COMPILATION OF DOCTRINES IN COMMERCIAL LAW

CODE OF COMMERCE

LETERS OF CREDIT

In Commercial transactions involving letters of credit, the functions assumed by a correspondent

bank are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. The notifying bank may suggest to the
seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to
accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no
liability. It follows therefore that when the petitioner refused to negotiate with the private respondent,
the latter has no cause of action against the petitioner for the enforcement of his rights under the letter.

A negotiating bank, on the other hand, is a correspondent bank which buys or discount a draft
under the letters of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship
will then prevail between the negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(FEATI BANK vs. CA)

What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and the required shipping documents
are presented to it. In turn, this arrangement assures the seller of prompt payment independent of any
breach of the main sales contract. By this so-called “independence principle” the bank determines
compliance with the letter of credit only by examining the shipping documents presented, it is precluded
from determining whether the main contract is actually accomplished or not. (BANK OF AMERICA vs. CA)

NEGOTIABLE INSTRUMENTS LAW

NEGOTIABILITY

The weight of authority in the United States is that postal money orders are not negotiable instruments,
the reason behind this rule being that, in establishing and operating a postal money order system, the government
is not engaging in commercial transactions but merely exercises a governmental power for the public benefit. It is
to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and
regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations
usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of
circumstances. (PHIL. EDUC. CO. vs. SORIANO)
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself. (CALTEX PHIL. vs. CA)

The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or
promise to pay “ not unconditional and the warrants themselves non-negotiable. There should be no question
that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. (METROBANK
vs. CA)

A negotiable instrument may, however instead of being negotiated, also be assigned or transferred. The
legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument, may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the instrument.

The words “not negotiable” , stamped on the face of the bill of lading, did not destroy its assignability, but the
sole effect was to exempt the bill from statutory provisions relative thereto, and a bill, though not negotiable, may
be transferred by assignment; the assignee taking subject to the equities between the original parties. (SESBRENO
vs. CA)

The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its
freedom to circulate freely as a substitute for money. (FIRESTONE TIRE & RUBBER vs. CA)

PAYABLE TO BEARER

Where a check is made payable to the order of “cash”, the word “cash” does not purport to be the name
of any person, and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement
of the check, but may pay it to the person presenting it without any indorsement. (ANG TEK LIAN vs. CA)

COMPLETE BUT UNDELIVERED INSTRUMENT

A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so
must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract.

Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to
him. Delivery of an instrument means transfer of possession, actual or constructive, from one person to another.
Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect to the instrument. (DEVELOPMENT BANK v.
SIMA WEI)