkbook with

through forgeries.
o Split accountability 50-50
General rule:
o If the indorsement is forged, the collecting bank must return the
money to the drawee bank

Basis: Sec 23 because the payee did not indorse

the check

This is NOT a case of negotiation, but presentment for

payment. So you cannot use the warranty argument

Mellicor:
o Maasim forged endorsement of Mellicor, and then PNB

presented check to HSBC for payment. The person was able

to withdraw money for HSBC. Great Eastern sued for return.

admits the genuineness of the signature of the drawer

Four general rules:
o 1. A party whose signature is forged is not liable

Unless hes in estoppel

o 2. An acceptor who pays on a BOE cannot recover the money
because he admits the genuineness of the signature of the

HELD: HSBC must return, because Mellicor (drawer) never

indorsed the check. [?]

Ford Philippines:
o Before, you file your ITR with the BIR. So the employee of
Ford was tasked to pay sales tax (P18M), made payable to a
payee (for payees account only), which is the Insular Bank of
America, the authorized collecting agent of BIR. The employee
showed a fake BIR receipt (See, I paid BIR na.) to Ford.
Instead, they deposited a worthless check with Insular Bank of

drawer
3. A Holder in Due Course acquires good title if forged

indorsement is not necessary for his title

(ex. in a bearer instrument)

4. A person negotiating an instrument after forgery is liable

(due to warranties)
Rules on clearing
o Checks are brought to a clearing house and are run through a
clearing house. They check the magnetic strips on the checks.

America (not funded), which they substituted with the check

issued by Ford Philippines. In their internal records, they made
it appear the worthless check was deposited. Citibank honored
the check. The person who deposited collected from Bank of
o

America. Ford had to pay BIR again. They sued.

HELD: Citibank must return the money to Ford, because Ford
ordered it to pay the BIR, which Citibank disobeyed. It says

Acceptor cannot get back the money, when it paid, because it

The amount will then be transferred to the collecting bank.

Then the checks will be physically given to the drawee bank.

The drawee bank has 24 hours to honor/dishonor the check.

If it dishonors it, the drawee bank returns the check to the

clearing house. The computer will return the amounts paid.

Any return beyond 24 hours: time-barred.

Here, the doctrine applies to the forged signature of

for payees account only and there was no indorsement from

o
o
o

BIR.
Citibank was guilty only of negligence.
The bank manager (who was complicit) was criminally liable.
JJ doesnt agree with the court as regards Insular Bank of

Americas liability.
o Check: G.R. 121413 29 Jan. 2001
Price v. Neal
o See Jack notes
PNB v. CA
o See Jack notes, too

the drawer.
BUT this 24 hour rule SHOULD NOT apply when it is
the payees or indorsees signature that is forged,
because the drawee bank has no way to find out, until

the drawer informs them.

But the SC wrongly applied the 24 hour rule to the

payees forged signature.

New rules (to prevent ping-pong of checks):

If a check is dishonored, you can only present it one

indorsed it to C for consideration. C, then to D. What is

drawn against insufficient funds]

What is the effect when the drawee does not return

Ds status as holder for value?

D is a holder for value with respect to A, B, and C

because C gave value.

reverse the entries.

BUT you are not precluded from suing to

collect after. But since the computer cannot

only to the extent of the lien.

o Company appealing a lost case posts supersedeas bond (ex.

reverse, while you are litigating, you do not

P500,000). Surety company asks for collateral (ex. cash, time

o

Consideration
Under the law, consideration is presumed
o Travel Inc.: Travel agency sued on the basis of a bouncing
wrong for asking the agency to prove the value of the ticket

negotiable for P1M.

Absence of consideration is a matter of defense against a person not a

HIDC (personal defense)

Partial failure of consideration is a proportionate defense. Somebody
issued a check for P20000 for 10 sacks of rice. The check bounced.

purchased. There is a presumption of valuable consideration,

and that the check was for such amount.
Ex. in BP 22, there is no need to prove the check was issued for
valuable consideration
In civil law, generosity, love, affection, etc. are valid consideration.
o [Glenns note: Sundiang says love and affection, etc.
cannot be considered valuable consideration.

But Jack

says that a donation is a simple contract and the law

The seller however only delivered 5 sacks of rice. HELD: He can only

sue for P10000

Want of consideration between drawer and payee cannot be invoked as
defense of drawee who accepted a BOE (Cornell)
o A drew a BOE for the amount of P10M in favor of B, the
o

So love and affection is valuable

consideration.]
Rule on holder for value vis--vis prior parties:
o Rule: Where value is given for the NI, the holder is a holder for
value in respect to all parties who became such prior to [the
time consideration was given]

payee, in exchange for 10 cars. B only delivered 5 cars.

[Same facts] X, the drawee, did not accept. Can A launch
the defense of partial failure of consideration against B?

Yes. Want of consideration is a defense against the

simply requires consideration sufficient to support a

simple contract.

deposit, money market placement, treasury bills, etc.)

The surety company is a holder for value to the extent of
P500K, even if the company issued a certificate of time deposit

check issued by a guy bringing in passengers. The CA was

A and b are parties who

became bound prior to the value given.

Rule on holder who has a lien on the instrument: He is a holder for value

have the amount.

more time. [Usual reason why one failure is allowed

the check within 24 hours?

The drawee cannot ask the computer to

A issued a PN to B, but there is no consideration.

payee.
[Same facts] X accepted. Can X refuse to pay on account
of partial failure of consideration?

No. The acceptor cannot use want of consideration

as defense. By accepting, he admits authority of the
drawer to draw the instrument, and that he will pay.

Accommodation parties
o Signs as party but does not received consideration or value

help the project.

Prudencio spouses.

therefore, from the underlying contract. Only lends his credit.

Liable to a holder for value, even if the holder for value

any

part

of

the

Surety companies charge

proceeds,

is

deemed

then the Prudencio spouses should pay PNB because PNB is

partys lawyer, Beltran, helped settle by issuing a company

countersigned by the VP). Mrs. Jose sued the corporation.

a holder for value!!!

Maniego:
o X was exchanging a post-dated check for cash to the

HELD: Here, the issuance of the check was ultra vires. It was

disbursing officer of AFP. AFP asked Y, Xs sister, to sign as

not pursuant to the corporations business.

accommodation indorser.

The client of

The check bounced.

Y was

Beltran was supposed to pay, not the corporation. Sue agents

acquitted for conspiracy charges, but was held civilly liable.

for acting in excess of authority.

Correct? HELD: Yes. Thats what an accommodation party is

As a general rule: a

corporation cannot be an accommodation party to an

instrument, because there is no business purpose to such

happened long after.

SO IF YOU FOLLOW THE IMPORT OF SEC 29, which
makes accommodation parties liable to holders for value,

The other

check (check of a corporation, signed by the President, and

released funds could have improved the project.

Sec. 52: definition of HIDC point in which a person must be is
in GF is when he took the instrument. The release of the funds

same consideration for the original obligation.

Decided to settle.

PNB took a risk,

rather than ensure the certain failure of the project, the

The consideration that supports the surety is the

Dispute over parcel of land.

money, it was in BF.

JJs comment: the law says Holder for value not HIDC. You
because the project was already failing.

an

surety/accommodation is not an absolute prerequisite.

Jose:
o

The court held that PNB is not a

cannot claim PNB was in bad faith when it released the money

accommodation party.

Clark: But note that independent consideration for the

Prudencio spouses are

receive consideration. When PNB released a portion of the

premiums for signing as co-makers. The surety company, not

receiving

PNB sued

holder in due course, because it knew that the spouses did not

the time that holder took the instrument.

Ex. Some banks try to get borrowers to get surety companies
to sign borrowing agreements.

HELD:

accommodation parties.

knowing him as merely an accommodation party at

o

But the project died anyway.

[unless that is the business of the corporation].

Prudencio: (JJ doesnt agree)
o Construction project. Borrowed from PNB for working capital.
The bank required two other signors.

The firm got the

Prudencio spouses who issued checks.

The project was

failing. PNB agreed to release part of the security money to

tasked to do when the check bounces, she pays.

Negotiation

When a bearer instrument is indorsed although unnecessary, but it still

ultimately negotiated.
o See Caltex case. When pledging a NI, there are no specific
provisions.

Fall back on the NCC.

Must comply with

requirements of putting it in a public instrument and

indorsement.
Indorsement must appear on the instrument itself.
o Or to a paper attached to it
Indorsement must be of the entire instrument.
o Indorsing only part of the amount will make it cumbersome.
o Prohibited to indorse to 2 or more indorsees severally. Ex: A
check for P100K is negotiated to Jose Cruz for 50K and

Manuel Santos for P50K.

PARTIAL indorsement is treated under law as an assignment.

It is subject to personal defenses.

EXCEPTION: When it has been paid in part (ex. on

installments)
Types of indorsements:
o Special specified person to whom it is being indorsed
o Blank does not name any person

Indorsement of an order instrument in blank can

convert the indorsement into a special indorsement by

writing his name

This ensures that the order instrument does not

become a bearer instrument

Ex. A issued a PN to B or order for P10K.

indorses it to C, but in blank. What can C do?

C can insert To C over the signature to

keep it an order instrument.

C CANNOT put To C, waiving notice of

To
Jose
Cruz,
for
collection
only
(as
agent only)

Yes,
but
subject
to
same
restriction
that he only
holds it for
collection

X, because
the
indorsee is
a
mere
agent of the
indorser

X,
because
there is no
transfer of title

To
Jose
Cruz,
as
trustee for
Glenn
Tuazon
(indorsee
named as
trustee)

Yes,
but
subject
to
same trust

Yes

Yes, because
there
is
transfer of title

dishonor. The contract must be consistent

with the tenor of the indorsement

Types of restrictive indorsements

Pay to Jose
Cruz only

Negotiabilit
y

Passing of
title

Consideration
presumed

Defense
available

Yes

Yes

X, because
indorsee is

a
HIDC,
defenses
against
indorser
cannot
apply to him
Yes,
defenses
against
indorser can
be
raised
against
indorsee
because he
is just an
agent
X, because
title
transfers

Rights of indorsee in restrictive indorsement:

o A) collect payment
o B) bring action indorser could bring
o C) transfer rights, if allowed to do so
Qualified indorsement
o Done by writing without recourse although the instrument is
still negotiable

This can be done if the instrument will fall due for a long time

indorser cannot run after the maker/acceptor because the M/A

(ex. 5 years), and the indorser does not want to be insecure for

has every right to dispose of his obligation while he feels

such a long time.

But qualified indorser still has some warranties under Sec. 65;

Genuine as to what it purports to be

(ex. not forged or materially altered)

Warrants his valid title

All prior parties have capacity to contract

That he is not aware of any fact that makes the

instrument valueless

(ex. that the maker is insolvent)

Ex. A issues a PN to B or order for P50K. B indorses to C,
then C to D. D indorses to E without recourse.

Can E collect from D?

No. The indorsement is qualified.

If As signature turned out to be forged, can E

solvent.
Signing of an instrument payable to bearer
o [wait for discussion on Sec 65]
o It can still be indorsed through mere delivery
o But the special indorser is only liable to those who can make
title through his indorsement
Payable to two or more payees
o All must endorse
o But if they are partners, there is mutual agency
Instrument payable to cashier or fiscal officer
o Assumed that the instrument is payable to the corporation he
represents
If name is misspelled
o Must indorse the instrument according to the misspelled name,
because other parties will not know that there was a mistake

collect from D?

Yes.
Because he warranted that the
instrument is genuine as to what it purports

E.
Conditional indorsement
o The maker (or acceptor) may disregard the condition because

the maker made an unconditional promise to pay. The indorser

o

cannot change the original obligation

The maker can also say lets wait and see if the condition is

fulfilled
If the maker pays, but the conditioned turned out to be
unfulfilled after, the remedy of the conditional indorser to run
after the indorsee to get back the money.

The conditional

made
If he wants, after signing as the misspelled name, he can sign
his real name, so it will appear wrong name indorsed to real

to be.
If D turned out to have forged Cs indorsement to
him, can E collect from D?

Yes, more so. He warranted his valid title to

name
Indorsed as an agent
o Must state that he is negotiating as an agent, and disclose the
principal, and that he is duly authorized
If there is date attached to the negotiation
o Presumed to be correct, but rebuttable
o If no date, the negotiation is presumed to have been done
before it was overdue

Useful to establish HIDC

Indicates a place
o Law of that country will govern as to questions of indorsement
Not every restrictive indorsement will destroy negotiability
o Only that in subsection A will destroy
o Crossed check is still negotiable

Can strike out an indorsement not needed for his title

o Example bearer instrument: can strike out indorsements B to

o
o

If its an order instrument, can E strike out B?

No. Because it is payable to the order of B.

You cannot take him out, or else, E cannot

draw title to the instrument.

ABCDE. E cancels the indorsement of C to D. He

Can sue in own name

Payment in due course discharges the instrument

Payment at or after maturity is in due course, and

without notice his title is defective

Sec 52 Holder in due course [very important]
o Requisites:

1. Instrument is complete and regular on its face

2. Must have become a holder before it was overdue

loses the right to run after C. D is also discharged, because D

lost his chance to run after C.

o
o

defect in title of the indorser

This elaborates #3

Defect in title of indorser = if he took it

RULE: The indorser who is struck out and ALL indorsers after
him are eliminated

Ex. If there is indorsement from A to Z, and you

HIDC
Indorsement to a prior indorser
o A-B-C-D-E-B
o Can B run after C, D, and E?

No. Because they in turn can run after B too!

There is compensation under law. The law will not

allow them to run around in circles.

Rights of the Holder

Rights of a holder

unlawful

means,

illegal

consideration, or negotiated it in breach of

point is that time of indorsement

Ex. Did not know necklace was fake at time of
transfer; knew it was fake at time of indorsement = not

through

cancel C, persons C to Y are discharged.

Instruments transferred without indorsement:
o Transferee will only step into the shoes of the transferor
o So defenses against transferor apply to the transferee too
o But the transferee can compel the transferor to indorse it

BUT in determining whether he is HIDC, the reckoning

and without notice of prior dishonor, if so

3. Took it in GF and for value
4. When he took, no notice of infirmity in instrument or

faith
Fraud ex. issuing it for a fake ring
Duress ex. ransom money
Unlawful means ex. stolen check
Illegal consideration ex. issued

for

marijuana
Rule on instruments payable on installments:

Status on payment

Knowledge

Effect

An installment has not

been paid and there is
no acceleration clause
An installment is not
paid and there is an
acceleration
clause
(automatic)
An installment is not
paid and there is an

Holder is aware

HDC as to installments
not due on the face of
the instrument
Not a HDC

Holder is aware

Holder is not aware

HDC as to installments
not due on the face of

acceleration
clause
(automatic)
An installment is not
paid and there is an
optional
acceleration
clause
An installment is not
paid and there is an
optional
acceleration
clause

the instrument
Holder not aware of the
exercise of this option

Holder is aware of its

exercise

HDC as to installments
not due on the face of
the instrument
Not a HDC

allowed Y to withdraw even if the check has not been cleared

the check was indorsed to him.

JJ thinks its better to use forgery as the theory of this case. Y

forged Xs indorsement. But the court used HDC anyway.

Stelco:
o The claimant received a check that was not indorsed to it by
DAIF (drawn against insufficient funds).

(which gave change). X stopped payment. ABC sued X. X

Claimant is not a

HDC.
Salas and State Investment House (2):
o In both cases there was lack or failure of consideration

launched defense of failure of consideration.

Issue: is ABC a HDC?
No. Since the check was crossed, it can only be deposited.

between the maker/drawer and payee of the NI. In one case, it

ABC should have inquired as to the title of Y, but it did not.

Similar case: State Investment House and Bataan

GENERAL RULE: If the checks are crossed, the taker

the payee already indorsed the check to another person.

must inquire as to the nature of the indorsers title

sued.
HELD: Z was not a HIDC because Z refused to explain how

the payee, and the check had a notice of prior dishonor due to

However, Y took the check and paid it to ABC hospital, and the

o
o

yet.
Mesina:
o X left a cashiers check (issued by ABC bank) payable to Xs
order. Y stole it and indorsed it to Z. ABC refused to pay. Z

under these circumstances?

Gatchalian:
o X issued a crossed check to Y, in order to buy a car from Z.
value of the check was greater than his bill to ABC hospital

Issue: is DEF a HDC?

No. The circumstances show that the check was already due
but Y asked DEF not to present it for payment yet. And DEF

A holder must be aware that something is wrong, but chose not to

investigate further as to not be a HDC. The test:
o Did he take it? Was is honest for him to take the instrument

o
o

Banco Atlantico:
o X paid Y a check, drawn against ABC bank. Y altered the
amounts. Y deposited it in DEF (her bank). Y told DEF not to
present the check for payment right away, even if it was already
due, and to let Y to draw the amount anyway. The alteration
was discovered. ABC refused to pay. DEF sued to recover.

was merely issued as security, and in the other, the car

delivered had the wrong chassis number. But in both cases,
Those persons are HDCs and the defense of failure/lack of

consideration does not vest.

May a payee be a HDC?
o Yes, because the law simply provides holder. A payee is a
holder, too.
(53) Negotiation of an instrument payable on demand after an
unreasonable length of time the holder is not a HDC.
o Consider the nature of the instrument, customs, and particular
facts

(54) A transferee who receives notice of infirmity before he has paid the
amount agreed for the instrument is a HDC only to the extent of the
amount paid by him.
o Ex. X issued a post-dated check to Y with value of P100K, and
X told Y to just pay him P80K right away because X could not
wait for the maturity of the check. Y has only paid P40K so far.
Then Y found out that the check was issued for a fake ring.
The check was presented but it was dishonored. Y sued Z, the
o

drawer. Can he collect?

HELD: Yes, but only to P50K, since that is half the value of the

Theres a contract with some

inequitable or iniquitous fact behind
it
Voidable contract
Ex: no consideration, undelivered
complete instrument, acquired by
force/illegal
means,
illegal
consideration, negotiation in breach
of faith, mistake, ultra vires act of
corporation
Not applicable to HDC

No contract because an element is

missing; or void against public policy
Void contract
Ex; material alteration (so the
consent is not anymore to this
instrument); undelivered incomplete
instrument (no consent); forgery (no
consent); minority (lack of capacity)
Applicable to HDC

check, and Y only paid half of the agreed consideration. He is

a HDC only to the extent of half the check.

Rights of HDC:
o 1. Sue in own name and receive payment
o 2. Free from personal defenses
o 3. May enforce payment against all parties liable thereon
o Exception: when he cannot recover full payment

37 restrictive indorsement [GT: I dont know why.]

Maybe JJ meant qualified indorsement under

Personal defenses are available against a non-HDC.

mean the non-HDC cannot collect. It just means that personal defenses

may be raised against him.

(58b) IMPT. Shelter Principle (GT)
o What it simply says is that a holder who (1) derives title from a
HDC (2) and is not a party to the illegality or fraud has the
same rights as the HDC as to the prior parties to the indorser,

38?
54 notice before full amount is paid
124 when materially altered, a HDC may still

D who was aware of the fraud but not a party to it. What is the

original tenor of the instrument

General rule: the instrument is avoided as to

effect?

D is a holder in due course as to the parties prior to

those not party to the alteration or did not

indorse it
But not everyone can invoke real defenses against a HDC. For

instance, an indorser warrants an instrument is genuine in all

respects it purports to be.

Also, an acceptor warrants the

authority of the drawer to pay.

Personal defenses

Real defenses

even if he is not.
Ex. A was induced by B through fraud to issue a PN to B or
order. B C, who was NOT aware of the fraud (HDC). C

enforce against the maker/drawee according to the

This does not

the indorser (A and B)

What if D indorses it to E, who is not an HDC?

Since E derives title from D, who is not an

HDC, E does not have the rights of an HDC.

There can be no curing. So D cant indorse the instrument to
F, an HDC, and have it re-indorsed back to him to cure his

title. He resumes his position as not a HDC.

PRESUMPTION:

o
o

General rule every holder is a HDC

Exception if it is shown that the title of the negotiator is
defective, then the holder has to prove that either the holder or

the negotiator is a HDC

Exception to the exception the exception does not apply to a
party that has become bound to the instrument prior to the
acquisition of defective title

Ex. A B C D E. D swindled C, then indorsed

to E.

When E runs after A, he is not required to

Acceptor

prove that he is a HDC because A was

process of dishonor
completed: 1. He will
pay the amount to
holder, 2. Or to a
subsequent
indorser
who pays for it
<But
drawer
may
express
stipulation
limiting his liability>
Pay according to tenor
of acceptance

bound to the instrument before the defective

title occurred.
Fossum:
o X issued a check to Y, a HIDC. Y negotiated to Z, which was
not a HIDC (it was aware of the failure of consideration
between X and Y). Z sued X to collect. X refused and raised
personal defense of lack of consideration.

Qualified indorser or
indorser by delivery

What is the

implication?

The burden of proof shifts upon Z to prove that either

Z or Y is a HIDC. In this case, it failed to do so.

In this case, Z loses the presumption of being HDC
because Ys title, as negotiating party, is defective. Y
has no benefit of the presumption because it is not a
holder anymore.

Liabilities of parties

General indorser

Party

Obligations

Warranties

Maker

Pay according to tenor

Drawer

If

1. Existence of payee
2. Capacity of payee to
indorse
1. Existence of payee

dishonored,

and

Either:
1.
Upon
due
presentment he will
accept/pay according to
tenor
2. Or if DH, he will pay
the amount to the

2. Capacity of payee to
indorse
3. On due presentment,
it will be accepted/paid
according to its tenor

1. Existence of drawer,
2.
Genuineness
of
drawers signature
3. Drawers capacity
and authority to draw
4. Existence of payee
and capacity to indorse
1.
Instrument
is
genuine and is what it
purports to be
2. He has good title
3. All prior parties had
capacity to contract
4. Has no knowledge of
any fact that would
impair the instrument
<IF BY DELIVERY
warranties only extend
to
immediate
transferee>
1.
Instrument
is
genuine and is what it
purports to be
2. He has good title
3. All prior parties had
capacity to contract
4. The instrument is

holder,
or
to
a
subsequent
indorser
compelled to pay it

valid and subsisting at

the
time
of
his
indorsement

View 2 (better view): Acceptance is assent to the

order of the drawer (132), which is just P4000. He did
not consent to P40000, since there must be
knowledge. (124) In fact, for a HDC, even if there is

alteration, he can enforce payment according to the

Liability of Maker
o Araneta: X issued a PN to Y. Y collected, by X failed to pay.

He lodged the defense that he used the money to pay for his

drawer, the BOE cannot exist.

sick daughters expenses, and his daughter is a beneficiary of

o

a trust administered by Y.
HELD: X must pay. He made an unconditional promise to pay.

What he did with the money is none of the courts business.

Liability of drawer
o Is merely secondary liable only if the instrument is
o
o

dishonored.
He can put without recourse to limit his liability.
Cebu International Finance v. CA:

D issued a check to P, drawn against BPI.

original tenor.
Acceptor admits existence of drawer because without the

He admits authority of the

drawer to draw.
Acceptor admits existence and capacity of payee to indorse,

because the instrument is meant to circulate.

o Acceptor does not admit signature of indorser.
Far East Bank:
o Someone wanted to buy jewelry in the amount of 200k. He
had a draft for 300+K from Land bank.

The jewelry store

accepted the draft but set aside the jewelry. Deposited the
P

check with account in FEB. Landbank paid. Being cleared, the

presented for payment, and BPI debited Ds account.

jewelry store guy delivered the jewelry to the buyer, and even

However, P was unable to receive the money because

paid the buyer change for the 100K difference.

BPI withheld payment [pending investigation of some

Landbank told FEB that the amount was altered from 30 pesos

anomalies]. P sought to collect from D.

HELD: D must pay, even if his account has already

to 300K. FEB returned the 300K to Landbank and debited the

account of the jewelry store.

FEB sued for the difference

been debited. He warranted that P will be paid, and if

against Landbank.
HELD: FEB cannot collect.

The provision on acceptance

not, he will make good the check.

Liability of acceptor
o X issued a check for P4000 to Y. Y indorsed it to Z. Z
altered the amount to P40000, and negotiated to H.

Later,

applies to payment. Since the tenor is that it is for 300K pesos,

Landbank bound itself to pay that amount. FEB should not

have returned the money to Landbank and debited the account

presented it for acceptance to E. E accepted it. For how

of the jewelry store. [Huh? Read again.]

JJ: the better view might be that a drawee who pays/accepts a

much can the check be enforced against the acceptor?

View 1: P40000 because that is the tenor of the

acceptance.

draft must be bound to pay the higher amount

Acceptance is always inseparably linked to the order.

Sec 61. Sec 139 acceptance assents to the order of

o
o

the drawer. There is nothing said that the acceptor

whom he delivered the instrument. Not liable to subsequent

warrants that the amount accepted is the same tenor

of the bill, as drawn.

Consent should imply

knowledge.
If the acceptor was deceived, it should not be

bound to an amount not in the original tenor.

The acceptor cannot recover the amount from the

acceptor is insolvent and he is aware of that fact (since here,

o

delivery.

Is

actually

an

check)
A (X irregular indorser) B C D E:

X is liable to B, C, D and E.

RULE: liable to all subsequent parties. (If payable to

parties subsequent to the maker or drawer)
What if X indorsed for the accommodation of B?

X is liable to C, D, and E.

If for the accommodation of the PAYEE

(example if here, for the accommodation of

the payee.
He is called such because you would normally expect the
payee as the first signature there.

DOES

NOT

ANSWER

FOR

But here, the irregular

indorsers signature is found there first.

P v. Maniego: accused had his sister indorse a stolen check

before the payee did. The law says

Sec 65 warranty where negotiation by delivery

there was failure of consideration

Underlying this principle same as Statute of Frauds. An
undertaking to answer for the debt of another must be in writing
to be enforceable. He must be only liable to the person he

dealt with
Sec 66 liability of general indorser
o Same as first 3 warranties of qualified indorser
o Last he warrants that the instrument is valid and subsisting
o If maker is insolvent, even if the indorser was not aware, he is

B), he is liable to all parties subsequent to

delivery

liable for breach of such. Examples:

Breach of warranty 1: the instrument is forged

Breach of W2: He stole the NI

Breach of W3: Prior party is a minor

Breach of W4: Knew that M/D was insolvent; or that

the maker or drawer or bearer, he is liable to all

by

SOLVENCY. It only warrants the four listed warranties and is

before

signing again will not increase the credit value of the

there is a breach of warranty).

NOTE:
SO IN GENERAL, a qualified indorser or one
negotiating

accommodation party

Must be an additional party (not a regular party

parties
Unlike a general indorser, a qualified indorser does not warrant
that the instrument will be paid. He is liable only if the maker or

payee on the ground that the drawers signature is

forged.
Sec 64 irregular indorser
o He signs in blank

See the list of warranties in the law [see table]

Person negotiating by delivery only liable to the person to

liable.
Chartered Bank:

X deposited (through indorsement) a check with ABC

bank, drawn against DEF bank.

X was able to

withdraw money although not cleared. Eventually, the

check bounced. ABC asked for return of money.

HELD: X must pay. When you indorsed, you

warranted. If for any reason (whatever reason) the

o

collection).

drawee does not pay, you are liable.

BPI v. CA: Somebody had a managers check purportedly

applicable.
Signature of indorser was forged.

Payee presented the

issued by American bank payable to cash. But he did not have

a dollar account. Asked a friend if he could accommodate him

signed at the back.

have the check deposited in the friends dollar account.

Must payee reimburse drawee?

No. It did not indorse the check. The signature is to

the first friend would withdraw. The friend gave the first guy a
withdrawal slip duly signed.

When the first guy returned,

although the check had not been cleared, BPI (deposit bank)
paid. But American bank dishonored it. BPI sued.

HELD: The proximate cause of the loss is the bank

itself. Why did it allow the first guy to withdraw when
the bank was not cleared. The depositor even kept

But RCBC accommodates employees,

allowing them to withdraw right away. The employee, a mother,

received a check, and deposited. Bank required the employee

to indorse the check as an irregular indorser. She was then

allowed to withdraw.

Some employee placed below the

indorsement: valid up 75,000 pesos only. The drawee bank

dishonored the check, since the indorsement was irregular.
RCBC asked the employee to return the immediately withdrawn
money.

HELD:

RCBC cannot collect.

The check was

dishonored because of the partial indorsement made

by its employee.

This is why the American bank

dishonored.
Far East Bank: (see the details above)

It was paid. Payee

Then the forgery was discovered.

acknowledge payment.
The law mentions that warranties of general indorser

apply only to HDC. Should we follow this?

JJ doesnt think so.

Sec 67 indorsed when not required incurs liabilities of an indorser
o Whether general or qualified
Sec 68 indorsers are presumed to be liable in the manner in which
they indorsed
o Parole evidence however may be accepted to prove otherwise
o For example A B C, C can prove that while Bs signature

the passbook: did not give it to his friend.

RCBC: There is a 45-day holding period if the check deposited
is drawn abroad.

Sec 66 (general indorsement) is not

check for payment to the drawee.

Deposited the check there. They agreed that after clearance,

It is actually a case of restrictive indorsement (only for

appears first, C indorsed it to him

Sec 69 indorsement by agent
o If he fails to disclose that he is just an agent, or fails to disclose
his principal, he will be liable as an indorser

Quiz up to section 69
Presentment for payment

Sec 70
o Presentment for payment not necessary to charge the primarily
liable person

Maker and acceptor

If the instrument is payable in special place and he is

able and willing to pay there at maturity = such
willingness is equivalent to tender of payment

What does this imply?

o If the person primarily liable is there

2.

on the place where it is payable on

acceptance
3. BOE payable elsewhere apart from residence or

the stated time, holder loses right to

recover interest due subsequent to
o
o

maturity + costs of collection

BUT he does not lose the right to

get paid
But for those secondarily liable (indorsers and drawer) there

presentment

for

place of business of drawee

OTHER OPTION May choose to negotiate it within a

o
o

reasonable time
Consequence: will discharge drawer and all other indorsers
EXCEPTIONS no need to present if/or treated as dishonored
if:
1. Drawee is dead, has absconded, fictitious, or lacks

the person primarily liable?

Those secondarily liable are discharged

But he can still go after the person primarily

capacity to contract
2. Presentment cannot

reasonable diligence
3. Although presentment is irregular, acceptance was

liable
So, the bottomline: the instrument must be
charge the secondarily liable persons see

be

made

even

after

refused on some other ground

Step 2: Give notice of dishonor by non-acceptance to
secondarily liable persons

EXCEPT, no need to give notice: if instrument was

Sec. 71 for special rules on when an

made/accepted for his accommodation and he has no

instrument must be presented

What is presentment?

Production of BOE to drawee for acceptance or

presented
AND will not prejudice rights of HIDC after omission to

reason to expect the instrument will be paid if

payment, or acceptor for payment, or of a PN to the

requires

presented for payment on date it is due to

expressly

is need for presentment for payment

What if the holder does not make presentment to

BOE

maker for payment

What constitutes presentment?

1. Personal demand for payment

2. Readiness to present the note and surrender it if

paid
[Step-by-step guide on presentment for payment]
o Step 1: Presentment for acceptance required if

1. BOE is payable after sight, or acceptance is

needed to fix the maturity of the instrument

give notice of dishonor

IF foreign bill,

Protest for non-acceptance or protest for

non-payment needed
Except
o 1. If instrument was made/accepted
for his accommodation and he has
no reason to expect the instrument
o

will be paid if presented

2. Delay is excused for fortuitous
circumstances

Except: will not prejudice rights of HIDC after

omission to protest
Step 3: Give notice of dishonor by non-payment to secondarily
liable persons (if dishonored by non-payment)

See notes above

EXCEPT: When presentment for payment is excused

1. Drawee is fictitious person

2. Presentment cannot be made even after

o
o
o

reasonable diligence
3. Waiver of presentment, express or implied

and indorser. Indorser said he was discharged because there

was no proper presentment for payment.

not

Bank refused to pay her because they paid the

husband. HELD: it was not presented by the husband, but the

wife. Bank should pay the wife.

HELD:

Letter of

demand is not sufficient. Law requires that the instrument be

Therefore, presentment not valid and

indorsement is discharged.
Failure excused on two grounds:

1) Instrument was lost

2) payment refused on some other ground

Ex. no funds, and not because it was not

shown
Sec 75
o Presentment where instrument payable at bank must be
made during banking hours. Law assumes that the bank will
o

in place where presentment is made

There is a wife who presented a negotiable certificate of time
deposit.

demanded
So he can check genuineness
This is why telephone as demand is not allowed
First Pacific (?) Check negotiated by car dealer to financing

shown to the maker.

banks
Sec 72 when presentment is sufficient
o REQUISITES:

1. Made by holder or agent

2. Reasonable hour on business day

3. At proper place defined

4. To person primarily liable

Is absent/inaccessible to any person found

of

company. When the instrument not paid, company sued maker

negotiation for collection between

must be made there.

If none provided, but address of maker is stated, go there
If none provided, to usual place of business/residence
Wherever he may be found/last known place

business/residence
Sec 74
o NI must be exhibited to the person from whom payment is
o
o
o

Sec 71
o Instrument not payable on demand

Make presentment on date due

o instrument payable on demand

Must be presented within reasonable time from issue

If its a BOE, you make it after a reasonable time after

last negotiation

What does negotiation here cover?

o Negotiation
for
value,

Sec 73 proper place for presentment

o If there is a stipulation where presentment must be made, it

be the source of the funds.

But if presentment is made beyond banking hours, it is valid if
the funds will not come from the bank, as long as it falls on the

date of maturity.
Sec 76-78
o Applies when principal debtors is:

o
o

Dead

Liable as partners

Liable as Joint debtors

If there is an address stipulated, pay there.
If dead, give to executor/admin

If there is one, and he can be found with reasonable

o
o

hold business on Saturday, they are usually half day.

diligence
o If partners, to any of the partners

Even if dissolved already

o If joint debtors, to all of them
When presentment is not required to charge those secondarily liable:
o DRAWER presentment not required to charge the drawer

payment
INDORSER when instrument was made/accepted for
indorsers accommodation, and indorser has no reason to

Sec 85
o If payable in a fixed period, it must be paid on that day

present it on next business day. So Monday.

Ex. BUT if it is payable on demand then the
maker/acceptor MUST pay provided it is presented on

working hours of Saturday.

Sec 86
o Time exclude first day, include last day
Sec 87 when instrument is payable at a bank
o Implied: that it is an order to the bank to pay for account of the
o

principal debtor
First National bank: PN payable at FNB. Maker had sufficient
funds. But holder did not show up at day of maturity. Dillydallied then the maker became insolvent. Had he shown up
by then, he would have been paid.

HELD:

No.

The fact

remains that he is the maker, so he is primarily liable, and

o

cannot be obtained
o 2. Presentment is excused and it is overdue and unpaid
What is the effect of dishonor by non-payment?
o Under the law, the moment it is dishonored, there is
liable. NO NEED to go to the primarily liable.

present before 12 noon, Saturday, if it is not a holiday

Contrast:

Ex. Payable on Friday. But it was declared a public

expect it will be paid if presented

Fortuitous event excuses delay in presentment
Presentment for PAYMENT excused if:
o 1. Cannot be done even after reasonable diligence
o 2. Drawee is fictitious person
o 3. Waiver of presentment express or implied
When is an instrument dishonored by non-payment?
o 1. Duly presented for payment and payment is refused or

immediately a right of recourse against those secondarily

The law wants a whole business day

Except instruments payable on demand can

holiday. So it becomes Saturday. But the law says

when there is no reasonable expectation that the drawee or

acceptor will pay the instrument

Ex. knows there are no funds or there is stoppage of

If on a Sunday or holiday, then go to next business day

If on a Saturday

On next business day. Because even if some offices

should pay.
N.B. Remember, failure to make proper presentment only
discharges those secondarily liable.

The primarily liable

person is still liable, although the holder may not claim interest

subsequent to maturity and costs of collection.

Sec 88 Payment in due course
o 1. At or after maturity
o 2. To the holder

3. By the debtor, in GF and w/o notice that the holders title is

defective
Notice of dishonor

Sec 89 dishonor
o Give notice of dishonor
o Any party may be compelled to pay it to the holder with right of
o
o

reimbursement
ABCDE

D giving notice to B will benefit E

Notice given by a holder benefits all subsequent holders and

notice against
o Notice may be given by holder himself or agent of the holder.
Sec 90 Who can give notice of dishonor
o 1. Holder
o 2. Agent of holder
o 3. Party to the instrument who may be compelled to pay the

o
o

holder, but only to those other parties he may seek

o
o
o

reimbursement from
4. Agent of such party
What about strangers?

Cannot give notice, except as agents

Who is considered a stranger?

Party discharged from the instrument

Person primarily liable who dishonored the instrument

Sec 91
o Notice may be given by a party or an agent
o Agent need not be authorized by the party

Because this is beneficial

o If the agent wants to give notice, on a instrument dishonored
on Monday, two options:

A) notify principal

On Tuesday

secondarily liable parties

B) notify parties who are secondarily liable

o If agent receives notice of dishonor, he must be authorized

Because this is prejudicial

Form of notice:
o In writing or oral

As long as it sufficiently describes the instrument and

prior parties that have right of recourse against the one given

Principal has until Wednesday to notify

indicates that it has been dishonored

Misdescription does not vitiate notice unless the party

to whom it is given is in fact misled

Personal or through mail
If written, need not be signed

In sufficient written notice may be supplemented by

verbal/oral communication
Rule as to jointly liable parties:
o If partners?

Notice to one is notice to all

o If joint payees or joint indorsees who indorse?

Sec 68 treats them as solidarily liable

o If joint drawers or joint accommodation indorsers, and
others not covered by 68?

Give notice to all

Sec 103 and 104 time within which notice must given
o Know the difference in rules where parties reside in the same
o

place (103) or different places (104)

SAME PLACE:

1. If given at place of business before close of

business hours the next day

2. If given at residence before usual hours of rest

the next day

3. If by mail sufficient to reach him the next day

DIFF PLACES:

1. If by post office in time to go by mail the next day;

if no mail at a convenient hour that day, the next mail

2. If not by post office within the time it would have
been received in due course had it been sent by post

office
N.B. This same time is counted again, after a party receives
notice of dishonor, to give that party a chance to give notice to

payment

Ex. C went to the office of X, the drawee, but he was

antecedent parties
What is the effect of miscarriage in mails?
o Sec 105 if notice was duly addressed and deposited in the

not there.

post-office, due notice is deemed given

o What is deposit in the post office?

Deposited in any branch of the P.O.

Deposited in any P.O. box

Sec 108: WHERE notice must be sent
o 1. Post office nearest to residence or where he is accustomed
o
o
o

When the drawer and drawee is the same person

Ex. managers check

o Drawee is fictitious person
When is notice of DH not needed to be given to drawer?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o 3. Drawer is the person to whom instrument was presented for
o

person secondarily liable)

Sec 114 when notice need not be given

manager, was there. And the drawer dishonored.

4. Drawer has no right to expect that drawee or acceptor will
honor

Ex. X withdrew her money from her bank account and

issued a check to cover for expected proceeds of
jewelry she had to sell. She failed to sell the jewelry.

to receiving letters
2. To place of business or residence
3. Place where he is sojourning
If notice is actually received, although not according to

these provisions, what happens?

It is still valid
When can there be waiver of notice of dishonor?
o 1. Before actual time for giving it comes
o 2. Or after failure to give it
o Can waiver be implied?

Yes.
Who is affected by a waiver in an instrument?
o If written on the instrument all the parties
o If written over a signature just that person
Waiver of protest
o Includes presentment and notice of dishonor (steps to hold a

But R, the drawer, who was the office

The check was in the hands of Y who had ABC

investment house rediscount it. The check bounced.
HELD: X had no right to expect the bank will pay
o
o

because she withdrew all her funds.

5. Drawer countermanded payment

Meaning, drawer stopped payment.

N.B. In all these cases, the drawer KNEW that there was or

would be dishonor.
When is notice of DH not needed to be given to indorser?
o 1. Drawee is fictitious person or has no capacity to contract
o

and the indorser is aware of this fact upon indorsement

2. Indorser is the person to whom presentment for payment

was made
3. Instrument was made or accepted for his accommodation

Drawer

Indorser

Drawer and drawee same person

Drawee fictitious or no capacity

Drawee is fictitious or no capacity,

Drawer is to whom instrument was

presented for payment
Drawer has no right to expect it will
be paid by drawee

and indorser knows

Indorser is to whom instrument was
presented for payment
Made or accepted for indorsers
accommodation (same principle: no
right to expect it will be paid)

Drawer countermanded

If an instrument was not accepted, and notice of dishonor by nonacceptance is given, is there need to give notice of dishonor by

non-payment?
o No.
o What is the exception?

If it was accepted in the meantime.

Failure to give notice of dishonor by non-acceptance does not prejudice
rights of a HIDC subsequent to the omission.
o Ex. A drew a BOE payable to B. B indorsed to C. C presented

instrument to D, a HIDC. D will not be precluded by Cs failure

Discharge

How a negotiable instrument is discharged:

o 1. Payment in due course by holder
o 2. Payment in due course by accommodated party
o 3. Intentional cancellation by holder
o 4. Any other act that discharges simple contract for money
o 5. Principal debtor becomes holder of instrument in his own
right
When person secondarily liable is discharged:
o 1. Discharge of instrument
o 2. Intentional cancellation of his signature by the holder

against secondarily liable party is expressly reserved

6. By extension of time of payment or right to enforce

instrument

Except if secondarily liable party assents

Or right to recourse is expressly reserved

What is the effect of an absolute and unconditional renunciation?
o A holder renouncing against prior parties terminates
recourse to that party
If against primarily liable person discharges the instrument
But it does not affect subsequent HIDC. So if C renounces all
claims against A and B, then negotiates it to D, who is a HIDC,

C indorsed the

to give notice of DH to A and B.

3. Discharge of a prior party

4. Valid tender of payment by prior party
5. Release of principal debtor, unless holders right of recourse

o
o

the BOE for acceptance to X. X dishonored the instrument. C

did not give notice of dishonor to A or B.

o
o
o

D is not prejudiced by the prior renunciation.

What is the form of renunciation?
o It must be absolute and unconditional
o If it is merely oral and the instrument is not surrendered, the
renunciation is not effective.
o It is not effective if not unintentionally, by mistake, etc.
What is the effect of a material alteration?
o Discharges all parties not party to the alteration
o Binds the one who made the alteration, those who assented,
o

and subsequent indorsers

What is the right of a HIDC?

If he is not party to the alteration, he may enforce it

according to the instruments original tenor
What is a material alteration?

1. Date goes into the obligation

2. Sum payable, principal or interest into amount

3. Time or place of payment into enforcement

4. Number or relations of parties into obligation

5. Medium or currency of payment into amount

A issued a PN to B for 4K. B indorsed to C. C changed

the amount to 40K and indorsed to D. D indorsed to E. E

those who receive the bill for value upon faith

is a HIDC. What is Es right?

Enforce the instrument for 4K against A or B

Enforce the instrument for 40K against C (made the

alteration) or D (indorsed and warranted)

Sections 48. 89. 122. 142. 186. 188. OTHER methods of discharge
o 48 striking out indorsements (relieves that person and all
o
o
o

o
o

pursuant to a LOC)
o Cannot be other than payment of money
Must accept within 24 hours from presentment
o Acceptance deemed done on date of presentment
o When is a bill deemed accepted?

Failed to act on it within 24 hours

Does the drawee have a right to retain the

bill for the whole 24 hours?
o No. The holder can ask for it back.

Failure to dissent within

But the drawee will still have the

reasonable time is an assent

186 stale check
188 holder of a check procures it to be accepted or certified

accept pa rin?

1. Before it is signed by the drawer

2. Even when it is incomplete

3. When it is overdue

4. Dishonored by prior non-acceptance or non-

Acceptance assent to order of drawer

o Must be in writing and signed by drawee

What if the drawee refuses to sign?

If drawee refused to write and sign, holder

may treat it as dishonored

What if the acceptance is written on a different

sheet of paper?

It does not bind the drawee, except to

the bill for value upon faith thereof

NB: this applies when the bill exists as of

time of acceptance
What if there is a promise to accept in writing?

payment
What is the special rule if the bill was dishonored
by prior non-acceptance, but it was accepted
thereafter?

The holder can consider the date of first

someone to whom it is shown and receives

rest of the 24 hours to decide.

Destroys the bill

NB: destruction must be on purpose

What are the special situations when can the drawee

Acceptance

thereof
NB: this applies for bills that do not exist yet
when the promise is made (Ex. BOE

those subsequent to him)

89 those secondarily liable to whom notice was not given
122 renunciation by holder
142 qualified acceptance by drawee discharges those
secondarily liable

Unless they assent to it.

Deemed an actual acceptance in favor of

presentment as date of acceptance

Kinds of acceptance:
o 1. General

Includes local but not confined only at a particular

place

2. Qualified

Conditional

Partial

Local (ONLY at a particular place)

As to time

Only some of drawees, but not all

What is the right of parties as to qualified acceptance?
o Holder can deem it DH by non-acceptance
o If holder allows qualified acceptance, indorser and drawer
o

discharged

Unless they assent

Failure to dissent is assent

BOE

When is presentment for acceptance needed?

o 1. Bill payable after sight or acceptance needed to fix maturity
o
o
o

of instrument
2. Bill expressly requires acceptance
3. Bill is payable elsewhere than residence or place of business
of drawee
What about other cases?

No need for presentment for acceptance to render any

party to the bill liable

What is the option of the holder?
o Must present the bill for acceptance within reasonable time
o Or negotiate the bill within reasonable time
What is the consequence of failure to present for acceptance?
o Discharges those secondarily liable
Time for presentment same as presentment for payment
Special rule when there is little time to present for acceptance

and does not discharge those secondarily liable

Can a BOE be addressed to more than one drawee?

o Depends. If joint drawees, yes.
o If alternative or successive, no.
When can a BOE be considered a PN?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o But can the holder treat it as a BOE still?

Yes.

Protest

Protest necessary for DH of a bill that on its face appears to be a foreign

bill
Made by Notary Public or respectable resident + two or more credible

before presenting for payment, where presentment for acceptance

is needed?
o Delay caused by prior presentment for acceptance is excused

some other ground

What if a bill is DH by non-acceptance?
o Immediate recourse to secondarily liable parties avail; no need
for presentment for payment

Presentment for acceptance

When is presentment for acceptance excused?

o 1. Drawee is dead, has absconded, fictitious, lacks capacity
o 2. Cannot make presentment even after reasonable diligence
o 3. Although presentment is irregular, acceptance refused on

witnesses
When must it be done?
o Day of DH
o If bill is noted in the notarial register, protest may be made
anytime
Where?
o Place of DH
o Except when expressly payable at the residence/business of
another person apart from the drawee
What is protest for better security?

If the drawee was adjudged bankrupt or insolvent, or made

assignment for benefit of creditors even before the bill

o
o

matures
Is this mandatory?

Nope
What is the purpose?

To inform the drawer/indorsers that the drawee is

insolvent and therefore they should prepare to pay

When is protest excused or dispensed with?
o Dispensed with for same grounds notice of DH is dispensed
with
o Excused for fortuitous event
When is protest also done?
o When bill is lost, destroyed, wrongly detained protest made
on copy/written particulars of the bill

Bills in set

Main Principle: each part of the bill, numbered and referring to the other
parts, the whole of the parts constitute one bill
o [usually, it is done to ensure that bills can be collected from
o

and it once again falls in the hands of an HIDC, he can still be

who will be able to collect

Indorser of two different parts is liable on every such part
How should the drawee accept?
o Accept on any part, and on one part ONLY. If he accepts on
multiple parts and these are severed, he is liable on all parts.

liable
Discharge of one part is discharge of all

Promissory notes and checks

Check special kind of BOE

o No need to present for acceptance you can present them for
o

payment immediately
Rules on BOE apply to checks too, such as the 24 hour
acceptance rule. If you dont return it in 24 hours, it is deemed

accepted
Cashiers and managers checks drawer and drawee is the same
Memorandum checks just usually used as evidence of credit, by the

drawer who got goods. He usually redeems it for cash

Travelers check you sign it twice (first as a specimen signature, and

even if one part is lost in the mail or so]

[So usually bills in a set are several copies of the same thing,

sent separately]
What if different parts are negotiated to different HIDCs?
o The one whose title accrues first is the true owner
o But the one who gets acceptance or payment first is the one

If he pays and did not get back the part with the acceptance,

second when paying. You present your passport too)

Crossing a check has three consequences:
o 1. Can be negotiated only once
o 2. Cannot be encashed; must be deposited

General can be deposited in any bank

Special must be deposited only in that bank

o 3. To be a HIDC, the holder must inquire as to what purpose

the check was issued for

STILL negotiable though
If you attempt to encash it, and it is obviously denied, you cannot run

after the drawer because there is no proper presentment for payment

Sec. 185 provisions applicable to BOE are applicable to checks
Case: Payee of a check presented a check in the morning, the bank
said the drawer had insufficient funds.

Presented again in the

afternoon, but the computers are offline, so the bank accepted it. Bank
found out after and chased after the payee to recover. HELD: Sec 62
by accepting, the bank admitted authority of drawer to draw.

Case: Customer bought managers check and asked that his account be

The bank realized that it made a mistake

authorizing a beneficiary to draw a draft/drafts which will be honored

because the account was actually closed. The customer already used

upon presentation to the bank

o Must be drawn in accordance with the terms and conditions

debited to purchase it.

the check to buy goods. HELD: It was a managers check so the store

Letter of credit instrument issued by banks on behalf of a customer

owner was a HIDC.

Certified checks:
o Banks usually do not do this anymore
Check must be presented for payment within reasonable amount of time
o Banking practice: 6 months, or else stale
o What happens when the check goes stale?

View one (2 cases): the obligation is discharged.

has no assurance that when it ships chemicals, it will be paid. So ABC

gets a letter of credit (LOC) with PBC. PBC then corresponds with a
bank in the US (ex. Citibank) PBC will transmit to Citibank the text of
the LOC, through SWIFT. Dupont then finds out that when it delivers the

Payment of an obligation with an NI the obligation is

chemicals, the bank will pay him. Since the bank is more trustworthy,

discharged when there is encashment or the value is

specified in the letter of credit

Purpose: to ensure certainty of payment
Ex. ABC Company wants to buy chemicals from Dupont. But Dupont

Dupont is now willing to sell the materials.

o Dupont ships the chemicals to PBC. So when the bill of lading

impaired due to the fault of the holder.

View two: the obligation remains because the

arrives, PBC will tell ABC Company that the goods arrived.

drawers bank account was not prejudiced. And there

was no loss caused by the delay.

PBC tells ABC Company that it will release the goods if there is

This will only

a trust receipt arrangement between them. So the proceeds of

happen if the bank becomes insolvent, that if the

payee didnt dilly-dally, he would have received

money.
Sito: When the payee delays in presenting a check for payment, the

BOE addressed to PBC, to pay it. Dupont then submits the bill
of lading, delivery receipt, etc. to PBC as proof of delivery so

indorsers are discharged, because they have an interest to discharge

their potential secondary liability.

Unreasonable delay will discharge

them.

So contrast the rules: the drawer will not be discharged; the

that Dupont will be paid.

Transphil: Two types of LOC
o Commercial LOC issued as payment pursuant to contract of
sale

indorsers will bes discharged

Letters of credit

the goods can be used to pay PBC if ABC does not pay.
Dupont will not collect directly from PBC. Dupont will issue a

The seller will be paid if the seller gives proof that he

complied with obligation to deliver

o Stand-by LOC
Governed now by UCP 600 (Uniform Customs and Practice for
Documentary Credits). This is revised every 10 years or so.
There are 3 underlying contracts in a LOC:
o COMMERCIAL

1. Application of customer for LOC where customer

buyer collected the goods but refused to send the certification!

undertakes that he will reimburse the bank when it

HELD:

pays the draft, and pays for bank charged

2. LOC bank tells beneficiary that if it draws the

need not pay. (This is a stupid move by the seller, because he

draft, it will pay him after submitting documents

3. Underlying contract
Independence principle (always asked in Bar)
o A bank which issued a LOC is obliged to pay the draft so long
as the beneficiary submits the documents required by the LOC,
without verifying if he actually complied with the obligation in
o

the underlying contract

Banks deal with documents only!

always give a fake one if he really wanted to defraud the buyer.

Interpretation of Letters of Credit MUST BE STRICT
o 1. Particular genus If the LOC requires that the seller submit
an invoice for pine lumber, but the invoice states pine timber,
o

even if the goods delivered turned out to be fake.

PBC v. Chua Tiep Seng: The bank does not guarantee the

pay
3. Misspellings If the LOC requires noodles but the
document says woodles the Bank may refuse to pay who

All that is

knows what a woodle is or could be.

When the bank discovers a discrepancy, what does it do?
o It forwards the documents to the buyer and notifies the latter of

meet specifications:

In a landmark case by the CA of New York, instead of

discrepancies it discovered. If the buyer agrees to waive the

the seller delivering goods, he delivered rubbish. The

the bank does not pay.

Cojack: Buyer is a con artist, so it ordered 3M worth of bags

discrepancy, then the bank pays. If the buyer does not waive,

court allowed the buyer to have a preliminary

the bank may refuse to pay

2. Quality specifications If the LOC requires Italian marble
and the document just says marble, the bank may refuse to

the documents required, so the bank must pay. This,

required is the bank act in good faith.

Distinguish between out and out fraud vis--vis failure to

To combat this, the buyer may require a

surveyors certificate to examine the goods. But the seller may

They do not deal with

genuineness of the documents submitted to it.

is at the mercy of the buyer.)

A seller can commit fraud by submitted forged or false
documents.

goods nor are they required to examine them.

Something Fabric case: The beneficiary submitted

The LOC requires buyers certification, so the bank

injunction to stop payment be issued because this

from Cojac company.

involves out-and-out fraud.

However, if there is mere

condition is that an invoice from Cojack be submitted. Cojac

failure

to

meet

submitted an invoice, of course, without the misspelled K. The

specifications, you cannot enjoin payment.

There was a case (Feati Bank) where somebody shipped
timber to someone abroad.

bank asked the buyer if he waives the discrepancy; the buyer

refused. The bank did not pay. Later, the buyer just paid 1M to

There was an agreement that

payment is by LOC. Among the documents is a certification of

the buyer that the goods delivered were the proper goods. The

It opened a letter of credit, and the

Cojac.
Red clause

A clause, usually written in red ink, where the beneficiary/seller

may

get payment

in advance, meaning, even

o
o

if the

beneficiary/seller has not yet delivered the goods to the buyer.

standby LOC from Z bank. Z bank issued the LOC, payable

This is usually because the beneficiary will purchase goods

when ABC shows documents proving that X defaulted on the

from a thirty party producer that does not accept anything but

loan. ABC gave this document. Z bank, however, refused to

cash (hunters, lumberjacks, etc.). If the beneficiary does not

pay the whole amount stating that X informed it that X had

deliver the goods, too bad. The buyer still bears the risk.
Evergreen clause
o A provision that allows an expiring LOC to be automatically

already made some payments, so these have to be deducted.

extended for indefinite number of periods until the issuing bank

the defect in the underlying contract cannot affect it. If there

informs the beneficiary of its termination.

Ex. A foreign company not doing business here sues and asks

HELD: Cannot do this! The LOC is a primary, absolute, and

unconditional obligation. It is not an accessory obligation, so

for a provisional remedy. The court requires a bond, so the

company obtains one from a surety firm.

too. In a case, where the depositor/applicant owed the bank

requires that the company open a stand-by LOC with a bank,

for a LOC, but he also assigned the certificate of time deposit

which will pay the surety firm if the company is held liable. This

to a third party, who has the better right? HELD: The bank. It

renewing it until the case is over.

May the seller in the Feati bank case (where the buyer refused to
issue a certification so the seller was not paid) sue the
correspondent bank when it failed or advance funds?
o No. The correspondent bank cannot be sued unless it

really was overpayment, X just has to run after ABC.

Bank lien over applicants property
o Usual stipulation in a LOC if the applicant has a deposit there,

The surety firm

LOC will most likely contain an evergreen clause, to keep

It cannot be affected by defects in the underlying obligation

Philamlife: X took a loan from ABC. ABC required X to open a

confirmed the letter of credit. It becomes solidarily liable.

Revocable, irrevocable
o Revocable: no need to notify the beneficiary, can be done
anytime
o Usually its irrevocable, for certainty of payment
Revolving letter of credit
o Automatically replenishes, whether per month, when the

amount is finished, or cumulative, etc.

Nature of LOC a contract between the customer who applied for it and

the bank, with a stipulation in favor of a third person

An LOC is a primary, absolute, and unconditional obligation

had a lien on the deposit.

Can there be enjoinment of payment in a stand-by LOC?
o 1) Proof of fraud is strong, 2) fraud must involve abuse of
independence principle, 3) irreparable injury
Metro v. Daway: Case for corporate rehabilitation does not suspend
payment from a stand-by LOC. It is a solidary obligation, there is no
need to exhaust the resources of the applicant corporation that applied
for the stand-by LOC.

Trust receipts

Trust receipt transaction (TRT) transaction where;

o The entruster, who has absolute title over the goods, releases
o

these to the entrustee (bank)

The entrustee executes and delivers a trust receipt, where:
(buyer)

1. He holds the goods in trust for the entruster

2. Sell or otherwise dispose of the goods

3. Turn over to the bank/entruster the proceeds of the

TR can apply even in domestic transactions

Nature of ownership/security interest Vintola:
o X imported puka shells, covered by a trust receipt with ABC

sale to the extent he is indebted

4. Or turn over the goods to the bank, in case unsold

Note: if the entrustee returns the goods, he does not incur any further

liability. The entruster/bank then sells the goods

Allied Banking: X imported goods, and opened a LOC with ABC bank.

ABC was the real ownership of the shells and X just held it in

When the equipment arrived, X took the goods from ABC and issued a

TRT is a security transaction, and the buyer is still really the

bank. X failed to sell the puka shells. X decided to return the

shells and claim he is not liable anymore because X claimed
trust. HELD: X is wrong. ABC can still recover the money. A

trust receipt in ABCs favor. X installed the goods in his factory. X failed

owner of the goods; it just relies on a legal fiction to create a

to pay. ABC sued X for violation of PD 115. X claimed the goods were

lien. ABC still has the right to recover the money; or it can sell

not covered because he did not sell nor manufacture/process them.

HELD: The goods were covered. It says sell or otherwise dispose.

the goods.
PNB Case:

The bank getting back the goods does not

Otherwise dispose covers the installed goods.

o Otherwise dispose can cover giving goods to a sister

terminate the obligation. It just has a lien, and to realize it, the

company
For estafa, there has to be misappropriation
o Meralco/steel towers case: X fabricated steel towers (hired

The bank then returns the excess or runs after the deficiency.

by Meralco). X imported materials, which X received and gave

a trust receipt to ABC bank for. X used the materials to build
the steel towers. But Meralco hasnt paid X yet, so X couldnt
pay ABC bank. ABC sued X for estafa. HELD: No estafa, no
o

bank must foreclose otherwise, it is pactum comissorium.

Warehouse Receipts Law

misappropriation.
Another case: X could not sell the goods covered by the TR.
X tried returning the goods to ABC, but it refused. HELD: X

did not commit estafa.

Can the trustee execute a Chattel Mortgage over the goods

covered by the TR?

o No. He does not have free disposition of the property.
X purchased goods. Independent of this purchase, X applied for a
credit facility with ABC bank.

bank did not have any lien or title to the goods; they were purchased
separately from the credit application.

that it is non-negotiable?

No. The stipulation is void.

When is it non-negotiable?
o Not payable to order or bearer AND there is a large print,
o

ABC bank required X to sign a trust

receipt for the goods he just purchased. HELD: This is invalid. The

When is a WHR negotiable?

o If payable to order or bearer
o If payable to order or bearer, can one insert a stipulation

usually in red, that it is non-negotiable

What is the consequence of not doing so?

If someone relied in GF that it is negotiable and acted

upon it, it will be treated as negotiable.

What is the rule on duplicate WHR?
o Same as non-negotiable if the holder though in GF that it was
the original, he could sue the WHM for damages

What are the obligations of the WHM?

o 1. Safeguard the goods
o 2. Deliver the goods

How does a creditor go about attaching/levying the goods covered

by a negotiable WHR?
o Ask for enjoinment of indorsement or renegotiation of the
receipt have the WHR frozen or surrendered, so it doesnt

To deliver

end up in the hands of someone who takes it for value and in

What are the conditions before the WHM delivers the goods?
o 1. Holder pays the WHMs liens
o 2. If the WHR is negotiable, to surrender the receipt
o 3. Readiness and willingness to sign an acknowledgment of

deliver.
The WHM in general, as a bailee, cannot claim ownership over the

during auction
What if the WHM delivers the goods without asking for surrender
of the WHR?
o He is liable for damages to any person who takes the WHR in
o

third party claim

But he may submit the situation for interpleader

2. WHM is excused for failure to deliver if he sold the goods to

satisfy an unpaid lien

o 3. WHM is excused for selling perishable or hazardous goods
What is the effect of alteration?
o Unlike in NIL, it does not discharge the WHM. The WHM is
liable under the original tenor of the WHR.
What is the effect of loss of the receipt?
o The claimant has to file a case in court and get a court order

GF and for value.

What if the WHM makes partial delivery of the goods?

He must cancel the WHR and issue a new one

reflecting the balance of the goods, or indicate partial

delivery on the receipt.

Again, failure to do so makes him liable to one who
takes the WHR in GF and for value.

To safeguard

telling the WHM to deliver the goods, after proof of loss. He

also has to post a bond, in case the WHR falls in the hands of
a person who took it in GF and for value. The latter goes
against the bond.

Until this is done, the WHM cannot be compelled to

goods. What are the exceptions?

o 1. WHR negotiated to him, so takes the goods in his own right
o 2. Has unpaid lien, so he foreclosed it and bought the goods

who has authority from the person entitled to delivery (SPA)

o 3. For negotiable WHR, the person in possession
Rules on refusal to deliver:
o 1. WHM cannot refuse to deliver the goods just because of a

receipt of the goods

To whom must the WHM deliver the goods to discharge his
liability?
o 1. Person lawfully entitled to the goods or his agent
o 2. Person entitled to delivery under non-negotiable WHR or

GF.

If the goods are lost, he is presumed to be at fault

But not for fortuitous events
What is the duty in keeping goods?
o He must segregate the goods belonging to different depositors
o But he is allowed to commingle if:

It is stipulated

It is customary to do so
What are the rules on commingled goods?

Each depositor gets a pro rata portion of the common mass

upon claim
What happens if there is partial loss?

In general

INSURANCE

Elements
o 1. Insured possesses interest susceptible of pecuniary
estimation
o 2. Insured is subject to risk of loss
o 3. As consideration, the insured pays premium
Someone organized a jeepney association. You give membership fees
and if a driver gets into an accident, the association pays indemnity.
Sued by Insurance Commission for not having license to do Insurance
Business.
o Held: Was conducting insurance business without license. Al
o

requisites concurred.
Contra Maxicare: Even if all elements are present, but if
primary purpose of contract is to provide services, then it is not
an insurance contract.

In Maxicare there is no insurance

contract because physicians pay for the first six sessions of

therapy after injury or loss, but the main purpose is to give
medical services. But here, even if you did not get injured or

sick, you can avail of medical checkup.

It is an aleatory contract.
o If you dont lose what was insured, there is no indemnity.
It is a personal contract.
o It does not adhere to the property insured because the
personality of both parties is crucial and is the primary
consideration for the contract.

Ex. teenagers will be charged higher insurance over

o

cars.
The buyer of a car, for instance, will only be insured if the
insurance company allows for an endorsement of the sellers
insurance contract.

It is unilateral
o It is only the insurer that has an obligation to perform (the

education or support, or in whom he has pecuniary interest

Ex. a key basketball player you signed for your team;

insured already paid).

It is conditional
What is the structure of the insurance code?
o Parties, elements of contract, form of the contract, performance

(marine, fire, etc.), regulation of insurance companies

You cannot insure the winning of the lottery. This is wagering.

family home as usufruct.

Who can be the insurer?

o One authorized by the Insurance Commission
Who can be insured?
o Anyone except a public enemy

Citizen of a country with which the Philippines is at

o

Germany and USA were at war (WWII) so the company cannot

collect.
Sec. 8 The mortgagor can sue the insurance company if it does not
pay. If the mortgagor performs an act that prejudices, the mortgagee

cannot collect.
o Ex. The Mortgagor brought fireworks to the building and it
o

exploded. The mortgagee cannot collect.

The mortgagor can have the mortgagee perform acts that
benefit the contract

Insurable interest

Insurable interest over life

o 1. Over own life, spouse and children

They have interest to

continue the life of their parents

Over property
o MAIN DIFFERENCE: there must be a valid legal interest
o The insurance cannot go beyond the value of the property

Whereas in life, you cannot put value over life of a

war with.
Wenfeld:
German company filed claim with Insurance
Company, and the Philippines was under US at that time. The

prevent performance
4. Any person upon whose life any estate or interest vested in
him depends

Ex. You are a married couple allowed to stay in the

Parties

a concert impresario in an opera you organized

3. Any person with legal obligation to pay money to him, or
respecting property or services whose death might delay or

of the contract (for what losses), special types of contract

2. Over any person on whom he depends solely or in part for

the life of the person.

The interest must exist when the policy takes effect AND when
loss occurs.

In life, need only exist when the policy takes effect

In life insurance, one can name anyone to be the beneficiary.

Only exception: you cannot name one to whom you

person
EXCEPT: if there is a way to place pecuniary value in

are prohibited to make donations to

Ex. co-guilty party of adultery/concubinage

You can insure anyones life, but you have to get his

consent + you must have insurable interest

Case: There was a couple that hatched a diabolical scheme
with an insurance company (in cahoots). Picked up a boy from
the straits and adopted him, promised to raise him well. Then
they insured his life, with themselves as beneficiary. But they
were planning to kill him. The first boy disappeared. They did

the same for a second boy and killed him. The second boys

fingerprints did not match the first boys prints, so the insurance

by the owner, as a school. It insured the building. It

company did not pay. Then they were found out.

Insured can change the beneficiary UNLESS it was made irrevocable in

caught fire. HELD: There was insurable interest.

Inchoate interest founded upon existing interest

Ex. stocks, which is based on subscription contract

o Partners, over the property of a partnership
o Carrier, over goods it is transporting since he will be liable
o WH man, over goods for safekeeping since he will be liable
A mere contingent interest over something: - NOT insurable
o Creditor with no collateral over properties of buyer
o Expectant heir
o Fictitious contract of sale (completely simulated)

A person leases property. In the contract, it said that

o

the policy.
o If the beneficiary is irrevocable, can it still be changed?

Yes. But if irrevocable, can only change beneficiary

o

with the latters consent.

Case: The father made the child an irrevocable beneficiary of
an insurance contract.

The father wanted to revoke.

The

company said the child must consent. The father said he is the
legal guardian anyway. HELD: father is wrong. He must go
through guardianship proceedings to have another one make

the lessor may shares of stock of a lessee [See

the decision for the child. But how does he prove that revoking

is for the best interest of the child?

When does the beneficiary forfeit?
o If he causes the insureds death.
o EXCEPTIONS?

When the killing is lawful (ex. self-defense, the

o

Harvardian Colleges was allowed to use a building

beneficiary is the executioner in death penalty)

If killing is unlawful the benefits go to the estate of the insured

(the beneficiary cannot benefit)

Insurable interest over property:
o Filipino Merchant: The importer has insurable interest in
The seller also has insurable interest

o
o
o

because he has legal title.

Contractor: has insurable interest over the building
Mortgagee has insurable interest
Also, under the law, he bears the risk of loss prior to

o
o

completion
Lessor and lessee both have insurable interest
Mere possessor.

Then

repurchased, and then loss in fire.

A person mortgaged his building. The property had been sold
in foreclosure. Then it was lost by fire. He had no more right

goods he is buying even if undelivered, because he can

compel delivery.

chuck case in transcript]

o Smuggled property against public policy
When must interest exist?
o When the policy takes effect and when loss occurs
o Need not exist in the meantime

Ex. Owned a car, insured, then sold it.

to redemption. HELD: Lost insurable interest.

o What if he still possessed the right of redemption?

He still has insurable interest

For life: interest need only exist upon taking effect.
o X insured his wifes life. They annulled their marriage. But the

wife failed to revoke the insurance. X can collect.

If you sold your car, if the buyer wants insurance, you have to endorse

the policy.
Change in interest after the loss does not change indemnity.

already an accrued liability at this time. It is a chose in action.

Change in interest in one or more listed things:

It is

over 16 is still valid.

Change of interest in will or succession does not avoid insurance.
o X insured Family Home against fire. X died and children

Need not disclose very minor sickness/injury

3. Party must make no warranty of the fact concealed

In this case, if there was a warranty, the violation is

inherited. The house burned. The children can collect.

What if the children bought the house from the father

not a concealment but a breach of contract

4. Other party has no means to ascertain the fact concealed

Case; If a party discloses that he has been

when he was still alive?

Insurance does not transfer.

X Y and Z co-owned a house. X bought Y and Zs shares and

Taxi company insured 20 units. Sold 4 of them. The insurance

became sole owner. The house burned. Insurance company

hospitalized and gave the contact # of the hospital,

the insurers failure to look into his records there

must pay because X was part of the original insured.

Stipulation that there need not be an insurance interest for an insurance
contract NULL AND VOID.

the insured made the agent his own agent for the purpose of filling up

Title IV concealment

the application form

There are matters the party need not indicate:
o The inspectors went to the place and found that it was near a
squatters area. But the company issued a fire insurance policy
anyway. A fire broke out. The insurance company cannot use

Failure to communicate what a party knows and ought to communicate

Consequence: injured party can rescind
Need not be intentional
Requisites:
o 1. Party must have known the fact concealed

Ex. he did not know he had cancer

o 2. Must be material to the policy

Test: the other party would not have entered into the

contract had he known of the fact concealed

Or the conditions in the K would have been different
Life insurance: usually involves failure to disclose

serious ailments
Case: Couple got an insurance policy for their
mongoloid baby, but they did not say he was a

were means to ascertain the fact

If the agent commits a concealment, the applicant will be bound by that,

mongoloid. HELD: concealment

There is a law prohibiting insurance companies from

the defense that it was near a squatters area, because it sent

o

inspectors.
Insured an oil tanker. Cannot use the defense, why did you
not disclose that there was a war in Afghanistan. They should

have known.
Nurse with a personal accident policy.

Insurance refused,

saying that she did not disclose there was a problem with
peace and order in Pampanga. HELD: Insurance company
should have known it was the center of the HUK movement

before.
Even if you die from another reason apart from the fact concealed, the
company is still not liable because it wouldnt have issued a policy.
Not required to disclose information of ones own judgment.
Can there be waiver?
o Yes. Either express (in the terms of insurance) or implied (as

refusing to issue insurance to someone with AIDS, as

when there is failure to make follow up inquiries as to facts

long as he discloses that he has AIDS

already communicated0.

Is there need to disclose nature or amount of ones interest?

o No. EXCEPT if one is not the absolute owner of the insured

If the insured has no personal knowledge of a fact, he may repeat the

information he has on the subject which he believes to be true
o There is a question in life insurance about medical history of

property.
Need not disclose matters which pertain to excluded or excepted risks.
o Ex. need not disclose that members of NPA are burning

the family. If one thinks his father died as a soldier, in action,

houses in their neighborhood if the fire insurance policy

exempts rebellion/coup/etc.-related destruction

due diligence was possible, he is liable for the truth of the

Misrepresentation

Statements made to induce the other party to enter into the contract
o 1. Untrue statement
o 2. With knowledge and intent to deceive; or stated as true
without knowing it to be true and which tends to mislead
o 3. Fact is material
Consequence voidable at option of insurer
o But waived for acceptance of premium payments despite

inducement.
o But it may qualify as an implied warranty
As a rule, parole evidence is not allowed to vary the terms and

goes into effect.

o If somebody applied to insure his vessel.

application denied, but then accepted on reconsideration.

there is no misrepresentation.

HELD: No misrepresentation.
Insured filled up the application form, the Insurance company said that
they will only accept if the applicant is not more than 60 years old. He
was more than 60 years old. Held: he wrote on the application form his
date of birth, but the company still issued a policy.

There was no

misrepresentation.
Do you take alcoholic beverages? Applicant said no. But he has been
drinking since he was 16. He died of liver failure Misrep. But if he only
drank small amounts on cocktail parties, it is not material. There is no

Manila to Cebu. Where is the vessel? It is anchored in

when the policy takes effect and the vessel is in Manila already,

physician told him.

Have you ever applied for a life insurance policy and the
application was rejected? He said no. But before, he had an

Ex. voyage from

Manila Yacht Club. But it is actually in Curimao. However,

to the risk
EXCEPT: Marine insurance where what is required is the

exact and whole truth

Ng Gan Zee:
o There is no misrepresentation because he relied on what the
o

It is

imposed by law.
A representation is presumed to refer to the date on which the policy

statement
Representation is false if facts do not coincide with what was asserted
o Test for defense: substantially true in every particular material
o

knowledge of ground for rescission

Misrepresentation as to the future is deemed a promise
Can be written or oral
Misrepresentation is not part of the contract.
It is a collateral

conditions of the contract. It may qualify an implied warranty.

when he actually died of AIDS, and he says the former.

But if the info came from the insureds agent, and exercise of

misrep.
Application did not disclose incidents of defalcation by clients. There
was another such case.

Insurance company found out.

Applicant

claimed that the question asked whether there was criminal conviction.

Insurer said that the application did not require that.

The bank

threatened to sue, but never did. [JJs stories]

Test of materiality SAME AS CONCEALMENT.
o If the other party would not have entered into the contract, or

perfected contract with the insured because it was

o

under different conditions

Sec48(a) action to rescind

If insurer has right to rescind, insurer must rescind prior to

commencement of action on the contract

Tender of premiums and notice that the policy is cancelled before suit is
deemed a rescission

o
o
o
If there

misrepresented.
In one case, the insured died within two year clause. This was invoked
have lapsed. SC said that when the person died, there is no more
policy; liability has accrued. So count from death.
o JJ agrees with the result, but not the interpretation
o JJ: If the insured did not disclose that he had tuberculosis and

effect or last reinstatement insurer is BARRED from questioning it or

alleging misrepresentation or concealment, or deceit/fraud
o N.B. Really, what you are barring are defenses against

he died after, the beneficiary CANNOT delay claim to beyond

two years and invoke the incontestability clause. THE LAPSE

fraudulent misrepresentation or concealment, but not anything

(vicious fraud)
5. Someone substituted for the insured during medical test

(ex. 8-seater plane)

7. Entered into military without consent
8. Failure to furnish proof of death
9. Action not filed on time
is concealment or misrepresentation, insurance company is still

by the insurance company. Beneficiary delayed claim after two years

If a life insurance policy has been in force for at least 2 years since first

else
Requisites
o 1. Life insurance
o 2. Payable proceeds upon death
o 3. In force for 2 years since issuance or reinstatement
In old days, there was no such clause.
If the policy lapsed and was reinstated, the 2 year period will run again.
BUT there are still defenses that can be invoked even in this period:
o 1. Claimant has no insurable interest
o 2. Uncovered risks (ex. insured engaged in car racing)
o 3. Policy lapsed and insured did not pay
o 4. Policy was entered into pursuant to scheme to kill insured

another person
6. If insured is riding in a plane and it is not a commercial flight

liable even if the cause was not due to the cause concealed or

Sec 48(b) incontestability clause

This fraud is not barred by the clause there is NO

OF THE TWO YEAR PERIOD MUST HAVE LAPSED WHILE

THE INSURED IS ALIVE. This is the proper meaning.
The Policy

Preliminary policy/cover note

o Has terms and conditions of policy that would have been
issued. Insurance company cannot collect separate premium
o

on preliminary policy and actual policy.

Common in car insurance and marine insurance

But there is still some delay or information to be

determined (ex. looking for third-party liability in car
insurance first [give to LTO the cover note] or looking

for adequate carrier for goods for marine goods

o
o
o

since the policy depends on the state of the boat]

Law requires that policies are in printed form. It cant be handwriting
anymore. Before you issue a new policy, the terms and conditions have

the new mill was finished it was insured. The policy however

to be approved by insurance commission.

What is the rule on riders and additional attached clauses?
o Does not bind insured UNLESS the descriptive name/title of

mentioned the old mill.

original?
o Must be countersigned by the insured or owner
o N.B. No need for signature of insured otherwise
If a cover note was issued within 60 days, the policy must be issued.
o In marine insurance, this is a problem because 60 days have

employees of the company, but the agency.

lapsed but no vessel has been found by the exporter.

The law says if the cover note extends beyond 60 days, written

extend beyond 60 days.

Insurance proceeds applied exclusively to person in whose name or for
whose benefit the policy is made
o Aboitiz: One vessel got burned in shipyard.

insured. Cannot claim Cebu Shipyard is also insured. [?]

If description is so general that it may comprehend any class or

HELD:

The

to insure against acts of those holding the money, which in this

case are the two.

Open policy
o There must be a maximum amount mentioned.
o

It is a

maximum liability of the insurer.

So there can be an amount mentioned, but you still have to

quantify the value within this amount.

Valued policy
o One expressing a policy that the thing be valued at a specified

sum
o Marine policies are usually this
Running policy
o Successive insurances
o Ex. Goodyear, instead of getting insurance whenever it ships
tires to distributors, it gets a running policy that covers all of

can claim the benefit.

When does insurance taken by one partner or part-owner apply to

common interest
Rules on interpretation:

Insurance

insurance company lost. The very purpose of the insurance is

persons, only he who can show it was intended to include him

the interest of his co-partners or co-owners?

o The terms of the policy must be applicable to the joint or

They stole money.

company refused to pay because it claimed they were not

Asked Cebu

Shipyard to pay. Held; policy clearly mentions Aboitiz as sole

HELD:

one even if the policy says otherwise.

Fortune: HELD: Security guard and driver of armored van had
possession of the money.

agreement of insured must be obtained.

NOW: there is a circular that allows cover notes to

Insurer refused.

spaces in the policy

What is the rule on additional riders or clauses issued after the

Burned.

Clearly they intended the new mill to be insured, not the old

the rider or clause is mentioned and written on the blank

If the provision is clear, there is no room to interpret

[SPACED OUT]
Tantoco Terminal: had two mills. Old mill was insured. When

these
In any case, it would have to notify the insurance company

which would issue an indorsement, for it to be covered

What is the rule on validity of agreements limiting times for
commencing action?

In general, a clause in an insurance policy that action upon the

policy must be brought upon by the insured within a certain

o

will place the insurer in violation of the code

Ex. Maximum risk it can insure is 20% of its net worth

period is valid
But if the period fixed is less than one year from the time cause

(Ex. 100M net worth, so they can issue up to 20M). It

of action accrues, the stipulation is void (the period becomes

the default 10 years, from a written contract)

In industrial life insurance period cannot be less

o

can issue policies beyond that but it must be

than 6 months from accrual of cause of action

When does cause of action accrue?

From rejection of the claim by the insurer, because

prior to this, there is no necessity to bring suit yet

What if the clause says that action must be
brought one year from loss?

Its void, because you have to submit your

reinsured.
Notice of cancellation:
o Must be in writing
o State ground for cancellation
o State that if the insured asks for the facts as basis, the insurer
will disclose
o * Prudent thing: to send by registered mail
(66) Insured in a non-life policy can automatically renew the policy as
long as he is willing to pay the premium
o Unless 45 days before expiration of policy, the insurer informs

claim to the insurer first, and this takes time.

him that it will not renew

If insurer does not do this, insured can renew as a

The insurer might decide beyond one year

sometimes. In this case, the action given to
the insured will be less than 1 year from the
o

time cause of action accrues.

N.B. One year period to file a case is not like period for appeal.

matter of right
Policy written for term longer than 1 year, it will be treated as written for
successive terms of 1 year
o Ex. construction contract requires policy covering the building

Asking for reconsideration from the company does not suspend

as it is completed. There were 2 fires, and 3 years. It will be

running of the period.

(64) Non-life policies cannot be cancelled without prior notice and only
for the grounds stated in law here
o 1. Non-payment of premium
o 2. Conviction of crime from acts increasing hazard insured
o
o

against
3. Discovery of fraud/material misrepresentation
4. Discovery of willful or reckless acts increasing hazard
insured against

Ex. a bus company that always gets into accidents

every week
5. Physical changes in property that makes it uninsurable

6. Determination by Commissioner that continuation of policy

treated as if it is expiring at every anniversary of the policy.

Warranties

Express or implied
o Express found in terms and conditions
o Implied imposed by law
Usually embodied in a rider
o These riders, issued with the policy, need not be signed
What is the difference of warranties from representations?
o Warranties are express and placed in the contract

Representations are not written and are but collateral

ones insured furniture store does not breach the

inducements
May relate to:
o Past ex. warranty that insured was never confined
o Present ex. warranty that insured is in good health
o Future ex. warranty in fire insurance that owner of property
will not store flammable materials
When does non-compliance with a future warranty not avoid the

gasoline in the warehouse for consumption of the

He warranted against past and future double insurance.

Then he obtained fire insurance over his house with
Insurer B. The same clause is included. The house burns
down. Is Insurer A liable? Is insurer B liable?

Both are not liable. There was breach of future

neighborhood is not nice. Insurer said that it will insure, but

double insurance warranty for contract A and breach

insured must put up a firewall within 30 days. A fire razed his

the breach of warranty, the insurer is not liable.

o Ex. cannot bring explosive materials into his house.
brought fireworks inside.
o
o

He

His kitchen caught fire without

relation to the fireworks. Insurer not liable.

Because the risk increased regardless.
What is the exception?

When it is merely incidental to the business.

of past double insurance for contract B.

Geagonia case: X insured his stocks in trade. Mortgaged them, and
insured them again, where there is loss proceeds go to mortgagee. Fire
destroyed the things. Insurer said X did not disclose second insurance.
HELD: No need to disclose. Different interests involved. First goes to
the mortgagor.

to rescind. The basis is not materiality but breach of

contract.
If there is a breach of warranty, and loss occurs EVEN IF not related to

owners car within 2 days.

Or mothballs in a drug store.

Double insurance not just to those he acquired before but also the
future. Failure to give information is a breach of warranty.
o X obtained fire insurance over his house with Insurer A.

policy?
o 1. Loss occurs
o 2. Performance becomes unlawful
o 3. Performance becomes impossible
Give an example
o Somebody tried to insure his house for fire. Inspectors said his

house in 10 days. HELD: the insurer is liable.

o Same if there is no cement available
o Or if it becomes unlawful
Violation of warranty allows the other party to rescind.
o Can the insured argue that it is not material?

No. The fact that it is in the policy entitles the insurer

warranty against placing inflammable materials.

Another example, Qua Chee Gan, where there was

Second goes to the mortgagee.

premium
Case on motor vehicle policies.

instance, placing alcohol to retouch the varnish of

X was issued an ordinary drivers

license. Can only drive 4 wheeled vehicles. He drove a 10 wheeler.

Vehicle involved in accident.

For

It is not double

insurance.
When is there a waiver by the insurer?
o When despite knowledge of the breach, it accepts the renewal

Insurer not liable because X is not

authorized to drive the 10 wheeled vehicle.

o Palermo case: ASKED IN BAR. Insurance contains provision
that the driver must be owner or the third party authorized with
valid driver license. Brought car to repair shop, and it was

driven for a road test. Employees drove it for a road test. If its

While distracted, robbers broke into the store and stole the

a third party driving [check?]

Stokes [?] case: European driving with his own license (which

is valid for a period, but not after).

[spaced out]
Under influence of liquor clause no need to actually be drunk, as

stocks in trade. Fire is just a remote cause.

Loss, the proximate cause of which is an excepted risk
o Fire insurance policies say that they do not cover loss due to

long as he is under the influence

Violation of material warrant entitles the other to rescind. Even if not

coup detat, rebellion, riots, etc.

Loss where the insured is guilty of gross negligence
o SMC hired a shipping company to transport thousand cases of

beer. Loaded on a barge. Towed by a tug boat. When the tug

rescinded, it can be launched as defense by the insurer.

When there is breach of warranty, it is presumed to be material.
When there is breach of warranty without fraud, what is the rule?
o It only exempts the insurer from the time the breach occurred.
o Give an example.

X obtained fire insurance over his house. Warranted

against storage of inflammable materials.
31, a fire broke out.

On Sept

On December 31 he stored

boat arrived, the SMC rep met the captain and told the latter
that the boat should be moved to a safer place since there is a
typhoon brewing. The captain ignored it and tied the barge to
the wharf. During the typhoon the rope broke, the barge was
cut loose. Claim against insurance the captain was grossly

inflammable materials (fireworks), then a fire broke

out. The insurer is not liable for the Dec 31 fire, but is
o

liable for the Sept fire.

What if there was fraud, i.e. there were inflammable

materials inside the house?

The policy doesnt attach in the first place.

[I give up. Not listening today. Just read transcript on breach of

warranty. Page 17-18 transcript]

[The next day]
The insurer is not liable for loss caused by connivance of insured
o Ex. told someone to steal his car, sell parts, and claim
insurance
Loss from unlawful act not liable
o Ex. committed arson
Loss in which peril insured against is only a remote cause
o Ex. fire insurance policy covers store and stocks in trade. The
house across the street caught fire. Everyone congregated.

negligent. There insurer is not liable.

Burden is on the insurer to prove that it is an excepted risk
o But for fire insurance, the burden is on the insured to prove that
it is not under an exempted risk
Ratio: because the thing is in possession of the insured, so he

can best give an explanation for the loss

o Radio Mindanao Case: [wrong interpretation of this rule]
Fire insurance notice must be given without unnecessary delay
o If reported an unreasonable time later ex. 6 months
o

opportunity is gone
Usually fire policies have a provision that claims must be filed

within a certain time. Beyond that, barred.

Look at purpose to give the insurer a chance to investigate

the claim
When proof is required, insured is not required to give proof that stands

in court
o Noda: police report should be sufficient
Defects in the notice or substantiation thereof which the insurer didnt
specify waived
o Because the insured is usually a layman

Delay in presentation of a claim/proof of loss is waived if the insurance

Marine insurance

company did not invoke that as a reason to deny the claim

If the policy requires a certificate, and the insured cannot produce it, it is

enough to say that he cannot produce it not because [eh] check

section 92
o I cannot submit the report not because the contents of the

in the hull of sea. The insurer was liable because it was perils

report are prejudicial, but because the investigator is abroad

and cannot be found
Double insurance

Requisites:
o 1. Insured must be the same

Ex. mortgagor mortgagee not the same

o 2. Several insurers
o 3. Same subject matter

Ex. factory and stocks in trade not the same

o 4. Same interest
o 5. Risk is the same
Learn the rules on reimbursement

Reinsurance

Two types:
o Treaty
o Facultative case by case
A reinsurer cannot intervene in the case of insurer and insured because
the reinsurer has his own interest anyway
After first layer, the subsequent layers are called reprocession

Insurance is covered by the rule of blah blah blah fides

Take note of the cut-through clause
o Insured can go straight to the reinsurer
o Ok in California, invalid in England

Perils of the sea:

o 1. Connected with navigation
o 2. Unusual movement of the sea/winds
o Cathay: pipes arrived in rusty condition because it was stored

of the sea. WRONG! Because nothing was unusual

Barratry
o Willful misconduct, not mere wrong judgment
Answers for general average
o Those who were saved will contribute to the general average
o Insurance policy will cover share in general average
o DOES NOT cover particular average

Ex. fruits became rotten due to nature of the fruits

Arrest of the vessel covers order by administrative officials, and
does not cover arrest order of court
DOESNT ANSWER for perils of the ship
o Ship is unseaworthy
Rule on concealment is stricter, because the ship is usually in the high
seas so the insurer is at a disadvantage harder to inspect.
Marine insurance belief of a third person as regards what is material
o Ex. surveyor saying that the ship is not seaworthy MUST BE
DISCLOSED it is material
[On flag of the ship, etc. spaced out
o Use of simulated papers, etc.]
o If the loss was not due to these, even if these were committed,
the insurer is STILLLL liable
IMPLIED WARRANTIES
o 1. Sea worthy
o 2. will not deviate
o 3. Will not engage in illegal ventures
o 4. It will carry necessary papers if nationality was stipulated

Warranty of seaworthiness extends from the hull also that it is

properly laden, and the complement of the vessel (master, etc.) is

If there are different portions of the voyage, it must be seaworthy in all

such portions
Deviation
o Check the three types of deviations
o Check when it is proper to make deviations

Any other deviation is not proper

Once the vessel deviates, even if it returns to the original route, the
insurer is exonerated.
Loss is either total or partial
o Actual total loss actual loss of the thing

Renders it valueless
o Constructive total loss is unique in marine insurance

Abandonment is act of insured after constructive total

loss. He relinquishes his share to the insurer

If damage is more than of value of property insured,

insured can declare constructive total loss

Insurer is liable for those acts of insured in good faith
o Ex. salvors fee, repairs in GF
If abandonment is proper but insurer refuses unjustly,
Silence for unreasonable period of time = acceptance
Marine insurer liable for all expenses (repairs, labor for recovery of

property, etc.)
<READ TRANSCRIPT ON MARINE AND FIRE no changes in the

law>
Motor vehicle liability insurance

Third party excludes

o Driver, etc.
o Relative by affinity/consanguinity within 2nd degree
o Employee [see qualification]

cannot use the same set of stories since these were chosen by

Intellectual Property

Rights of intellectual creator exists from moment of creation

o Even if you havent registered yet with the National Library
o Unilever: Came out with an advertisement that is similar to

then the writer still gives consent.

o If there are several writers and the parts are distinct, they only

is not yet registered with the National Library. But the law is
clear no need to register to have rights over intellectual

creation.
Are email and letters also covered?
o Yes. Any form of text is covered.
Even choreography, musical compositions,

drawings,

architecture, sculptures, computer etc.

Paglinawan: A dictionary can be copyrighted.

He came up with a

argued that you cannot have a monopoly on words. Court held that the

original writer used his judgment in selecting which words will be used.
Pilita Corales adopted A Million Thanks To You as her final song in
concerts.

In response, someone printed the word thanks a million

times and it was not allowed to be registered because it is not an

intellectual creation.
Are derivative works also created?
o Yes, but you have to get the consent of the original creator.
o Examples of these are dramatizations of novels,

or

translations.
o Or adaptations (ex. Miss Saigon, from Madame Buttefly)
What about compilations?
o This involves judgment of, for instance, the best Filipino short
stories. So he has to get the consent of those whose stories
he included in the compilation.

have copyright over the parts they prepare.

For DVDs?
o The producer, music composer, director of photography,
screenwriter, author of the work on which the movie is based,

paintings,

Spanish-English dictionary where he borrowed 87% of the entries. He

the first compiler; unless, of course, he gets permission.

To be protected it must be original. This is the main principle.
Plagiarism is different from infringement.
If the writer is anonymous, then it is the publisher that represents. But if
the writer can still be identified (ex. Nick Joaquin as Quijano de Manila),

PNGs prior commercial. Unilever said that PNGs commercial

And if someone else wants to make another compilation, he

etc.
o But for collecting, the producer has the right.
If the work is done for hire or is part of his duties, then the employer will
own the copyright.
Torrens system.
o If you sell, mortgage, convey your copyright, you must register
it with the National Library to bind third parties.
Owner can object to the distortion of his work.
Transfer of the work to new media will not violate [?]
How long do these rights last?
o Modern rights last up to 50 years after the death of the author.
o They are not assignable.
The economic rights of author need permission:
o Reproduction or substantial reproduction (ex. photocopying an
entire book)
o Derivative works
o Public distribution or exhibition
Businesses started playing certain songs to drum up business.
Technically, this is economic exploitation of the work.

The character Charlie Brown is copyrighted. So sporting goods cannot

use Charlie Brown on their goods. Or a bakery cannot use Cookie

Monster.
Some artist connoisseurs bought Xs paintings for a cheap price.
Then they sold the paintings for a fortune when he became
famous. What is Xs right?
o He must get 5% of the selling price.