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Negotiable Instruments Law (Act No. 2031) : 1. The Negotiable Instrument 3. Life of A Negotiable Instrument
Negotiable Instruments Law (Act No. 2031) : 1. The Negotiable Instrument 3. Life of A Negotiable Instrument
No. 2031) The Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said
statute should not be tampered with haphazardly or
Chapter I. lightly. Nor should it be brushed aside in order to
meet the necessities in a single case.
INTRODUCTION
3. Life of a Negotiable
Instrument
1. The Negotiable Instrument
1. issue
Written contract for the payment of money, by 2. negotiation
its form intended as substitute for money and 3. presentment for acceptance in certain bills
intended to pass from hand to hand to give the 4. acceptance
HDC the right to hold the same and collect the 5. dishonor by or acceptance
sum due. 6. presentment for payment
Instruments are negotiable when they conform 7. dishonor by nonpayment
to all the requirements prescribed by the NIL 8. notice of dishonor
(Act 2031, 03 February 1911). 9. protest in certain cases
Although considered as medium for payment of 10. discharge
obligations, negotiable instruments are not
legal tender (Sec. 60, New Central Bank Act,
R.A. 7653);
Negotiable instruments shall produce the effect 4. Kinds of Negotiable
of payment only when they have been Instruments
encashed or when through the fault of the
creditor they have been impaired. (Art. 1249,
CC) BUT a CHECK which has been cleared and
4.1. Promissory note - a promise to pay
credited to the account of the creditor shall be money
equivalent to a delivery to the creditor of cash. unconditional promise in writing made by
one person to another signed by the maker
engaging to pay on demand, or at a fixed or
Negotiable Non-negotiable
determinable future time a sum certain in
Contains all the Does not contain all the
money to order or to bearer
requisites of Sec. 1 of requisites of Sec. 1 of
where a note is drawn to the maker’s own
the NIL the NIL
order, not complete until indorsed by him
Transferred by Transferred by
(Sec. 184, NIL).
negotiation assignment
HDC may have better Transferee acquires
rights than transferor rights only of his 4.2. Bill of exchange - an order made by one
transferor person to another to pay money to a third person.
Prior parties warrant Prior parties merely unconditional order in writing addressed by
payment warrant legality of title one person to another signed by the person
giving it
Transferee has right Transferee has no right
requiring the person to whom it is addressed
of recourse against of recourse
to pay on demand or at a fixed or
intermediate parties
determinable future time a sum certain in
money to order or to bearer (Sec. 126, NIL).
Check: bill of exchange drawn on a
2. Negotiable Instruments Law bank payable on demand.
o The NIL applies only to instruments which Promissory Note Bill of Exchange
conform with the requisites laid down by Sec1 Unconditional promise Unconditional order
of the law. Should any of said requisites be Involves 2 parties Involves 3 parties
absent, the instrument would not be negotiable Maker primarily liable Drawer only secondarily
and would therefore not be governed by the liable
NIL but by the general law on contracts. Only 1 presentment - Generally 2
for payment presentments - for
acceptance and for 1. “ORDER OR PROMISE TO PAY”
payment a. PROMISSORY NOTE:
i. PROMISE TO PAY: should be
express on the face of the
5. Parties instrument
ii. Word "promise" is not absolutely
necessary. Any expression
5.1. As regards promissory note: equivalent to a promise is sufficient.
1. Promissor/maker iii. Mere acknowledgment of a debt
2. Payee - person to whom the promise to insufficient
pay is made. b. BILLS OF EXCHANGE:
i. Order - command or imperative
5.2. As regards bill of exchange: direction; the instrument, by its
1. Drawer - person who gives the order to nature, demanding a right.
pay. ii. Words which are equivalent to an
2. Drawee - addressee of the order. order are sufficient.
3. Payee - person to whom the payment is to iii. A mere request or authority to
be made. pay does not constitute an order.
iv. Although the mere use of polite
Indorser - the payee of an instrument who words like "please" does not of itself
transfers it to another by signing it at the back deprive the instrument of its
thereof characteristics as an order, its
Indorsee - person to whom the indorser language must clearly indicate a
negotiates the instrument, who, by such demand upon the drawee to pay.
negotiation, becomes the holder of the
instrument. 2. “UNCONDITIONAL”
a. The promise or order to pay, to be
unconditional, must be unqualified.
b. Sec. 3, NIL: “An unqualified order or
Chapter II. promise to pay is unconditional…though
coupled with:
NEGOTIABILITY i. “An indication of a particular fund out
of which reimbursement is to be
made, or a particular account to be
debited with the amount
1 Requisites of Negotiability1 UNCONDITIONAL: Mere
indication of the particular fund
1.1. Must be in Writing and Signed by out of which reimbursement is
to be made, or an indication of
the Maker a particular account to be
1. No person liable on the instrument whose
debited with the amount
signature does not appear thereon.
ii. “A statement of the transaction which
2. One who signs in a trade or assumed
gives rise to the instrument.
name liable to same extent as if he had
UNCONDITIONAL: Mere
signed in his own name. (Sec. 18, NIL)
recital of the transaction or
3. Signature of party may be made by duly
consideration for which the
authorized agent; no particular form of
instrument was issued
appointment necessary. (Sec. 19, NIL)
However, the fact that the
4. "In writing" - includes print; written or
condition appearing on the
typed
instrument has been fulfilled
5. Signature, binding so long it is intended
will not convert it into a
or adopted as the signature of the signer or
negotiable one.
made with his authority.
iii. But an order or promise to pay out of
a particular fund is not unconditional
1.2. Must contain an Unconditional CONDITIONAL: when
Order or Promise to Pay reference to the fund clearly
indicates an intention that such
fund alone should be the source
1
Suggested Mnemonics: UP MaSCoT’S PaWN: of payment
Unconditional order and Promise, payable in
Money, Signed by maker, Certainty as to Time, Sum
and Parties, in Writing, include words of
Negotiability.
METROPOLITAN BANK v. CA (1991) 2.) No time for payment is expressed;
3.) Where an instrument is issued,
The treasury warrants in question are not NIs. They accepted, or indorsed when overdue, it
are payable from a particular fund, to wit, Fund is, as regards the person so issuing,
501. The indication of Fund 501 as the source of the accepting, or indorsing it, payable on
payment to be made on the treasury warrants demand.
makes the order or promise to pay "not
unconditional" and the warrants themselves non- Demand instruments: Holder may call for
negotiable. payment any time; maker has an option to
pay at any time, and the refusal of the
1.3. Sum Payable must be Certain holder to accept payment will terminate the
1. Sec. 2, NIL: The sum payable is a sum running of interest, if any, but the obligation
certain, even if: to pay the note remains.
a. With interest;
b. By stated installments; 2. at a fixed time
c. By stated installments with o Only on the stipulated date, and not
acceleration clause; before, may the holder demand its
d. With exchange, whether at a fixed rate payment.
or at the current rate; or o Should he fail to demand payment, the
e. With costs of collection or attorney's instrument becomes overdue but
fee. remains valid and negotiable. It is
2. A sum is certain if from the face of the merely converted to a demand
instrument it can be mathematically instrument.
computed.
3. A stipulation to pay a higher rate of 3. at a determinable future time
interest if the note is not paid or a lower
rate if it is paid on or before maturity does o Determinable future time, if
not render the instrument non-negotiable. expressed to be payable (Sec. 4, NIL):
A check with 2 parallel lines in the upper left hand 3.4. That at time it was negotiated to
corner means that it could only be deposited and
him, he had no notice of :
may not be converted to cash. Consequently, such
o any infirmity in instrument
circumstance should put the payee on inquiry and
o any defect in title of person
upon him devolves the duty to ascertain the
negotiating;
holders’ title to the check or the nature of his
1. title DEFECTIVE when (Sec. 55, NIL):
possession. Failing in this respect, the payee is
a. instrument / signature obtained by
declared guilty of gross negligence amounting to
fraud, duress, force or fear or other
legal absence of good faith and as such the
unlawful means OR for an illegal
consensus of authority is to the effect that the
consideration; or
holder of the check is not a holder in good faith.
b. instrument is negotiated in breach of
faith, or fraudulent circumstances
YANG v. CA (2003)
2. NOTICE of infirmity or defect –
… in accepting the cross checks and paying cash for
a. actual knowledge of the infirmity or
them, despite the warning of the crossing, the
defect OR knowledge of such facts that
subsequent holder could not be considered in good
his action in taking the instrument
faith and thus, not a holder in due course.
amounted to bad faith (Sec.56, NIL)
b. Notice to an AGENT is chargeable
against the principal.
iii. FINANCING COMPANY
c. INSUFFICIENT NOTICE
1) Consolidated Plywood v.
i. CONSTRUCTIVE NOTICE (ex.
IFC: A FINANCING
notice of defenses disclosed by
COMPANY that is the
public records, doctrine of lis
indorsee of a note issued
pendens) is insufficient to charge a
by a buyer payable to the
purchaser of a NI with notice.
seller of goods is NOT a
Just as a purchaser of a
holder in good faith as
negotiable instrument is
to the buyer. In case the
not put on inquiry, neither
goods sold turn out to be
is he charged with notice of
defective, it cannot
defenses or equities
recover the purchase
disclosed by public records,
price of the goods from
nor is he affected by the
the buyer.
doctrine of lis pendens.
However, notice to an such defective title (i.e., where defense is
agent is chargeable not his own) – presumption in favor of holder
against the principal.
ii. Notice of an ACCOMODATION
PARTY is not notice of a defect.
6. Rights of Holder in Due
Thus, an accomodation Course
party (one who has
signed the instrument as 6.1. Under the NIL4
maker, drawer, acceptor 1. to sue on the instrument in his own
or endorser, without name (Sec. 51, NIL)
receiveing value therefor, 2. to receive payment on the instrument
and for the purpose of – discharges the instrument (Sec. 51,
lending his name to some NIL)
other person) is liable on 3. holds instrument free of any defect of
the instrument, title of prior parties (Sec. 57, NIL)
notwithstanding the fact 4. free from defenses available to prior
that the holder knew him parties among themselves (Sec.57,
to be an accomodation NIL)
party. 5. may enforce payment of instrument
d. RIGHT of a transferee who receives for full amount, against all parties liable
NOTICE of any infirmity or defect (Sec.57, NIL)
BEFORE he has PAID THE FULL
amount for the instrument
i. He will be deemed a HDC only to
6.2. JUR: BPI v. ALFRED BERWIN & CO.
the extent of the amount Only a HDC may enforce payment on the PN.
therefore paid by him (Sec.54, In CAB, it is not clear whether A (the payee) is
NIL) still the HDC since D (the maker) believed that A
may have negotiated it. Thus, to compel D to
pay would expose him to pay a second time to
the HDC (in case A was no longer one).
4. Effect of Qualified,
Conditional and Restrictive 6.3. DISADVANTAGE of being a
Indorsements NON HDC:
o The Negotiable Instruments Law does
A. The status of a holder as a HDC is not
not provide that a holder not in due
affected by his taking under a qualified
course can not recover on the
indorsement.
instrument. The disadvantage of … not
B. A conditional indorsement does not
being a holder in due course is that the
deprive the conditional indorsee or
negotiable instrument is subject to
subsequent holder of the rights of a HDC.
defenses as if it were non-negotiable.
If he fulfills all the requisites in Sec. 52
One such defense is absence or failure
then he is immune from all the personal
of consideration. (Atrium Mgt v de Leon,
defense.
2001)
C. A restrictive indorsement which prohibits
further negotiation will not prevent the
indorsee from being a HDC. BUT, if he
further indorses the instrument, then the 7. Rights of Purchaser from
subsequent indorsee will not be a due
course holder.
Holder in Due Course (Sec.58)
7.1. General Rule: In the hands of any
holder other than a HDC, NI is subject to same
5. Who is Deemed HDC defenses as if it were non-negotiable.
(burden of proof) (Sec.59)
A. General Rule: Prima facie presumption in 7.2. Exception: A holder who derives title
favor of holder through a HDC and who is NOT himself A PARTY
B. Exception: Burden is reversed (burden on TO ANY FRAUD or illegality has all rights of such
holder to prove that he or some person former holder in respect to all parties prior to the
under whom he claims acquired title as latter EVEN though he himself does not satisfy
HDC) when it is shown that the title of any Sec.52
person who has negotiated instrument was
defective
C. Exception to exception: There will be no 4
Suggested Mnemonics: REFS: Receive and Enforce
reversal if the party being made liable payment, Free from any defect of title and defenses,
became bound prior to the acquisition of
Sue
2. Real Defenses
8. Presumption in Favor of Due
Course Holding 2.1. Incapacity: REAL defense but
available only to the incapacitated party (ex.
minor or corporation); the indorsement or
A. Every holder is deemed prima facie to be a assignment of the instrument by a corp. or by an
holder in due course; infant passes the property therein,
1. BURDEN SHIFTS when it is shown that notwithstanding that from want of capacity, the
the title of any person who has corp. or infant may incur no liability thereon.
negotiated the instrument was (Sec.22, NIL)
defective. Holder MUST PROVE that he
or some person under whom he claims
acquired the title as a holder in due
2.2. Incomplete, Undelivered
course.
2. But the last mentioned rule does not Instrument
apply in favor of a party who became 1. Instrument will not, if completed and
bound on the instrument prior to the negotiated without authority, be a valid
acquisition of such defective title. contract in the hands of ANY holder, as
(Sec.59., NIL) against any person whose signature was
B. However, this presumption arises only in placed thereon before delivery. (Sec.
favor of a person who is a holder as 15, NIL)
defined in Section 191 of the Negotiable 2. Who may be estopped from raising the
Instruments Law, meaning a “payee or real defense under Sec 15? A drawee
indorsee of a bill or note, who is in bank whose negligent custody of the
possession of it, or the bearer thereof.” checks, after partial execution,
(Yang v CA, 2003) contributed to its escape
3. Personal Defenses
Chapter V.
3.1. Complete, Undelivered
DEFENSES & EQUITIES Instrument
a. CONCLUSIVE presumption of a valid
delivery – where the instrument is in the
1. Defenses in General hands of a HDC
b. PRIMA FACIE presumption of a valid
delivery – where the instrument is no longer
1.1. REAL defense – attaches to
in the possession of a party whose sig
instrument on the principle that there was no
appears thereon (Sec. 16, NIL)
contract at all; available against ALL holders
including holders in due course. They are those
which attach to the instrument itself and 3.2. Incomplete, Delivered (sec.14)
generally, disclose an absence of one of the
essential elements of a contract. 1. This is a personal defense only because
provision states that if any instrument
1.2. PERSONAL defense – grows out of
so completed is negotiated to a holder in
the agreement or conduct of a particular person
due course, it is valid and effectual for
in regard to the instrument which renders it
all purposes
inequitable FOR HIM, though holding the legal
2. 2 Kinds of Writings:
title, to enforce it against the party sought to
i. Where instrument is wanting in
be made liable; not available against a HDC.can
any material particular: person in
be raised only against holders not on due
possession has prima facie
course. Here, the true contract appears , but
authority to complete it by filing up
for some reason , the defendant is excused
blanks therein
from the obligation to perform.
ii. Signature on blank paper
1.3. Equities or Claims of delivered by person making the
Ownership are of 2 Kinds signature IN ORDER that the paper
1. Legal – one who has legal title to the may be CONVERTED into a NI
instrument may recover possession operates as prima facie authority to
thereof even from holder in due course fill up as such for any amount
2. Equitable – may only recover from a 3. The authority to fill up is limited by the
holder not in due course following:
a. When completed, it may be 2. REAL when the law expressly provides for
enforced upon the parties thereto illegality as a real defense (Statutory
only if it was filled strictly in declaration of illegality
accordance with the authority
given RODRIGUEZ v MARTINEZ (1905)
b. The filling up must be within a
reasonable time Maker cannot be relieved from the obligation of
paying the holder the amount of the note alleged to
NOTE: If the signature on a paper is have been executed for an unlawful consideration.
given only for autograph purposes (Illegality is personal, so defense only against a
and the same is converted into a NI, holder not in due course)
this will amount to forgery, The holder paid the value of the note to its former
constituting thus a valid defense holder. He did so without being aware of the fact
even against a HDC that the note had an unlawful origin. He accepted
note in good faith, believing the note was valid and
4. This provision contemplates delivered absolutely good. The maker even assured the
instruments, so the person in holder before the purchase that the note was good
possesion cannot be a thief or a finder and that he would pay it at a discount .
but a person in lawful possession- one
to whom the instrument has been 3.5. Duress
delivered. 1. In general, PERSONAL defense.
5. In order that any such instrument, 2. REAL if duress so serious as to give
when completed, may be enforced rise to a real defense for lack of
against any person who became a contractual intent
party thereto prior to its completion: 3. CAMPOS: There may be cases where
a. must be filled up strictly in the duress employed is so serious that it
accordance w/ AUTHORITY given will give rise to a real defense because
b. within a REASONABLE TIME – in of the lack of contractual intent .
determining what is reasonable Although the signer may know what he
time, regard is to be had to the is signing, there may be wanting the
(1) nature of the instrument, (2) intent or willingness to be bound. Then
usage of trade or business (if any) it becomes a real defense.
with respect to such instruments,
and 3) the facts of the particular
case
6. BUT if negotiated to HDC, may enforce 4. Sometimes Real, Sometimes
it as if it had been filled up properly Personal
7. What details may be filled up?
a. Amount, as to a signed blank
paper
b. Date (Sec 13 “… The insertion of a
4.1. Forgery (Sec. 23): made without
wrong date does not void the authority of person whose signature it purports to
instrument in the hands of a be
subsequent holder in due
course…”) 1. In general, a REAL defense: … Effect
c. Place of payment
d. Name of payee a. signature is wholly inoperative
b. no right to retain instrument, or
give discharge, or enforce payment
3.3. Lack of Consideration(Sec. against any party thereto, can be
28) acquired through or under such
1. ABSENCE or failure of consideration is a signature (unless forged signature
matter of defense as against any person unnecessary to holder’s title)
not a HDC. c. No subsequent party can acquire
2. PARTIAL FAILURE of consideration is a the right against any party thereto
defense pro tanto whether the failure is an (prior to the forgery) to:
ascertained and liquidated amount or i. Retain the instrument
otherwise . ii. Give a discharge there for
iii. Enforce payment thereof
3.4. Illegality
1. In general, a PERSONAL defense even if 2. PERSONAL if the party against whom it
CC1409 provides that a contract with an is sought to enforce such right is
illegal cause is void. PRECLUDED from setting up
forgery/want of authority;
a. Who are PRECLUDED? with the drawee bank.
i. parties who make certain RULE: The drawee who
warranties, like a general pays the holder of the bill
indorser or acceptor after cannot recover from the
forgery (Sec. 62, NIL) holder what he paid under
ii. estopped / negligent parties mistake
iii. parties who ratify (BUT there 2) Stop Payment Order is
are conflicting views whether one issued by the drawer
“precluded” includes of a check countermanding
ratification) his first order to the
drawee bank to pay the
b. One view holds that a forged check. RULE: The drawee
signature cannot be ratified bank is bound to follow the
because ratification involves the order, provided it is
relation of agency and a forger received prior to its
does not assume to act for certification or payment of
another. the check
3) SOME EXCEPTIONS:
3. ACCEPTANCE AND PAYMENT of a o If the payment to holder is
forged instrument a legitimate debt of the
When there is acceptance and drawer which the holder in
payment of a forged instrument, the due course could have
rights and liabilities of the parties recovered from the drawer
depend on whether the forgery anyway.
pertains to the drawer/maker’s o If the stop order comes
signature or merely of an after the bank has certified
indorsement. or accepted the check, the
a. Drawer/Maker’s signature bank is under the legal
i. PRICE v NEAL, The drawee duty to pay the holder and
who had paid an accepted bill will not be liable to the
as well as a non-accepted bill, drawer for doing so.
each of which was forged,
could NOT recover the money iii. Effect Of Negligence Of
paid out on the bill. The Depositor - If proximate cause
neglect was on the part of the of loss, the bank (drawee) is
drawee. not liable
SAMSUNG CONSTRUCTION CO., INC. VS. FAR ii. When drawee may recover
EAST BANK AND TRUST CO. AND CA (2004) from DRAWER
The general rule remains that the drawee who 1) Where the instrument is
has paid upon the forged signature bears the loss. originally a bearer
The exception to this rule arises only when instrument, because the
negligence can be traced on the part of the indorsement can be
drawer whose signature was forged, and the need disregarded as being
arises to weigh the comparative negligence unnecessary to the holder’s
between the drawer and the drawee to determine title
who should bear the burden of loss. 2) Indorsement forged by an
Still, even if the bank performed with utmost employee or agent of the
diligence, the drawer whose signature was forged drawer
may still recover from the bank as long as he or 3) If due to the drawer’s
she is not precluded from setting up the defense negligence/delay, the
of forgery. After all, Section 23 of the Negotiable forgery is not discovered
Instruments Law plainly states that no right to until it is too late for the
enforce the payment of a check can arise out of a bank to recover from the
forged signature. Since the drawer, Samsung holder or the forger
Construction, is not precluded by negligence from
setting up the forgery, the general rule should GEMPESAW v CA, PBC
apply.
While there is no duty resting on the drawer to look
b. Indorsement: for forged indorsements on his cancelled checks, a
i. When it is the signature of depositor is under a duty to set up an
the indorser that is forged, accounting system and business procedure as
the drawee and drawer CAN are reasonably calculated to prevent or render
recover vs holder the forgery of indorsements difficult, particularly
1) The drawee can recover by the depositor’s own employees.
the amount paid by him As a rule the drawee bank who has paid the check
in cases where only an with forged indorsement, cannot charge the drawer’s
indorsement has been account for the amount of the said check. An
forged . This is because exception to this rule is where the drawer is guilty of
drawee makes no such negligence which causes the bank to honor the
warranty as to the check.
genuineness of any
indorsement. iii. When drawee may not
2) Generally, the drawee recover from holder
may only recover from
the holder. Should he fail 1) Where the instrument is
to do so(for instance due originally a bearer
to insolvency) he cannot instrument , because the
recoup his loss by indorsement can be
charging it to the disregarded as being
drawer’s account unnecessary to the holder’s
3) Although a title
depositor/drawer owes a 2) If drawee fails to act
duty to his drawee bank promptly , if he delays in
to examine his cancelled informing the holder whom
checks, he has no he paid
similar duty as to forged
indorsements. iv. Between Drawee Bank and
4) The drawer, as soon as Collecting Bank
he comes to know of the 1) Collecting bank only liable
a forged indorsement for forged indorsements
and not forgeries of the the bank to know that the check was duly indorsed by
drawer or maker’s the original payee and where the bank pays the
signature. (PNB v CA, amount of the check to a 3rd person , who has forged
1968) the signature of the payee , the loss falls upon the
2) The collecting bank or bank who cashed the check , and its remedy is
last indorser generally against the person to whom it paid the money.”
suffers the loss because
it has the duty to BPI v CA (1992)
ascertain the
genuineness of all prior Section 23 of the NIL has 2 parts. The first part states
indorsements considering the general rule that a forged signature is wholly
that the act of presenting inoperative and payment made through or under such
the check for payment to signature is ineffectual. The second part admits of
the drawee is an exception. In this jurisdiction, the negligence of the
assertion that the party party invoking the forgery is an exception to the
making the presentment general rule.
had done its duty to Both drawee and collecting bank were negligent
ascertain the in the selection and supervision of their employees
genuineness of the resulting in the encashment of the checks by the
indorsements. (BPI v CA, impostor. Both banks were not able to overcome the
1992) presumption of negligence in the selection and
3) In presenting the checks supervision of their employees
for clearing the collecting Considering the comparative negligence of the
agent, made an express parties, the demands of substantive justice are
guarantee on the validity satisfied by allocating the loss and the costs on a 60-
of “all the prior 40 ratio.
endorsements”. ( BDO v
Equitable bank) ASSOCIATED BANK v CA (1996)
4) The drawee bank is not
similarly situated as the By reason of the statutory warranty of a general
collecting bank because indorser in Section 66 of the Negotiable Instruments
the former makes no Law, a collecting bank which indorses a check bearing
warranty as to the a forged indorsement and presents it to the drawee
genuineness of any bank guarantees all prior indorsements, including the
indorsement. The drawee forged indorsement. It warrants that the instrument
bank’s duty is but to is genuine, and that it is valid and subsisting at the
verify the genuineness of time of his indorsement. Because the indorsement is
the drawer’s signature a forgery, the collecting bank commits a breach of
and not of the this warranty and will be accountable to the drawee
indorsement because the bank. This liability scheme operates without regard to
drawer is its client. fault on the part of the collecting/presenting bank.
5) Where the negligence of Even if the latter bank was not negligent, it would still
the drawee bank is the be liable to the drawee bank because of its
proximate cause of the indorsement.
collecting bank’s
payment of a check with PCIB v. CA (2001)
a forged indorsement,
the drawee bank may be … A bank which cashes a check drawn upon another
held liable to the bank, without requiring proof as to the identity of
collecting bank . persons presenting it, or making inquiries with regard
6) When both are guilty of to them, cannot hold the proceeds against the drawee
negligence, the degree of when the proceeds of the checks were afterwards
negligence of each will be diverted to the hands of a third party. In such cases
weighed in considering the drawee bank has a right to believe that the
the amount of loss which cashing bank (or the collecting bank) had, by the
each should bear. (refer usual proper investigation, satisfied itself of the
to BPI v CA, 1992) authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been
GREAT EASTERN LIFE v HONGKONG & forged or diverted and in turn received payment
SHANGHAI BANK (1922) thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the
“Where a check is drawn payable to the order of fraud practiced on the drawee bank.
one person and is presented to a bank by another
and purports upon its face to have been duly
indorsed by the payee of the check , it is the duty of
4.2. Material Alteration (Sec.124) (PNB v CA, 1996; Int’l Corporate
1. As a DEFENSE: Bank v CA, 2006)
a. PERSONAL defense when used to c. EFFECT: an innocent alteration
deny liability according to the (generally, changes on items other
tenor of the instrument than those required to be stated
b. REAL defense when relied on to under Sec. 1, N. I. L.) and
deny liability according to the spoliation (alterations done by a
altered terms. stranger) will not avoid the
2. What constitutes material alteration? instrument, but the holder may
a. Statutory: Review Sec.125, NIL enforce it only according to its
i. change date original tenor. (PNB v CA, citing J.
ii. sum payable, either for Vitug)
principal or interest
iii. time or place of payment 4. EFFECT OF MATERIAL ALTERATION
iv. number/relations of parties
v. medium/currency of a. General Rule: Where NI materially
payment, altered w/o the assent of all parties
vi. adds place of payment where liable thereon it is AVOIDED,
none specified, except as against:
vii. other change/addition altering i. party who has himself made,
effect of authorized or assented to
viii. instrument in any respect alteration
ii. subsequent indorser because
b. Jurispridence by indorsement he warrants
i. An alteration is said to be that the instrument is in all
material if it changes the respects what it purports to be
effect of the instrument. It and that it was valid and
means that an unauthorized subsisting at the time of his
change in an instrument that indorsement (Secs. 65 and
purports to modify in any 66, NIL)
respect the obligation of a b. As to a HOLDER in DUE COURSE
party or an unauthorized i. When an instrument that has
addition of words or numbers been materially altered is in the
or other change to an hands of a HDC not a party to
incomplete instrument the alteration, HDC may
relating to the obligation of a enforce payment thereof
party. (PNB v CA, 1996) according to orig. tenor
ii. A material alteration is one ii. Alteration must NOT be
which changes the items apparent on the face of the
which are required to be instrument for the holder then
stated under Section 1 of the would not be a holder in due
Negotiable Instruments Law. course
(Metrobank v Cabilzo, 2006) iii. Where the interest rate is
altered , the holder in due
3. IMMATERIAL ALTERATION course can recover the principal
a. Campos: Any other alteration sum with the original rate of
would be non-material and would interest
not affect the liability of any prior c. When alteration is of the amount or
party . Note that #7 is a catch-all the interest rate is altered, the
provision such that sec 125 may holder can recover the ORIGINAL
still have broad applicability. AMOUNT/interest rate.
b. Alterations of the serial numbers
do not constitute material
alterations on the checks... [It] is 5. DRAWER’S NEGLIGENCE
not an essential requisite for a. The general rule is that the drawee
negotiability under Section 1 of cannot charge against the drawer’s
the Negotiable Instruments Law. account the amount of an altered
The aforementioned alteration did check.
not change the relations between b. BUT, the drawer’s negligence,
the parties. The name of the before or after the alteration, may
drawer and the drawee were not estop him from setting up alteration
altered. The intended payee was as a defense.
the same. The sum of money due c. However, the drawer is not bound
to the payee remained the same. to so prepare the check that nobody
else can successfully tamper with it
(ex. a drawer cannot be expected negligence which
to foresee that his clerk will use proximately
acid to alter his checks, Critten v. contributed to the
Chemical Natl Bank) erroneous
d. Where the negligence of the payment by
drawer consists in failing to drawee, holder
discover alterations previously liable (PCIB v CA,
made which he could have 2001)
discovered by a comparison of the
cancelled checks and check stubs MONTINOLA v PNB (1951)
or by diligent observation of his
records and could thus have The insertion of the words “Agent Philippine
prevented the drawee bank from National Bank” converted the bank from a mere
subsequently cashing other drawee to a drawer and therefore changes its
altered checks , the drawee can liability, constitutes material alteration of the
charge the subsequent check instrument without consent of the parties liable
against the negligent drawer’s thereon and so discharges the instrument. Drawee
account. bank is not liable.
EPCIB v ONG (2006) [S]ince the said check had been certified by the
drawee bank, by the certification, the funds
A manager’s check is an order of the bank to pay, represented by the check are transferred from the
drawn upon itself, committing in effect its total credit of the maker to that of the payee or holder,
resources, integrity and honor behind its issuance. and for all intents and purposes, the latter becomes
By its peculiar character and general use in the depositor of the drawee bank, with rights and
commerce, a manager’s check is regarded duties of one in such situation. Where a check is
substantially to be as good as the money it certified by the bank on which it is drawn, the
represents. certification is equivalent to acceptance. Said
certification “implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
3. Clearing have been set apart for its satisfaction, and that they
a. Clearing - check collection process shall be so applied whenever the check is presented
b. Clearing house - where for payment. It is an understanding that the check is
representatives of different banks meet good then, and shall continue good, and this
every afternoon of every business day to agreement is as binding on the bank as its notes
receive the envelopes containing checks circulation, a certificate of deposit payable to the
drawn against the bank he represents for order of depositor, or any other obligation it can
examination and clearance. assume. The object of certifying a check, as
regards both parties, is to enable the holder to
4. Certification use it as money.” When the holder procures the
a.Definition check to be certified, “the check operates as an
i. an agreement by which a bank assignment of a part of the funds to the
promises to pay the check at any
time it is presented for payment
creditors.” Hence, the exception to the rule the genuineness of all prior endorsements considering
enunciated under Section 636 of the Central Bank that the act of presenting the check for payment to
Act to the effect “that a check which has been the drawee is an assertion that the party making the
cleared and credited to the account of the creditor presentment has done its duty to ascertain the
shall be equivalent to a delivery to the creditor in genuineness of the endorsements." The rule finds
cash in an amount equal to the amount credited to more meaning in this case where the check involved
his account” shall apply in this case x x x. is drawn on a foreign bank and therefore collection is
more difficult than when the drawee bank is a local
one even though the check in question is a manager’s
5. Surrender of Check check
a. The surrender of the check by the
holder to the drawee bank upon its
payment is not negotiation. By
paying the check, the drawee bank
3. Secondary Parties
extinguishes it as a negotiable
instrument and converts it into a mere 3.1. Liability of DRAWER
voucher. 1. Sec. 61, NIL
b. Distinction between surrender of check a. Admits existence of payee and his then
upon payment thereof and negotiation capacity to endorse
i. The delivery of the check by the b. Engages that on due presentment
holder to the drawee bank upon instrument will be accepted, or paid, or
its payment is not negotiation. By both, according to its tenor
paying the check, the drawee c. That if it be dishonored + necessary
bank extinguishes it as a proceedings on dishonor duly taken, will
negotiable instrument and pay the amount thereof to the holder or
converts it into a mere voucher. to a subsequent indorser who may be
ii. In the case of a deposit of a check compelled to pay it
by the holder thereof in a bank 2. Limiting Liability: drawer may insert in the
other than the drawee bank, the instrument an express stipulation negativing
signature at the back of the check / limiting his own liability to holder
would constitute an indorsement,
unless otherwise indicated. The PNB v. PICORNELL (1922)
holder in negotiating the check to
the depositary bank, which in turn Picornell obtained money from PNB Cebu to purchase
will collect on the check from the tobacco to be shipped to Manila. Picornell then drew
drawee bank, through the a bill of exchange drawn against his principal,
clearinghouse. Hyndman, Tavera & Ventura (HTV), in favor of PNB or
his order. Upon presentation of the bill, HTV accepted
BPI vs CA (2000) it. However, HTV subsequently refused to pay the bill
because some of the tobacco shipped were damaged.
In depositing the check in his name, private HELD:
respondent did not become the outright owner of A. Liability of Acceptor (HTV)
the amount stated therein. He was merely PNB is a holder in due course and the partial
designating petitioner as the collecting bank. This is want of consideration does not exist with
in consonance with the rule that a negotiable respect to the bank who paid full value for
instrument, such as a check, whether a manager’s the bill of exchange.
check or ordinary check, is not legal tender. The want of consideration between the
As such, after receiving the deposit, under its own acceptor and drawer does not affect the
rules, petitioner shall credit the amount in private rights of the payee who is a remote party.
respondent’s account or infuse value thereon only The payee or holder gives value to the
after the drawee bank shall have paid the amount of drawer, and if he is ignorant of the equities
the check or the check has been cleared for deposit. between the drawer and acceptor, his is in
Again, this is in accordance with ordinary banking the position of a bona fide indorsee.
practices and with this Court’s pronouncement that B. Liability of Drawer (Picornell)
"the collecting bank or last endorser generally As drawer of the bill, he warranted that it
suffers the loss because it has the duty to ascertain would be accepted upon proper presentment
& paid in due course. As it was not paid, he
6
became liable to the payment of its value to
“SEC. 63. Legal character . – Checks representing PNB.
deposit money do not have legal tender power and their The fact that Picornell was an agent of HTV
acceptance in the payment of debts, both public and in the purchase of the tobacco does not
private, is at the option of the creditor: Provided, however,
necessarily make him an agent of HTV in
that a check which has been cleared and credited to the
drawing the bill of exchange. These are 2
account of the creditor shall be equivalent to a delivery
to the creditor of cash in an amount equal to the different contracts. He cannot claim
amount credited to his account.
exemption from liability by invoking the the time the check was issued to him. Such
existence of agency. knowledge negates the element of deceit and
Drawer received notice of protest in constitutes a defense in estafa through bouncing
fulfillment of the condition set by law for checks.
his liability to arise.
Drawer's liability is only secondary as the
liability of the acceptor is primary. 3.2. Liability of INDORSERS:
1. Indorser
BANCO ATLANTICO v AUDITOR GENERAL a. Sec. 63, NIL: A person placing his
(1978) signature upon an instrument other than as
a maker, drawer, or acceptor unless he
B fraudulently altered checks payable to her drawn indicates by appropriate words his intention
by the Embassy by increasing the amounts. B to be bound in some other capacity
negotiated these checks by indorsement to BA w/c i SAPIERA vs CA (1999). It is
paid the full amount of the checks without first undisputed that the four (4) checks
clearing with the drawee bank, contrary to normal issued by de Guzman were signed
banking practice. HELD: Drawer (embassy) not by petitioner at the back without
liable. BA is guilty of negligence in giving B special any indication as to how she should
treatment as a privileged client, in disregard of be bound thereby and, therefore,
elementary principles of prudence that should she is deemed to be an indorser
attend banking transactions. Hence, it should suffer thereof.
the loss. BA could not have been a HDC. b. Sec. 67, NIL: A person, who places his
signature on an instrument negotiable by
NOTE: The Camposes note that the drawer delivery, incurs all the liabilities of an
was not held liable because the decision was indorser.
based on §23 on forgery instead of §124 on c. Sec 64, NIL: Irregular Indorser
material alteration. If BA had been a HDC, i When a person not otherwise a
the Embassy could have been held liable for party to an instrument, places
the original amount of the checks thereon his signature in blank
before delivery, he is liable as an
3. CRIMINAL LIABILITY FOR BOUNCING indorser, in accordance w/ these
CHECK rules:
a. Under BP 22 1) Instrument payable to order of
3rd person: liable to payee and
PEOPLE v NITAFAN(1992) to all subsequent parties
2) Instrument payable to the
Lim issued a memorandum check which was order of maker/drawer, or
subsequently dishonored for insufficiency of funds. payable to bearer: liable to all
A memorandum check has the same effect as an parties subsequent to
ordinary check and within the ambit of BP 22. What maker/drawer
the law punishes is the issuance itself of a bouncing 3) Signs for accommodation of
check & not the purpose for which it was issued nor payee, liable to all parties
the terms & conditions relating to its issuance. subsequent to payee
2. WARRANTIES:
b. Estafa under the RPC a. Every person negotiating an instrument by
delivery or by a qualified indorsement
PACHECO v CA (1999) warrants: (Sec. 65, NIL)
ii Instrument genuine, in all respects
The essential elements in order to sustain a what it purports to be
conviction under the above paragraph are: iii He has good title to it
1. that the offender postdated or issued a check in iv All prior parties had capacity to
payment of an obligation contracted at the time the contract
check was issued; v He has no knowledge of any fact
2. that such postdating or issuing a check was done w/c would impair validity of
when the offender had no funds in the bank, or his instrument or render it valueless
funds deposited therein were not sufficient to cover vi in case of negotiation by delivery
the amount of the check; only, warranty only extends in favor
3. deceit or damage to the payee thereof. of immediate transferee
b. General or Unqualified Indorser:
PEOPLE v REYES (2005) Every person who indorses without
qualification, warrants to all subsequent
There is no estafa through bouncing checks when it HDCs: (Sec. 66, NIL)
is shown that private complainant knew that the i. instrument genuine, good title,
drawer did not have sufficient funds in the bank at capacity of prior parties
ii. instrument is at time of indorsement the instrument, he knew that the indorser was only
valid and subsisting an accommodation party.
iii. eon due presentment, it shall be The fact that the accommodation party stands only as
accepted or paid, or both, according to a surety in relation to the maker is a matter of
tenor concern exclusively between accommodation indorser
iv. if it is dishonored, and necessary & accommodated party. It is immaterial to the claim
proceedings on dishonor be duly of a holder for value. The liability of the
taken, he will pay the amt. To holder, accommodation party remains primary &
or to any subsequent indorser who unconditional.
may be compelled to pay it
3. Order of Liability among Indorsers (Sec. 68, SADAYA v. SEVILLA (1967)
NIL):
a. among themselves: liable prima facie in The solidary accommodation maker who made
the order they indorse, but proof of payment has the right of contribution from his co-
another agreement admissible accommodation maker. This right springs from an
b. but holder may sue any of the indorsers, implied promise between the accommodation makers
regardless of order of indorsement to share equally the burdens that may ensue from
c. joint payees/indorsees deemed to their having consented to stamp their signatures on
indorse jointly and severally the promissory note. The following are the rules on
reimbursement:
TUAZON v RAMOS (2005) 1. A solidary accommodation maker of a note may
demand from the principal debtor reimbursement
After an instrument is dishonored by nonpayment, for the amount he paid to the payee; and
indorsers cease to be merely secondarily liable; 2. A solidary accommodation maker who pays on
they become principal debtors whose liability the note may directly demand reimbursement
becomes identical to that of the original obligor. from his co-accommodation maker without first
The holder of a negotiable instrument need not directing his action against the principal debtor
even proceed against the maker before suing the provided that :
indorser. (a) he made the payment by virtue of a
judicial demand or
(b) the principal debtor is insolvent.
3.3. Accomodation Party
1. Accomodation Party: one who signed TRAVEL-ON, INC. v. CA
instrument as maker/drawer/acceptor/ indorser
w/o receiving value thereof, for the purpose of Travel-On was entitled to the benefit of the statutory
lending his name to some other person presumption that it was a HDC, that the checks were
2. Liability : Liable on the instrument to HFV supported by valuable consideration. The only
even if holder knew he was only an AP evidence private respondent offered was his own
testimony that he had issued the checks to Travel-On
MAULINI v. SERRANO (1914) as payee to "accommodate" its General Manager; this
In accommodation indorsement, the indorser makes claim was in fact a claim that the checks were merely
the indorsement for the accommodation of the simulated, that private respondent did not intend to
maker. Such an indorsement is generally for the bind himself thereon. Only evidence of the clearest
purpose of better securing the payment of the note, and most convincing kind will suffice for that purpose.
i.e. he lends his name to the maker not to the
holder. An accommodation note is one which the CRISOLOGO-JOSE v. CA.
accommodation party has put his name, without
consideration, for the purpose of accommodation
some other party who is to use it and is expected to
pay it.
Note: Campos disagrees with this ruling, referring
to the case of Goodman v Gaul where an
accommodation indorsement may be made for the
accommodation of the payee or holder.
Honor
A. Acceptance
9. Bills in Set
1. Practice of accepting for honor is obsolete
2. When bill may be accepted for honor. — A. composed of various parts being numbered,
When a BE has been (1) protested for and containing a reference to the other
dishonor by non-acceptance or protested parts, all of which parts constitute one bill of
for better security and (2) is not overdue lading
any person not being a party already B. Bills in set constitute one bill. (Sec. 178,
liable may, with the CONSENT of the NIL)
holder, intervene and accept the bill supra C. Right of HDCs where different parts are
protest for the honor of any party liable negotiated. — the holder whose title first
thereon or for the honor of the person for accrues is the true owner of the bill. But
whose account the bill is drawn. nothing in this section affects the right of a
3. The acceptance for honor may be for part person who, in due course, accepts or pays
only of the sum for which the bill is drawn; the parts first presented to him. (Sec. 179.,
4. where there has been an acceptance for NIL)
honor for one party, there may be a further D. Liability of holder who indorses two or
acceptance by a different person for the more parts of a set to different persons. —
honor of another party. (Sec. 161, NIL) liable on every such part, and every indorser
5. Referee in case of need — person whose subsequent to him is liable on the part he
name is inserted by the drawer of a bill and has himself indorsed, as if such parts were
any indorser to whom the holder may separate bills. (Sec. 180, NIL)
resort in case bill is dishonored by non- E. Acceptance - may be written on any part
acceptance or non-payment; option of the and it must be written on one part only. If
holder to resort to the referee (Sec. 131, the drawee accepts more than one part and
NIL) such accepted parts negotiated to different
B. PAYMENT FOR HONOR - any person may holders in due course, he is liable on every
intervene and pay bill protested for non- such part as if it were a separate bill. (Sec.
payment supra protest (Sec. 171, NIL) 181, NIL)
F. Payment - When the acceptor of a bill
6.3 INSTRUMENTS PAYABLE AT BANK drawn in a set pays it without requiring the
part bearing his acceptance to be delivered
Sec 87: Where the instrument is made payable at a up to him, and the part at maturity is
bank, it is equivalent to an order to the bank ton outstanding in the hands of a holder in due
pay the same for the account of the principal debtor course, he is liable to the holder thereon.
therein (Sec. 182, NIL)
G. Effect of discharging one of a set. — Except
BINGHAMPTON PHARMACY v FIRST NATIONAL as herein otherwise provided, the whole bill
BANK (1915) is discharged. (Sec. 183, NIL)
There is a distinction between the drawer of a check
& the maker of a note payable at a bank:
Note payable at Check
bank
maker of a note is drawer of a check is Chapter VII.
primarily liable on only liable after
the instrument dishonor DISCHARGE
Law excuses requires presentment
presentment of the within a reasonable
instrument time at the peril of
discharging the
1. Definition: Discharge
drawer
The release of all parties, whether primary or
obligation of the Breach of the duty of
secondary, from the obligation on the instrument;
maker of a note is the holder of a check
renders the instrument non-negotiable
not a conditional to present for
4. principal debtor becomes holder of
2. Discharge of the instrument at or after maturity in his own
INSTRUMENT right
5. renunciation of holder: (Sec. 122, NIL)
2.1. How discharged: (Sec 119)7 a. holder may expressly renounce his
1. By Payment in due course rights vs. any party to the instrument,
a. Sec. 88: Payment is made in due before or after its maturity
course when it is made: b. absolute and unconditional renunciation
i at or after the maturity of the of his rights against PRINCIPAL DEBTOR
payment made at or after maturity discharges the
o if payment is made before instrument
maturity and the note is c. renunciation does not affect rights of
negotiated to a HDC, the HDC w/o notice.
latter may recover on the d. Renunciation must be in writing unless
instrument. instrument delivered up to person
ii to the holder thereof primarily liable thereon
o payment to one of several material alteration – review Sec.
payees or indorsees in the 125, NIL: what constitutes material
alternative discharges the alteration (Sec. 124, NIL: material
instrument, alteration w/o assent of all parties
o but payment to one of several liable avoids instrument except as
joint payees or joint indorsers against party to alteration and
is not a discharge. The party subsequent indorsers)
receiving payment must have
been authorized by others to
receive payment. 3. OF SECONDARY PARTIES
iii in good faith and without notice
that his title is defective (Sec. 120, NIL)8
b. By whom made:
i payment in due course by or on A. by discharge of instrument
behalf of principal debtor B. intentional cancellation of signature by holder
ii payment in due course by party C. discharge of prior party
accommodated where party is D. valid tender of payment by prior party
made/ accepted for E. release of principal debtor, unless holder’s right
accommodation of recourse vs. 2ndary party reserved
c. When check deemed paid by drawee F. any agreement binding upon holder to extend
bank time of payment, or to postpone holder’s right to
i Once the holder receives the cash enforce instrument, UNLESS
ii If the bank credits the amt of the 1. made with assent of party secondarily liable,
check to the depositor’s account or
iii Where the drawee bank charges 2. right of recourse reserved.
the check to the account, G. Failure to make due presentment (Secs. 70, 144,
indicating intention to honor the NIL)
check H. failure to give notice of dishonor
2. intentional cancellation by holder I. certification of check at instance of holder
a. if unintentional or under mistake or J. reacquisition by prior party
without authority of holder, 1. where instrument negotiated back to a prior
inoperative; party, such party may reissue and further
b. where instrument or signature appears negotiate, but not entitled to enforce
to have been cancelled, burden of payment vs. any intervening party to whom
proof on party which alleges it was he was personally liable
unintentional, etc. (Sec. 123, NIL) 2. where instrument is paid by party
3. any other act which discharges a simple secondarily liable, it’s not discharged, but
contract for payment of money a. the party so paying it is remitted to his
a. ex. issuance of a renewal note— former rights as regard to all prior
novation parties
b. Refer to Art 1231 of the Civil Code
8
Suggested Mnemonics: CuPID CRRAFFT:
intentional Cancellation, Prior Party and Instrument
7
Suggested Mnemonics: PICk ROAD: Payment in Discharge, Certification, Release, Reacquisition, any
due course, Intentional Cancellation, Renunciation, Agreement, Failure to make due presentment, Failure
any Other Act, Debtor becomes holder. to give notice of dishonor, valid Tender of payment.
b. and he may strike out his own and all delivery of a bond do not warrant
subsequent indorsements, and again therefore that the corporation which
negotiate instrument, except issued the bonds has any judicial
i where it’s payable to order of 3rd capacity to act. A general indorser
party and has been paid by thereof however would be liable for such
drawer want of capacity.
ii where it’s made/accepted for
accommodation and has been paid 2.2. Debentures
by party accommodated 1. similar to bonds except that they are usually
for a shorter tem and may or may not be
accompanied by a mortgage.
2. they are often issued on the general credit of
the issuer corporation
Chapter VIII.
OTHER FORMS OF
3. Drafts and Letters of
COMMERCIAL PAPER Credit
3.1. Drafts and Letters of Credit - The
1. In General draft and the letter of credit are generally used
together to effect payment in international
1.1. Commercial papers – transactions.
1. also Negotiable instruments; 3.2. Draft a form of BE generally used to facilitate
2. merely special forms of either PNs or BEs; the transactions between persons physically remote
3. also governed by the NIL from each other.
3.3. Letters of Credit
1.2. Quasi-negotiable includes commercial 1. one person requests some other person to
paper which though not governed by the NIL, have advance money or give credit to a third
certain attributes of negotiability. person, and promises that he will repay the
same to the person making the
Can the beneficiary invoke the independence Although a stock certificate is sometimes regarded as
principle? Yes. quasi-negotiable, in the sense that it may be
To say that the independence principle may only be transferred by endorsement, coupled with delivery it
invoked by the issuing banks would render nugatory is well settled that the instrument is non-negotiable,
the purpose for which the letters of credit are used because the holder thereof takes it without prejudice
in commercial transactions. As it is, the to such rights or defense as the registered owner or
independence doctrine works to the benefit of both credit may have under the law, except in so far as
the issuing bank and the beneficiary. such rights or defenses are subject tot eh limitations
imposed by the principles governing estoppel.