Chapter 7

APPLICABILITY OF NEGOTIABLE1 INSTRUMENTS LAW 2

In this case the instrument is not negotiable since it 1s

addressed to joint drawees in the alternative. Section 128
prohibits two or more drawees in the alternative or in succession.
(Emphasis supplied.)

Other examples of bills of exchange

1. Bank draft
A bank draft is a “bill of exchange drawn by a bank
upon
its correspondent bank, . . . issued at the solicitation of a
stranger
who purchases and pays therefor.” (Kohler v. First National
Bank, 289 P 47, 49, 157 Wash. 417 [1930]) It is also defined as
an “order for payment of money.” (Polotsky v. Artis
ans Savings
Bank, Del. 180 A. 791, 792, 7 WW. Harr 142 [1935]) In
the case of
Citytrust Banking Corporation v. CA (G.R. No. 92591
, 30 April
1991), Citytrust from which the private respondent purc
hased
the bank draft, was the drawer of the draft through
which it
ordered Marine Midland, the drawee bank, to pay
the amount of
US $40,000.00 in favor of Thai International Airways,
the payee.
The drawee bank acting as a “payor” bank is solely liable
for acts
not done in accordance with the instructions of the draw
er bank
or of the purchaser of the draft. The drawee bank has
the burden
of proving that it did not violate. Meanwhile, the drawe
r, if sued
by the purchaser of the draft is liable for the act of
debiting the
customer’s account despite an instruction to stop paym
ent. The
drawer has the duty to prove that he complied
with the order to
inform the drawee.
2. Demand draft
A demand draft is a bill of exchange payable
on demand.
(Arnd v. Aylesworth, 145 Iowa 185; Ward v. City Trust Com
pany,
102 N.Y.S. 50; Bank of Republic v. Republic
State Bank, 42 S.w.
2d, 27) Considered as a bill of exchange
, a draft is Said to be, like
the former, an open letter of request from, and an ord
er by, one
Person on another to pay a sum of money ther
ein mentioned to a
third person, on demand or at a future time
therein specified. (13
Words and Phrases, 371) As a matter of fact,
the term “draft” is often
used, and is the common term,
for all bills of exchange, And the
words “draft” and “bill of exchange” are used indiscri
minately,
 INSTRUMENTS LAW SIMPLIFIED
28 NEGOTIABLE
(A Guide to Passing the Bar)

Nat. Bank, 108 S.E., 811; Hinnemann y,

(Ennis v. Coshoctan
Rosenback, 39 N.Y. 98, 100, 101; Wils
on v. Bechenau, 48 Supp,
272, 275)
ing
On the other hand, a bill of exchange within the mean not
2031) does
of our Negotiable Instruments Law (Act No.
s of the drawee
operate as an assignment of funds in the hand
is the
who is not liable on the instrument until he accepts tt. This
exchange of itself does
clear import of Sec. 127, it says: “ & bill of
s of the
not operate as an assignment of the funds in the hand
ee is not
drawee available for the payment thereon and the draw
same.” In other
liable on the bill unless and until he accepts the
words, in order that a drawee may be liable on the draft and then
become obligated to the payee it is necessary that he first accepts
the same. In fact, our law requires that with regard to drafts or
bills of exchange there is need that they be presented either for
acceptance or for payment within a reasonable time after their
issuance or after their last negotiation thereof as the case may
be. (Sec. 71, Act 2031) Failure to make such presentment will
discharge the drawer from liability or to the extent of the loss
caused by the delay. (Sec. 186, ibid.) (Republic v. First National
Bank of New York, G.R. No. L-16106, 30 December 1961)
3. Trade Acceptance
This refers to a bill of exchange for the amount of specific
purchase, drawn on and accepted by the buyer for the payment
at a specified time. (Black’s Law Dictionary, 7th Ed.)

C. Check defined
A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions
of Act 2031 applicable to a bill of exchange payable on demand
apply to a check. (Sec. 185)
Acheckisa negotiable instrument that serves as a substitute
for money and as a convenient form of payment in financial
transactions and obligations. The use of checks as payment
allows commercial and banking transactions to proceed without
the actual handling of money, thus, doing away with the need t©
 Chapter 1
APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW

physically count bills and coins whenever payment is made. It

permits commercial and banking transactions to be carried
out
quickly and efficiently. (Mitra v. People, G.R. No. 191404 [2010])
A check 18 not only a written evidence of a contract right but
piso, 9 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. (DBR
v. Sima Wei,
G.R. No. 85419 [1993])

BAR QUESTION:

Bar Exam Year 2012

MCQ No. 25
A check is —
a. A bill of exchange.
b. The same as a promissory note.
c. Is drawn by a maker.
d. Anon-negotiable instrument.

Author’s suggested answer: A

Under Sec. 185 of the Negotiable Instruments Law, a check is a bill
of exchange drawn on a bank payable on demand. Except as provided,
the provisions of the NIL applicable to a bill of exchange payable on
demand apply to a check. (Note: In MCQ's, explain only when required)

Parties in a check
1. Drawer

2. Drawee

3... Payee
Acheck is a special kind of bill of exchange where the drawee
normally is a bank. Under Sec. 62, a bank is not liable until it
accepts the instrument. This is the reason why a check is required
30 NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED
(A Guide to Passing the Bar)

to be presented for payment and as a matter of procedure, a

verification in addition to the clearing process is observed by the
drawee bank — the purpose is to limit its liability.
While a check is a negotiable instrument, it does not produce
the effect of payment that would extinguish the obligation but
only when it has been encashed. Neither the creditor can be
compelled to accept the check as a mode of payment. Art. 1249 of
the Civil Code provides that:
“The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have

x x x.” (Emphasis supplied.)

As held in the case of Associated Bank (Now Westmont
Bank) v. Tan, G.R. No. 156940, 12 December 2004), a check is not
legal tender or money and its value can properly be transferred
to a depositor’s account only after the check has been cleared by
the drawee bank.
Under ordinary banking practice, after receiving a check
deposit, a bank either immediately credits the amount to a
depositor’s account; or infuses value to that account only after
the drawee bank shall have paid such amount, or until the same
is encashed.

Within what time a check must be presented

A check must be presented for payment within a reasonable
time after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay. (Sec. 186)
Section 193 provides what constitutes reasonable time, !?
wit:
 : ‘ Chapter 1 31
APPLICABILITY OF NEC *OTIABLE INSTRUMENTS
LAW

a In determining
74 2
whatis. a ‘reasonable time’
: ,
regard
is to be had to the nature of the instrument, the usage
of trade or business with respect to such instruments,
and the facts of the particular case.”
In the case of Wong v. CA (351 SCRA 100 [2001]), the
Supreme Court said that, by current benking practice, a check
becomes stale after more than six months or 180 days. In this
case, the respondent deposited the checks 157 days after the date
of the check. Hence, said checks cannot be considered stale.
Further, in the case of International Corporate Bank v.
Gueco (351 SCRA 517 [2001]), the following are the salient
points:
1. Asstale check is one which has not been presented for
payment within a reasonable time after its issue. It is
valueless and therefore should not be paid;
2. An instrument not payable on demand must be
presented for payment on the day it falls due;
3. When the instrument is payable on demand,
presentment must be made within a reasonable time
after its issue;

4. In the case the bill of exchange, presentment is

sufficient if made within a reasonable time after the
last negotiation.

It was ruled also in this case that, a check must be presented

for payment within a reasonable time after its issue, and in
determining what is a “reasonable time,” regard is to be had
to the nature of the instrument, the usage of trade or business
with respect to such instruments, and the facts of the particular
case. The test is whether the payee employed such diligence as
a prudent man exercises in his own affairs. This is because the
nature and the theory behind the use of a check points to its
immediate use and payability.
A check, as distinguished from an ordinary bill of exchange,
is supposed to be drawn against a previous deposit of funds
ordinarily intended for immediate payment. x x x A bank is
 LAW SIMPLIFIED
32 NEGOTIABLE INSTRUMENTS
(A Guide to Passing the Bar)

, up to only
under no obligation to make part payment ona check
drawer’s fund. x x x Failure of a bank to pay
the amount of the
it is sufficient,
the check of a merchant or trader, when the depos
any proof of
entitles the drawer to substantial damages without
])
actual damages. (Moran v. CA, G.R. No. 105836 [1994
Likewise, a check of itself does not operate as an assignment
of any part of the funds to the credit of the drawer with the bank,
and the bank is not liable to the holder unless and until it accepts
or certifies the check. (Sec. 189)
As held in Security Bank and Trust Co. v. CA (291 SCRA 33
[1998]), the following are of material importance:
1. There was no contractual relation created between the
drawee bank and the payee as a result of the payment
by the former of the amount of the check;
2. Drawee bank simply paid (or is paying) the check for
and in behalf of the drawer;
3. If the check was dishonored upon presentment for
payment, the payee cannot sue the drawee bank but
only the drawer for lack of privity; and
The funds from which the check shall be paid belong to the
drawer and merely deposited with the drawee bank.

Kinds of Checks

1. | Manager’s check — drawn by the bank’s manager upon

the bank itself payable to third person and is similar to
cashier’s check both as to effect and use.
A manager’s check is one drawn by a bank’s manager, upon
the bank itself. It is settled that it stands on the same footing as
a certified check, which is deemed to have been accepted by the
bank that certified it, as it is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity and
honor behind its issuance. By its peculiar character and general
use in commerce, a manager’s check is regarded substantially
to be as good as the money it represents. (Philippine National
Bank v. Tria, G.R. No. 193250, 25 April 2012)
 Chapter 1 33
APPLICABILITY OF NEGOTIABLE INSTRUMENTS
LAW
An ordinary check ref
ers
0 a bill of exchange drawn by a
depositor (drawer) on a bank (drawee), requesting the latter to
pay a person named therein (payee) or to the order of the payee
or to the bearer, a named sum of money. The issuance of the
check does not of itself operate as an assignment of any part of
the funds in the bank to the credit of the drawer. Here, the bank
becomes liable only after it accepts or certifies the check. After
the check is accepted for payment, the bank would then debit the
amount to be paid to the holder of the check from the account of
the depositor-drawer.
There are checks of a special type called manager’s or
cashier’s checks. These are bills of exchange drawn by the bank’s
manager or cashier, in the name of the bank, against the bank
itself. Typically, a manager’s or a cashier’s check is procured from
the bank by allocating a particular amount of funds to be debited
from the depositor’s account or by directly paying or depositing
to the bank the value of the check to be drawn. Since the bank
issues the check in its name, with itself as the drawee, the check
is deemed accepted in advance. Ordinarily, the check becomes
the primary obligation of the issuing bank and constitutes its
written promise to pay upon demand.
Nevertheless, the mere issuance of a manager’s check does
not ipso facto work as an automatic transfer of funds to the account
of the payee. In case the procurer of the manager’s or cashier’s
check retains custody of the instrument, does not tender it to
the intended payee, or fails to make an effective delivery, the
instrument remained undelivered. (Rizal Commercial Banking
Corporation v. HiTri Development Corporation, G.R. No.
192413, 13 June 2012)

BAR QUESTION:
Bar Exam Year 2012

MCQ No. 18
In pavment for his debt in favor of X, Y gave X a Manager’s
Check / "i amount of Php100,000.00 dated 30 May 2012.
 LAW SIMPLIFIED
NEGOTIABLE INSTRUMENTS
(A Guide to Passing the Bar)
-

— A Manager’,
Which phrase best completes the statement
Check:
a. Isa check issued by a manager of a bank for his own
account.

b. Isacheck issued by a manager of a bank in the name of

the bank against the bank itself for the account of the bank.
c. Is like any ordinary check that needs to be presented
for payment also.
d. Is better than a cashier’s check in terms of use and
effect.

Author’s suggested answer: B

A manager’s check is one drawn by a bank’s manager, upon the
bank itself. It is settled that it stands on the same footing as a certified
check, which is deemed to have been accepted by the bank that certified
it, as it is an order of the bank to pay, drawn upon itself, committing
in effect its total resources, integrity and honor behind its issuance.
By its peculiar character and general use in commerce, a manager's
check is regarded substantially to be as good as the money it represents.
(Philippine National Bank v. Tria, G.R. No. 193250, 25 April
2012) (Note: In MCQ's, explain only when required)
2. Cashier’s checks — is a check of the bank’s cashier on his
own or another check. It is a bill of exchange drawn by
the cashier of a bank upon the bank itself, and accepted
in advance by the act of its issuance. It is really the
bank’s own check and may be treated as a promissory
note with the bank as a maker. The check becomes the
primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand.
The mere issuance of it is considered an acceptance
thereof. If treated as promissory note, the drawer
would be the maker and in which case, the holder need
not prove presentment for payment or present the bill
to the drawee for acceptance. (Internation
al Corporate
Bank v. Gueco, supra)
 APPLIC . ABILITY
TY Chapter
OF OR NEGOTIABLE
Nene 1 35
INSTRUMENTS LAW

In the case of Republic v. PNB (G.R. No. L-16106, 30

December 1961)
, a cashier’ s check is a check of the bank’s cashier
on his or anothe t bank. It is in effect a bill of —
by
:
a bank on itself and a :
, ct a
: Perecdrawn
bill of exchange Lc as
(10 CJS. 409) ccepted in advance by the act of issuance.

A cashier’s check issued on request of a depositor is the

substantial equivalent of a certified check and the deposit
represented by the check Passes to the credit of the checkholder,
who is thereafter a depositor to that amount. (Lummus Cotto
n
Gin Co. v. Walker, 70 So. 754, 756,
195 Ala. 552)
A cashier’s check, being merely a bill of exchange drawn by
a bank on itself, and accepted in advance by the act of issuance,
is not subject to countermand by the payee after indorsement,
and has the same legal effects as a certificate deposit or a certified
check. (Walker v. Sellers, 77 So. 715, 201 Ala. 189) (supra)

3. Certified checks — where a check is certified by the bank

on which it is drawn, the certification is equivalent to
an acceptance. (Sec. 187) It likewise guarantees the
availability of funds for the check. And, where the
holder of a check procures it to be accepted or certified,
the drawer and all indorsers are discharged from
liability thereon. (Sec. 188)
4. Stale checks - not presented or encashed within six
months.

BAR QUESTION:

Bar Exam Year 2012

MCQ No. 17

Astale check is a check —

a. That cannot anymore be paid although the underlying
obligation still exists.
b. That cannot anymore be paid and the underlying
obligation under the check is also extinguished.
36 NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED
(A Guide to Passing the Bar)

c. That can still be negotiated or indorsed so that whoever

is the holder can.
d. Which has not been presented for payment within a
period of 30 days.

Authors’ suggested answer: A

It is settled that a stale check is one which has not been presented
for payment within a reasonable time after its issue. It is valueless
and therefore should not be paid. (International Corporate Bank
v. Gueco, 351 SCRA 517 [2001]) It is valueless in a sense that it is
no longer negotiable. However, the check by becoming stale, it does
not extinguish the obligation. (Note: In MCQ’s, explain only when
required)

5. Crossed check — bears two parallel lines across its face

normally on the upper left side diagonally and signify-
ing either for payee’s account only or for deposit only.
A crossed check is defined as a check crossed with
two lines, between which are either the name of a bank
or the words “and company,” in full or abbreviated. In
the former case, the banker on whom it is drawn must
not pay the money for the check to any other than the
banker named; in the latter case, he must not pay it to
any other than a banker. (Black’s Law Dictionary 301,
4th Ed., citing 2 Steph. Comm. 118, note C; 7 Exch. 389;
[1903] A.C. 240; Farmers’ Bank v. Johnson, King & Co.,
134 Ga. 486, 68 S.E. 65, 30 L.R.A., N.S. 697)
In one case, it was ruled that the crossing of one
of the subject checks should have put petitioner on
guard; it was duty-bound to ascertain the indorser’s
title to the check or the nature of his possession. And
crossing of the checks mean:
a. The check may not be encashed but only deposited
in the bank;
The check may be negotiated only once to
one
who has an account with a bank; and
 Chapter 1 =
APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW

c. The act of crossing the check serves as a warning

to the holder that the check has been issued for
a definite purpose so that he must inquire if he
has received the check pursuant to that purpose,
otherwise, he is nota holder in due course. (Traders
Royal Bank v. Radio Philippines Network, Inc.,
G.R. No. 138510 [2002])
A crossed check with the notation “account payee only”
can only be deposited in the named payee’s account. It is gross
negligence for a bank to ignore this rule solely on the basis
of a third party’s oral representations of having a good title
thereto.
The nature of crossed checks should place a bank on notice
that it should exercise more caution or expend more than a
cursory inquiry, to ascertain whether the payee on the check has
authorized the holder to deposit the same in a different account.
It is well to remember that “[t]he banking system has become an
indispensable institution in the modern world and plays a vital
role in the economic life of every civilized society. Whether as
mere passive entities for the safe-keeping and saving of money
or as active instruments of business and commerce, banks have
attained an [sic] ubiquitous presence among the people, who
have come to regard them with respect and even gratitude and,
above all, trust and confidence. In this connection, it is important
that banks should guard against injury attributable to negligence
or bad faith on its part. As repeatedly emphasized, since the
banking business is impressed with public interest, the trust
and confidence of the public in it is of paramount importance.
Consequently, the highest degree of diligence is expected, and
high standards of integrity and performance are required of it.
(Equitable Banking Corporation v. Special Steel Products, Inc.,
G.R. No. 175350, 13 June 2012)
Thus, in this case, the Supreme Court ruled that a bank can
be held liable for quasi-delict for allowing the crossed check to be
deposited in the account of a person other than the Payee named
in the check and eventually allowing the depositor to withdraw
 SIMPLIFIED
38 NEGOTIABLE INSTRUMENTS LAW
(A Guide to Passing the Bar)

the amount of the check. A quasi-delict is an act or Omission,

there being fault or negligence, which causes damage to another.
Quasi-delicts exist even without a contractual relation between
the parties

BAR QUESTION:
Bar Exam Year 2005
No. 2(a) — Definition of Crossed Check and its Effects

What is a crossed check? What are the effects of crossing a

check? Explain.

Author’s suggested answer:

A crossed check is a check crossed with two parallel lines drawn
diagonally across its face usually at the upper left corner signifying
that check may not be encashed but only for deposit, the check may
be negotiated only once to one who has an account with the bank and
that the check serves as a warning to the holder that the check has been
issued for a definite purpose.
In one case decided by the Supreme Court, it was ruled that
the crossing of one of the subject checks should have put petitioner
bank on guard; it was duty-bound to ascertain the indorser’s title to
the check or the nature of his possession. And crossing of the checks
mean:
a. The check may not be encashed but only deposited in the
bank;
b. The check may be negotiated only once to one who has an
account with a bank; and
c. The act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpos
so that he must inquire if he has received the check pursuan!
to that purpose, otherwise, he is not a holder in due course.
(Traders Royal Bank v. Radio Philippines Network,
Inc., G.R. No. 138510 [2002])
 Chapter 1 ?
APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW

| Bar Exam Year 2004

No. 3(d) — Crossed check

Distinguish clearly (1) crossed checks from cancelled checks.

(2%)
Author’s suggested answer:
A crossed check is a check crossed with two parallel lines drawn
diagonally across its face usually at the upper left corner signifying
that check may not be encashed but only for deposit, the check may be
negotiated only once to one who has an account with the bank and that
the check serves as a warning to the holder that the check has been issued
for a definite purpose. Whereas, a cancelled check is a check bearing a
notation that it has been paid by the bank on which it was drawn. A
cancelled check is often used as evidence of payment marked or stamped
“paid” and/or “cancelled.”
6. Bad checks — a check that is not honored because the
account either contains insufficient funds or does not
exist. Also termed hot check; worthless check; rubber
check; bounced check; cold check; bogus check; false
check; dry check.
Blank check — a check signed by the drawer but left
blank as to the payee or the mount, or both.
Cancelled check ~ a check bearing a notation that it
has been paid by the bank on which it was drawn.
A cancelled check is often used as evidence of Ppay-
ment.

Memorandum check — a check that a borrower gives

to a lender for the amount of the short-term loan, with
the understanding that it is not to be presented for
payment but will be redeemed by the borrower when
the loan falls due.
10, Traveler’s check — a cashier’s check that must be
signed by the purchaser at the time of purchase and
countersigned when cashed, An instrument that (1)
40 NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED
(A Guide to Passing the Bar)

is payable on demand, (2) is drawn on or Payable

at or through a bank, (3) is designated by the term
“traveler’s check” or by a substantially simija,
term, and (4) requires, as a condition to payment,
a countersignature by a person whose specimen
signature by a person whose specimen signature
appears on the instrument. (Black’s Law Dictionary, 7¢h
Ed. No. 6-10, p. 230.)

Distinction between checks and bill of exchange

Ll. As to drawee: Under Sec. 185, a check is always and
must necessarily be a bank while a bill of exchange.
Sec. 126 only requires that the same must be addressed
to another not necessarily a bank. A bill of exchange
may be drawn against an individual, corporation or a
bank;

It follows that in a check, since the drawee is a bank it

is therefore drawn on a deposit which is not in the case
of a bill of exchange;
A check is always classified as a bill of exchange while
a bill of exchange is not always in the form of a check.
Since a check is always drawn ona bank, it presupposes
deposit of funds in the hands of the drawee. Whereas,
in a bill of exchange, the funds in the hands of the
drawee does not necessarily presupposes deposit of
funds;
As to presentment for payment: Under Sec. 186,
a check must be presented for payment within a
reasonable time after its issue otherwise the drawer
will be discharged from liability. Whereas, under Sec.
71, where a bill is not payable on demand, presentment
must be made on the day it falls due. Where it is
payable on demand, presentment must be made
within a reasonable time after its issue, except
that in
the case of a bill of exchange, presentment for
payment
will be sufficient if made within a reasonable
time afte!
the last negotiation thereof:
 Chapter 1
APPLICABILITY OF NF GOT 41
IABLE INSTRUMENTS LAW

thee of exchange may be

presented for payment
within reasonable time after its las
t negotiation while
a check under Sec. 186 must be presented
for payment
within a reasonable time after its issu
e;
As to presentment for acceptance: Under Sec. 143, a bill
of exchange must be presented for acceptance where
the bill is payable after sight, or it is necessary to fix
the maturity, when it expressly stipulates or where the
bill is payable elsewhere other than the residence or
place of business of the drawee. A check need not be
presented for acceptance though in banking practice
the same is not prohibited;
As to time payable: A check is always payable on de-
mand while a bill of exchange under Sec. 1, par. (c),
may either be payable on demand or at a fixed deter-
minable future time;
Under Sec. 188, when the holder of a check procures it
to be accepted or certified, the drawer and all indorsers
are discharged from liability. In a bill of exchange, mere
acceptance of the instrument does not discharge from
liability the parties secondarily liable.

Important principles in banking practice

1. Bank transactions pass through a succession of bank
personnel whose duty is to check and countercheck
transactions for possible errors. In the instant case, the
teller should not have accepted the local deposit slip
with the cashier’s check, that on its face was clearly a
regional check without calling the depositor’s attention
to the mistake at the very moment this was presented
to her. Neither should everyone else down the line who
processed the same check for clearing have allowed
the check to be sent to Central Bank. Depositors do
not pretend to be past master of banking technicalities,
much more of clearing procedures. As soon as their
deposits are accepted by the bank teller, they wholly
repose trust in the bank personnel’s mastery of banking,
 INSTRUMENTS LAW SIMPLIFIED
NEGOTIABLE
; (A Guide to Passing the Bar)

and
their and the bank’s sworn profession of diligence
(Tan
meticulousness in giving irreproachable service.
1994)
v. CA, G.R. No. 108555, 20 December
In this case, the respondent bank cannot exculpate
itself from liability by claiming that its depositor
“impliedly instructed” the bank to clear his check
with the Central Bank by filling a local check deposit
slip. Such posture is disingenuous, to say the least.
First, why would RCBC follow a patently erroneous
act born of ignorance or inattention or both. Second,
bank transactions pass through a succession of bank
personnel whose duty is to check and countercheck
transactions for possible errors. In the instant case, the
teller should not have accepted the local deposit slip
with the cashier’s check that on its face was clearly a
regional check without calling the depositor’s attention
to the mistake at the very moment this was presented
to her. Neither should everyone else down the line who
processed the same check for clearing have allowed
the check to be sent to Central Bank. Depositors do
not pretend to be past master of banking technicalities,
much more of clearing procedures. As soon as their
deposits are accepted by the bank teller, they wholly
repose trust in the bank personnel’s mastery of banking,
their and the bank’s sworn profession of diligence and
meticulousness in giving irreproachable service.
The bank is not expected to be infallible but, it
must bear the blame for not discovering the mistake
of its teller despite the established procedure requiring
the papers and bank books to pass through a battery
of bank personnel whose duty it is to check and
countercheck them for possible errors. (supra)
Banks handle daily transactions involving millions of
pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of
their employees and officials is far greater than those
of ordinary clerks and employees. For obvious reasons,
 APPLI we Chapter 1
? AICABILITY OF NEGOTIABLE INSTRUMENTS LAW

the banks are expected to exercise the highest degree

of diligence in the selection and supervision of their
employees. (BPI v. CA, G.R. No. 102383, 26 November
1992)

The weight of authority is to the effect that “the

possession of check on a forged or unauthorized
indorsement is wrongful, and when the money is
collected on the check, the bank can be held for moneys
had and received.” The proceedsare held for the ri ghtful
owner of the payment and may be recovered by him.
The position of the bank taking the check on the forged
or unauthorized indorsement is the same as if it had
taken the check and collected without indorsement at
all. The act of the bank amounts to conversion of the
check.
When the Bank paid the checks so endorsed
notwithstanding that title had not passed to the
endorser, it did so at its peril and became liable to the
payee for the value of the checks. This liability attached
whether or not the Bank was aware of the unauthorized
endorsement. (Associated Bank v. CA, G.R. No. 89802,
7 May 1992)
In this case, the petitioners were negligent when
they permitted the encashment of the checks by
Sayson. The Bank should have first verified his right
to endorse the crossed checks, of which he was not the
payee, and to deposit the proceeds of the checks to his
own account. The Bank was by reason of the nature of
the checks put upon notice that they were issued for
deposit only to the private respondent’s account. Its
failure to inquire into Sayson’s authority was a breach
of a duty it owed to the private respondent. (supra)
The banking industry is impressed with public
interest. Consequently, the highest degree of diligence
is expected, and high standards of integrity and
performance are even required of it. By the nature of
its functions, a bank is under obligation to treat the
 NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED
(A Guide to Passing the Bar)

accounts of its depositors with meticulous care ang

always to have in mind the fiduciary nature of jt.
relationship with them. (Solid Bank v. Arrieta, G.R.
No. 152720, 17 February 2005)
A bank is under no obligation to make part payment on
a check, up to only the amount of the drawer’s funds,
where the check is drawn foranamountlarger than what
the drawer has on deposit. Such a practice of paying
checks in part has never existed. Upon partial payment,
the check holder could not be called upon to surrender
the check, and the bank would be without a voucher
affording a certain means of showing the payment.
The rule is based on commercial convenience, and any
rule that would work such manifest inconvenience
should not be recognized. A check is intended not only
to transfer a right to the amount named in it, but also to
serve the further purpose of affording evidence for the
bank of the payment of such amount when the check
is taken up. (Moran v. CA, G.R. No. 105836, 7 March
1994)
In the case of Prudential Bank v. CA (G.R. No. 125536,
16 March 2000), citing Simex International (Manila),
Inc. v. Court of Appeals (183 SCRA 360, 367 [1990]),
and Bank of Philippine Islands v. IAC, et al., (206
SCRA 408, 412-413 [1992]), the Supreme Court
had occasion to stress the fiduciary nature of the
relationship between a bank and its depositors and the
extent of diligence expected of the former in handling
the accounts entrusted to its care, thus:

In every case, the depositor expects the bank to treat his

account with the utmost fidelity, whether such account consists
only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo, and
as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it a5
and to whomever he directs. A blunder on the part of bank, such
 Chapter 1 45
APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW

as the dishonor of a check without good reason, can cause the

depositor not a little embarrassment if not also financial loss and
perhaps even civil and criminal litigation.
The paint is that as a business affected with public interest
and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their
relationship. .. .
In the case of Philippine National Bank v. Court of
Appeals (G.R No. 126152, 28 September 1999), it was held that
“a bank is under obligation to treat the accounts of its depositors
with meticulous care whether such account consists only of a
few hundred pesos or of millions of pesos. Responsibility arising
from negligence in the performance of every kind of obligation is
demandable. While petitioner’s negligence in this case may not
have been attended with malice and bad faith, nevertheless, it
caused serious anxiety, embarrassment and humiliation.” Hence
[the Court] ruled that the offended party in said case was entitled
to recover reasonable moral damages.
Even if malice or bad faith was not sufficiently proved in
the instant case, the fact remains that petitioner has committed
a serious mistake. It dishonored the check issued by the private
respondent who turned out to have sufficient funds with
petitioner. The bank’s negligence was the result of lack of due
care and caution required of managers and employees of a firm
engaged in so sensitive and demanding business as banking.
Accordingly, the award of moral damages by the respondent
Court of Appeals could not be said to be in error nor in grave
abuse of its discretion. (supra)
8. Asthe banking business is affected with public interest,
and because of the nature of their functions, banks
are under obligation to treat the accounts of their
depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. The law
imposes a duty of diligence, the standard of diligence
expected of one engaged in the banking business. (BPI
v. CA, G.R. No. 136202, 25 January 2007)
 LIFIED
46 NEGOTIABLE INSTRUMENTSI AW SIMP
(A Guide to Passing the Bar)

D. Bills in set

Bills in set constitute one bill

Where a bill is drawn in a set, each part of the set being
numbered and containing a reference to the other parts, the
whole of the parts constitutes one bill. (Sec. 178)
A bill in a set is one negotiable instrument composed of
several parts (or pages), each part being numbered and containing
a reference to the other parts, the whole of the parts constituting
but one bill.

Illustration:

First Part

Page 1 of 2 SSC-R Manila

Exchange for Php100,000.00 24 July 2015
First

10 days after sight of this First of Exchange

(Second part unpaid), pay to the order of Federer
Php100,000.00
To: Roddick Sgd. Dimitrov
Bulacan

Second part
Page 2 of 2 SSC-R Manila
Exchange for Php100,000.00 24 July 2015
Second
10 days after sight of this Second of Exchange
(First part unpaid), pay to the order of Federer
Php100,000.00
To: Roddick Sgd. Dimitrov
Bulacan
 sk te as won, Chapter 1 “
APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW
Purpose of a bill in set
The purpose of drawing bills in set is to increase the
probability that at least one part of the bill would reach its
destination.

Right of holders where different parts are negotiated

Where two or more parts of a set are negotiated to different
holders in due course, the holder whose title first accrues is, as
between such holders, the true owner of the bill. But nothing
in this section affects the right of a person who, in due course,
accepts or pays the parts first presented to him. (Sec. 179)
In the preceding illustration, if Federer negotiates the first
part of the bill to Agassi on 26 July 2015, and the second part
to Bjorn on 28 July 2015, both are holders in due course, Agassi
is considered as the true owner as his title first accrues. As to
drawee, Roddick should accept or pay only Agassi. However,
if Bjorn presented his bill for acceptance and payment ahead of
Agassi and Roddick accepts and pays the second part in due
course, Roddick is not liable to Agassi.

Liability of holder who indorses two or more parts of a set to

different persons
Where the holder of a set indorses two or more parts to
different persons, he is liable on every such part, and every
indorser subsequent to him is liable on the part he has himself
indorsed, as if such parts were separate bills. (Sec. 180)

Acceptance of bill drawn in sets

The acceptance may be written on any part and it must be
written on one part only. If the drawee accepts more than one
part and such accepted parts negotiated to different holders in
due course, he is liable on every such part as if it were a separate
bill. (Sec. 181)
Simply put, the drawee in bills in set is required to accept
only one part of the bill and the acceptance thereof may be written
on the said (one) part of the set. Such that if the drawee accepted
 INSTRUMENTS | AW SIMPLIFIED
48 NEGOTIABLE Bar)
(A Guide to Passing the

its acceptance on every bil})

all the parts of the bill (by writing
and these parts of the pill were
subsequently negotiated, then the
of the bill as if it werea separate
drawee is liable on every part
there are two parts of the bill,
bill. In the given illustration, since
100,000.09
then upon negoti ation, the drawee is liable foronlyPhpfor one part
drawee is liable
each. But if not ne gotiated, the
of the bill, Php100,000.00.

wn in sets
Payment by acceptor of bills dra
When the acceptor of a bill drawn in a set pays it without
ered up to
requiring the p art bearing his acceptance to be deliv
him, and the part at m aturity is outstanding in the hands of a
holder in due course, he is liab
le to the holder thereon. (Sec,
182)
In other words, the drawee upon paying the bill, before
set
he accepts, he must require that part of the bill in a
ren der ed
bearing his acceptance to be delivered to him or sur
for payment. The acceptor should pay the part bearing his
acceptance. Should he not do so, and the part at maturity is
still outstanding in the hands of a holder in due course, then
he is liable to the holder.

Effect of discharging one of a set

Except as herein otherwise provided, where any one part of
a bill drawn ina set is discharged by payment or otherwise, the
whole bill is discharged. (Sec. 183)
Discharging by payment of one set except for Secs. 180, 181,
and 182, the whole bill is discharged. This is simply because that
part constituting bills in set is regarded as one bill. Payment ina
part of the bill is payment in whole.

E. Inland and Foreign Bills of Exchange

An inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within the Philippines.
Any other billis a foreign bill. Unless the contrary appears 00 the
face of the bill, the holder may treat it as an inland bill. (Sec. 129)
 Chapter
APPL BITTY OF NEGOTIABLE Ps SSTRUME
IRUMEN NTSTS LAW

Kinds of Bills of I xchange:

1. Inland Bill drawn and pavable within the Philip

pines

2. Foreign
_ Bill drawn in the Philipp
i ines but payable
outside o ’ 1 of the country
but
out de
pay. of the
; country or drawn outside
Pe) ible in the Philippines
’ | or drawn and payable |
outside the Philippines.
.

Illustration:
1. Inland Bill

24 July 2015

SSC-R Manila
Pay to Federer or order Php100,000.00 on demand.
To: Roddick
Bustos, Bulacan

Sgd. Dimitrov

2. Foreign Bill

24 July 2015
Switzerland

Pay to Federer or order Php100,000.00 on demand.

To: Roddick
Bustos, Bulacan
Sed. Dimitrov

Section 118 requires that a protest is necessary in case

of foreign bills, and failure to do so will discharge the parties
secondarily liable. However, while it is necessary to determine
Whether the bill is foreign or an inland bill for purposes of
protest, if the contrary appears on the face of the bill, the holder
 50 NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED
(A Guide to Passing the Bar)

may treat it as an inland bill. This simply means that eithe; the
country where the bill is drawn and/or payable must appear
or be printed on the face of the bill. Otherwise, the holde; ic
privileged to treat it as an inland bill. Once treated as an inland
bill, protest is no longer necessary.
A protest under Sec. 154 is made by a notary public or py
any respectable resident of the place where the bill is dishonored
in the presence of two or more credible witnesses specifying
as mandated by Sec. 153, annexed to the bill or must contain ;
copy thereof, and must be under the hand and seal of the nota ry
making it and must specify:
The time and place of presentment;

b. The fact that presentment was made and the manner

thereof;
c. The cause or reason for protesting the bill; and
d. The demand made and the answer given, if any, or the
fact that the drawee or acceptor could not be found.

FE When bill may be treated as promissory note

1. The drawer and drawee are the same person; or
2. The drawee is a fictitious person; or
3. The drawee person not having capacity to contract,
the holder may treat the instrument at his option
either as a bill of exchange or as a promissory note.
(Sec. 130);
4. Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat
it as either at his election. (Sec. 17[e])
If the drawer and the drawee are the same person, to whom
is the drawer commanding or giving order to pay? As such, if
treated as a note, the maker becomes the drawer and the liability
now is primary as compared to a drawer which is merely
secondary.