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1 | N E G O T I A B L E I N S T R U M E N T S S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o

But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
RECITATIONS AND LECTURE NOTES
FROM THE CLASSES OF DEAN JOSE R. SUNDIANG
SAN BEDA COLLEGE OF LAW
MENDIOLA, MANILA


I. GENERAL CONSIDERATIONS

Q: What is a negotiable instrument?
A negotiable instrument is a written contract for the payment of
money which complies with the requirements of Section 1, NIL; which by its
form and on its face is intended as a substitute for money and passes from
hand to hand as money so as to give the holder in due course the right to
hold the instrument free from personal defenses available to prior parties.

Q: What are the stages in the life of a negotiable instrument?

BILL OF EXCHANGE PROMISSORY NOTE
1. the mechanical act of writing


2. issuance, first delivery to the payee

3. negotiation, transfer from one
person to another so as to constitute
the transferee a holder

4. presentment for acceptance,
applicable only to CERTAIN TYPES of
bills of exchange, presentment to the
drawee in order for him to signify his
assent to the order of the drawer

5. acceptance or dishonor by non-
acceptance
*drawee either accepts or dishonors
the bill
1. preparation and signing (writing)

2. issuance, first delivery to the payee

3. negotiation

4. presentment for payment or
dishonor by non-payment

5. notice of dishonor

6. discharge

**presentment for acceptance is not
necessary in promissory notes because
the drawer already knows that he is
liable to pay, and his liability is primary
in character.

6. presentment for payment or
dishonor by non-payment
*drawee either pays the bill or refuses
to pay it

7. notice of dishonor
*in case of dishonor, notice of
dishonor is required to be given to
persons secondarily liable, informing
them that the maker or
drawer/acceptor refused to pay or
accept the instrument

8. protest (required only for FOREIGN
bills of exchange)

9. discharge

Q: What are the primary kinds of negotiable instruments?
1. Promissory Notes
2. Bills of Exchange
3. Checks

PROMISSORY NOTE BILL OF EXCHANGE CHECK
An unconditional
promise in writing made
by one person to
another, signed by the
maker, engaging to pay
on demand or at a fixed
determinable future
time a sum certain in
money to order or to
bearer
An unconditional order
in writing addressed by
one person to another,
signed by the person
giving it, requiring the
person to whom it is
addressed to pay on
demand or at a fixed
determinable future
time, a sum certain in
money to order or to
bearer
A bill of exchange drawn
on a bank, payable on
demand

Q: Are negotiable instruments legal tender?

2 | N E G O T I A B L E I N S T R U M E N T S S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o


But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
No; they are not fully guaranteed by the government to be
used for the payment of debts, as required by sec.52 of the new central
bank act. Also, art.1249, NCC specifically states that negotiable papers
and other mercantile documents do not produce the effect of payment
until they are encashed or when through the fault of the creditor, they
have been impaired. (art.1249, NCC; sec.52,NCBA)

Q: What is the difference between a bill of exchange and a promissory
note?

BILL OF EXCHANGE PROMISSORY NOTE
- is in the nature of an unconditional
ORDER

- signed by the DRAWER

- requires ACCEPTANCE before
presentment for payment
- in the nature of an unconditional
PROMISE

- signed by the MAKER

- acceptance prior to presentment for
payment is not necessary

Q: Differentiate a bill of exchange from a check?

BILL OF EXCHANGE CHECK
-may or may not be drawn on a bank


-payable on demand or at a fixed
determinable future time

-requires presentment for acceptance


-may or may not be drawn on a deposit
of funds

-death of the drawer does not revoke
the drawees authority to pay


-always drawn on a bank


-always payable on demand


-presentment for acceptance is not
necessary in the case of checks

-drawn on a deposit of funds in the
custody of the bank

-death of drawer revokes the banks
authority to pay


-must be presented for payment within
a reasonable time AFTER ITS LAST
NEGOTIATION
-must be presented for payment within
a reasonable time AFTER ITS ISSUE


II. NEGOTIABILITY vs. NON-NEGOTIABILITY

Q: What are the essential requisites of a negotiable instrument?
An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing, and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named therein with reasonable certainty
(sec.1, NIL)

Q: How is negotiability determined?
1. By considering only what appears on the face of the
instrument
2. By ascertaining the presence/absence of the requisites
under sec.1, NIL
3. By considering the whole of the instrument

*NB: if what appears on the face of the instrument is
ambiguous, the provisions of Sec.17, NIL should be followed


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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
Q: Does the phrase a sum certain in money mean the same thing as a
certain sum of money?
No, they dont mean the same thing. A sum certain in money
refers to a fixed amount, whereas A certain sum of money makes no
reference to a fixed amount.

Q: would an additional fee to the principal amount payable and stated
on the face of the instrument affect negotiability?
No, the instrument is still negotiable as per sec.2, NIL

Q: what are the requirements for the said installments?
1. The number of installments must be stated
2. The maturity dates for each installment must be stated

Q: Suppose the 2
nd
installments maturity date wasnt fixed?
The instrument is still negotiable, the installment shall be
payable on demand

Q: the instrument says I promise to pay Juan php100,000 from my salary
in san beda college of law. Is it negotiable>
No, the promise is conditional (on the availability of funds), it
contravenes sec.1, NIL

Q: Is there a difference between the phrase bearer, Juan dela Cruz and
Juan dela Cruz or bearer?
Yes, the former phrase employs the word bearer as an
adjective, the latter, a noun. Consequently, the former phrase would
make an instrument non-negotiable.

Q: What is the difference between a negotiable instrument and one that
is non-negotiable?
*Refer to table contained in the notes on Summary of Doctrines,
pages 1 and 2

Q: What is the effect should the payee fail to give notice of dishonor to
an endorser?
The endorser is discharged

Q: Does sec.1(e) apply to a promissory note?
Obviously not. There is no drawee to speak of, in terms of
promissory note

Q: Suppose the instrument gives the holder an option to require
something to be done instead of demanding payment in money, is the
instrument negotiable?
Yes, if the HOLDER is the one given the option. If, on the other
hand, it is the DRAWER/MAKER who can choose to do anything other
than pay the holder in money, the instrument is not negotiable.
*see: sec.3(d), NIL

Q: When can we say that the instrument is still negotiable when it states
a source of funds for the payment of the instrument?
The general test is to ascertain whether or not the source of
funds so stated carries the GENERAL CREDIT of the maker or drawer. If
it does, the instrument is negotiable. If it does not, and it merely carries
the credit of a PARTICULAR fund, the instrument is no longer
negotiable.
*Recall: one of the essential requisites of negotiability is that
the promise or order to pay a sum certain in money must be
UNCONDITIONAL

Q: If an instrument states a particular fund out of which reimbursement
is to be made by the drawee, is it rendered non-negotiable?
No, what renders the instrument non-negotiable is when the
fund for PAYMENT is particularly specified, not one for reimbursement.

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
There is a difference between a fund for payment and a fund for
reimbursement.

*Notice here that negotiability is NOT affected because the
order to pay is still unconditional. The drawee must pay, and then later
on reimburse himself. If there arent enough funds for reimbursement,
well thats between the drawer and the drawee. The important thing is
that the obligation to pay the payee or holder has been met
unconditionally.

Q: When do we say that the sum payable is certain?
When the amount that is to be paid can be determined on the
face of the instrument in accordance with Sec.2, NIL

Q: when is an instrument payable on demand? (Sec.7, NIL)

Q: When is it payable to bearer? (sec.9, NIL)

Q: When the only or last endorsement is one in blank, what is the effect?
As per sec.9(e), NIL, the instrument shall be payable to bearer.

Q: Correlating sec.9(e) and sec.40, NIL, what conclusion can be drawn?
The cardinal rule in negotiable instruments: once a bearer
instrument, always a bearer instrument.
*If the only or last endorsement is an endorsement in blank, the
instrument is payable to bearer under sec.9(e). Sec.40, on the other
hand, states that where an instrument, payable to bearer, is endorsed
specially, it may nevertheless be further negotiated by delivery xxx. This
means that once an instrument is endorsed in blank, it becomes payable
to bearer, and even if a subsequent endorser endorses it specially, the
instrument is NOT CONVERTED into an order instrument, but remains a
bearer instrument which can be further negotiated by delivery.

Q: Who is a holder?
The holder is a payee or endorsee in possession of the
instrument. Depending on the TYPE of instrument, the holder is
1. A payee or endorsee who is IN POSSESSION of the
instrument, if the same is an ORDER instrument; or
2. The one IN POSSESSION of the instrument, if the same is a
BEARER instrument

Q: What is the difference between Negotiability and Assignability?

NEGOTIABILITY ASSIGNABILITY
Re: CONTRACTS
INVOLVED
pertains to special kinds
of contracts (i.e.: those
involving negotiable
instruments or
documents)
pertains to all manner of
contracts in general
Re: AVAILABLE
DEFENSES
HDC is free from
personal defenses
assignee is not immune
from defenses between
and among prior parties
Re: CAUSE FOR THE
CONTRACTS
cause is presumed cause is presumed
Re: LIABILITIES OF
ENDORSER
endorser is not liable
unless there be
presentment for
payment/acceptance

Re: WARRANTIES a general endorser
warrants the solvency of
the principal debtor
assignor does not
warrant the solvency of
the principal debtor
Re: ACQUISITION OF A
BETTER RIGHT BY
HOLDER OR
ASSIGNEE
a holder may acquire a
better right than the
prior endorser (i.e. as in
the case of a HDC under
the shelter rule)
acquisition of a better
right by the assignee is
precluded subrogation,
the assignee merely
steps into the shoes of
the assignor

Q: If there is no stipulation as to the time of payment, when is the
instrument payable?
On demand, as per sec.7, NIL

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact

Q: If an instrument has a stipulation as to the CURRENCY which would
be used for payment, is it rendered non-negotiable?
No, by sum certain in money, sec.1 does NOT equate money
with legal tender. Parties can therefore validly agree that the money
may be paid in currency other than pesos.

Q: Is the phrase pay to X or order the same as pay to the order of X?
Not quite. pay to X or order means that the instrument is to be
paid either to (a) X, the bearer or (b) to whoever X might want to be
paid (i.e.: his order). On the other hand pay to the order of X does not,
at face value, include X as a payee but rather the person/s whom X might
order to be paid.
However, it MAY mean the same thing, if X intends to endorse
the instrument to himself, make it payable to himself. In that event, the
distinction between the two phrases disappears.

Q: If the instrument is ambiguous on its face or bears omissions, how do
we construe it?
In accordance with Sec.17, NIL

Q: If it is not clear whether the instrument is a bill or not, what can the
holder do?
The holder can treat the instrument as either one or the other
at his election (sec.17[e])

Q: Suppose there is ambiguity as to whether the instrument is a note or
a bill. What is more advantageous to the holder to treat it as a note, or
as a bill?
As a promissory note, because of the primary liability of the
maker, and the relatively more expedient steps in obtaining the
discharge of the instrument

Q: May a holder treat a bill as a promissory note, even if there is actually
no ambiguity on the face of the instrument?
Yes, there are 3 instances when, despite the lack of ambiguity,
the holder may elect to treat a bill of exchange as a promissory note:
1. When drawer and drawee are the same person (i.e.: in the
case of managers or cashiers check);
2. Where the drawee is a fictitious person; or
3. Where the drawee does not have capacity to act
(Sec.130, NIL)


II. TRANSFER AND NEGOTIATION

Q: What is meant by negotiation?
The transfer of the instrument from one person to another so
as to constitute the transferee the holder thereof (Sec.191)

Q: How is negotiation effected?
Depending on the type of instrument involved
1. An ORDER instrument is negotiated by endorsement,
completed by delivery
2. A BEARER instrument is negotiated by mere delivery

Q: What is an endorsement?
An endorsement is a transaction effected by writing on the
instrument or on an attached paper thereto (i.e.: an allonge) of ones
own name and signature, specifying to whom or to whose order the
instrument is to be payable (sec.30, NIL)






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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
Q: What are the types of endorsements?



















BASIC TYPES OF ENDORSEMENTS
*see: sec.9(e); sec.40; sec.34, sec.35
1. SPECIAL
-specifies the person to whom or to
whose order the instrument is to be
payable
-legal effect: for subsequent
negotiations, the instrument requires
the endorsement of the person so
specified

2. BLANK
-does not specify any person to whom
or to whose order the instrument is
payable
-legal effect: the instrument is payable
to bearer (if it was originally an order
instrument, it ceases to be payable to
order and becomes payable to bearer.
After this, it REMAINS a bearer
instrument, even if a subsequent
endorser endorses it specially)

**important:
an instrument that STARTED OUT as a
BEARER instrument may be converted
to an order instrument and
reconverted again to a bearer
instrument; but once this is done i.e.:
once an order instrument becomes a
bearer instrument , it stays a bearer
instrument. The only way to simplify it
is that a bearer instrument may only
become an order instrument ONCE
that is, when it was originally made as
a bearer instrument and subsequently
endorsed specially. If it became a
bearer instrument because of an
endorsement in blank, it cant be
converted to an order instrument.
Point of no return, reached.













OTHER TYPES OF ENDORSEMENTS
*see: sec.36, sec.38, sec.39,













3. RESTRICTIVE
-the endorsement either (a) prohibits
further negotiation; (b) constitutes
the endorsee the agent of the
endorser; or (c) constitutes the
endorsee a trustee; if it prohibits
further negotiation, the instrument
ceases to be negotiable

4. CONDITIONAL
-payment is conditioned by either the
happening or non-happening of an
event
-legal effect: the party required to pay
may disregard the condition and go
ahead and pay, however, the person
who is paid must hold the payment or
its proceeds IN TRUST, and wait for
the event to happen or not. It does, or
doesnt, the endorsee/trustee must
return the money or its proceeds.

5. QUALIFIED
-the endorser negatives personal
liability by writing the words without
recourse or sans recourse or others
of like import on the instrument
-legal effect: the endorser becomes a
mere assignor of the title to the
instrument, but negotiability of the
same is not impaired

Q: Under sec.40, what is meant by a fictitious person? Is this to be
interpreted literally?
No, there is still a person involved, except that this person does
not have any right to the instrument. This is what is meant fictitious

Q: what is material in determining whether a person is fictitious?
The intention of the maker


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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
Q: what is a blank endorsement?
*see: sec.34

Q: Under sec.40, why should the special endorsers be held liable, despite
the fact that the instrument remains a bearer instrument anyhow?
Because of the accumulation of secondary contracts. The
endorsements made by these people are, in and of themselves,
contracts for which they may be held liable.

Q: Under Sec.38 (ie. qualified endorsement), to whom does the phrase
without recourse refer to? Without recourse against whom?
Against the qualified endorser

Q: Under Sec.39 (i.e.: conditional endorsement), what is the reason that
the person paying may disregard the condition?
The relativity of contracts. The payor is not a party to the
principal contract, which is why he may disregard the condition and pay
before it happens.

Q: What is conditional here? (sec.39)
The endorsement

Q: Do all types of restrictive endorsements destroy negotiability?
No, only the one which prohibits further endorsement


III. DUE COURSE HOLDING

Q: Who is a holder in due course?
A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue and
without notice that it has previously been dishonored, if such
was the fact;
(c) That he took it in good faith and for value; and
(d) That at the time it was negotiated to him, he had no notice
of any infirmity in the instrument or defect in the title of the
person negotiating it. (sec.52, NIL

*The prima facie presumption is that every holder of negotiable paper is
a HDC (sec.59), however, the same presumption may be refuted and in
such an event, it becomes incumbent upon the holder to prove that he
or some person under whom he claims acquired the title as HDC.

Q: May a payee be considered a holder in due course, considering that
the instrument was simply issued to him and not endorsed?
Yes

*cross refer sec.52 with sec.191 sec 191 defines a holder as the payee
or endorsee of a bill or note who is in possession of the same, or one
who is a bearer of the same. Holder under sec.52 must be read in the
light of sec.191s definition, thus a payee may be a holder, and since a
holder of a negotiable instrument may become a holder in due course, a
payee may logically become a HDC as well. This was the ruling of the SC
in Eulalio Prudencio et.al. c. CA, 143 SCRA 7, 16.

Q: what are the rights of a HDC?
1. To take the instrument free from personal defenses between
prior parties
2. To enforce payment for the full amount against all parties
liable thereon (sec.57)
Q: What is the Shelter Rule?
It is the doctrine which allows a holder who derives his title
through a holder in due course, and who is not himself a party to any

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
fraud or illegality affecting the instrument to have all the rights of the
HDC in respect of all parties prior to the latter. (Sec.58)

*NB: the shelter rule allows an innocent holder to derive his title from a
holder in due course. The scenario contemplated by the law is one
where the negotiation of an instrument was tainted by fraud or illegality
before it came into the hands of the present holder. The present holder,
therefore, who had nothing to do with the infirmity in the instrument,
may derive his title from the HDC before him, and will himself be
deemed a HDC.

Q: What is the exception to the shelter rule?
A prior party who was NOT a holder in due course may NOT
purchase the instrument from the sheltered holder (who is of course, a
HDC) and gain a clean title thereto.

*NB: suppose a prior party had something to do with the fraud tainting
the negotiation of the instrument. He allows an innocent person to
purchase it. The innocent person, by operation of law, becomes a
sheltered holder, a holder in due course. May the prior party again
purchase the instrument from the sheltered holder and claim to be free
of all personal defenses? Obviously not. The shelter rule cannot be used
to circumvent the law. The rule under sec.58 is not available to the
person repurchasing the instrument, if he was party to the fraud before
the sheltered holder acquired the instrument. Such a person is not
allowed to improve his position by reacquiring the instrument from a
HDC. In the event of repurchase, the instrument, as regards him, would
still be subject to both personal and real defenses. This was the ruling in
the case of Fossum v. Hermanos, et. al., 44 Phil 713, 717-718.

*NB: the exception also applies to agents.

Q: Suppose the instrument was defective, but the defect was not
apparent. Does this destroy due course holding?
No, sec.52 requires that the instrument is complete and regular
on its face. If the defect was not apparent, the holder may still be
deemed a HDC.

Q: What are circumstances that destroy due course holding?
1. Irregular and defective instruments
2. Taking the instrument when it was overdue
3. The holder has notice of the infirmity or defect in the
instrument
4. The holder did not take the instrument in good faith
5. The holder did not take the instrument for value
6. The holder ignored circumstances which should have put him
on inquiry (i.e.: the check was crossed)
7. The holder was not a HDC, and was a party to an illegality
during negotiation, and he tried to reacquire the instrument
from a subsequent HDC.


IV. LIABILITIES AND ENFORCEMENT THEREOF

Q: Who are the parties primarily and secondarily liable for a negotiable
instrument?

TYPE OF INSTRUMENT PARTIES LIABLE NATURE OF LIABILITY






BILL OF EXCHANGE
Acceptor
(see: sec.127)

Accommodation
Acceptor
(sec.29)




PRIMARY
General Endorsers
(see: sec.62)



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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact

Endorsers of Bearer
Instruments
(sec.67)

Accommodation
Endorsers
(sec.29)

Acceptor for Honor
(sec.165)

Drawer
(sec.61)







SECONDARY







PROMISSORY NOTE
Maker
(see: sec.60)

Accommodation Maker
(sec.29)




PRIMARY
General Endorsers
(see: sec.62)

Endorsers of Bearer
Instruments
(see: sec.67)

Accommodation
Endorser
(sec.29)





SECONDARY








CHECK

Acceptor
(sec.127)

Accommodation
Acceptor
(sec.29)





PRIMARY
Drawer
(sec.61)




General Endorsers
(sec.66)

Acceptor for Honor
(sec.165)

Accommodation Drawer
(sec.29)


SECONDARY
IMPORTANT:
-An accommodating partys liability is not strictly primary and secondary, per se.
It depends on what capacity the accommodating party signed either as maker,
drawer, endorser or acceptor. This is because the accommodating party, by
lending his name, becomes a surety for the accommodated party. Ergo, the
capacity in which he signs determines his liabilities liabilities that may either be
primary or secondary. The same principle goes for persons signing as agents if
they fail to sign in accordance with sec.20.

-The NIL has special rules for the liability of IRREGULAR ENDORSERS:
1. If the instrument is payable to the order of a 3
rd
person, an irregular
endorser is liable to the payee and all subsequent payees
2. If the instrument is payable to the order of the maker or drawer, or is
payable to bearer, he is liable to all parties subsequent to the maker or
drawer;
3. If he signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee (sec.64)

-An irregular endorser is one who signs in a peculiar manner, whose name
appears on the instrument where one would naturally expect anothers. (Ogden,
Negotiable Instruments, 4
th
Ed., p. 226)


Q: Are the primary and secondary liabilities the same as the liabilities for
warranties?
No, The primary and secondary liabilities of the parties stem
from their obligations to pay the sum certain in money stated in the
instrument. The liabilities for warranties stem from the warranties made
by the parties to an instrument, which warranties are separate and
ancillary contracts to the principal one involving the sum payable stated
in the instrument.

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact

PARTY WARRANTIES



ACCEPTOR
1. The existence of the drawer, the
genuineness of his signature and
his capacity and authority to draw
the instrument;
2. The existence of the payee and
his then capacity to endorse
*sec.62



GENERAL ENDORSER



ENDORSER OF A BEARER
INSTRUMENT
1. That the instrument is genuine
and in all respects what it
purports to be;
2. That he has good title to it;
3. That all prior parties had capacity
to contract;
4. That the instrument is, at the time
of his endorsement, valid and
subsisting
*secs.66, 67


QUALIFIED ENDORSER


PERSON NEGOTIATING BY MERE
DELIVERY
1. That the instrument is genuine
and all respects what it purports
to be;
2. That he has good title to it;
3. That all prior parties had capacity
to contract;
4. That he has no knowledge of any
fact which would impair the
validity of the instrument or
render it valueless
*sec.65


Q: May a corporation be held liable when one of its officers signs as an
accommodation party?
It depends. If the officer was specifically authorized to do so,
the corporation is liable. If not, the act was one ultra vires for which the
corporation cannot be held liable.

Q: What is the liability of an agent who signs a negotiable instrument on
behalf of another person?
The agent is NOT personally liable if he signs in the manner
prescribed under sec.20, that is if he
1. Adds to his signature words indicating that he signs for or
on behalf of a principal or in a representative capacity; and
2. Discloses his principal
Failure of an agent to sign in this manner would operate to make him
personally liable, as if he had signed the instrument on his own.

Q: What is the legal effect of a signature per procuration?
It operates as notice that the agent has but a limited authority
to sign and the principal is bound only in case the agent so signing acted
within the actual limits of his authority
*see: sec.21

Q: When is a party deemed an accommodation party?
When the person meets the following requisites
1. He must be a party to the instrument, signing as maker,
drawer, acceptor or endorser;
2. He must not receive value therefor;
3. He must sign for the purpose of lending his name or credit
to some other person

Q: May a person who does not sign the instrument be held liable?
GENERALLY, No. But there are exceptions where a person who
did not actually sign the instrument may be held liable
1. One who signs in a trade or assumed name (sec.18)
2. One who signs through an agent or authorized person
(sec.19)
3. Incapacitated persons who sign through their legal
guardians
4. Forgers of signatures (sec.23)

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
5. Persons whose signatures were forged but who are
precluded from setting up the defense of forgery (sec.23)
6. In case of constructive acceptance (sec.137)
7. Endorsers who sign on an allonge
8. Persons who negotiate by mere delivery (sec.65)

Q: What are the steps in holding the secondary parties liable?

PROMISSORY NOTE BILL OF EXCHANGE ACCEPTOR FOR HONOR
or REFEREE IN CASE OF
NEED
1. presentment for
payment within the
required period to
the maker

2. If the note is
dishonored, notice
of dishonor should
be given to the
endorsers
1. Presentment for
Acceptance

2. If the bill is
dishonored by non-
acceptance, notice
of dishonor should
be given to the
endorsers and
drawer; protest for
dishonor is required
if the bill is a foreign
bill

3. If the bill is
accepted,
Presentment for
Payment; if the bill
is dishonored upon
presentment for
payment, notice of
dishonor must be
given to secondarily
liable persons;
protest must be
made if the bill is a
foreign bill

1. Protest for non-
payment

Q: When is presentment for payment unnecessary?
1. As far as the DRAWER goes, when he has no right to expect
or require that the drawee or acceptor will pay the
instrument (sec.79)
2. As regards the ENDORSER, where the instrument was
made or accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
presented (sec.80)
3. Where, after the exercise of reasonable diligence,
presentment cannot be made (sec.82)
4. Where the drawee is a fictitious person (sec.82)
5. When presentment has been waived, either expressly or
impliedly (sec.82)

Q: Does non-presentment of a bill relieve the drawer of all liability?
No, the drawer is only discharged from the liability to the extent
caused by the delay or non-presentment. Failure to present on time
does not totally wipe out all liability.

Q: What is acceptance?
The signification by the drawee of his assent to the order of the
drawer to pay a sum certain in money embodied in a bill of exchange

Q: What are the requisites of acceptance?
1. It must be in writing;
2. Must be signed by the drawee;
3. Drawee must assent to paying a sum certain in money and
not by any other means

Q: When is presentment for acceptance required?
1. Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to
fix the maturity of the instrument;

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
2. Where the bill expressly stipulates that it shall be presented
for acceptance;
3. Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee
(sec..145)

Q: How is presentment for acceptance made?
1. By or on behalf of the holder;
2. At a reasonable hour;
3. On a business day or before the bill is overdue;
4. At the proper place;
5. To the drawee or the person authorized to accepted or
refuse acceptance on his behalf
6. If the bill is addressed to 2 or more drawees who are not
partners, presentment must be made to all of them unless
one has the authority to accept or refuse acceptance on
their behalf in which case presentment must be made to
that person only;
7. Where the drawee is dead, presentment may be made to
his personal representative;
8. Where the drawee has been adjudged a bankrupt or an
insolvent, or has made an assignment for the benefit of
creditors, presentment may be made to him or to his
trustee or assignee
(secs.144, 145, 146, 72, 85, 73)

Q: when is presentment for acceptance unnecessary or excused?
1. Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to contract
by bill;
2. Where, after the exercise of reasonable diligence,
presentment cannot be made;
3. Where, although presentment has been irregular,
acceptance has been refused on some other ground
(sec.149)

Q: What is constructive acceptance?
Acceptance by provision of law, whereby the drawee is deemed
to have accepted the instrument should either of the following
circumstances arise:
1. The bill was delivered to the drawee and he destroys the
same;
2. The bill was delivered to the drawee but he refuses to pay
within 24 hours or within such other period as the holder
may allow to return the bill either as accepted or non-
accepted (i.e.: drawee unduly retains the bill)
(sec.137)

Q: What is a notice of dishonor?
A notice which informs the secondary parties that the
instrument was either dishonored by non-acceptance or non-payment,
and that the holder of the instrument so dishonored intends to enforce
the liabilities of the persons so notified

Q: Does the payee have a legal obligation to inform the drawer that the
instrument was dishonored?
No, the payee is under no obligation to do so. The notice is only
required to preserve the payees right to recover on the dishonored
instrument, since failure to give notice to the drawer or endorsers
operates to discharge them of their respective liabilities on the
instrument

Q: If no notice was given, is the drawer completely absolved of liability
to the payee?
No, the contractual liability still subsists

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact

Q: When is an instrument considered dishonored by non-payment?
1. When it is duly presented for payment and payment is
refused or cannot be obtained; or
2. Presentment is excused and the instrument is overdue and
unpaid (sec.83)

Q: When is a bill dishonored by non-acceptance?
1. When it is duly presented for acceptance and such
acceptance is refused or cannot be obtained;
2. When presentment for acceptance is excused and the bill is
not accepted (sec.149)

Q: May a person give notice of dishonor to prior parties, even if he was
not authorized to do so?
Yes, sec.91 states that notice of dishonor may be given by any
agent either in his own name or in the name of any party entitled to give
notice, whether that party be his principal or not; effectively then, a
person may give notice for another even if he was not authorized to do
so

Q: To whom should notice be given to the endorsers, in a case where
the endorsers are partners?
To either of them, pursuant to the principle of mutual agency
between and among partners (Art.1818, NCC)

Q: When is notice of dishonor excused or unnecessary?

DRAWER (sec.114) ENDORSER (sec.115)
1. where the drawer and the drawee
are the same person



1. when the drawee is a fictitious
person or person not having
capacity to contract, and the
endorser was aware of that fact
at the time he endorsed the


2. when the drawee is a fictitious
person or a person not having
capacity to contract

3. when the drawer is the person to
whom the instrument is
presented for payment

4. where the drawer has no right to
expect or require that the drawee
or acceptor will honor the
instrument

5. where the drawer has
countermanded payment

instrument;

2. where the endorser is the person
to whom the instrument is
presented for payment

3. where the instrument was made
or accepted for his
accommodation
*NB:
Notice to these persons under these circumstances is no longer necessary
because they either (a) knew of the dishonor beforehand; or (b) were
themselves responsible for the dishonor


Q: May notice of dishonor be waived?
Yes, it may be waived either before the tine of giving notice has
arrived or after the omission to give due notice, and the waiver may be
either express or implied ( sec.109)

Q: Who are bound by the waiver of notice of dishonor?
If the instrument itself contains the waiver, all parties to it are
bound. If on the other hand, the waiver is written above the signature of
a particular endorser only, then only that endorser is bound.(sec.110)

Q: Does the failure to give notice of dishonor affect the rights of a
subsequent HDC?

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
No, an omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a HDC subsequent to the omission
(sec.117)

Q: What is protest?
A formal statement in writing made by a notary public at the
instance of the holder declaring that the instrument has been presented
for payment or for acceptance but the same was dishonored. It is
generally indispensable only for foreign bills of exchange, however, the
need for it may also be waived.

Q: May protest be made for inland bills?
Yes, although the NIL only requires protest for foreign bills,
there is no prohibition against making a protest for the dishonor of
inland bills. (sec.152, sec.118)

Q: In what instances is protest necessary?
1. Where a foreign bill was dishonored by non-acceptance
(sec.152)
2. Where a foreign bill, previously accepted, was subsequently
dishonored by non-payment (sec.152)
3. Where a bill is sought to be accepted for honor (sec.161)
4. Where a bill is to be presented for payment to an acceptor
for honor (sec.167)
5. where a bill is dishonored by an acceptor for honor
(sec.170)

Q: What are the legal effects of a waiver of protest?
1. Protest itself is waived;
2. Presentment for payment or acceptance is also deemed
waived;
3. Notice of dishonor is also deemed waived

Q: when is there an acceptance for honor?
When the original drawee refuses to accept a bill of exchange
and there is a need to save the credit of certain parties. A third person or
stranger to the instrument accepts the instrument for honor thereby
making himself liable to all parties to the bill subsequent to the party for
whose honor he accepted

Q: What is the nature of the liability of the acceptor for honor?
Secondary, because his engagement is to pay only if the bill is
not paid by the drawer and provided that it has been duly presented for
payment and protested for non-payment and that notice of dishonor is
given to him.

*NB: The nature of an acceptor for honors liability is different from that
of an ordinary acceptor in this regard, since an ordinary acceptor is
primarily liable the moment he accepts the instrument

Q: What are the requisites of acceptance for honor?
1. The bill of exchange has been protested for dishonor by
non-acceptance (and for better security);
2. The acceptor must be a stranger to the bill
3. The holder must consent to the acceptance for honor
4. The acceptance for honor must be made before the
instrument is overdue
5. The acceptance for honor must be in writing, must indicate
that it is an acceptance for honor, and must be signed by
the acceptor for honor
( secs.161, 162, 165)

Q: who may make a payment for honor?
Any person, for the honor of any person liable on the
instrument or for the honor of the drawer (sec.171)


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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact

V. THE SHORT-CUT RULE, TRUNCATION OF RIGHT OF RECOURSE IN
FORGED CHECKS

Q: What is the right of recourse of the parties to a forged check where
the signature forged belonged to the payee?
The short-cut rule holds that the payee whose signature was
forged can go directly to the collecting bank, regardless of whether or
not the checks were actually delivered to the payee. (Associated Bank,
et. al. v. CA and Reyes, GR. No 89802, May 7, 1992; Westmont Bank v.
Ong, GR No.132250, January 30, 2002)

Q: Mario issued a check drawn against his checking account with BOC,
the drawee-bank, to Pablo. Tisco stole the check and forged Pablos
signature as endorser, thereby making it appear that the check was duly
endorsed to him by the latter. Tisco then deposited the check with RCB,
his bank whom he designated as collecting bank. Determine the
respective rights of recourse of the parties. (NEGO MIDTERMS AY
2012-2013)
Pablo, as payee whose endorsement was forged by Tisco and
who lost the note to the latter through theft, may proceed against RCB,
the collecting bank, for recovery of the amount. RCB became liable as a
general endorser when it endorsed the check to the drawee-bank, BOC,
thereby warranting that the check was genuine and in all respects what
it purports to be. RCB, the collecting bank, may only recover against
Tisco, the forger-depositor, because no privity of contract exists
between the maker and the collecting bank, nor between the payee,
Pablo, and the collecting bank. The collecting bank may hold the
depositor liable because the depositor is its client. Mario, as maker, may
proceed against the drawee-bank and not the collecting bank because
there is no privity between the him as maker and the collecting bank.

Q: what is the rationale behind the short-cut rule?
The collecting bank is ultimately liable. The collecting bank is
liable to the payee and must bear the loss because it is its legal duty to
ascertain that the payees endorsement was genuine before cashing the
check. As a general rule, a bank or corporation who has obtained
possession of a check upon an unauthorized or forged endorsement of
the payees signature and who collects the amount of the check from
the drawee, is liable for the proceeds thereof to the payee or other
owner, notwithstanding that the amount has been paid to the person
from whom the check was obtained (Westmont Bank v. Ong, cited
above)
*The theory behind the rule is that the possession of the check is
wrongful and when the money had been collected, the collecting bank
can be held liable because it is deemed to have held the money for the
rightful owner in order for the latter to recover them. The position of
the bank taking the check on the forged or unauthorized endorsement
is the same as if it had taken it and collected the money without
endorsement at all and the act of the bank amounts to conversion of the
checks.

*The rationale is to expedite the right of recourse of the payee, to reach
by a desirable short-cut, the person who ought to be allowed to recover
directly from the collecting bank, regardless of whether the check was
delivered to the payee or not

*IMPORTANT:
-This rule is NOT readily applicable to a case where the signature that
was forged belonged to the DRAWER, or to OTHER SUBSEQUENT
ENDORSERS.

-If the drawers signature was forged, the drawer may not be held liable
for the amount on the instrument (although he may certainly be held
liable for the underlying contract).


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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
-If the endorsers signature was forged, the cut-off rule operates to bar
recovery from the parties prior to the forged endorsement. A
subsequent holder may not therefore enforce payment against the
drawee, the drawer, or the payee because parties prior to the forgery
may set it up as a defense (unless of course they are precluded from
doing just that)

-Obviously then, where the facts of any problem do not present a case
where it was the PAYEES signature that had been forged, application of
the short-cut rule is not advisable.

VI. DEFENSES

Q: What is a personal defense?
One which involves the relationships of the parties between
and amongst themselves, wherein there is a true and valid underlying
contract but where, for various reasons (i.e.: fraud, duress, mistake,
prior breach of contract by the holder, etc.), the defendant is excused
from his obligation to perform.

Q: What is a real defense?
One which involves the instrument or the underlying contract
itself, wherein there is an absence of one or more of the essential
elements of a contract or where the admitted contract is vitiated

Q: What defenses may be raised against a HDC?
Only real defenses those which call into question the
instrument or the underlying contract.

REAL DEFENSES PERSONAL DEFENSES
1. Minority (available only to the
minor)
2. Forgery
3. Non-delivery of an incomplete
1. Failure or Absence of consideration
2. Illegal consideration
3. Non-delivery of a complete
instrument
instrument
4. Material Alteration
5. Ultra Vires act of a corporation
6. Fraud in Fact
7. Illegality
8. Vicious force or violence
9. Lack of authority
10. Prescription
11. Discharge in insolvency
4. Conditional delivery of a complete
instrument
5. Fraud in inducement
6. Filling up blanks without authority
to do so
7. Duress of intimidation
8. Filling up blanks beyond a
reasonable time
9. Transfer in breach of faith
10. Mistake
11. Ante-dating or post-dating for
illegal or fraudulent purposes

Q: Does negotiation by a minor operate to pass title to the holder?
Yes

*NB: although the defense is a real one, the negotiation still
passes title to the holder, the same rule also applies to corporations
with regards to an ultra vires act the corporation may raise it as a
defense but the negotiation still transfers title

Q: What is delivery?
The transfer of possession of the negotiable instrument by one
person to another with the intention to transfer title to the instrument

Q: What is the effect if an instrument which is not complete was
delivered?
The delivery will not effect a valid contract in the hands of any
holder as against any person whose signature was placed thereon prior
to delivery (sec.15)

Q: When may delivery be deemed valid?
When it is made either by or under authority of the person
making, drawing, accepting or endorsing the instrument (sec.16)

Q: What are the rules involving delivery?

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
1. A negotiable instrument must be delivered
2. Delivery must either be by or under authority of the person
making, drawing, accepting or endorsing the instrument
3. Delivery is presumed to have been made if the instrument is
no longer in the hands of the maker or drawer for the
purpose of issuing it, or the endorser for the purpose of
transferring title
4. As between immediate parties and remote parties who are
not holders in due course, the delivery of a complete
instrument may be established to be conditional or for a
special purpose, and not for transferring title
5. As between immediate parties and remote parties who are
not holders in due course, it may be established that there
was no delivery at all of the complete instrument
6. As to holders in due course, it cannot be established that
there was no delivery because delivery as to the HDC is
conclusive upon his possession of the instrument
7. As to a HDC, it cannot be established that the delivery was
only conditional or for a special purpose
(sec.16)

Q: What are the rules with regard to filling up blanks in a negotiable
instrument?
1. A person in possession of such an instrument has prima
facie authority to complete the instrument by filling it up
strictly in accordance with the authority given and within a
reasonable time
2. If a person delivers a blank paper which contains his
signature and which he intends to convert into a negotiable
instrument, the person to whom it is delivered has prima
facie authority to fill it up for any amount in accordance
with the authority given and within a reasonable time;
3. If the holder of the instrument, after it was filled up, is a
HDC, the holder may enforce the instrument as if it were
filled up with the proper authority and within a reasonable
time
(sec.14)

Q: when is fraud a real defense? When is it merely a personal one?

FRAUD IN EXECUTION/
FRAUD IN FACTUM
FRAUD IN INDUCEMENT
-person is induced to sign an
instrument without knowing its
character as a note or bill




-a REAL defense
-persons who signs the same is aware
that he is signing a negotiable
instrument, and intends to sign it, but
was only induced to do so through
fraud, his consent having been vitiated
by it

-a PERSONAL defense

Q: When may an alteration become a defense?
When it is material (sec.1, 125)

Q: Is material alteration a complete defense?
No, only a partial one. A HDC who is in possession of a
materially altered instrument and who is not a party to the alteration
may enforce payment thereof according to its original tenor (sec.124)

Q: What is the effect of ante-dating or post-dating a negotiable
instrument?
Ante- or post-dating does not per se affect the instrument. A
personal defense only arises when the ante-dating or post-dating was
done for a fraudulent or illegal purpose

Q: what is the effect of forgery?

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
A forged signature is wholly inoperative and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under
such signature, unless the party against whom it is sought to be enforce
such a right is precluded from setting up the forgery or the want of
authority (sec.23)

TYPE OF INSTRUMENT PARTY WHOSE
SIGNATURE WAS
FORGED
EFFECTS










PROMISSORY NOTE


Maker
Maker is not liable on
the instrument to all
subsequent parties
whether the instrument
is an order or a bearer
instrument







Endorsers
Still secondarily liable
because they warrant
that the instrument is
genuine and in all
respects what it
purports to be

If the note is payable to
BEARER, the forged
signatures may not be
set up as a defense,
because the signature of
the endorser is
unnecessary to pass title
to the instrument the
maker is still primarily
liable on the note.









Drawer
Drawer is not liable on
the instrument to all
subsequent parties
whether the bill is an
order or bearer bill











BILL OF EXCHANGE











Endorsers
Subsequent holder
cannot enforce payment
against the drawer,
drawee or payee

Endorsers prior to the
forgery may set up the
real defense of forgery

Endorsers subsequent to
the forgery are still liable

Endorsers precluded
from setting up forgery
as a defense are liable,
despite having endorsed
the bill prior to the act
of forgery

If the bill is a BEARER bill
of exchange, the holder
may still recover from
the drawer because the
forged signature is
unnecessary for his title.

Q: How does the Cut-ff Rule operate?
Parties prior to the forged signature are cut-off from the parties
after the forgery and cannot be held liable for the forgery. These parties
may validly set up the defense of forgery against any holder, including a
HDC.

Q: Are there any exceptions to the cut-off rule?
Yes, prior parties may still be held liable if they are precluded
from setting up the defense of forgery either because of their
warranties, representations of their negligence (i.e.: endorsers who had
anything to do with the forgery prior to its commission may still be held
liable)

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact

Q: What is the effect of an insertion of a wrong date on an instrument?
The act becomes a personal defense between immediate and
prior parties, and the HDC has the right to regard the wrongfully
inserted date as the true date (sec.13)

Q: Senator Corupto executed a negotiable promissory note payable to
Simpo or the latters order, as a reward for the political support and
friendship given by Simpo to the Senator. Later on, the note was
negotiated to Hovo, a holder in due course. May Hovo enforce the note
against Corupto? Would your answer remain the same, if it were Simpo
who would seek to enforce payment against Corupto? (NEGO
MIDTERMS AY 2012-2013)
1. YES, Hovo may enforce the note against Corupto. Hovo, being
a holder in due course, possesses the right to enforce the instrument for
the full amount stated thereon against the maker, Corupto; and has
taken the instrument free of all personal defenses between prior
parties. Corupto may not set up the defense of want or absence of
consideration against Hovo because the same is merely a personal
defense, and personal defenses may not be raised against a holder in
due course.
2. NO, The same answer above would not apply in the event
that it would be Simpo seeking to enforce the note against Corupto. The
note was issued for support and friendship and as such, Corupto may
set up as a personal defense the want or absence of consideration for
the issuance of the note. Friendship and support (in the same manner
as love and affection) do not constitute value or consideration under
the ambit of the negotiable instruments law. Absence or lack of
consideration is a defense pro tanto between immediate parties, and
against a holder who is not a holder in due course.

Q: May lack of consent be ratified?
Yes, ratification by the party whose signature was obtained
without valid consent, for example, precludes that party from raising
the defense of lack or vitiation of consent. The principles of estoppel
and ratification may apply in this case.


VII. DISCHARGE OF AN INSTRUMENT

Q: What is discharge?
Release from further liability
1. AS TO THE PAPER ITSELF: the end of a contractual
obligation
2. AS TO THE PARTIES: the release of some or all of them
from further obligation and liability under the instrument

Q: Is there such a thing as partial discharge?
Yes, as when the instrument (i.e.: the contractual obligation it
represents) is not yet discharged, and only part or some of the obligors
are released.

Q: Suppose all the obligors are released, what happens to the
instrument?
The instrument is deemed released as well

Q: How is an instrument discharged?
1. By payment in due course by or on behalf of the principal
debtor
2. By payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation;
3. By the intentional cancellation thereof by the holder;
4. By any other act which will discharge a simple contract for
the payment of money;

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~Point of Impact
5. When the principal debtor becomes the holder of the
instrument at or after maturity in his own right
(sec.119)

Q: What is meant by payment in due course?
Payment is said to have been made in due course when it is
made at or after maturity date of the instrument to the holder thereof in
good faith and without notice that his title is defective (sec.88)

Q: May payment be made by the delivery of another negotiable
instrument?
No (Art.1249, NCC)

Q: What is the effect of payment by a secondary party?
The instrument is NOT discharged, but such a party is remitted
to his former rights with regards to prior parties (i.e.: he becomes a
holder again and not just an endorser), and he may strike out his own
and all subsequent endorsements (those made by the people he owed)
and re-negotiate the instrument, EXCEPT when (a) the instrument is
payable to the order of third person and the payment was made by the
drawer; and (b) where it was made or accepted for accommodation and
has been paid by the party accommodated. (sec.121)

Q: Why is a prior party who reacquires the instrument permitted to
strike out endorsements?
Because the endorsements he strikes out are those which are
not necessary for his title

Q: why does payment by the party accommodated where the
instrument is made or accepted for his accommodation discharge the
instrument?
Because the payment is in effect one made by the principal
party (since the accommodating party acts as surety for the
accommodated party, payment by the latter is actually payment by the
principal debtor which discharges the instrument)

Q: Why does payment by the drawer discharge the instrument under
sec.121(a)?
Because the drawer is the party ultimately liable in case the
instrument is drawn payable to the order of third person.

Q: Suppose the third person who paid actually did so with the intention
of acquiring title over the instrument, is the instrument discharged?
No, in this case, the payor is not considered a third person
within the contemplation of 119. The payor is either a holder or an
assignee as the case may be.

Q: to whom should payment be made?
To the HOLDER of the instrument
(see notes on who is a holder? pages 4,5 as discussed above)

Q: Is there a possibility that a payor who had already previously made
payment may be made to pay again?
Yes, the rightful holder who may have been unlawfully deprived
of the instrument may still enforce payment against a payor who
previously paid with knowledge of the defect in the previous holders
title.

Q: how does cancellation discharge the instrument?
Depends on WHAT KIND of cancellation was effected
intentional cancellation discharges the instrument, conversely, if the
cancellation was NOT intentional, the instrument is not discharged.
*Intentional cancellation takes place when the holder writes
the word cancelled on the instrument or does something childish to
it (think: tearing it up, burning it, etc) (sec119)


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where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
Q: What are the acts which discharge simple contracts?
1. payment or performance
2. loss of the thing due
3. condonation or remission of the debt
4. confusion or merger of the rights of creditor and debtor
5. compensation
6. novation
7. annulment or rescission
8. fulfillment of a resolutory condition
9. prescription
(see: art.1231, NCC; check notes for oblicon)

Q: how are secondarily liable parties discharged? (sec.120)

1. By any act which discharges the
instrument
(art.1231 + other pertinent provisions
of the NCC)
2. By the intentional cancellation of
his signature by the holder
An endorser whose endorsement is
struck out and all endorsers
subsequent to him are relieved from
liability on the instrument (sec.48)

Discharge here means discharge by
some act of the creditor, it does not
include discharge by operation of law
(i.e. by bankruptcy, insolvency,
prescription, failure to give notice of
dishonor)
3. By the discharge of a prior party
4. By a valid tender of payment It is the fault of the holder under this
circumstance that he was not paid,
thereby discharging the secondary
parties.
5. By a release of the principal
debtor unless the holders right of
recourse against the party
secondarily liable is expressly
reserved
The release of the principal debtor
discharges the instrument and persons
secondarily liable lose their right of
recourse against the principal debtor

EXCEPTION: when right of recourse
against secondary parties was
expressly reserved
6. By any agreement binding upon
the holder to extend the time of
payment or to postpone the
holders right to enforce the
instrument unless made with the
consent of the party secondarily
liable or unless the right to
recourse against such party is
expressly reserved
Because the assurance of the drawer
and the endorsers is to pay according
to the tenor of the instrument. An
agreement to extend the time of
payment varies the original
undertaking of the secondary parties
(compare art.2079, NCC re: guaranty;
same principle applies)

EXCEPTIONS: (a) the extension was
made with the consent of the
secondary parties; (b) right of
recourse against secondary parties
was expressly reserved



VIII. CHECKS AND THE RELATIONSHIPS BETWEEN PAYEE, DRAWEE AND
DRAWER

Q: What is a check?
A bill of exchange drawn on a bank, payable on demand
(sec.185)

Q: When should a check be presented for payment?
Within a reasonable time after its issue (sec.186)

Q: Is a drawee liable upon the issuance of a check?
No, the drawee is not liable just because he happens to be the
drawee. A check does not operate as an assignment of any part of the
funds to the credit of the drawer with the bank, the bank is not liable to
the holder unless and until he accepts the same, in which case, the
drawee becomes an acceptor (sec.189)

Q: what is a certified check?

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~Point of Impact
One drawn by a depositor upon funds to his credit in a bank
which a proper officer of the bank certifies will be paid when duly
presented for payment

Q: Is certification completely similar to acceptance?
No, certification is equivalent to acceptance (sec.187) but they
differ in the sense that (a) certification done at the instance of the
HOLDER results in a discharge while ordinary acceptance does NOT
discharge; and (b) in certification, the bank debits the drawers account
at the time of certification, not after, as in ordinary acceptance

Q: How does certification operate?
Upon certification, the bank debits the drawers account, in
effect setting aside the funds to meet the check if and when it is
presented for payment. The funds that were set apart are no longer
within the control of the drawer but have been precisely segregated for
the purpose of paying the check. This is why certification procured by
the holder discharges the secondary parties because the certified
check would now operate as an assignment of part of the funds to the
credit of the drawer (sec.189). The theory is that the holder, by
requesting such certification instead of payment, enters into a new
contract with the bank, and not one within the contemplation of the
drawer or a prior endorser. The drawer and the endorsers are expecting
that the check will be presented for payment only and not for
certification, hence they are discharged.

*The bank virtually says that the check is good; we have the
money of the drawer here ready to pay it. We will pay it now if you will
receive it. The holder says, No, I will not take the money; you may certify
the check and retain the money for me until this check is presented. The
money being due and the check presented, it is his own fault if the holder
declines to receive the pay xxx (1 Morse on Banks and Banking, p.920; cited
in PNB V. National City Bank of New York, 63 Phil 711, 717-720)

Q: What is a crossed check?
A check which bears 2 parallel lines diagonally on the left top
portion. If the crossing of a check is SPECIAL, the name of a bank or
business institution is written between the 2 parallel lines (meaning that
the drawee should pay only with the intervention of that company), if
the crossing is GENERAL, the words written between the 2 parallel lines
are and Co. or for payees account only

Q: Does the NIL govern crossed checks?
No, the Code of Commerce under sec.541 does. Sec.541 of the
Code of Commerce was patterned after the Bills of Exchange Act of 1882
(secs.76,77 of the Bills of Exchange Act of 1882)

Q: What is the effect of crossing a check?
Generally, the crossing of a check puts the holder on inquiry
and requires him to ascertain the endorsers title to the check. Failing in
this respect, the holder is declared guilty of gross negligence amounting
to legal absence of good faith (think: holder can no longer become a
HDC)
Specifically, the effects are
1. The check may not be encashed but only deposited in a
bank
2. The check may only be negotiated once (to the person with
the account in the bank)
3. The act of crossing serves as a warning to the holder that
the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that
purpose

Q: Differentiate a bill of exchange from a check
(see page 2 of these notes for tabular presentation)


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~Point of Impact
Q: What is the relationship between and among the drawer, drawee
and payee of a check?





AVAILABILITY OF
RIGHT OF
RECOURSE

PRESENCE OF PRIVITY OF CONTRACT
DRAWER DRAWEE PAYEE
DRAWER
X

X
DRAWEE
X

*
PAYEE
X


DRAWER:
-has privity of contract with payee
-has privity of contract with drawee
-has right of recourse against drawee bank

DRAWEE:
-has privity of contract with drawer
-has recourse against drawer, in some instances
-no privity of contract with, or right of recourse against, payee

PAYEE:
-privity of contract with drawer
-recourse against drawer
-no privity of contract or right of recourse against drawee
*EXCEPTION: payee has right of recourse against drawee via tort action
under art.19, NCC (abuse of right), if he can prove that (a) drawee has a
legal right or duty toward him; (b) the right or duty was exercised in bad
faith; and (c) for the sole intent of prejudicing or injuring another (HSBC v.
Catalan, GR Nos. 159590 and 159591; October 18, 2004)

Q: What is a collecting bank?
The bank with which a payee-holder of a check deposits the
same. The payee in this case usually has an account with the bank,
known as the depositary bank or collecting bank

Q: What is the relationship between the payee and the collecting bank?
One of agent and principal. The collecting bank acts as the
agent of the depositor when it sends the check for clearing.

*check clearing is done through a clearinghouse, an
association of banks or other payors for the purpose of settling
accounts with each other on a daily basis. Each member of the
clearinghouse forwards all deposited checks drawn on other members
and receives from the clearinghouse all checks drawn on it. Balances are
adjusted and settled on a daily basis.

Q: Does the collecting bank become the owner of the check deposited
with it?
No, the check is only being collected from the drawee bank for
the principal, the depositor.

Q: If a check was forged prior to the deposit with the collecting bank,
and the check is subsequently paid, is the collecting bank liable?
Yes, because the collecting bank was the last endorser of the
check. It endorsed the check for clearing with the drawee bank, and the
drawee bank relied on the collecting banks warranty, given upon
endorsement, that the instrument is genuine and in all respects what it
purports to be. The liabilities and warranties of a collecting bank are the
same as those of a general endorser (see: sec.66).

Q: What is the right of recourse of a collecting bank who was forced to
reimburse the drawee for a forged check?
The collecting bank may proceed against its client, the
depositor because it is only with the depositor that privity of contract

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~Point of Impact
exists, and also because the payee-depositor is liable under the same
warranties of a general endorser (sec.66, NIL)

Q: Is the drawer allowed to countermand payment on a check?
It depends. If the drawer has a valid defense against the holder
of the check (i.e.: holder failed to deliver the goods that he promised),
the drawer may countermand payment. If not, the drawer may be held
criminally liable under Batas Pambansa Blg.22 which penalizes the
making, drawing or issui9ng a check to apply on account or for value
knowing that at the time of issue the check is not sufficiently funded.

Q: What is the Iron-Clad Rule?
The rule which prohibits the countermanding of payment of
certified checks (and by analogy, managers or cashiers checks).
Because of the nature of these checks, they are considered to be as
good as the money they represent, and may not be countermanded by
either the payee or the bank.

CHECK CLEARING, CLEARING REGULATIONS

(Cross-refer with notes on Summary of Doctrines, under the title
Checks)

*IMPORTANT:
- The drawee bank is not only bound by the NIL with regards to the
negotiation or handling of a check, it is also bound by the rules on
clearinghouse regulations enacted by the Central Bank, through the
Philippine Clearing House Corporation (PCHC) and its regional arms.

THE 24-HOUR RULE: the drawee bank must return checks or items
cleared through the PCHC within 24 hours (think: especially applicable to
forged checks where the forged signature belongs to the drawer) to the
collecting bank; failure to do so makes the drawee liable for negligence
and absolves the collecting bank of liability (sec.20, PCHC Rules)

*the 24-hour rule does NOT apply to checks whose forged
endorsements belong to endorsers, or to check which have been
materially altered. In these cases, the checks should be return within 10
years (yes, YEARS), since sec.21 of the PCHC Rules states that they
should be returned within the period prescribed by law for the filing of
a legal action (10 days, pursuant to art.1144, NCC actions based upon a
written contract or an obligation created by law prescribe in 10 years
from the time the right of action accrues) (see: Aquino, Banking and
Negotiable Instruments Law, vol. I, 2009)


IX. NEGOTIABLE DOCUMENTS OF TITLE

Q: What is a negotiable document of title (NDT)?
A document used in the ordinary course of business in the sale
or transfer of goods as proof of possession or control of the goods, or
authorizing or purporting to authorize the possessor to transfer or
receive either by endorsement or delivery, goods represented by such
document.

Q: What are the features and functions of NDTs?
1. They serve as a contract
2. They serve as receipt of goods
3. They operate as transferable documents of title to the
goods they describe

Q: How are NDTs different from negotiable instruments?

NEGOTIABLE
INSTRUMENTS
NEGOTIABLE
DOCUMENTS OF TITLE

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~Point of Impact
Re: GOVERNING LAWS NIL
Code of Commerce
NCC (Arts.1507-1520)
Warehouse Receipts
Law (WRL);
Trust Receipts Law (TRL)
Re: PURPOSE AND
FUNCTION
Transfer of Credit or
Money
Transfer of Goods
Re: POSSIBILITY OF DUE
COURSE HOLDING
Holder may be a HDC Holder is not a holder in
due course, but a holder
for value
Re: MODE OF TRANSFER By Negotiation
By Assignment
By Negotiation
By Assignment
Re: CONVERTIBILITY
THROUGH
NEGOTIATION
An ORDER instrument
may be converted to a
bearer instrument

A BEARER instrument
may only be converted
to an order instrument
ONCE if it was
originally a bearer
instrument

Once a bearer
instrument, always a
bearer instrument
Universal Convertibility
An ORDER document
may be converted into a
BEARER document, and
back again
Re: WARRANTIES All parties (i.e.: drawers,
makers, endorsers) to a
negotiable instrument
are bound by their
respective warranties
only the TRANSFEROR
of a NDT makes
warranties in favor of
the transferee

Endorsers are not liable
for failure on the part of
the bailee to deliver the
goods


Q: What determines the negotiability?
Words of negotiability (art.1507, NCC; Sec.5, WRL)

Q: What is the effect of stamping the words non-negotiable on a NDT?
There is no effect, if the document contains words of
negotiability, it remains negotiable despite the stamping on it of the
words non-negotiable or others of like import

Q: How is a NDT negotiated?

BEARER DOCUMENT ORDER DOCUMENT
By delivery
(Art.1508, NCC)

*POSSESSION is controlling - the
warehousemans obligation follows
the possessor
By endorsement
(a) in blank; or
(b) to bearer; or
(c) to a specified person

If the document is endorsed to a
specified person, he may again
negotiate the document in blank, to
bearer or to another specified person
(Art.1509, NCC)

*ENDORSEMENT is controlling the
warehousemans obligation follows
the endorsement (if endorsed in blank
or to bearer, warehousemans
obligation follows accordingly)

Q: Does the transfer of a NDT result in the transfer of title to the goods?
Yes, because transfer of the document controls the transfer of
goods. Negotiation of a document has the effect of manual delivery so
as to constitute the transferee the owner of the goods. The direct
obligation of the bailee issuing the document to hold possession of the
goods is owed to the transferee from the moment of negotiation
(Art.1513, NCC)

Q: Suppose the document was not negotiated but merely transferred to
the holder, what are the effects?
The person to whom it has been transferred and not negotiated
acquires as against the transferee the title to the goods, subject to the
terms of any agreement with the transferor (i.e.: person in possession

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~Point of Impact
becomes an assignee of the goods), and the transferee may convert the
plain transfer to negotiation by compelling the transferor to complete
the negotiation process (Art.1515; secs.42,43, WRL)

Q: what is the effect if there was in fact an intent to negotiate the
document but possession of the same is retained by the transferor?
The interest of the prior transferee may be defeated if the
document is subsequently transferred to a purchaser in good faith
without notice. The subsequent negotiation of the document under any
sale or other disposition to any person receiving the same in good faith
and for value and without notice of the previous sale, mortgage or
pledge, shall have the SAME EFFECT as if the first purchaser had
EXPRESSLY AUTHORIZED the subsequent negotiation (sec.48, WRL)

*No, Art.1544 of the NCC on double sales does NOT apply to the
second sale of a negotiable document like a warehouse receipt. The law
(WRL) practically negates the will of the first purchaser and assumes
that buyer 1 willingly permitted sale number 2.
*Read this together with the right of the purchaser to compel
the transferor to complete the negotiation this is why.

Q: What are the rights of a person to whom a NDT was duly negotiated?
1. He acquires such title to the goods as the person
negotiating the document to him had or had ability to
convey
2. The direct obligation of the bailee issuing the document to
hold possession of the goods for him as if such bailee had
contracted directly with him
(Art.1513, NCC; Art.41, WRL)

*Think: the goods follow the document of title, BUT notice that
NO ADDITIONAL RIGHTS are conferred over the goods to the
transferee.
*Here lies the crucial distinction between NDTs and NIs. Under
the NIL, a holder in due course may acquire a better right than his
transferor (i.e.: he gets a clean title to the instrument); whereas the
transferee of a NDT acquires merely what the transferor had or could
give (owing to the fact that NDTs are found under the law on Sales, the
maxim applies: nemo dat quod non habet. One cannot sell what he does
not have if the person who deposited the goods with the bailee who
issued the document is not legally entitled to the goods, no such title to
them will be acquired by the transferee of the document of title EVEN IF
he is a holder for value)

Q: Suppose the goods were sought to be repossessed by an unpaid
seller. May he run after the purchaser of the warehouse receipt?
No, no sellers lien or right of stoppage in transitu shall defeat
the rights of any purchaser for value in good faith to whom the receipt
has been negotiated, nor shall the warehouseman be obliged to deliver
or be justified in delivering the goods to an unpaid seller UNLESS the
receipt is first surrendered for cancellation (sec.49, WRL)

Q: What is the significance of the unpaid seller presenting to the
warehouseman the receipt for cancellation? Why cant the
warehouseman deliver the goods prior to the surrender of such a
receipt by the unpaid seller?
The surrender for cancellation of the receipt by the unpaid
seller means that the unpaid seller has validly reacquired the receipt
from the holder for value

Q: May the warehouseman validly refuse to deliver the goods to a
person claiming them?
Yes (secs.31, 49, WRL; art.1519, NCC)

*Flag this as another key distinction with negotiable
instruments under the NIL, the parties liable may NOT validly refuse to

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~Point of Impact
pay a holder in due course (except, of course, when they can raise real
defenses against the HDC)

Q: Who may negotiate a NDT?
1. The owner
2. A person to whom the possession or custody of the
document has been duly entrusted by the owner
(art.1512, NCC; sec.40, WRL)

*Theres a massive conflict in THIS particular area of the Civil Code
negotiation of NDTs, owing to these 2 provisions:

ART.1512 ART.1518
A negotiable document of title may be
negotiated:
(1) By the owner thereof; or
(2) By any person to whom the
possession or custody of the
document has been entrusted by
the owner, if, by the terms of the
document the bailee issuing the
document undertakes to deliver
the goods to the order of the
person to whom the possession
or custody of the document has
been entrusted, or if at the time
of such entrusting the document
is in such form that it may be
negotiated by delivery
The validity of the negotiation of a
negotiable document of title is not
impaired by the fact that the
negotiation was a breach of duty on
the part of the person making the
negotiation or by the fact that the
owner of the document was
deprived of the possession of the
same by loss, theft, fraud, accident,
mistake, duress, conversion, if the
person to whom the document was
negotiated or a person to whom the
document was subsequently
negotiated paid value therefor in
good faith, without notice of the
breach of duty or loss, theft, fraud,
accident, mistake, duress or
conversion.

*The question is obvious: if a NDT was negotiated by someone OTHER
than the owner of the duly authorized person (i.e.: in violation of
art.1512), would art.1518 serve to validate the negotiation?

*scenario: a thief negotiated the document of title to a purchaser for
value. Did the purchaser for value acquire nothing because the thief had no
title to the goods that he could validly have conveyed? THEORY: the
purchaser for value ACQUIRED a title to the goods, notwithstanding the
thiefs title. Art.559, par.1 of the NCC states that The possession of
movable property acquired in good faith is equivalent to a title.
Nevertheless, the one who has lost any movable or has been unlawfully
deprived thereof, may recover it from the person in possession of the
same. The innocent purchaser for values title is NOT derived from the
thief he has an original title granted by art.559 on the law on property.
His possession is deemed equivalent to a title in and of itself. With regards
to the right of recovery, the lawful owner would not be able to recover
from the innocent purchaser for value despite the wording of art.559,
because art.1518 specifically exempts the circumstances of breach of duty,
loss, theft, fraud, accident, mistake, duress or conversion. In this sense,
art.559 and art.1518 constitute reciprocal exceptions to each other. But
what about the earlier discussion regarding the rights of a holder for
value? (see page 29) Theres really no real contradiction since it still holds
true that a purchaser for value obtains merely a derivative title from the
transferor. In the case of an innocent purchaser for value and good fait h
who was unaware of the defect in the transferors title, he may invoke
art.559 and claim the title granted to him by that provision. All the same,
the innocent purchaser for value and good faith acquired nothing from the
thief. His title isnt based on the thiefs.

*A final and interesting point: the above discussion is applicable to a
BEARER document, one which may be negotiated by delivery without need
of the endorsements of the owner or his representative. If, of course, the
document is an ORDER document, then the ENDORSEMENT of the specified
person (i.e.: the owner or his duly authorized agent) is necessary. The thief,
in order to negotiate it, would need the signature of one of these 2
persons. Since hes a thief, he cant lawfully obtain it. He would then have
to forge the signatures. And forgery renders the endorsement inoperative.

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~Point of Impact
This is Dean Sundiangs analysis. (I ask you, though: Do the provisions of
the NIL [sec.23] apply suppletorily to the negotiation of NDTs? Would it not
be more in line with civil law to apply the Statute Frauds and deem the
contract entered into by the thief as unenforceable for violating
Art.1403(1) because he entered into it by forging the signatures of the
owner or the duly authorized representative and thus entered into the
contract in the name of another person without having been given proper
authority or legal representation? Just thinking aloud Kimiko)

Q: Do the endorsers of a NDT make any warranties?
No, endorsers are not liable for the failure of the bailee to
deliver the goods. Only the transferor of the document makes any
warranties in favor of the transferee

Q: What are the warranties of a transferor of a NDT?
1. That the document is genuine
2. That he has a legal right to negotiate or transfer it
3. That he has knowledge of no fact which would impair the
validity or worth of the document; and
4. That he has a right to transfer the title to the goods and
5. That the goods are merchantable or fit for a particular
purpose, whenever such warranties would have been
implied if the contract of the parties had been to transfer
without a document of title the goods represented thereby
(Art.1516, NCC; Sec.44, WRL)

Q: when is a document of title (particularly a warehouse receipt)
deemed non-negotiable?
When it states that the goods received will be delivered to the
depositor or to any other specified person (Sec.4, WRL)

Q: How may a non-negotiable document of title be transferred?
By assignment. A transferee of a non-negotiable receipt merely
steps into the shoes of the transferor, his right may be defeated by
other persons who by law are given superior rights. The transferee gains
no additional rights over the goods by virtue of the transfer (sec.4, WRL;
art.1515, NCC)
The transferee, however, has a right to compel the transferor to
complete the negotiation by endorsement (art.1514, NCC; sec.42, WRL)

Q: What are the obligations of the bailee?
1. To possess the goods for the persons entitled to them;
2. To deliver the goods upon presentment of the document;
3. To cancel the document upon presentment

Q: What is the legal effect if the bailee failed to cancel the document
after presentment?
He shall be liable for failure to deliver the goods to anyone who
purchases the same for value and in good faith

Q: What is the primary liability of the bailee?
Failure to deliver the goods without a valid reason makes the
bailee liable for conversion

Q: Is a warehouseman justified in delivering the goods because the
claimant alleged that the document was lost or destroyed?
No, loss or destruction does not authorize the warehouseman
to deliver the goods. He cannot determine for himself the fact of loss,
only a court of competent jurisdiction may do so (Aquino, Banking Law
and Negotiable Instruments Law, vol. I, 2009)

Q: If goods were released because of a court order, is the
warehouseman free from all liability?

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
No, the warehouseman is still liable to a person to whom the
negotiable receipt has been or shall be negotiated for value without
notice of the proceedings or of the delivery of the goods (sec.14, WRL)
The warehousemans remedy is to enforce the bond required
by the court or to run after the person who obtained the release of the
goods

Q: May the warehouseman refuse to deliver the goods on account of an
adverse claim over them?
Generally, no. No title to or right to the possession of the goods
on the part of the warehouseman shall excuse him from liability for
refusing to deliver the goods according to the terms of the receipt
(sec.16, WRL)
EXCEPTIONS: (1) The warehousemans title or right is derived
directly or indirectly from a transfer made by the depositor at the time
of or subsequent to the deposit for storage; (2) The right is based on the
warehousemans lien.

Q: Under the WRL, what defenses may the warehouseman raise for non-
delivery of the goods?
1. Loss of destruction of the goods without his fault
2. Failure to satisfy bailees lien (sec.8)
3. Failure to surrender the NDT(sec.8)
4. Lack of willingness by the person claiming the goods to sign
acknowledgement of receipt (sec.8)
5. Receipt by the bailee of a request by or on behalf of the
person lawfully entitled to a right of property or possession
in the goods, not to make delivery (sec.10)
6. The bailee has information that the delivery about to be
made was to one not lawfully entitled to the possession of
the goods
7. Delivery to a claimant with a better right
8. Attachment or levy of the goods by a creditor where the
document is surrendered or its negotiation is enjoined and
the document is impounded (sec.25)
9. The document of title is attached by a creditor (sec.26)

Q: What are the charges included in a warehousemans lien?
1. All lawful charges for storage and preservation of the
goods
2. All lawful claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering and other
charges and expenses in relation to the goods;
3. All reasonable charges and expenses for notice and
advertisements of the sale, and for the sale of the goods
where default had been made in satisfying the
warehousemans lien

Q: When is a warehousemans lien deemed lost?
1. When he surrenders the possession of the goods
2. When he refuses to deliver the goods when demand is
made with which he is bound to comply under the WRL


X. LETTERS OF CREDIT

Q: What is a letter of credit (LOC)?
An engagement by a bank or other person made at the request
of a customer that the issuer will honor drafts or other demands for
payment upon compliance with the conditions specified in the credit
(Prudential Bank v. IAC, 216 SCRA 157, 267)





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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
Q: How does a letter of credit operate?



*Behind the scenes, before the seller and the buyer both get their ends
of the deal, other banks may play a hand in the credit transaction

o The issuing or opening bank may contract the facilities of one
of its correspondent banks for the purpose of advising the
seller of the credit (this bank is called the advising bank or
notifying bank)

o The seller may not trust the opening bank (usually because the
opening bank is a foreign and unfamiliar bank), in which case,
he may use the facilities of another, better-known and bigger
bank known as the confirming bank. The confirming bank
usually carries a dollar account maintained by the opening bank,
and thereby assumes the obligation of paying the seller upon
presentment of the tender documents. The seller may now
proceed against the confirming bank for the payment of the
credit. In this regard, the confirming banks liability is primary,
as if the credit was issued by it and the opening bank jointly.

o Another bank, known as the negotiating bank, may buy or
discount a draft drawn against the letter. If the draft
contemplated by the LOC is to be drawn on the opening bank
or on another designated bank not found in the city of the
seller, any bank in the sellers city which buys or discounts the
drafts becomes a negotiating bank.

o The paying bank is the bank against whom the drafts are to be
drawn. It may or may not be the opening bank.

Q: Who are the parties in a LOC?
Generally, there are at least 3 parties the buyer, the seller or
beneficiary, and the opening bank.

Q: What are the transactions involved in a letter of credit?
There are at least 3 transactions
1. The contract of sale of goods between the buyer and seller
2. The contract of the buyer with the issuing bank, whereby
the issuing bank promises to pay drafts drawn by the seller-
1
Buyer and Seller agree on what documents must be presented
2
Buyer secures a letter of credit in favor or seller from his bank,
which is termed the issuing or opening bank
3
Once the credit is established, seller ships goods to buyer and in
the process, obtains the tender documents
4
To obtain payment for goods, seller executes a draft and presents
it to bank, along with tender documents
5
Bank pays seller and obtains possession of the documents of title
6
Buyer reimburses bank for the payment it made to seller
7
Bank gives buyer the documents of title upon reimbursement
8
Buyer obtains title over the goods he purchased from seller

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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
beneficiary, and the buyer reciprocally promises to
reimburse the issuing bank
3. The letter of credit proper

*Other contracts include the contract of carriage between the seller and
the carrier for the goods, the contract of surety between the seller and
the warehouseman or bailee for the keeping of the goods, and the
various credit agreements between intermediary banks regarding the
negotiation of the drafts drawn against the letter of credit

Q: What is the Independence Principle?
The independence principle is a doctrine embodied in the
Uniform Customs and Practice for Documentary Credits (UCP) adopted
by the International Chamber of Commerce, which essentially holds that
the contracts involved in a letter of credit arrangement are to be
maintained in a state of perpetual separation.

*The parties to these different transactions may not co-opt the rights of
recourse or remedies found in each transaction, nor are they obligated
to go beyond the respective responsibilities of each of the transactions
in order to determine the propriety or validity of the others.

*This is what differentiates a LOC from other accessory contracts.

*A direct consequence of this principle is that banks deal only in paper,
and not in goods. The bankers issuing agent should be able to sit with a
necktie and a white shirt at a desk in a bank and by looking at the papers
presented to him determine whether the bank is obligated to make
payment or not. He is not obligated, and indeed, is foreclosed from
donning his overalls and going into the field to determine whether the
underlying contract has been performed. (White and Summers, cited in
Bank of America v. CA, 228 SCRA 357)

Q: Is the issuing bank the only party who may invoke the independence
principle?
No, other parties (i.e.: even the beneficiary, in proper cases)
may invoke the principle

Q: What is the Fraud Exception?
An exception to the independence principle, which holds that
when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents documents to the confirming or paying bank
which contain material representations of fact that are untrue, and
which the beneficiary was aware of, the buyer may seek an injunction
against payment. (Transfield Phils., Inc. v. Luzon Hydro Corp., GR No.
146717, November 22, 2004)

*Requisites:
1. There is clear proof of fraud
2. It is an abuse of the independent purpose of the LOC and not
merely fraud under the main agreement
3. Irreparable injury might follow if injunction is not granted or the
recovery of damages would be severely impaired


XI. TRUST RECEIPTS

Q: What is a trust receipt transaction?
Under the Trust Receipts Law (TRL), a trust receipt transaction
is any transaction by and between an entruster and an entrustee where
the former releases possession of goods to the latter upon the
execution of the entrustee of a trust receipt. By the receipt, the
entrustee binds himself to hold the goods in trust for the entruster and
to sell or otherwise dispose of them, with the obligation to remit the
proceeds thereof to the entruster (sec.4, TRL)


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But this is the world we live in and justice does NOT always triumph. This isnt the wild west
where you can clean up the streets with a gun even though thats exactly whats needed.
~Point of Impact
Q: What are the obligations of the entrustee?
1. Hold the goods, documents or instruments in trust for the
entruster and dispose of them strictly in accordance with
the terms and conditions of the trust receipt
2. Receive the proceeds in trust for the entruster and turn
them over to the extent of the amount owing to the
entruster as appears on the trust receipt
3. Insure the goods for their total value against loss from fire,
theft, pilferage, or other casualties
4. Keep the goods or proceeds thereof separate and capable
of identification as property of the entruster
5. Return the goods, documents or instruments in the event
of non-sale or upon demand of the entruster
6. Observe all other lawful terms and conditions of the trust
receipt
(sec.9, TRL)

Q: What are the rights of the entruster?
1. To receive the proceeds from the sale of the goods, etc.
released under a trust receipt to the extent of the amount
owing to him as appears in the receipt
2. To receive the goods, etc. upon the return of the same by
the entrustee in case of non-sale
3. To enforce all other rights conferred upon him in the trust
receipt
(sec.7, TRL)

Q: What is the right of a purchaser for value and in good faith upon
buying the goods sold by the entrustee?
The purchaser for value and in good faith acquires the goods,
documents or instruments free from the entrustees security interest
(sec.11, TRL)

Q: Who bears the risk of loss of the goods?
The entrustee, even though he is not the owner of the goods.
Loss of goods pending their disposition, does not extinguish the
entrustees liability, even if the loss was not due to the fault or
negligence of the entrustee (sec.10, TRL)