MERCANTILE LAW

2017 GOLDEN NOTES

FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
 The UST GOLDEN NOTES is the annual student-edited bar review
material of the University of Santo Tomas, Faculty of Civil Law.
Communications regarding the Notes should be addressed to the
Academics Committee of the UST Bar Operations.

Address: Academics Committee

UST Bar Operations
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008

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(02) 406-1611 loc. 8578

Academics Committee
Faculty of Civil Law
University of Santo Tomas
España, Manila 1008

All rights reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical
and Royal University of Santo Tomas, the Catholic University of the Philippines.

2017 Edition.

No portion of this material may be copied or reproduced in books, pamphlets, outlines or

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No. ____________

Printed in the Philippines June 2017.

 ACADEMIC YEAR 2017-2018
CIVIL LAW STUDENT COUNCIL
JONATHAN SANTOS PRESIDENT
MA. JASMIN A. LABACO INTERNAL VICE PRESIDENT
NIÑO JOSEPH B. PIO RODA EXTERNAL VICE PRESIDENT
KARIZZA KAMILLE M. CRUZ SECRETARY

UST BAR OPERATIONS

NIKKI MEI Q. KO CHAIRPERSON

RHOSE AZCELLE L. MAGAOAY VICE-CHAIRPERSON
JANN PATRICIA M. TORRES SECRETARY
JERREMIAH KRIZIAH B. BATALLER ASST. SECRETARY
NELLE FRANCESE DELA PAZ ASST. SECRETARY
ALEXANDER MARA J. VINLUAN HEAD, PUBLIC RELATIONS OFFICER
DENZ CHRISTIAN A. RESENTES ASST. HEAD PUBLIC RELATIONS OFFICER
CLARICE ANGELINE V. QUESTIN HEAD, FINANCE COMMITTEE
KAIRA MARIE B. CARLOS ASST. HEAD, FINANCE COMMITTEE
CLARA LOUISSE J. YUMANG HEAD, HOTEL ACCOMMODATIONS COMMITTEE
EMMANUEL A. LANDAYAN ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
JOHN AL-NAIR SIMONE L. JUMAMIL ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
PATRICIA MAE D. GUILLERMO ASST. HEAD, HOTEL ACCOMMODATIONS
COMMITTEE
NIÑO JOSEPH B. PIO RODA LOGISTICS COMMITTEE
JOCHRIS DANIEL Z. GUADES LOGISTICS COMMITTEE
BERYLL ANDRÉ Y. BARCENAS LOGISTICS COMMITTEE
MON FRANCIS A. TOLENTINO LOGISTICS COMMITTEE
MICHAEL EARVIN R. SABADO LOGISTICS COMMITTEE

ATTY. AL CONRAD B. ESPALDON

ADVISER
 ACADEMICS COMMITTEE

CAMILLE ANGELICA B. GONZALES SECRETARY GENERAL

EMNIE VALERIE B. DURAN DEPUTY SECRETARY GENERAL
IRVIN L. PALANCA EXECUTIVE COMMITTEE
MARIELLA A. MARASIGAN EXECUTIVE COMMITTEE
LARA NICOLE T. GONZALES EXECUTIVE COMMITTEE

CAMILLE ANGELICA B. GONZALES LAYOUT ARTIST

CIARI T. MENDOZA COVER DESIGN ARTIST

MERCANTILE LAW COMMITTEE

JOSEPH NELSON A. HERNANDEZ
MERCANTILE LAW COMMITTEE HEAD

FLORRENCE FAYE S. FRANCO ASST. HEAD, CORPORATION LAW

KELLY ANN RUBIN ASST. HEAD, TRANSPORTATION LAW
MAICA A. PRUDENTE ASST. HEAD, INTELLECTUAL PROPERTY LAW
JANINE AIRA A. ARENAS ASST. HEAD, INSURANCE LAW
JACKIELYN KRYSTYL C. BANA ASST. HEAD, SPECIAL COMMERCIAL LAWS

MEMBERS
NEREN O. NIEVA
GERALD L. NACPIL
CAMILLE ANNE P. DE ASIS
STEFFI NICOLE P. FLORES
CLAIRE MARGARETTE M. BONA
ZARA JANELLA M. CACHA
DIVINE CARLOS

ATTY. MARY GRACE L. JAVIER

Adviser
 FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS

ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.

DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR

LENY G. GADANIA, R.G.C.

GUIDANCE COUNSELOR
 OUR DEEPEST APPRECIATION TO OUR
MENTORS AND INSPIRATION

DEAN NILO T. DIVINA

DEAN AMADO L. DIMAYUGA

ATTY. JACINTO D. JIMENEZ

ATTY. ALBERT R. PALACIOS

ATTY. AMADO T. TAYAG

ATTY. TEOFILO R. RAGADIO

ATTY. ALLAN B. GEPTY

JUSTICE GABRIEL T. ROBENIOL

JUSTICE JAPAR B. DIMAAMPAO

JUDGE MARIA ELLA CECILIA D. ESCALANTE

ATTY. MARIAN JOANNE K. CO-PUA

For being our guideposts in understanding the intricate sphere of Mercantile Law.
-Academics Committee 2017
 Foreword for 2017 Golden Notes
Dean Nilo T. Divina

It is with pleasure that I introduce to you the 2017 Golden Notes - a product of the concerted
and dedicated efforts of our students, faculty and staff to ensure that our Bar candidates are
armed with the most comprehensive, updated and easy to digest reviewer as their companion
in the review process. This will provide key concepts, updated jurisprudence, relevant
comparisons and notable changes in the law, if any, right at your fingertips.

With the aid of selected lawyers, Golden Notes remains at the forefront of providing legal
insights raised from past bar questions and current events that could be part of the discussion
in the bar examinations.

Notably, the editors of this book signified their intention to serve in assisting our aspiring
lawyers to develop the kind of mentality needed in justifying answers supported by facts and
relevant provisions of laws during the Bar examinations, through the publication’s logical
sequence and meticulous presentation of even the most difficult legal concepts.

With the aim of increasing the candidate’s confidence and ensuring the efficient use of his/her
time in pouring through all eight (8) Bar subjects, we have enlisted the expertise of some of
the most senior practitioners in the different fields of law, including noted jurists and
esteemed bar reviewers. The diversity of the publication's roster of consultants and editors
ensures that it remains relevant and essential. Indeed, with contributions from different
people mentioned above, this issue of the Golden Notes marks an important new step in the
direction of the UST Faculty of Civil Law.

Let these notes, however, not detract you from the true goal. There is no substitute for hard
work, and there is no shortcut to excellence. Persevere. Strive. Keep the faith. You will make
it.

“Courage and perseverance have a magical talisman, before which difficulties disappear and
obstacles vanish into air.”
- John Quincy Adams
 TABLE OF CONTENTS
*BASED ON 2017 BAR SYLLABUS

I. LETTERS OF CREDIT…………………………………………………………………………………………………………………1
A. Definition and Nature of Letter of Credit………………………………………………..…….…………...……….1
B. Parties to a Letter of Credit………………………………………..…………………………………..………………….3
1. Rights and Obligations of Parties…………………………..……………………………………....………3
C. Basic Principles of Letter of Credit……………………………………………………………………………..……...5
1. Doctrine of Independence…………………………………………………………………………………….5
2. Fraud Exception Principle……………………………………………………….……………………………7
3. Doctrine of strict Compliance……………………………………………..…………………………………7

II. TRUST RECEIPTS LAW……………………………………………………………………………………..………………………9

A. Definition/Concept of a Trust Receipt Transaction………...…………………………..………………………9
1. Loan/Security Feature……………………………………………………………………..…………………11
2. Ownership of the Goods, Documents and Instruments under a Trust
Receipt……………………………………………………………………………………………………..…………...11
B. Rights of the Entruster……………………………………………………………………………………………………11
1. Validity of the Security Interest as Against the Creditors of the Entrustee/ Innocent
Purchasers for Value..............................................................................................................................…..12
C. Obligation and Liability of the Entrustee……………..……………………………….…………………………..12
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or
Instruments………………………………………………………………………………………..……………...….12
2. Return of Goods, Documents or Instruments in Case of Sale...............................…………..12
3. Liability for Loss of Goods, Documents or Instruments…………………………...……………13
4. Penal Sanction if Offender is a Corporation………………………..………………………….…….13
D. Remedies Available……………………………………………………………………………………………..………….15
E. Warehouseman’s Lien…………..…………………………………………………………………………………………23

III. NEGOTIABLE INSTRUMENTS LAW………………………………………………………………………………..………25

A. Forms and Interpretation……………………………….…………………………….……………………..………….25
1. Requisites of Negotiability…………………………………….…………………………………..………..26
2. Kinds of Negotiable Instruments……………………………….…………………..……………………32
B. Completion and Delivery……………………………………………………………..………………………………….34
1. Insertion of Date…………………………………………………..…………………………………………….34
2. Completion of Blanks…………………………………………………….……………………………………35
3. Incomplete and Undelivered Instruments……………………………...……………………...…….36
4. Complete but Undelivered Instruments…………………………………………………………..…..37
C. Signature……………………...………………………………………………………….……………………………………..37
1. Signing in Trade Name……………………………………………..………………………………………...38
2. Signature of Agent……………………………………………………….……………………………………..38
3. Indorsement by Minor or Corporation……………………………….……………………..………...38
4. Forgery……………………………………………………...………………………………………………………39
D. Consideration………………………………………………………………..……………………………………………….41
E. Accommodation Party………………………………………………….…………………………………………………43
F. Negotiation……………………………………………………………………………………………………………………..46
1. Distinguished from Assignment………………………….……………..………………………………..46
2. Modes of Negotiation………………………………………………………………...……………………….46
3. Kinds of Indorsements……………………………………………………………………………………….48
G. Rights of the Holder………………………………………………………………………………………………………..49
1. Holder in Due Course………………………………………………………………………………………….49
2. Defenses Against the Holder……….………………………………………………………………………52
H. Liabilities of Parties……………………………….……………………………………………………………………….54
1. Maker………………………………………………………………………………………………………………..54
2. Drawer………………………………………………………………………………………………………………55
3. Acceptor………………………………………………………………….…………………………………………56
4. Indorser………………………………………………………………..…………………………………………...56
5. Warranties………………………………………………….……………………………………………………..58
I. Presentment for Payment…………………………………………..…………………………………………………….59
 1. Necessity of Presentment for Payment………………………………….…………………….………59
2. Parties to Whom Presentment for Payment Should Be Made…………………..………...….60
3. Dispensation with Presentment for Payment…………………………………….…….…………..61
4. Dishonor by Non-Payment………………………………………………………………….………………61
J. Notice of Dishonor……………………...…………………………………………………………………………..………..61
1. Parties to Be Notified………………………….……………………………………………..……………….62
2. Parties Who May Give Notice and Dishonor…………………………………………………...……62
3. Effect of Notice……………………………………………………………..……………………………………63
4. Form of Notice……………………………………………………………..…………………….......................63
5. Waiver…………………………………………………………………………………….....................................63
6. Dispensation with Notice………………………………………………………………………….……......63
7. Effect of Failure to Give Notice………………………………………………………….………………...64
K. Discharge of Negotiable Instrument……………………………………………………………...…………………64
1. Discharge of Negotiable Instrument…………………………………..………………………………..64
2. Discharge of Parties Secondarily Liable…………………………….…………………………………65
3. Right of Party Who Discharged Instrument………………………..………………………………..66
4. Renunciation by Holder………………………………………………………..…………………………….66
L. Material Alteration……………………………………………………………………………………..............................66
1. Concept………………………………………………………………………..…………….................................66
2. Effect of Material Alteration…………………………………………….………………………………….66
M. Acceptance……………………………………………………….....................................................................................67
1. Definition……………………………………………………………………..…………….................................67
2. Manner……………………………………………………………………………………………………………...67
3. Time for Acceptance………………………………………………………….……………………………….68
4. Rules Governing Acceptance……………………………………………………………………………….68
N. Presentment for Acceptance……………………………………………………………………………………………68
1. Time/Place/Manner of Presentment………………………………….……………………………….69
2. Effect of Failure to Make Presentment…………………………….…………………………………..69
3. Dishonor by Non-Acceptance……………………………………………...………………………………69
O. Promissory Notes…………………………………………………………...………………………………………………70
P. Checks……………………………………………………………………………………………..……………………………..71
1. Definition ………………………………………………………………………..………………………………...71
2. Kinds………………………………………………………………………...……………………………………….72
3. Presentment for Payment…………………………………………..……………………………………….74
a. Time……………………………………………………………...……………………………………...74
b. Effect of Delay………………………………………………..……………………………………...74

IV. INSURANCE CODE……………………………………………………………………….………………………………………...75

A. Concept of Insurance………………………………………………………………...…………………………………….75
B. Elements of an Insurance Contract…………………………………………………………………………………..78
C. Characteristics/Nature of Insurance Contracts………………………………………………………………...79
D. Classes…………………………………………………………………………………………………………………………..80
1. Marine………………………………………………………………….……..…………………………………...108
2. Fire…………………………………………………….………………………..…………………………………..118
3. Casualty…………………………………………………………………………………………………………...120
4. Suretyship………………………………………………………………….…………………………………….123
5. Life…………………………………………………………………………………………………………………..124
6. Compulsory Motor Vehicle Liability Insurance…………………………………………………..126
E. Insurable Interest……………………………………………………………………...……………………………………80
1. In Life/ Health……………………………………………………………………………………………………82
2. In Property…………………………………………………………………………….…………………………..84
3. Double Insurance and Over Insurance…………………………………..…………………………….85
4. Multiple or Several Interests on Same Property…………………………………………………...87
F. Perfection of the Contract of Insurance…………………………………………………………………………….88
1. Offer and Acceptance/Consensual……………………………………………………...……………….89
a. Delay in Acceptance…………………………………………………..…………………………..90
b. Delay of Policy……………………………………………………………….……………………...90
2. Premium Payment……………………………………………………………………………………………...90
3. Non-Default Options in Life Insurance………………………………………………………………...95
 4. Reinstatement of Lapsed Policy of Life Insurance………………………………..……………….95
5. Refund of Premiums……………………………………………………………………..……………………96
G. Rescission of Insurance Contracts……………………………………………………………………………………97
1. Concealment………………………………………………………………………………………………….......97
2. Misrepresentation/Omissions…………………………………………………………………………..100
3. Breach of Warranties…………………………………………………..……………………………...........102
H. Claims Settlement and Subrogation……………………………………………………………………………….104
1. Notice and Proof of Loss……………………………………………..…………………………………….104
2. Guidelines on Claims Settlement……………………………...………………………………………..105
a. Unfair Claims Settlement; Sanctions……………………………………………………..105
b. Prescription of Action………………………………………………………………………….105
c. Subrogation…………………………………………………………………………………………106

V. TRANSPORTATION LAWS…………………………………...………………………………………………………….……130
A. Common Carriers………………………………………………………………………….………………………………130
1. Diligence Required of Common Carriers……….……………………………………….…………..133
2. Liabilities of Common Carriers…………………………………...………………………….…………136
B. Vigilance over Goods…………………………………………………………………………………….………………138
1. Exempting Causes………………………………………………………………………….…………………138
a. Requirement of Absence of Negligence…………………………………………...…….139
b. Absence of Delay…………..……………………………………………………..………………141
c. Due Diligence to Prevent or Lessen the Loss……………………..………………..…142
2. Contributory Negligence……………………………......................................………………………….142
3. Duration of Liability…………………………………………………………………………………………147
a. Delivery of Goods to Common Carrier……………………………….....……………….147
b. Actual or Constructive Delivery……….……………………………...……………………142
c. Temporary Unloading or Storage……………………………....…………………………143
4. Stipulation for Limitation of Liability……………………………………….………..………………143
a. Void Stipulations…………………………………………………………..……………………..144
b. Limitation of Liability to Fixed Amount………………………………….……………..145
c. Limitation of Liability in Absence of Declaration of Greater
Value……………………………………………………………………………………………………...145
5. Liability for Baggage of Passengers……………………………………………………..…………….145
a. Checked-in Baggage………………………………………………………………..……...……145
b. Baggage in Possession of Passengers………………………………..…………………..146
C. Safety of Passengers……………………………………………………………………………………….……………..146
1. Void Stipulations…………………………………………………………………………..………………….147
2. Duration of Liability…………………………………………………………………………………………147
a. Waiting for Carrier or Boarding of Carrier…………………….………………………147
b. Arrival of Destination…………………………………………………………………………..148
3. Liability for Acts of Others……………………………………………………………..…………………149
a. Employees…………………………………………………………………………..………………149
b. Other Passengers and Strangers…………………………………………………..………150
4. Extent of Liability for Damages……………………………………………………………..…………..151
D. Bill of Lading……………………………………………………………………………………………….………………..153
1. Three-Fold Character………………………………………………………………..……………………...153
2. Delivery of Goods……………………………………………………………………………………………..154
a. Period of Delivery…………………………………………………………..……………………154
b. Delivery Without Surrender of Bill of
Lading…………………………………………………………………………………………………….154
c. Refusal of Consignee to Take Delivery………………………….……………………….154
3. Period for Filing Claims…………………………………………………………………………………….155
4. Period for Filing Actions……………………………………………………...……………………………155
E. Maritime Commerce……………………………………………………………………………….……………………..156
1. Charter Parties…………………………………………………………………………………………………156
a. Bareboat/Demise Charter…………………………………….……………………………...156
b. Time Charter……………………………………………………………………………………….156
c. Voyage/Trip Charter………………………………………………..…………………………..156
2. Liability of Ship Owners and Shipping Agents…………………….……………………………...157
 a. Liability for Acts of Captain………………………………………….……………………….158
b. Limited Liability Rule…………………………………………………...……………………...160
c. Exceptions to the Limited Liability Rule……………………….……………………….160
3. Accidents and Damages in Maritime Commerce………………………….……………………..161
a. General and Particular Averages…………………………………….…………………….161
b. Collisions………………………………………………………………………….…………………162
4. Carriage of Goods by Sea Act…………………………………………………………………………….164
a. Application…………………………………………………………………...……………………..164
b. Notice of Loss or Damage……………………………………………..….……….………… 164
c. Period of Prescription……………………………………………………………….…………165
d. Limitation of Liability……………………………………………………..…………………...167
F. The Warsaw Convention………………………………………………………………………….……………………167
1. Applicability…………………………………………………………………………….………………………168
2. Limitation of Liability…………………………………………………………...…………………………..169
a. Liability to Passengers……………………………………………………..…………………..169
b. Liability for Checked Baggage…………………………………..…………………………..169
c. Liability for Handcarried Baggage…………………………...………………..…………..169
3. Willful Misconduct………………………………………………………………….………………………..170

VI. THE CORPORATION CODE…………………………………………………………………………………………………..175

A. Corporation…………..………………………………………………………………………...……………………………175
1. Definition……………………………………………………………………….…………….………………….175
2. Attributes of the Corporation……………………………………………………………………………175
B. Classes of Corporations…………………………………………………………..…………………….………………181
C. Nationality of Corporations…………………………………………………..………………………….……………187
1. Place of Incorporation Test………………………………….……………………………………………187
2. Control Test………………………………………………………….……….…………………………………187
3. Grandfather Rule…………………………………………………….……………………………..…………188
D. Corporate Juridical Personality…………………………………………………………………………..…………190
1. Doctrine of Separate Juridical
Personality…………………………………………………………….……………………………………………190
a. Liability for Torts and Crimes…………………...………………………………….………196
b. Recovery of Moral Damages…………………………………..………..………………...…196
2. Doctrine of Piercing the Corporate Veil………………………………..……………………………198
a. Grounds for Application of Doctrine……………………....…………….……………… 198
b. Test in Determining Applicability…………………………………………………………203
E. Incorporation and
Organization……………………………………………………………………………………...………………..……………206
1. Number and Qualifications of
Incorporators……………………………………………………….…………………………………...…...……208
2. Corporate Name - Limitations on Use of Corporate Name……………………………..……210
3. Corporate Term……………………………………………………………………………………………..…213
4. Minimum Capital Stock and Subscription Requirements………………………….…………213
5. Articles of Incorporation……………………………………….……………………………….…………214
a. Nature and Function of Articles………………………………………...……………….…214
b. Contents……………………………………………………………………………...………………214
c.Amendment……………………….…………………………………………………………………215
d. Non-Amenable Items………………………………………………...…………………………216
6. Registration and Issuance of Certificate of Incorporation……………………...……………216
7. Adoption of By-Laws…………………………………………….……………………………..……………217
a. Nature and Functions of By-Laws………………………..………………………………..217
b. Requisites of Valid By-Laws……………………………..…………………………………..217
c. Binding Effects…………………………………………………………………………………….218
d. Amendment or Revision………………………………………………….…………………...220
F. Corporate Powers………………………………………………………………………………………………………... 220
1. General Powers, Theory of General Capacity………………………………….………………….221
2. Specific Powers, Theory of Specific Capacity……………………………………….……………..223
a. Power to Extend or Shorten Corporate Term…………………….………………….223
 b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded
Indebtedness…………………………………………………………………….………..224
c. Power to Deny Pre-Emptive Rights………………………………….……………………226
d. Power to Sell or Dispose of Corporate Assets………………….…………………….228
e. Power to Acquire Own Shares………………………………………………………………229
f. Power to Invest Corporate Funds in Another Corporation or
Business…………………………………………………………………………….…………………...230
g. Power to Declare Dividends…………………………………………………………………231
h. Power to Enter Into Management Contract………………………….………………..234
i. Ultra Vires Acts…………………………………………………………………..………………...235
i. Applicability of Ultra Vires Doctrine………………………..………………..235
ii. Consequences of Ultra Vires Act…………………………….………………..239
3. How Exercised…………………………………………………………………………………………………240
a. By the Shareholders…………………………………………………………..…….…………..240
b. By the Board of Directors…………………………………………………………….………240
c. By the Officers…………………………………………………………………………..…………242
4. Trust Fund Doctrine…………………………………………………………………….…….……………..244
G. Board of Directors and Trustees……………………………………………………..……………………………..245
1. Doctrine of Centralized Management………………………………………………………………...245
2. Business Judgment Rule………………………………………………………………….………………..246
3. Tenure, Qualifications and Disqualifications of Directors or Trustees……………...….246
4. Elections………………………………………………………………………………………………..………...249
a. Cumulative Voting/Straight Voting…………………………………….………………...250
b. Quorum…………………………………………………………………………………………...….250
5. Removal………………………………………………………………………………………………...………...250
6. Filing of Vacancies……………………………………………………………………………………………251
7. Compensation……………………………………………………………………………………………..…...252
8. Fiduciaries Duties and Liability Rules……………………………..…………………………………253
9. Responsibility for Crimes…………………………………………………..……………………………..258
10. Inside Information…………………………………………………………….……………………………258
11. Contracts……………………………………………………………………………..………………………...259
a. By Self-Dealing with the Corporation……………………………………………………259
b. Between Corporations with Interlocking Directors…………………..…………...259
12. Executive Committee……………………………………………………………………...………………260
13. Meetings…………………………………………………………………………………………..……………261
a. Regular or Special…………………………………………………………….………………….261
i. When and Where………………………………………..…………………………...261
ii. Notice……………………………………………………..……………………………...262
b. Who Presides…………………………………………………………………………...………... 263
c. Quorum……………………………………………………………………………………………….264
d. Rule on Abstention………………………………………………………………..…………….264
H. Stockholders and Members……………………………………………….………………………………..…………264
1. Rights of a Stockholder and
Members……………………………………………………………………………………………..………………264
a. Doctrine of Equality of Shares………………………………...……………………….……265
2. Participation in Management……………………………………………….…………………...………265
a. Proxy……………………………………………………………………...…………...………………265
b. Voting Trust ……………………………………………………...………………………………..267
c. Cases When Stockholders’ Action is Required…………………...…………………..269
i. By a Majority Vote…………………………………………………….……………..270
ii. By a Two-Thirds Vote……………………………………….…………………….270
iii. By Cumulative Voting…………………………………………………………….270
3. Proprietary Rights………………………………………………………………………….………………...270
a. Right to Dividends…………………………………………………………...…………………..270
b. Right of Appraisal………………………………………………………...……………………...271
c. Right to Inspect……………………………………………………………………………………273
d. Pre-Emptive Right………………………………………………………….……………………275
e. Right to Vote………………………………………………………………………..………………276
f. Right of First Refusal…………………………………………………………………………….277
 4. Remedial Rights……………………………………………………………………………………………….278
a. Individual Suit……………………………………………………………………………………..278
b. Representative Suit………………………………………..……………………………………278
c. Derivative Suit……………………………………………………………………………………..278
5. Obligation of a Stockholder………………………………………….…………………………………...282
6. Meetings……………………………………………………………………...…………………………………..283
a. Regular or Special………………………………………………………………………………..283
i. When and Where……………………………..……………………………………...283
ii. Notice…………………………….………………….…………………………………...283
b. Who Calls the Meetings………………………………..……………………………………... 284
c. Quorum……………………………………………………………………………………………….284
d. Minutes of the Meetings………………………………….…………………………………...285
I. Capital Structure…………………………………………………………………………….……………………………...285
1. Subscription Agreements…………………………………………….……………………………………285
2. Consideration for Stocks…………………………………………………………………………………..287
3. Shares of Stock………………………………………………………………………………………………...287
a. Nature of Stock……………………………………………………………………………………288
b. Consideration for Shares of Stock…………………….…………………………………..288
c. Watered Stock…………………………………………………….……………………………….289
i. Definition…………………………………………...…………………………………...289
ii. Liability of Directors for Watered Stocks………………………………….289
iii. Trust Fund Doctrine for Liability for Watered Stocks………………290
d. Situs of the Shares of Stock…………………………………………………………………..290
e. Classes of Shares of Stock…………………………………………….……………………....290
4. Payment of Balance of Subscription………………………………………………..………………...294
a. Call by Board of Directors……………………………………………….……………………294
b. Notice Requirement…………………………………………………………………….………295
c. Sale of Delinquent Shares………………………………………………………..……………295
i. Effect of Delinquency……………………………………………………..………...295
ii. Call by Resolution of the Board of Directors…………………….……….296
iii. Notice of Sake……………………………………………………...………………...296
iv. Auction Sale and the Highest Bidder……………………………………….296
5. Certificate of Stock…………………………………………………………………………………………...297
a. Nature of the Certificate………………………………………..……………………………..297
b. Uncertificated Shares………………………………………………………………..…………297
c. Negotiability…………………………………………………………………………….………….297
i. Requirements for Valid Transfer of Stocks………………………...……...298
d. Issuance………………………………………………………………………………………..…….302
i. Full Payment………………………………………………………………...…………302
ii. Payments Pro-Rata…………………………………………………….…………...302
e. Lost or Destroyed Certificates………………………………………………...…………….302
6. Stock and Transfer Book…………………………………………………………………………………..304
a. Contents…………………………………………………………………………...…………………304
b. Who may make Valid Entries……………………………………...………………………..304
7. Disposition and Encumbrance of Shares……………………………………………………………304
a. Sale of shares…………………………………………………………….………………………...304
b. Allowable Restrictions on the Sale of Shares……………………………..…………..305
c. Requisites of a Valid Transfer…………………………………………………..…………...305
d. Involuntary Dealings with Shares…………………………………………………………306
J. Dissolution and Liquidation……………………………………………………………………………………………306
1. Modes of Dissolution…………………………………………………………………….………………….308
a. Voluntary…………………………………………………………………….……………………...309
i. Where No Creditors Are Affected……………………….…………………….309
ii. Where Creditors Are Affected…………………………..……………………..309
iii. By Shortening of Corporate Term…………………..………………………310
b. Involuntary…………………………………………………………………………………………310
i. By Expiration of Corporate Term………………...……………………………310
ii. Failure to Organize And Commence Business Within 2 Years From
Incorporation………………………………………………………………..…………...311
 iii. Legislative Dissolution………………………………….…………....................311
iv. Dissolution by the SEC on Grounds under Existing Laws………....311
2. Methods of Liquidation………………………………………………………………………….…………312
a. By the Corporation Itself……………………………………………………………………...313
b. Conveyance to a Trustee within a Three-Year Period…………………………….314
c. By Management Committee or Rehabilitation Receiver………………………....315
d. Liquidation After Three Years…………………………………………………….………..320
K. Other Corporations……………………………………………………………………………………………………….320
1. Non-Stock Corporations…………………………………………………………….……………………..326
a. Definition………………………………………………………………………….………………...326
b. Purposes…………………………………………………………………………..…………………329
c. Treatment of Profits…………………………………………………………………………….329
d. Distribution of Assets upon Dissolution………………………………………………..329
2. Foreign Corporations……………………………………………………………………….………………329
a. Bases of Authority over Foreign Corporations………………………………………330
i. Consent……………………………………………………………………..…………….330
ii. Doctrine of “Doing Business” (related to definition under the Foreign
Investments Act, R.A. No. 7042)………………..…………………….330
b. Necessity of a License to Do Business…………………………………………………...332
i. Requisites for Issuance of a License………………………………………….333
ii. Resident Agent………………………………………………………………...……..334
c. Personality to Sue………………………………………………………………………..………335
d. Suability of Foreign Corporations………………………………………………………...335
e. Instances When Unlicensed Foreign Corporations May Be Allowed to
Sue……………………………………………………………………………………………………..…..336
f. Grounds for Revocation of License……………………………………..…………………337
L. Mergers and Consolidations……………………………………………………………………………….………….337
1. Definition and Concept……………………………………………………………………………………..337
2. Plan of Merger or Consolidation……………………………………………………...………………...342
3. Articles of Merger or Consolidation……………………………………………….………………….343
4. Procedure………………………………………………………………………………………..………………343
5. Effectivity…………………………………………………………………………………….…………………..343
6. Effects and Limitations………………………………………………………….………………………….344

VII. SECURITIES REGULATION CODE (R.A. No. 8799)…………………..…………………...………………………345

A. State Policy, Purpose………………………………………………………………………………………….…………346
B. Definition of Securities…………………………………………………………………………………….……………346
C. Kinds of Securities………………………………………………………………………………………...………………349
1. Exempt Securities…………………………………………………………………………..…………...……349
2. Exempt Transactions………………………………………………………………….……….……………350
3. Non Exempt…………………………………………………………………………………….…………….…350
D. Procedure for Registration of Securities………………………………………………...………………………350
E. Prohibitions on Fraud, Manipulation and Insider Trading……………...………………………….……352
1. Manipulation of Security Prices…………………………………………………..………….…………352
2. Fraudulent Transactions……………………………………...………………………………...…………353
3. Insider Trading…………………………………………………………………………………...……………354
F. Protection of Investors………………………………………………………………………………….………………355
1. Tender Offer Rule……………………………………………………………………..………………...……355
2. Rules on Proxy Solicitation……………………………..................................…………………………358
3. Disclosure Rule………………………………………………………………………...………………………358
G. Civil Liability………………………………………………………………………………………….……………..………359

VIII. BANKING LAWS………………………………………………………………………………..…………………………….. 361

A. The New Central Bank Act (R.A. No. 7653) ………………………………………………………………361
1. State Policies………………………………………………………………………….………………………...361
2. Responsibility and Primary Objective of the BSP………………………………………...……..361
3. Monetary Board - Powers and Functions………………………...………………………...………361
4. How the BSP Handles Banks in Distress…………………………………………………….………362
a. Conservatorship………………………………………..…………………………………………362
 b. Closure……………………………………………………………………………………….....……363
c. Receivership…………………………………………….…………………………….……………364
d. Liquidation……………………………………………………………………….…………………364
5. Legal Tender Power…………………………………………………..………………………………..……367
6. Foreign Exchange Operations………………………………………………………….……………..…368
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)…………………………………368
1. Purpose………………………………………………….……………………………………………..…………368
2. Prohibited Acts………………………………………………………………………………...………………369
3. Deposits Covered…………………………………………………………………………………………..…369
4. Exceptions………………………………………………………………………….……………………………369
5. Garnishment of Deposits, including Foreign Deposits………………………..……….………374
C. General Banking Law of 2000 (R.A. No. 8791) …………………………………………...……………...375
1. Definition and Classification of Banks…………………………………………………………..……375
2. Distinction of Banks from Quasi-Banks and Trust Entities……………………….…………376
3. Bank Powers and Liabilities………………………………………………………………………...……377
a. Corporate Powers………………………………………………..………………………………377
b. Banking and Incidental Powers………………………………………………..…..………377
4. Diligence Required of Banks……………………………………………………………………..………378
5. Nature of Bank Funds and Bank Deposits………….……………………………....………………380
6. Stipulation of Interests……………………………………………………………………..………………382
7. Grant of Loans and Security Requirements ………………………………………...…..…………382
a. Ratio of Net Worth to Total Risk Assets……………………………….………………..382
b. Single Borrower’s Limit……………………...……………………………..…………………382
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their
Related Interests) ……..…………………………………………………….……… 383

IX. INTELLECTUAL PROPERTY CODE …………………………...……………………………………………………….…384

A. Intellectual Property Rights in General……………………………………….……………………….…………384
1. Intellectual Property Rights……………………………………………..……………………….………384
2. Differences between Copyrights, Trademarks and Patent…………………………..………440
B. Patents…………………………………………………………………………………………………………………………386
1. Patentable Inventions……………………………………………………………………..……………..…386
2. Non-Patentable Inventions…………………………………………………………………….…………389
3. Ownership of a Patent……………………………………………………………………...….……………389
a. Right to a Patent…………………………………………………………….………….…………389
b. First- to- File Rule…………………………………………………………………………..……390
c. Inventions Created Pursuant to a Commission……………….……..………………390
d. Right of Priority………………………………………………………………….…….…………390
4. Grounds for Cancellation of a Patent………………………………………………...……….………381
5. Remedy of the True and Actual Inventor…………………………………….…………..…………392
6. Rights Conferred by a Parent…………………………………………………………….………………393
7. Limitations of Patent Rights……………………….…………………………………..…………………394
a. Prior User……………………………………………………………………………………………394
b. Use by the Government………………...…………………………..…………………………394
8. Patent Infringement………………………………………………………………..……………………..…395
a. Tests in Patent Infringement……………………………….……………….………………396
i. Liberal Infringement…………………………………………………..……………396
ii. Doctrine of Equivalents………………………..…………………………………396
b. Defenses in Action for Infringement……………………………………………..………397
9. Licensing……………………………………………………………………………..…………………..………397
a. Voluntary……………………………………………………………..……………………..………397
b. Compulsory……………………………………………………….……………………..…………398
10. Assignment and Transmission of
Rights…………………………………………………………………………………………………….……………400
C. Trademarks……………………………………………………………………………….…………………………………401
1. Definition of Marks, Collective Marks, Trade Names……...………….………………..………401
2. Acquisition of Ownership of Mark……………………………………….…………………….………402
3. Acquisition of Ownership of Trade Name……………………………………………………..……404
4. Non-Registrable Marks……………………………………….………………………………….…………405
 5. Tests to Determine Confusing Similarity between Marks……………………………………407
a. Dominancy Test………………………………………………..…………………………………407
b. Holistic Test………………………………………………………………………………...………410
6. Well-Known Marks…………………………………….……………………………………………….……413
7. Rights Conferred by Registration ……………………………….………………………….…………415
8. Infringement and Remedies………………………………..………………………………….…………417
a. Trademark Infringement………………………………………………………………...……417
b. Damages……………………………………………...........................................…………………418
c. Requirement of Notice……………………...………………………………………….………418
9. Unfair Competition……………………………………………………………..……………………………419
D. Copyrights………………………………………………………………………………………………....…………………422
1. Basic Principles, Sections 172.2, 175 and 181……………………………………………………422
2. Copyrightable Works……………………………………………………………………..…………………423
a. Original Works………………………………………………………………...……………..……423
b. Derivative Works……………………………………………………………..……….…………423
3. Non-Copyrightable Works………………………………..…………………………….…………………424
4. Rights of Copyright Owner…………………………………………………………….…………….……425
5. Rules on Ownership of Copyright………………………………………………..……….……………429
6. Limitations on Copyright…………………………………..………………………………...……………431
a. Doctrine of Fair Use………………………………………………………………..……………433
7. Copyright Infringement………………………………………………………………………….…………435

X. SPECIAL LAWS……………………………………………………………………………………………………………………..445
A. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194)……………………..445
1. Policy of the Law
2. Covered Institutions
3. Obligations of Covered Institutions
4. Covered Transactions
5. Suspicious Transactions
6. When is Money Laundering Committed
7. Unlawful Activities or Predicate Crimes
8. Anti-Money Laundering Council
9. Functions
10. Freezing of Monetary Instrument or Property
11. Authority to Inquire into Bank Deposits
B. Foreign Investment Act (R.A. No. 7042) ………………………………………...………………………………457
1. Policy of the Law………………………………………………………………………………………………457
2. Definition of Terms…………………………………………………….………………………….…………457
a. Foreign Investment………………………………………………………………..…….………457
b. “Doing Business” in the Philippines………………………………………...……………457
c. Export Enterprise……………………………………………..……………………….…………458
d. Domestic Market Enterprise…………………………………………………...……………458
C. Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142) ………………..………..…461
1. Types of Rehabilitation Proceedings…………………………………………………………....……462
a. Court Supervised
i. Voluntary Proceedings
ii. Involuntary Proceedings
b. Pre-Negotiated
c. Out of Court or Informal
2. Commencement Order………………………………………………………………….…….……………464
3. Rehabilitation Receiver…………………………………………………………….………………………467
4. Management Committee…………………………………………………………………..………………468
5. Rehabilitation Plan…………………………………………………………………..………………………469
6. Cram Down Effect……………………………………………………………………….……………………471
7. Stay or Suspension Order…………………………………………………………………………….……471
8. Liquidation……………………………………………………………………………….………...……………471
a. Kinds of Debtors……………………………………………………...……………..……………471
i. Juridical Debtors…………………………………….………….……….……………471
1) Voluntary Liquidation
 2) Involuntary Liquidation
ii. Individual Debtors………….………………………………………………………472
1) Suspension of Payments
2) Voluntary Liquidation
3) Involuntary Liquidation
b. Procedure…………………………………………………………………………………….…………475
i. Conversion of Rehabilitation Proceedings to Liquidation
Proceedings………………………………………………………….……………………475
ii. Liquidation Order……………………………………………...……………………475
iii. Effects of the Liquidation Order……………………………………………...475
iv. Rights of Secured Creditors……………………………….………………...…476
v. Powers, Duties, and Responsibilities of the Liquidator…………...…476
vi. Determination of Claims…………………………………………………...……476
vii. Liquidation Plan……………………………………………………………...……477
 DISCLAIMER

THE RISK OF USE OF THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER
 LETTERS OF CREDIT

LETTERS OF CREDIT parts with the goods and the buyer of the goods
gets control of the goods upon payment. Which
statement is most accurate? (2012 Bar)

A: The use of the Letter of Credit serves to reduce

DEFINITION AND NATURE OF the risk of nonpayment of the purchase price in a
LETTER OF CREDIT sale transaction.

Non-payment of the buyer of its obligation

under the Letter of Credit does not give the bank
Letter of Credit (L/C) the right to take possession of the goods covered
by the Letter of Credit
It is any arrangement, however named or described,
whereby the issuing bank acting at the request and The opening of a L/C does not vest ownership of the
on the instructions of a customer (applicant) or on goods in the bank in the absence of a trust receipt
its own behalf, binds itself to: (PAN) agreement. A letter of credit is a mere financial
device developed by merchants as a convenient and
1. Pay to the order of, or accept and pay drafts relatively safe mode of dealing with the sales of
drawn by a third party (Beneficiary), or goods to satisfy the seemingly irreconcilable
2. Authorize another bank to pay or to accept and interests of a seller, who refuses to part with his
pay such drafts, or goods before he is paid, and a buyer, who wants to
3. Authorizes another bank to Negotiate, against have control of the goods before paying (Transfield
stipulated documents. Philippines, Inc. v. Luzon Hydro Corporation, G.R. No.
146717, November 22, 2004).
Provided, the terms and conditions of the credit are
complied with (Uniform Customs & Practice for LAWS GOVERNING LETTERS OF CREDIT
Documentary Credits, Art. 2).
Letter of credit is governed by the Uniform
PURPOSE OF LETTER OF CREDIT Customs and Practice for documentary Credits
issued by the International Chamber of Commerce
The use of credits in commercial transactions serve (Metropolitan Waterworks vs. Daway, G.R. No.
to reduce the risk of non-payment of the purchase 160723, July 21, 2004).
price under the contract for the sale of goods.
However, letters of credit are also used in non-sale NOTE: The law on contracts and damages shall also
settings where they serve to reduce the risk of non- apply to provide remedies to the party aggrieved by
performance. Generally, credits in the non-sale the breach of the main contract although such
settings have come to be known as “standard breach will not affect the obligation of the bank to
credits” (Transfield Philippines, Inc. vs. Luzon Hydro pay the beneficiary or its right to obtain
Corp., GR. No. 146717, November 22,2004). reimbursement from the applicant of the letter of
credit if the terms of the letters of credit have been
Nature of Letters of Credit as a Financial Device complied with.

A letter of credit is a financial device developed by DURATION OF LETTERS OF CREDIT

merchants as a convenient a relatively safe mode of
dealing with sales of goods to satisy the seemingly 1. Upon the period fixed by the parties; or
irreconcilable interests of a seller, who refuses to 2. If none is fixed, one year from the date of
part with his goods before he is paid, and a buyer, issuance.
who wants to have in control of the goods before
paying. The use of credits in commercial Q: Rodzssen Supply, Inc. (Rodzssen) applied for
transactions serves to reduce the risk of and obtained an irrevocable 30-day domestic
nonpayment of the purchase price under the Letter of Credit from Far East Bank and Trust
contract of sale of the goods and to reduce the risk Company Inc. (FEBTC) on January 15, 1979, in
of non-performance of an obligation in a non-sale favor of Ekman and Company Inc. (Ekman), in
setting (Transfield Philippines, Inc. vs. Luzon Hydro order to finance the purchase of five units of
Corp., GR. No. 146717, November 22,2004). hydraulic loaders in the amount of P190,000.
Originally set to expire on February 15, 1979,
Q: Letters of Credit are financial devices in the subject Letter of Credit was amended several
commercial transactions which will ensure that times to extend its validity until October 16,
the seller of the goods is sure to be paid when he 1979. Three units of the hydraulic loaders were

1
 MERCANTILE LAW
delivered to Rodzssen for which FEBTC on show that the applicant
March 26, 1979, paid Ekman the sum of has not performed the
P114,000.00, which amount Rodzssen paid undertaking (Transfield
FEBTC before the expiry date of the LC. FEBTC Philippines, Inc. v. Luzon
paid Ekman for the last two hydraulic loaders on Hydro Corp., supra).
March 14, 1980 or five months after the
expiration of the Letter of Credit. Was FEBTC
justified in paying Ekman? IRREVOCABLE LETTER OF CREDIT VS.
CONFIRMED LETTER OF CREDIT
A: NO. Clearly, the bank paid Ekman when the
former was no longer bound to do so under the BASIS IRREVOCABLE
subject Letter of Credit. The subject Letter of Credit CONFIRMED L/C
L/C
had become invalid upon the lapse of the period Kind of obligation
fixed therein. Thus, respondent should not have What it
Duration of the assumed by the
paid Ekman; it was not obliged to do so. (Rodzssen pertains
L/C correspondent
Supply Co. Inc. v. Far East Bank & Trust Co., G.R. No. to
bank.
109087. May 9, 2001) The
correspondent
Incidents in the life of a Letter of Credit (CAIS- bank gives an
ERR) absolute
The issuing
assurance to the
1. Contract of Sale between the buyer and seller bank may not,
beneficiary that it
2. Application for L/C by the buyer with the bank without the
will undertake the
3. Issuance of L/C by the bank consent of the
issuing bank’s
4. Shipping of goods by the seller What it beneficiary and
obligation as its
5. Execution of draft and tender of documents by means the applicant,
own according to
the seller revoke its
the terms and
6. Redemption of draft (payment) and obtaining undertaking
condition of the
of documents by the issuing bank under the
credit. (FEATI
7. Reimbursement to the bank and obtaining of letter.
Bank and Trust
documents by the buyer Company v. CA,
G.R. No. 94209,
ESSENTIAL CONDITIONS OF A LETTER OF April 30, 1991).
CREDIT
An irrevocable letter of credit is granted by a bank
1. Issued in favor of a definite person. which authorizes a creditor in a foreign country to
2. Limited to a fixed or specified amount, or to one draw upon a debtor of another and to negotiate the
or more amounts, but with a maximum stated draft through the agent or correspondent bank or
limit (Code of Commerce, Art. 568). any bank in the country of the creditor (Belman Inc.
v. Central Bank, G.R. No. L-10195, November 29,
NOTE: If any of these essential conditions is not 1958)
present, the instrument is merely considered as a
letter of recommendation. Q: When does an Irrevocable Letter of Credit
become a consummated contract?
KINDS OF LETTER OF CREDIT
A: An irrevocable letter of credit becomes a
COMMERCIAL L/C STANDBY L/C consummated contract when the agent or
Involves the payment of correspondent bank or any bank in the country of
Involves non-sale
money under a contract the creditor pays or delivers to the latter the amount
transactions.
of sale. in foreign currency, as authorized by the bank in the
Payable upon country of the debtor in compliance with the letter
Payable upon the certification by the of credit granted by it. It is the date of the payment
presentation by the beneficiary of the of the amount in foreign currency to the creditor in
seller-beneficiary of applicant’s non- his country by the agent or correspondent bank of
documents that show performance of the the bank in the country of the debtor that turns from
he has taken affirmative agreement. The executory to executed or consummated contract. It
steps to comply with the documents that is not the date of payment by the debtor to the bank
sales agreement accompany the in his country of the amount of foreign exchange
beneficiary's draft must sold that makes the contract executed or

2
 LETTERS OF CREDIT
consummated, because the bank may grant the against the account party under the law on
debtor extension of time to pay such debt. (Belman contracts and damages.
Inc. v. Central Bank, supra.)
The number of parties may be increased. The
Courts cannot order the release to the applicant following additional parties may be:
of the proceeds of an Irrevocable Letter of Credit
without the consent of the Beneficiary 1. Advising/notifying bank – the correspondent
bank (agent) of the issuing bank and
Such order violates the irrevocable nature of the L/C. determines the apparent authenticity of the
The terms of an irrevocable letter of credit cannot L/C. it assumes no liability except to notify
be changed without the consent of the parties, and/or transmit to the beneficiary the existence
particularly the beneficiary thereof (Phil. Virginia of the L/C (FEATI Bank and Trust Company v. CA,
Tobacco Administration v. De Los Angeles, G.R. No. L- G.R. No. 94209).
27829, August 19, 1988).
2. Confirming bank –lends credence to the L/C
issued by a lesser known bank as if it were the
PARTIES TO A LETTER OF CREDIT one that issued the letter of credit. Its obligation
is similar to the issuing bank. Thus, beneficiary
may tender documents to the confirming bank
Parties to a Letter of Credit transaction and collect payment. It collects fees for such
engagement and obtains reimbursement from
1. Applicant/Buyer/Importer/Account Party – the issuing bank (ibid).
procures the letter of credit, purchases the
goods and obliges himself to reimburse the 3. Paying bank – bank on which the drafts are to
issuing bank upon receipt of the documents of be drawn, which may be the issuing bank, the
title. The applicant has no obligation to advising bank or another bank not in the city of
reimburse the issuing bank if the latter pays the beneficiary (ibid).
without the stipulated documents or in case of
discrepant documents, unless the applicant 4. Negotiating bank – buys or discounts a draft
waives the discrepancy. He has the right to have under the letter of credit. Its liability is
the marginal deposit deducted from the dependent upon the stage of the negotiation. If
principal obligation under the L/C and to have before negotiation, it has no liability with
the interest computed only on the balance and respect to the seller but after negotiation, a
not on the face value thereof. contractual relationship will then prevail
between the negotiating bank and the
2. Issuing Bank – one which, whether a paying beneficiary (ibid).
bank or not, issues the L/C and undertakes to
pay the seller upon receipt of the draft and
proper documents of title from the seller and to
surrender them to the buyer upon
reimbursement. After due payment, issuing RIGHTS AND OBLIGATIONS OF PARTIES
bank is entitled to reimbursement as a matter
of right. Reimbursement includes debiting the
bank account of the applicant, if any. The failure
of the beneficiary to present the draft to the Three (3) distinct but intertwined contracts in a
applicant does not affect the right of the issuing Letter of Credit transaction (2002, 2008 Bar)
bank to reimbursement.
1. Between the applicant/buyer/importer/account
3. Beneficiary/Seller/Exporter – in whose favor party and the beneficiary/seller/exporter - The
the instrument is executed. One who delivers applicant is the one who procures the letter of
the documents of title and draft to the issuing credit and obliges himself to reimburse the
bank to recover payment. He has a prestation issuing bank upon receipt of the documents of
to do under the main contract but his failure to title while the beneficiary is the one who in
fulfill his obligation under the main contract compliance with the contract of sale ships the
does not negate his right to payment from the goods to the buyer and delivers the documents
issuing bank as long as he is able to submit the of title and draft to the issuing bank to recover
required documents and comply with the terms payment for the goods. The relationship
of the credit, without prejudice to his liability between them is governed by the law on sales if

3
 MERCANTILE LAW
it is a commercial L/C but if it is a stand-by letter The concept of guarantee vis-a-vis the concept of
of credit it is governed by the law on obligations irrevocable L/C is inconsistent with each other. L/Cs
and contract. are primary obligations and not security contracts
and while they are security arrangements, they are
2. Between the issuing bank and the beneficiary/ not converted thereby into contracts of guaranty
seller/exporter - The issuing bank is the one that (MWSS v. Hon. Daway, G.R. No.160732, June 21,
issues the letter of credit and undertakes to pay 2004).
the beneficiary upon strict compliance of the
latter to the requirements set forth in the letter The liability of issuing bank is primary and solidary.
of credit. On the other hand, the beneficiary Neither is the issuing bank entitled to the benefit of
surrenders document of title to the bank in excussion.
compliance with the terms of the L/C. Their
relationship is governed by the terms of the Entitlement of a bank to reimbursement
L/C.
Once the issuing bank shall have paid the
3. Between the issuing bank and the applicant/ beneficiary after the latter’s compliance with the
buyer/importer - The applicant obliges himself terms of the L/C, the bank is entitled to
to reimburse the issuing bank upon receipt of reimbursment. Presentment for acceptance to the
the documents of title. Their relationship is customer/applicant is not a condition sine qua non
governed by the terms of the application and for reimbursement (Prudential Bank v. IAC, G.R. No.
agreement for the issuance of the L/C by the 74886, December 8, 1992).
bank.
Consequence of payment upon an expired Letter
NOTE: By the Doctrine of Independence, the of Credit
relationship among: a) the issuing bank and the
beneficiary; b) the issuing bank and the applicant; An issuing bank which paid the beneficiary upon an
and c) the beneficiary and the applicant while expired L/C can recover the payment from the
interrelated are separate, distinct and independent applicant which obtained the goods from the
of one another. beneficiary to prevent unjust enrichment (Rodzssen
Supply Co. v. Far East Bank and Trust Co, G.R. No.
An Issuing Bank is not a guarantor 109087, May 9, 2001).

DIFFERENT ROLES AND LIABILITIES OF THE BANKS INVOLVED IN LETTER OF CREDIT TRANSACTIONS

KIND OF BANK ROLE LIABILITY

Notifying/ Serves as an agent of the issuing Does not incur any obligation more than just
Advising Bank bank; notifying the seller/beneficiary of the opening
of the L/C after it has determined its apparent
Warrants the apparent authority. (Bank of America NT & SA v. CA, G.R.
(Appearance to unaided senses) No. 105395, December 10, 1993)
authenticity of the L/C (Bank of
America NT & SA v. CA, G.R. No. It does not guarantee the genuineness or due
105395, December 10, 1993). execution of the L/C. It is not liable for damages
even if the L/C turns out to be spurious
provided the spurious character is not
apparent on the face of the instrument.

Confirming Bank Lends credence to the L/C issued

by a lesser-known bank. Direct obligation, as if it is the one which issued
the L/C.
The confirming bank collects fees
for such engagement and obtains Its obligation is similar to the issuing banks.
reimbursement from the issuing Thus, beneficiary may tender documents to the
bank. confirming bank and collect payment.

Negotiating Bank Buys the seller’s draft and later on Depends on the stage of negotiation, thus:
sells the draft to the issuing bank.

4
 LETTERS OF CREDIT
1. Before negotiation – No liability with respect
to the seller. Merely suggests its willingness to
negotiate.

2. After negotiation – A contractual relationship

will then arise, making the bank liable. As
holder, it has the right to payment from the
bank primarily liable on the draft (either the
issuing or confirming bank). If the party
primarily liable on the L/C refuses to honor the
draft, the negotiating bank has the right to
proceed against the drawer thereof.
Paying Bank May either be the issuing bank or Direct obligation.
any other bank in the place of the
issuing bank to facilitate payment
to the beneficiary.

BASIC PRINCIPLES OF LETTER OF CREDIT DOCTRINE OF INDEPENDENCE

Letters of Credit are not considered as DOCTRINE OF INDEPENDENCE/ INDEPENDENCE

Negotiable Instruments PRINCIPLE

A L/C is not considered a negotiable instrument. The relationship of the buyer and the bank is
However, drafts issued in connection with L/C’s can separate and distinct from the relationship of the
be considered negotiable instruments. The buyer and seller in the main contract; the bank is not
presumption that the drafts drawn in connection required to investigate if the contract underlying
with the L/C’s have sufficient consideration applies the L/C has been fulfilled or not because in
(Lee v. CA, G.R. No. 117913, February 1, 2002). transactions involving L/C, banks deal only with
documents and not goods (BPI v. De Reny Fabric
Q: ABC Company filed a Petition for Industries, Inc., L-2481, October 16, 1970). In effect,
Rehabilitation with the Court. An order was the buyer has no course of action against the issuing
issued by the Court, (1) staying enforcement of bank.
all claims, whether money or otherwise against
ABC Company, its guarantors and sureties not Two-Fold nature of the Independence Principle
solidarily liable with the company; and (2)
prohibiting ABC Company from making 1. Independence in toto where the credit is
payments of the liabilities, outstanding as of the independent from the justification aspect and is
date of the filing of the Petition. XYC Company is a separate obligation from the underlying
a holder of an irrevocable Standby Letter of agreement. This principle is illustrated by
Credit which was previously procured by ABC standby L/C; or
Company in favor of XYC Company to secure 2. Independence only as to the justification aspect
performance of certain obligations. In the light which is identical with the same obligations
of the Order issued by the Court, can XYC under the underlying agreement. This principle
Company still be able to draw on their is illustrated by a commercial L/C or repayment
Irrevovable Standby Letter of Credit when due? standby (Transfield v. Luzon Hydro Corp., supra).
Explain your answer. (2012 Bar)
Effect of the buyer’s failure to procure a Letter of
A: XYC Company, the beneficiary of the standby Credit to the main contract
letter of credit, can draw on the letter of credit
despite filing of petition for corporate The L/C is independent from the contract of sale. The
rehabilitation. The liability of the bank that issued failure of Reliance to open, the appropriate L/C did
the letter of credit is primary and solidary. Being not prevent the birth of that contract, and neither
solidary, the claims against them can be pursued did such failure extinguish that contract. The
separately from and independently of the opening of the L/C in favor of Daewoo was an
rehabilitation case (MWSS v. Daway, supra). obligation of the buyer and the performance of that

5
 MERCANTILE LAW
obligation by buyer was a condition of enforcement become delinquent with his accounts. Demands
of the reciprocal obligation of seller to ship the were made by the SMC against Goroza and PNB
subject matter of the contract to buyer. But the but neither of them paid. SMC filed a Complaint
contract itself between the buyer and the seller had for collection of sum of money against PNB and
already sprung into legal existence and was Goroza. RTC rendered a decision in favor of the
enforceable. plaintiff ordering Goroza to pay. In the
meantime, trial continued with respect to PNB.
The failure of a buyer seasonably to furnish an
agreed L/C is a breach of the contract between PNB moved to terminate the proceedings on the
buyer and seller. Where the buyer fails to open a ground that a decision was already rendered
letter of credit as stipulated, the seller or exporter is finding Goroza solely liable. The RTC denied the
entitled to claim damages for such breach. Damages PNB's motion and issued a Supplemental
for failure to open a commercial credit may, in Judgment which stated that the RTC omitted by
appropriate cases, include the loss of profit which inadvertence to insert in its decision the phrase
the seller would reasonably have made had the "without prejudice to the decision that will be
transaction been carried out (Reliance Commodities, made against the other co-defendant, PNB,
Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, which was not declared in default." The CA
December 17, 1993). affirmed the Resolution of RTC.

Partial payments on the loan cannot be added in Was the CA incorrect in affirming the RTC
computing the issuing bank’s liability under its despite complete adjudication of relief to SMC
own Standby Letter of Credit and the perfection of appeal by Goroza?

Although these payments could result in the A: NO. It is clear from the proceedings held before
reduction of the actual amount, which could and the orders issued by the RTC that the intention
ultimately be collected from the issuing bank, the of the trial court is to conduct separate proceedings
latter’s separate undertaking under its letters of to determine the respective liabilities of Goroza and
credit remain. The letter of credit is an absolute and PNB, and thereafter, to render several and separate
primary undertaking which is separate and distinct judgments for or against them.
from the contract underlying it (Insular Bank of Asia
& America v. IAC, G.R. No. 74834, November 17, 1988). The propriety of a several judgment is borne by the
fact that SMC's cause of action against PNB stems
In a standby letter of credit securing a loan from the latter's alleged liability under the letters of
obligation, any payment of the debtor to the creditor credit which it issued. On the other hand, SMC's
should not be deducted from the total obligation of cause of action against Goroza is the latter's failure
the issuing bank to the beneficiary. The issuing to pay his obligation to the former. As to the
bank, after payment of the full amount, is entitled to separate judgment, PNB has a counterclaim against
full reimbursement from the debtor. But the debtor SMC which is yet to be resolved by the RTC. The so-
may recover excess payment from the creditor to called "independence principle" assures the seller
prevent unjust enrichment. or the beneficiary of prompt payment independent
of any breach of the main contract and precludes the
Q: SMC entered into an Exclusive Dealership issuing bank from determining whether the main
Agreement with Goroza wherein the latter was contract is actually accomplished or not. As the
given by SMC the right to trade, deal and market principle's nomenclature clearly suggests, the
or otherwise sell its various beer products. obligation under the letter of credit is independent
of the related and originating contract. In brief, the
Goroza applied for a credit line with SMC, but letter of credit is separate and distinct from the
one of the requirements for the credit line was a underlying transaction.
letter of credit. Thus, Goroza applied for and was
granted a letter of credit by the PNB in the In other words, PNB cannot evade responsibility on
amount of P2,000,000.00 and subsequently an the sole ground that the RTC judgment found
additional credit line of P2,400,000.00 which Goroza liable and ordered him to pay the amount
the latter approved. Under the credit sought to be recovered by SMC. PNB's liability, if
agreement, the PNB has the obligation to release any, under the letter of credit is yet to be
the proceeds of Goroza's credit line to SMC upon determined (Philippine National Bank vs San Miguel
presentation of the invoices and official receipts Corporation, GR No. 186063, January 15, 2014).
of Goroza's purchases of SMC beer products to
PNB. Initially, Goroza was able to pay his credit Q: AAA Carmakers opened an Irrevocable Letter
purchases with SMC. However, Goroza started to of Credit with BBB Banking Corporation with

6
 LETTERS OF CREDIT
CCC Cars Corporation as beneficiary. The can stand on its own, it needs a supporting
irrevocable Letter of Credit was opened to pay contract. It is merely an alternative course and
for the importation of ten (10) units of Mercedes does not in any way prevent the beneficiary
Benz S class. Upon arrival of the cars, AAA from directly claiming from the applicant
Carmakers found out that the cars were all not (Transfield Philippines, Inc. v. Luzon Hydro
in running condition and some parts were Corporation, supra)
missing. As a consequence, AAA Carmakers
instructed BBB Banking Corporation not to
allow drawdown on the Letter of Credit. Is this FRAUD EXCEPTION PRINCIPLE
legally possible? (2012 Bar)

A: NO, because under the "Independence Principle", The Exception to the Independence Principle
conditions for the drawdown on the Letters of (2010 Bar)
Credit are based only on documents, like shipping
documents, and not with the condition of the goods The “Fraud Exception Principle” is the exception to
subject of the importation. the Independence Principle. It provides that the
untruthfulness of a certificate accompanying a
Q: X Corporation entered into a contract with PT demand for payment under a standby letter of credit
Construction Corporation for the latter to may qualify as fraud sufficient to support an
construct and build a sugar mill within six (6) injunction against payment.
months. They agreed that in case of delay, PT
Construction Corporation will pay X Under the fraud exception principle, the beneficiary
Corporation P100,000.00 for everyday of the may be enjoined from collecting on the letter of
delay. To ensure payment of the agreed amount credit if the beneficiary committed fraud by
of damages, PT Construction Corporation substituting fraudulent documents even if on their
secured from Atlantic Bank a confirmed and face the documents complied with the
irrevocable letter of credit which was accepted requirements.
by X Corporation in due time. One week before
the expiration of the six (6) month period, PT This principle refers to fraud in relation with the
Construction Corp. requested for an extension of independent purpose or character of the L/C and
time to deliver claiming that the delay was due not only fraud in the performance of the obligation
to the fault of X Corporation. A controversy as to or contract supporting the letter of credit
the cause of delay which involved the (Transfield vs. Luzon Hydro Corp., supra).
worksmanship of the building ensued. The
controversy remained unsolved. Despite the Remedy for fraudulent abuse
controversy, X corporation presented a claim
against Atlantic Bank by executing a draft Injunction against payment is the remedy; provided
against the letter of credit. the requisites enumerated immediately below this
item are present.
a. Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain. Requisites in order to enjoin the Beneficiary
b. Can X Corporation claim directly from PT from drawing or collecting under the Letter of
Construction Corp.? Explain. (2008 Bar) Credit on the basis of fraud (PAI)

A: 1. Clear Proof of fraud;

a. NO. Atlantic Bank cannot refuse to pay X 2. Fraud constitutes fraudulent Abuse of the
Corporation. This is because of the Doctrine of independent purpose of the letter of credit and
Independence which provides that the not only fraud under the main agreement; and
obligation of the issuing bank to pay the 3. Irreparable Injury might follow if injunction is
beneficiary does not depend on the fulfillment not granted or the recovery of damages would
or non-fulfillment of the contract supporting be seriously damaged (Ibid.)
the letter of credit. The only instance where
Atlantic Bank can refuse payment is when X
Corporation was not able to strictly comply
with the letter of credit. DOCTRINE OF STRICT COMPLIANCE
b. YES. X Corporation may directly claim from PT
Construction Corporation. A letter of credit by
itself does not come into operation without a
contract supporting it. It is no a contract that

7
 MERCANTILE LAW
The documents tendered by the seller/beneficiary credit has been transmitted to it on his
must strictly conform to the terms of the L/C. The behalf, has confirmed the letter of credit.
tender of documents must include all documents Consequently, FE Bank is liable under the
required by the letter. It is not a question of whether letter of credit. Is the argument tenable?
or not it is fair or equitable to require submission of Explain. (1993 Bar)
documents but whether or not the documents were
agreed upon. Thus, a correspondent bank which A.
departs from what has been stipulated under the a. FE Bank cannot be held liable under the letter
L/C acts on its own risk and may not thereafter be of credit since the certificate is not issued by BV.
able to recover from the buyer or the issuing bank, It is a settled rule in commercial transactions
as the case may be, the money thus paid to the involving letters of credit that the documents
beneficiary (Feati Bank and Trust Company v. CA, tendered must strictly conform to the terms of
supra). the letter of credit. The tender of documents by
the beneficiary (seller) must include all
Q: BV agreed to sell to AC, a Ship and documents required by the letter. A
Merchandise Broker, 2500 cubic meters of logs correspondent bank which departs from what
at $27 per cubic meter FOB. After inspecting the has been stipulated under the letter of credit, as
logs, CD issued a purchase order. when it accepts a faulty tender, acts on its own
risks and it may not thereafter be able to
On the arrangement made upon instruction of recover from the buyer or the issuing bank, as
the consignee, H&T Corporation of LA, the case may be, the money thus paid to the
California, the SP Bank of LA issued an beneficiary. Thus the rule of strict compliance.
irrevocable letter of credit available at sight in (Feati Bank and Trust Company v. CA, supra).
favor for the total purchase price of the logs. The b. The argument made by BV is untenable. The FE
letter of credit was mailed to FE Bank with the Bank in this case is only a notifying bank and
instruction "to forward it to the beneficiary". not a confirming bank. It is tasked only to notify
The letter of credit provided that the draft to be and/or transmit the required documents and
drawn is on SP Bank and that it be accompanied its obligation ends there. It is not privy to the
by, among other things, a certification from AC, contract between the parties, its relationship is
stating that the logs have been approved prior only with that of the issuing bank and not with
shipment in accordance with the terms and the beneficiary to whom he assumes no liability.
conditions of the purchase order.
Q: At the instance of CCC Corporation, AAA Bank
Before loading of the vessel chartered by AC, the issued an irrevocable Letter of Credit in favor of
logs were inspected by custom inspectors and BBB Corporation. The terms of the irrevocable
representatives of the Bureau of Forestry, who L/C state that the beneficiary must present
certified to the good condition and exportability certain documents including a copy of the Bill of
of the logs. After loading was completed, the Lading of the importation for the bank to release
Chief Mate of the vessel issued a mate receipt of the funds, BBB Corporation could not find the
the cargo which stated that the logs are in good original copy of the Bill of Lading so it instead
condition. However, AC refused to issue presented to the bank a Xerox copy of the Bill of
required certification in the letter of credit. Lading. Would you advice the bank to allow the
Because of the absence of certification, FE Bank drawdown on the Letter of Credit? (2012 Bar)
refused to advance payment on the letter of
credit. A: NO, because the rule of strict compliance in
commercial transactions involving letters of credit,
a. May FE Bank be held liable under the Letter requiring documents set as conditions for the
of Credit? Explain. release of the fund has to be strictly complied with
b. Under the facts above, the seller, BV, argued or else funds will not be released.
that FE Bank, by accepting the obligation to
notify him that the irrevocable letter of

DOCTRINE OF STRICT COMPLIANCE VS. INDEPENDENCE PRINCIPLE

Basis Doctrine of Strict Compliance Doctrine of Independence

8
 LETTERS OF CREDIT
Principle Documents tendered by the seller or Relationship of the buyer and the bank is
beneficiary must strictly conform to the separate and distinct from the relationship
terms of the letter of credit. of the buyer and seller in the main contract.
Consequence of the A correspondent bank which departs The bank is not required to investigate
Doctrine from what has been stipulated and acts whether the contract underlying the L/C
on its own risk may not thereafter be has been fulfilled or not.
able to recover.
Payment of the Beneficiary cannot draw on the letter of Fraud Exception Principle can enjoin
Beneficiary credit if he did not comply with its terms beneficiary from drawing or collecting
and conditions. under the L/C if there is fraud in relation
with the independent purpose of the L/C.

TRUST RECEIPT proceeds to the lender (Metropolitan Bank vs. Go,

G.R. No. 155647, November 23, 2007).

Two views regarding Trust Receipts

DEFINITION/CONCEPT OF A
TRUST RECEIPT TRANSACTION 1. As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for
the entruster and to sell or otherwise dispose of
Trust Receipt (TR) transaction GDI with the obligation to turn over to the
entruster the proceeds if they are unsold or not
It is any transaction between the entruster and otherwise disposed of, in accordance with the
entrustee: terms and conditions specified in the TR (P.D.
115, Sec. 4).
1. Whereby the entruster who owns or holds title 2. As a commercial transaction – It is a separate
or security interests over certain specified and independent security transaction intended
goods, documents or instrument (GDI), releases to aid in financing importers and retail dealers
the same to the possession of entrustee upon who do not have sufficient funds (Nacu v. CA,
the latter’s execution of a TR agreement. G.R. No. 108638, March 11, 1994).
2. Wherein the entrustee binds himself to hold the
GDI in trust for the entruster and, in case of A Trust Receipt is not a negotiable instrument
default:
a. to sell or otherwise dispose such GDI with Like L/C’s, TR’s are not negotiable instruments. The
the obligation to turn over to the entruster presumption of consideration under the negotiable
the proceeds to the extent of the amount instrument law may not necessarily be applicable to
owing to it or trust receipts (Lee v. CA, supra).
b. to turn over the GDI itself if not sold or
otherwise disposed of in accordance with SUBJECTS OF A TRUST RECEIPT TRANSACTION
the terms and conditions specified in the (GDI)
TR.
1. Goods – shall include chattels and personal
A TR is a commercial document whereby the bank property other than money, things in action, or
releases the goods in the possession of the entrustee things so affixed to land as to become a part
but retains ownership thereof while the entrustee thereof (P.D. 115, Sec. 3 [d]). Goods must be
shall sell the goods and apply the proceeds for the object of lawful commerce.
full payment of his liability with the bank. It is a 2. Documents – written or printed evidence of title
security arragement to which a bank acquires to goods (P.D. 115, Sec. 3 [a]). E.g. L/C.
ownership of the imported personal property 3. Instruments – negotiable instruments;
(Garcia vs. Court of Appeals, G.R. No. 119845, July 5, certificates of stock, or bond or debenture for
1996). It is a document which expresses a security the payment of money issued by a corporation,
transaction where the lender, having no prior title or certificates of deposit, participation
to the goods on which the lien is to be constituted, certificates or receipts, credit or investment
and not having possession over the same since instruments of a sort marketed in the ordinary
possession thereof remains in the borrower, lends course of business or finance (P.D. 115, Sec. 3
him money to the borrower on security of the goods [e]). E.g. checks, drafts, promissory notes, bills
which borrower is privileged to sell, clear of the lien, of exchange.
and with an agreement to pay all or part of the sale

9
 MERCANTILE LAW
PARTIES TO A TRUST RECEIPT TRANSACTION day, C went to F Bank to apply for a loan to pay
the construction materials. As security for the
1. Entruster - A lender, financer or creditor. loan, C was made to execute a trust receipt. One
Person holding title over the GDI subject of a TR year later, after C failed to pay the balance on the
transaction; releases possession of the goods loan, F Bank was charged with violation of the
upon execution of TR (P.D. 115, Sec. 3[c]). Trust Receipts Law. Will the case against C
2. Entrustee - A borrower, buyer, importer or prosper? Reason briefly. (2007 Bar)
debtor. He is the person to whom the goods are
delivered for sale or processing in trust, with A: The case of estafa against C will not prosper. PD
the obligation to return the proceeds of sale of 115 does not apply in this case because the proceeds
the goods or the goods to the entruster (P.D. of the loan are used to renovate C's commercial
115, Sec. 3[b]). building. TR transactions are intended to aid in
financial importers and retail dealers who do not
TRANSACTIONS NOT CONSIDERED AS A TRUST have sufficient funds or resources to finance the
RECEIPT importation or purchase of merchandise and who
may not be able to acquire credit except through
1. A sale by a person in the business of selling for utilization, as collateral, of the merchandise
profit who retains general property rights in the imported or purchased. The transactions
GDI. contemplated under the Trust Receipts Law mainly
2. Where the seller retains title or other interest involved acquisition of goods for the sale thereof.
as security for the payment of the purchase The transaction is properly called a simple loan with
price (P.D. 115, Sec. 4). the trust receipt as merely a collateral or security
for the loan (Ng vs. People, supra).
The sale of goods by a person in the business of
selling goods, for profit, who at the outset of the Q: Supermax is a domestic corporation engaged
transaction, has as against the buyer, general in the construction business. On various
property rights in such goods, or who sells occasions, Metrobank extended several
goods to the buyer on credit, retaining title or commercial letters of credit to Supermax. These
other interest as security for the payment of the commercial credits were used by Supermax to
purchase price, does not constitute as trust pay for delivery of several construction
receipt transaction. There is no trust receipt, materials to be used in their construction
notwithstanding the label, if goods offered as business. Thereafter, Metrobank required Hur
security for a loan accommodation are goods Tin Yang, as representative and Vice- President
sold to the debtor unde a supposed trust receipt for Internal Affairs of Supermax, to sign 24 trust
transaction (Sps. Dela Cruz vs. Planters Products, receipts as security for the construction
Inc., G.R. No. 158649, February 18, 2013, in materials. When 24 TRs fell due and despite the
Divina, 2014). receipt of demand letter, Supermax failed to pay
or deliver the goods or proceeds to Metrobank.
3. If the entrustee is already the owner or in As the demands fell on deaf ears, Metrobank
possession of the goods before delivery of the filed a complaint for estafa against Hur Tin Yang.
loan and execution of the trust receipt
transaction, the transaction shall be considered Hur Tin Yang, while admitting signing the trust
a simple loan even though the parties may have receipts, argued that said trust receipts were
denominated the agreement as one of TR. To be demanded by Metrobank as additional security
in the nature of TR, the entruster should have for the loans extended to Supermax for the
financed the acquisition or importation of the purchase of construction equipments and
goods. The funds should have been delivered materials, and that Metrobank knew all along
before or simultaneously with delivery of the that the construction materials subject of the
goods. TRs were not intended for resale but for
4. Where the entruster bank knew even before the personal use of Supermax relating to its
execution of the trust receipt agreements that construction business.
the construction materials covered were never
intended by the entrustee for resale or for the Is Hur Tin Yang not guilty of estafa?
manufacture of items to be sold (Hur Tin Yang
v. People, supra). A: YES. In the instant case, the factual findings of the
trial and appellate courts reveal that the dealing
Q: C contracted D to renovate his commercial between Hur Tin Yang and Metrobank was not a TR
building. D ordered construction materials from transaction but one of simple loan. His admission –
E and received delivery thereof. The following that he signed the TRs on behalf on Supermax,

10
 TRUST RECEIPTS LAW
which failed to pay the loan or turn over the 2. The entrustee cannot be relieved of his
proceeds of the sale or the goods to Metrobank upon obligation to pay the loan in favor of the
demand – does not conclusively prove that the entruster bank in case of loss or destruction of
transaction was, indeed, a trust receipts transaction. the GDI (Rosario Textile Mills Corp. vs. Home
In contract to the nomenclature of the transaction, Bankers Savings and Trust Company, supra).
the parties really intended a contract of loan. The 3. Where the proceeds of the sale are insufficient
Court, in Ng vs. People, and Land Bank of the to satisfy the loan executed by the entrustee, the
Philippines v. Perez ,cases which are in all four entruster bank can institute an action to collect
corners the same as the instant case, ruled that the the deficiency (Landl Co. vs. Metropolitan Bank
fact that the entruster bank knew even before the and Trust Co. G.R. No. 159622, July 30, 2004).
execution of the trust receipt agreements that the 4. Repossession by the entruster of the GDI does
construction materials covered were never not amount to dacion en pago. The repossession
intended by the entrustee for resale or for the of the goods by the entrustee was merely to
manufacture of items to be sold is sufficient to prove secure the payment of its obligation to the
that the transaction was a simple loan and not a entrustor and not for the purpose of
trust receipts transaction. transferring ownership in satisfaction of the
obligation (PNB vs. Pineda, G.R. No. L-46658 May
When both parties enter into an agreement 13, 1991).
knowing fully well that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not OWNERSHIP OF THE GOODS, DOCUMENTS, AND
a trust receipt transaction penalized under Sec. 13 INSTRUMENTS UNDER A TRUST RECEIPT
of PD 115 in relation to Art. 315, par. 1(b) of the RPC,
as the only obligation actually agreed upon by the
parties would be the return of the proceeds of the Real owner of the articles subject of the Trust
sale transaction. This transaction becomes a Receipt transaction
mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase The real owner of the articles subject of the TR is the
of the goods (Hur Tin Yang vs. People, supra). entrustee who binds himself to hold the designated
GDI. The entruster merely holds a security interest.
If under the trust receipt, the bank is made to appear
LOAN/SECURITY FEATURE as the owner, it was but an artificial expedient, more
of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants,
TWO FEATURES OF A TRUST RECEIPT which it cannot do, just to give consistency with
TRANSACTION purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer. To
1. Loan feature - is brought about by the fact that consider the bank as the true owner from the
the entruster financed the importation or inception of the transaction would be to disregard
purchase of the goods under TR (Sps. Vintola vs. the loan feature thereof (Rosario Textile Mills Corp.
Insular Bank of Asia and America, G.R. No. 73271, vs. Home Bankers Savings and Trust Company,
May 29, 1987). supra).
2. Security feature - property interest in the GDI to
secure performance of some obligation of the The entrustee, however, cannot mortgage the goods
entrustee or of some third persons to the because one of the requisites of a valid mortgage is
entruster (Rosario Textile Mills Corp. v. Home that the mortgagor must be the absolute owner of
Bankers Savings and Trust Company, G.R. No. the property mortgaged or must have free disposal
137232, June 29, 2005). thereof. Entrustee is not the absolute owner of the
goods under trust receipt nor has free disposal
EFFECTS OF THE DUAL FEATURES OF A TRUST thereof.
RECEIPT
The entruster is not responsible as principal or
1. The entrustee cannot absolutely be relieved of vendor under any sale or contract to sell made by
the obligation to pay his loan just because he the entrustee.
surrendered the goods to the entruster if the
entruster refuses to accept and subsequently
deposited them in the custody of the court (Sps. RIGHTS OF THE ENTRUSTER
Vintola vs. Insular Bank of Asia and America,
supra).

11
 MERCANTILE LAW
1. To be entitled to the Proceeds from the sale of 4. To Keep GDI or the proceeds thereof, whether
the GDI to the extent of the amount owing to in money or whatever form, separate and
him. capable of identification as property of the
2. To the Return of the GDI in case of non-sale and entruster;
enforcement of all other rights conferred to him 5. To Return GDI to the entruster in case they
in the TR. could not be sold or upon demand of the
3. May Cancel the trust and take possession of the entruster; and
goods, upon default or failure of the entrustee 6. To Observe all other conditions of the TR (P.D.
to comply with any of the terms and conditions 115, Sec. 9).
of the TR (P.D. 115, Sec. 7).
4. To Sell the goods with at least five day notice to NOTE: Not all obligations of the entrustee are
the entrustee and apply the proceeds in criminal in nature. The gravamen of the criminal
payment of the obligation. Entrustee liable to offense under the trust receipts law is the failure of
pay deficiency, if any. the entrustee to deliver the proceeds of the sale to
the entruster up to the extent of the entrutee's
obligations or the return of the same in case of non-
VALIDITY OF THE SECURITY INTEREST AS sale.
AGAINST THE CREDITORS OF THE ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR
DISPOSITION OF GOODS, DOCUMENTS OR
Entruster has a better right over the goods than INSTRUMENTS
that of the creditors of the entrustee

The entruster’s security interest in goods, Disposition of the proceeds of the sale of the
documents, or instruments pursuant to the written goods, documents or instruments
terms of a TR shall be valid as against all creditors
of the entrustee for the duration of the TR agreement The proceeds of the sale of GDI shall be applied in
(P.D. 115, Sec. 12). the following (SDP):

The security interest of the entruster over the goods 1. Expenses of the Sale;
under the trust receipt is superior to the monetary 2. Expenses Derived from re-taking, keeping and
claims of the laborers of the entrustee. storing the GDI; and
3. Principal obligation (P.D. 115, Sec. 7).
Purchaser in good faith can defeat the rights of
the entruster over the goods NOTE: Full payment of the loan or delivery of the
sale proceeds equivalent to the full amount of the
A purchaser in good faith acquires the goods, obligation extinguishes both criminal and civil
documents or instruments free from the entruster's liabilities of the entrustee. In case of deficiency, the
security interest (P.D. 115, Sec. 11). entrustee shall be liable thereon. However, any
excess shall belong to him.

OBLIGATION AND LIABILITY

OF THE ENTRUSTEE RETURN OF GOODS, DOCUMENTS OR
INSTRUMENTS IN CASE OF NON-SALE

Obligations and Liabilitites of the Entrustee

(HR-IKRO) Obligation of the Entrustee in case the goods,
documents or instruments were not sold
1. To Hold GDI in trust for the entruster and to
dispose of them strictly in accordance with the The entrustee should return the GDI to the entruster
terms of TR; (P.D. 115, Sec. 4).
2. To Receive the proceeds of the sale for the
entruster and to turn over the same to the The return of the GDI in case of non-sale
entruster to the extent of amount owing to the extinguishes only the criminal liability of the
latter; entrustee unless he pays in full his loan obligation.
3. To Insure GDI against loss from fire, theft, The consequent acquittal of the entrustee in the
pilferage or other casualties; criminal case does not bar the filing of a separate

12
 TRUST RECEIPTS LAW
civil action to enforce the civil liability of the
entrustee. LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
The failure to turn over goods or proceeds realized
from the sale thereof is a criminal offense under Art.
315(l) (b) of RPC (estafa) except if he disposed of Entrustee shall bear the loss of the goods,
the goods in accordance with the terms. documents, or instruments which are the
subject of a Trust Receipt
Q: CCC Car, Inc. obtained a loan from BBB Bank,
which fund was used to import ten (10) units of Loss of the GDI which is the subject of a TR, pending
Mercedes Benz S class vehicles. Upon arrival of their disposition, irrespective of whether or not it
the vehicles and before release of said vehicles was due to the fault or negligence of the entrustee,
to CCC Car, Inc. X and Y, the President and shall not extinguish his obligation to the entruster
Treasurer, respectively, of CCC Car, Inc. signed for the value thereof (P.D. 115, Sec. 10).
the Trust Receipt to cover tha value of the ten
(10) units of Mercedes Benx S class vehicles RES PERIT DOMINO IN TRUST RECEIPT
after which, the vehicles were all delivered to
the Car display room of CCC Car, Inc. Sale of the Principle of Res Perit Domino is not a valid defense
vehicles were slow, and it took a month to against an Entrustee in cases of loss or destruction
dispose of the ten (10) units. CCC Car, Inc. of the goods, documents, or instruments secured by
wanted to be in business and to save on various a Trust Receipt. For the principle of res perit domino
documentations required by the bank, decided to apply the entrustee must be the owner of the
that instead of turning over the proceeds of the goods at the time of the loss. A TR is a security
sales, CCC Car Inc. used the proceeds to buy agreement, pursuant to which a bank acquires a
another ten (10) units of BMW 3 series. ‘security interest’ in the goods. It secures an
indebtedness and there can be no such thing as
a. Is the action of CCC Car, Inc. legally justified? security interest that secures no obligation. If under
Explain your answer. a trust receipt transaction, the entruster is made to
b. Will the corporate officers of CCC Car, Inc. be appear as the owner, it was but an artificial
held liable under the circumstances? expedient, more of legal fiction than fact, for if it
Explain your answer. (2012 Bar) were really so, it could dispose of the goods in any
A: manner it wants. Thus, the ownership of the goods
a. NO. It is the obligation of the entrustee, CCC Car, remaining with the entrustee, he cannot be relieved
Inc. to receive the proceeds of the sale of the of the obligation to pay his/her loan in case of loss
goods covered by the trust receipts in trust for or destruction (Rosario Textile Mills vs. Home
the entruster and to turn over the same to him Bankers Association, supra).
th extent of the obligation (P.D. 115, Sec. 4)
B. YES. Failure of the entrustee to turn over the
proceeds of the sale of the goods shall PENAL SANCTION IF OFFENDER IS A
constitute the crime of estafa. If the violation is CORPORATION
committed by a juridical entity, the penalty
shall be imposed upon the directors, officers,
employees or other officials or persons therein
ELEMENTS ESTAFA IN TRUST RECEIPT
responsible for the offense, without prejudice
to the civil liabilities arising from the criminal
In order that the entrustee may be validly
offense. Hence, the corporate officers are
prosecuted for estafa under Art. 315, paragraph
criminally liable for the violation of the law
1(b) of the RPC, in relation with Sec. 13 of PD 115,
being he human agent responsible for the same
the following elements must be established (R-
(P.D. 115, Sec. 13).
MAD):

1. The entrustee Received the subject goods in

trust or under the obligation to sell the same
and to remit the proceeds thereof to the
entruster, or to return the goods if not sold;
2. The entrustee Misappropriated or converted
the goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse
of confidence to the damage and prejudice of

13
 MERCANTILE LAW
entruster; and enacting the law, sought to find a way to assist
4. A Demand was made on the entrustee by importers and merchants in their financing in order
entruster for the remittance of the proceeds or to encourage commerce in the Philippines.”
the return of the unsold goods (Land Bank of the
Philippines vs. Perez, GR No. 166884, June 13, The principle is of course not limited in its
2012). application to financing importations, since the
principle is equally applicable to domestic
NOTE: If proof as regards the delivery of GDI to the transactions. Regardless of whether the transaction
accused (entrustee) is insufficient, estafa cannot lie is foreign or domestic, it is important to note that
(Ramos vs. CA, G.R. No. L-3992-25, August 21, 1987). the transactions discussed in relation to trust
receipts mainly involved sales (Ng vs. People, G.R.
Compliance with the obligation under the Trust No. 173905, April 23, 2010).
Receipt agreement vis-a-vis criminal liability
In another case it was held that when both parties
1. If compliance occurred before the criminal enter into an agreement knowing that the return of
charge- there is no criminal liability. the goods subject of the trust receipt is not possible
2. If compliance occurred after the charge even even without any fault on the part of the entrustee,
before conviction- the criminal action will not be it is not a trust receipt transaction penalized under
extinguished. Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of
P.D. 115 does not violate the prohibition in the the proceeds of the sale transaction. The transaction
Constitution against imprisonment for non- becomes a mere loan, where the borrower is
payment of a debt obligated to pay the bank the amount spent for the
purchase of the goods (LBP vs. Perez, supra).
What is being punished is the dishonesty and abuse
of confidence in the handling of money or goods to PENAL SANCTION WHEN THE OFFENDER IS A
the prejudice of another regardless of whether the CORPORATION
latter is the owner or not. It does not seek to enforce
payment of the loan. Thus, there can be no violation Though the entrustee is a corporation, nevertheless,
of a right against imprisonment for non-payment of the law specifically makes the officers, employees or
a debt (People vs. Nitafan, G.R. No. 81559, April 6, other officers or persons responsible for the offense,
1992). without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or
Q: Is lack of intent to defraud a bar to the other officials or employees responsible for the
prosecution of these acts or omissions? (2006 offense.
Bar)
If the crime is committed by a corporation or other
A: NO. The mere failure to account or return gives juridical entity, the directors, officers, employees or
rise to the crime which is malum prohibitum. There other officers thereof responsible for the offense
is no requirement to prove intent to defraud (Ching rshall be charged and penalized for the crime,
vs. Secretary of Justice, G.R. No. 164317, February 6, precisely because of the nature of the crime and the
2006). penalty therefor. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a
Penal sanction is not available if the goods are crime punishable by imprisonment (Ching vs.
not intended for sale or resale Secretary of Justice, supra).

To be a TR transaction, the goods must be intended Rationale behind the accountability of the
for sale or resale. The Supreme Court, in one case, officers of the corporation
held that the trial court erred in ruling that the
agreement in the case was a TR transaction because The rationale is that such officers or employees are
the goods involved were intended to be used in the vested with the authority and responsibility to
fabrication of steel communication towers. devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
The Court further ruled that, “the true nature of a accountable; thus, they have a responsible share in
trust receipt transaction can be found in the the violations of the law (ibid).
‘whereas’ clause of PD 115 which states that a trust
receipt is to be utilized ‘as a convenient business NOTE: An officer of a corporation who signed a TR
device to assist importers and merchants solve their cannot hide behind the cloak of the separate
financing problems.’ Obviously, the State, in corporate personality of the corporation, where “he

14
 TRUST RECEIPTS LAW
is the actual, present and efficient actor.” Corporate they represent, EXCEPT if they contractually
officers or employees, through whose act, default or agree/stipulate or assume to be personally liable for
omission the corporation commits a crime, are the corporate’s debts, as in this case. The RTC and
individually guilty of the crime. The principle CA correctly adjudged petitioner personally and
applies whether or not the crime requires the solidarily liable with Novachem for the obligations
consciousness of wrongdoing (Ching vs. Secretary of secured by the subject trust receipts based on the
Justice, supra). finding that he signed the guarantee clauses therein
in his personal capacity an even waived the benefit
Q: The President of Novachem, Crisologo, of excussion (Crisologo vs. People of the Philippines,
applied for commercial letters of credits from G.R. No. 199481, December 3, 2012).
private respondent Chinabank to finance the
purchase of 1,600 kgs. of amoxicillin trihydrite
micronized from Hyundai Chemical Company in
South Korea and glass containers from San REMEDIES AVAILABLE
Miguel Corporation. Subsequently, Chinabank
issued Letters of Credit. After petitioner
received the goods, he executed for and in behalf DEFENSES AVAILABLE TO NEGATE CRIMINAL
of Novachem the corresponding trust receipt LIABILITY OF THE ENTRUSTEE
agreements in favour of Chinabank. (CoCo CaCo No LP)

On January 2004, Chinabank, through its staff 1. Compliance with the terms of the TR either by
assistant, filed before the City Prosecutor’s payment, return of the proceeds or return of the
Office a Complaint-Affidavit charging Crisologo goods (P.D. 115, Sec. 13).
for violation of P.D. No. 115 in relation to Article 2. Consignment.
315 of RPC for his purported failure to turn-over 3. Cancellation of the TR agreement and taking
the goods or the proceeds from the sale thereof. into possession of the goods by the entruster.
RTC rendered a Decision acquitting Crisologo of
criminal charges. It however adjudged him NOTE: Repossession of the goods will
civilly liable to Chinabank. On appeal of the civil extinguish only the criminal liability.
aspect, the CA affirmed the RTC Decision. It
noted that the Crisologo signed the “Guarantee 4. Compromise by parties before filing of
Clause” of the trust receipt agreements in his information in court. Compromise of estafa case
personal capacity and even waived the benefit of arising from TR transaction, after the case has
excussion against Novachem. As such, he is been filed in court does not amount to novation
personally and solidarily liable with Novachem. and does not erase the criminal liability of the
Is the decision of CA correct? accused (Ong vs. CA, G.R. No. L-58476, September
2, 1983).
A: YES. Section 13 of the Trust Receipts Law 5. Non-receipt of the goods by the entrustee or
explicitly provides that if the violation or offense is where proof of delivery of goods to the accused
committed by a corporation, as in this case, the is insufficient. (Ramos vs. CA, supra).
penalty provided for under the law shall be imposed 6. Loss of goods without fault of the entrustee.
upon the directors, officers, employees or other 7. The transaction does not fall under PD 115
officials or person responsible for the offense, (Colinares vs. CA, G.R. No. 90828, September 5,
without prejudice to the civil liabilities arising from 2000, Consolidated Bank and Trust Corporation
the criminal offense. vs. CA, G.R. No. 114286, April 19, 2001).

In this case, Crisologo was acquitted of the charge NOTE: In these cases, the execution of a TR was
for violation of the Trust Receipts Law in relation to made after the goods covered by it had been
Article 315 of the RPC. As such, he is relieved of the purchased, making the buyer the owner thereof.
corporate criminal liability as well as the The transaction does not involve a TR but a simple
corresponding civil liability arising therefrom. loan even though the parties denominate the
However, as correctly found by the RTC and CA, he transaction as one of a TR.
may still be held liable for the trust receipts and L/C
transactions he had entered into in behalf of Q: Ricardo mortgaged his fishpond to AC Bank to
Novachem. secure a P1M loan. In a separate transaction, he
opened a letter of credit with the same bank for
Settled is the rule that debts incurred by directors, $500,000 in his favor of HS Bank, a foreign bank,
officers, and employees acting as corporate agents to purchase outboard motors. Likewise, Ricardo
are not the direct liability but of the corporation

15
 MERCANTILE LAW
executed a Surety Agreement in favor of AC cancel the trust and take possession of the goods to
Bank. be able to enforce his right thereunder. The law uses
the word "may" in granting to the entruster the right
a. Can AC Bank take possession of the to cancel the trust and take possession of the goods.
outboard motors? Why? Consequently, the entrustee has the discretion to
b. Can AC Bank also foreclose the mortgage avail of such right or seek any alternative action,
over the fishpond? (2005 Bar) such as a third party claim or a separate civil action
which it deems best to protect its right, at any time
A: upon default or failure of the entrustee to comply
a. If what Ricardo executed is a trust receopt, AC with any of the terms and conditions of the trust
Bank can take possession of the outboard agreement (South City Homes, Inc. vs. BA Finance
motors so that it can exercise its lien and sell Corporation, G.R. No. 135462, December 7, 2001).
them. If what Ricardo executed is a Surety
Agreement, AC Bank cannot take possession of Q: BBB Banking Corporation issued a Letter of
the outboard motors because it has no lien on Credit in the amount of P5Million, for the
them. purchase of five (5) tons of corn by X. Upon
b. AC Bank can also foreclose the mortgage over arrival of the goods, the goods were delivered to
the fishpond if Ricardo fails to pay the loan of the warehouse of X. Thereafter he was asked to
P1M. sign a Trust Receipt covering the goods. When
the goods were sold, X did not deliver the
Failure of the entrustee to deliver the proceeds proceeds to BBB Banking Corporation, arguing
of sale will give the entruster the right to file a that he will need the fund for the subsequent
civil action and a criminal action for estafa importation. Is there sufficient basis to sue for
(1991, 1997, 2006 Bar) criminal action? (2012 Bar)

Sec. 13 of P.D. 115, Trust Receipts Law, provides A: There is no sufficient basis for a criminal action
that the failure of an entrustee to turn over the because when the trust receipt was signed, the
proceeds of the sale of the goods, documents or ownership of the goods was already with X.
instruments covered by a trust receipt to the extent
of the amount owing to the entruster or as appears Q. Dennis failed to comply with his undertaking
in the trust receipt or to return said goods, under the TR he issued in favor of ABC bank. The
documents or instruments if they were not sold or bank filed both criminal and civil cases against
disposed of in accordance with the terms of the trust Dennis. The court proceeded with the civil case
receipt shall constitute the crime of estafa. independently from the criminal case. Is the
court correct in proceeding independently
The civil action may be instituted in the criminal although a criminal case is also instituted?
action or separately filed independently of the
criminal action. The criminal action is based on ex- A: YES, the complaint against Dennis is based on the
delictu for violation of the law while the civil action failure of the latter to comply with his obligation as
is based on ex-contractu for violation of the trust spelled out in the TR. This breach of obligation is
receipt arrangement. separate and distinct from any criminal liability for
"misuse and/or misappropriation of goods or
Repossession of goods proceeds realized from the sale of goods, documents
or instruments released under trust receipts",
Repossession of the goods by the Entruster cannot punishable under Sec. 13 of the PD 115. Being based
be considered as payment. Payment would legally on an obligation ex contractu and not ex delicto, the
result only after the entruster has foreclosed on the civil action may proceed independently of the
securities, sold the same and applied the proceeds criminal proceedings instituted against petitioners
thereof to the entrustee’s obligation. Since the TR is regardless of the result of the latter (Sarmiento vs.
a mere security arrangement, the repossession by CA, G.R. No. 122502, December 27, 2002).
the entruster cannot be considered payment of the
loan/advances given to the entrustee under the Effect of novation of a Trust Agreement
letter of credit/trust receipt (PNB v. Pineda, supra).
Where the entruster and entrustee entered into an
Cancellation of Trust Receipt in case of default agreement which provides for conditions
incompatible with the TR agreement, the obligation
In the event of default by the Entrustee on his under the trust receipt is extinguished. Hence, the
obligation under the Trust Receipt agreement, it is breach in the subsequent agreement does not give
NOT absolutely necessary for the Entruster to rise to a criminal liability under P.D. 115 but only

16
 WAREHOUSE RECEIPTS LAW
civil liability (Philippine Bank vs. Ong, G.R. No. 2. A person authorized by a Warehouseman.
133176, August 8, 2002).
FORM AND ESSENTIAL TERMS OF A
Deposits in a savings account opened by the buyer WAREHOUSE RECEIPT
subsequent to the Trust Receipt transaction cannot
be automatically applied to outstanding obligations It need not be in particular form but must embody
under the Trust Receipt account. The receipt of the within its written or printed terms (LCD-DSWD-
bank of a sum of money without reference to the TR LF):
obligation does not obligate the bank to apply the
money received against the trust receipt obligation. 1. Location of the warehouse
Neither does compensation arise because 2. Consecutive number of the receipt
compensation is not proper when one of the debts 3. Date of the issue
consists in civil liability arising from criminal 4. A statement whether the goods received will be
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No. Delivered to bearer, to a specified person or to
134436, Aug. 16, 2000). a specified person or his order
5. Signature of the warehouseman
Q: E received goods from T for display and sale 6. If the receipt is issued for goods of which the
in E's store. E was to turn over to T the proceeds Warehouseman is the owner, either solely or
of any sale and return the ones unsold. To jointly or in common with others, the fact of
document their agreement, E executed a trust such ownership; and
receipt in T’s favor covering the goods. When E 7. Description of the goods
failed to turn over the proceeds from his sale of 8. A statement of the amount of advances made
the goods or return the ones unsold despite and of liabilities incurred for which the
demand, he was charged in court for estafa. E warehouseman claims a Lien.
moved to dismiss on the ground that his liability 9. Fees (WHR Law, Sec. 2)
is only civil. Is he correct? (2011 Bar)
EFFECTS OF OMISSION OF ANY OF THE
A: NO, since his breach of the trust receipt ESSENTIAL TERMS (CIV-N)
agreement subjects him to both civil and criminal
liability for estafa. 1. Conversion of the contract to ordinary deposit.
2. Injured person can hold warehouseman liable
for all damages caused by the omission.
WAREHOUSE RECEIPTS LAW 3. Validity of receipt not affected.
(ACT 2137, AS AMENDED) 4. Negotiability of receipts not affected (Gonzales
vs. Go Fiong & Luzon Surety Co., G.R. No. 91776,
Warehouse Receipt August 30, 1958).

It is a written acknowledgment by the PROHIBITED TERMS IN A WAREHOUSE

warehouseman that he has received and holds RECEIPT
certain goods therein described in his warehouse
for the person to whom the document is issued. A warehouseman may insert in a receipt issued by
(NCC, Art.1507-1520) him, any other terms and conditions provided that
such terms and conditions shall not be (C2-RMN):
Warehouseman
1. Contrary to the Warehouse Receipts Law (Sec.
A person, natural or juridical, lawfully engaged in 3).
the business of storing of goods for profit (WHR 2. Contrary to law, morals, good customs, public
Law, Sec. 58). order or public policy.
3. Terms Reducing the required diligence of the
Warehouse warehouseman (Ibid).
4. Those exempting the warehouseman from
The building or place where goods are deposited liability for Misdelivery or for not giving
and stored for profit. statutory notice in case of sale of goods. Those
exempting the warehouseman from liability for
PERSONS WHO MAY ISSUE A WAREHOUSE Negligence.
RECEIPT
Effect when the goods deposited are incorrectly
1. Warehouseman, whether public or private, described
bonded or not (WHR Law, Sec. 1).

17
 MERCANTILE LAW
GR: Warehouseman shall be liable for damages for Effect when a Negotiable Warehouse Receipt
non-existence or misdescription of goods at the was delivered without the necessary
time of its issue. indorsement (Ac - DC)

XPN: When the goods are described based on: 1. The transferee Acquires title against the
1. Series or labels upon them transferor
2. Statement that the goods are of certain kind. 2. There is no Direct obligation of the
warehouseman; and
Person to whom the goods should be delivered 3. The transferee can Compel the transferor to
(PDO) complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the
1. To the person lawfully entitled to the time when the indorsement is actually made.
Possession of the goods, or his agent;
2. To the person entitled to Delivery under a non- Forged signature of the owner
negotiable instrument or with written
authority; or In case the signature of an owner was forged and the
3. To the lawful Order of a negotiable receipt forger was able to withdraw the goods from the
(person in possession of a negotiable receipt) Warehouseman, the owner has the following rights:
(WHR Law, Sec. 9).
1. If under warehouse receipt, the goods are
deliverable to the depositor or to his order, the
owner of the said negotiable receipt may
KINDS proceed against the warehouseman and/or the
holder.
2. Without the valid indorsement of the owner to
Kinds of Warehouse Receipt the holder or in blank, the warehouseman is
liable to the owner for conversion in the
1. Negotiable warehouse receipt misdelivery.
2. Non-negotiable warehouse receipt 3. If the goods are deliverable to bearer, the owner
may only proceed against the holder. The
NEGOTIABLE WAREHOUSE RECEIPT warehouseman is not liable for conversion
where the goods are delivered to a person in
Negotiable Warehouse Receipt possession of a bearer negotiable instrument.

It is a receipt in which it states that the goods Validity of the negotiation of a receipt is not
received will be delivered to the bearer or to the impaired by fraud, mistake or duress
order of any person named in such receipt (WHR
Law, Sec. 5). It is negotiated by delivery or Breach of duty on the part of the person making the
indorsement plus delivery. negotiation or fraud, mistake or duress on the
owner of the receipt to entrust possession or
NOTE: No provision shall be inserted in a negotiable custody DOES NOT impair the validity of
receipt that it is non-negotiable. Such provision, if negotiation of a warehouse receipt. The same is true
inserted, shall be void, and the receipt shall remain provided that the person to whom the receipt was
negotiable. A negotiable warehouse receipt cannot negotiated or a person to whom the receipt was
be converted into non-negotiable (WHR Law, Sec. 5). subsequently negotiated paid value therefor,
without notice of the breach of duty, or fraud,
Person who may negotiate a Negotiable mistake or duress (WHR Law, Sec. 47).
Warehouse Receipt
Non-payment by the original depositors of the
1. The owner; purchase price will NOT render the further
2. Any person to whom the possession or custody negotiation of the receipt invalid
of the receipt has been entrusted by the owner,
if, by the terms of the receipt, the goods are The negotiation of the warehouse receipt by the
deliverable to the order of the person to whom buyer of goods purchased from and deposited to the
the possession or custody of receipt has been warehouseman is valid even if the warehouseman
entrusted or in such form that it may be who issued the negotiable warehouse receipt was
negotiated by delivery (WHR Law, Sec. 40). not paid by the buyer. The validity of the negotiation
cannot be impaired by the fact that the
owner/warehouseman was deprived of the

18
 WAREHOUSE RECEIPTS LAW
possession of the same by fraud, mistake or Effect of indorsement of a Non-Negotiable
conversion (PNB vs. Noah’s Ark Sugar Refinery, G.R. Warehouse Receipt
No. 107243, September 1, 1993).
Even if the receipt is indorsed, the transferee
Duplicate receipts must be so marked in case acquires no additional right (WHR Law, Sec. 39).
one negotiable receipt is issued for the same
goods WARRANTIES ON A WAREHOUSE RECEIPT

A warehouseman shall be liable for all damages A person who, for value, negotiates or transfers a
caused by his failure to do so to anyone who receipt by indorsement or delivery, including one
purchased the subsequent receipt for value who assigns for value a claim secured by a receipt,
supposing it to be an original, even though the unless a contrary intention appears
purchase be after the delivery of the goods by the to warrants(GRIT):
the holder of the original receipt (WHR Law, Sec. 6).
1. Receipt is Genuine
The word “duplicate” shall be plainly placed upon 2. Legal Right to negotiate or transfer it
the face of every such receipt, except the first one 3. No knowledge of defects that may Impair the
issued (ibid.). validity or worth of the receipt
4. That he has a right to Transfer title to the goods
NON-NEGOTIABLE WAREHOUSE RECEIPT and that the goods are merchantable or fit for a
particular purpose whenever such warranties
It is a receipt in which it is stated that the goods would have been to transfer without a receipt
received will be delivered to the depositor or to any of goods represented thereby (WHR Law, Sec.
other specified person (WHR Law, Sec. 4). 44).

NOTE: To make it non-negotiable, it is needed to be NOTE: The indorsee does not guarantee that the
indicated in the face of the warehouse receipt by the warehouseman will comply with his duties (WHR
warehouseman issuing it that the same is “non- Law, Sec. 45).
negotiable,” or “not negotiable” (WHR Law, Sec.7).
When no warranty implied
Failure to mark the warehouse receipt as “non-
negotiable” shall entitle the holder, who purchased A mortgagee, pledgee, or holder for security of a
it for value supposing it to be negotiable, to treat receipt who, in good faith, demands or receives
such receipt negotiable (ibid). payment of the debt for which such receipt is
security, whether from a party to a draft drawn for
Transfer of a Non-Negotiable Warehouse such debt or from any other person, shall not, by so
Receipt doing, be deemed to represent or to warrant the
genuineness of such receipt or the quantity or
A non-negotiable warehouse receipt may be quality of the goods therein described. In short, a
transferred by its delivery to the transferee creditor receiving the WHR given as collateral
accompanied by a deed of assignment, donation or makes no warranty (WHR Law, Sec. 46).
other form of transfer.

DISTINCTION BETWEEN NEGOTIABLE INSTRUMENT AND NEGOTIABLE WAREHOUSE RECEIPT

NEGOTIABLE INSTRUMENT NEGOTIABLE WAREHOUSE RECEIPT

Does not contain an unconditional promise to pay a
Contains an unconditional promise to pay a sum
sum certain in money. The obligation is to deliver
certain in money.
goods.
The subject is money. The subject is merchandise.
The negotiable instrument is the object of value. The warehouse receipt is not the object of value.
Intermediate parties are not liable for the warehouse
Intermediate parties become secondarily liable. man’s failure to deliver the goods.

Although endorsers or intermediate parties are not

The general endorsers warrant that the instrument
liable for any failure on the part of the warehouseman
after due presentment shall be paid and in case of
or previous endorsers of the receipt to fulfill their

19
 MERCANTILE LAW
dishonor and notice of dishonor given, the endorser obligations they may be held liable for breach of
shall pay the holder. warranties such as: (1) receipt is genuine and in
respect what it purports to be (2) they have legal title
to the instrument (3) goods are fit for consumption
and merchantable (4) they are not aware of any
information that will make the instrument worthless

RIGHTS OF A HOLDER OF A NEGOTIABLE WAREHOUSE RECEIPT VS.

THE RIGHTS OF A TRANSFEREE OF A NON-NEGOTIABLE WAREHOUSE RECEIPT

NEGOTIABLE WAREHOUSE RECEIPT NON-NEGOTIABLE WAREHOUSE RECEIPT

May be acquired through negotiation May be acquired through transfer or assignment
Rights of the holder of the receipt: Rights of transferee:

1. If indorsed: 1. Acquires title to the goods subject to the terms of

any agreement with the transferor (WHR Law, Sec.
a. Acquires title to the goods as the person 42).
negotiating (WHR Law, Sec. 41).
2. Acquires the right to notify the warehouseman of
b. Acquires the direct obligation of the the transfer and thereby acquires the direct obligation
warehouseman to hold possession of the goods for of the warehouseman to hold possession of the goods
him as if the warehouseman directly contracted for him (ibid).
with him (ibid).
NOTE: Prior to notice, the title of the transferee may
2. If not indorsed: be defeated by the levy of an attachment or execution
upon the goods by a creditor of the transferor or by a
He may compel indorsement; other-wise, he would notification to the warehouseman by the transferor or
acquire title as that of an assignee (WHR Law, Sec. 43). a subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor (ibid.).
Defeats the lien of the seller of the goods covered
Acquires the title as that of his transferor.
thereby (WHR Law, Sec. 49).
Good covered cannot be garnished, attached or levied
on execution by unless:

1. Receipt is surrendered. Pending notification to the warehouseman, goods can

be garnished, attached or levied on execution
2. Its negotiation is enjoined by the court.
Reason: Absent such notice, both the warehouseman
3. The goods are impounded by the court (WHR Law, and the sheriff have a right to assume that the goods
Sec. 25). are still owned by the person whose name appears in
the receipt.
NOTE: This shall not apply if the person depositing is
not the owner of the goods or one who has no right to
convey title to the goods binding upon the owner.
Protects the purchaser in good faith and for value. The assignee only steps into the shoes of the assignor.

warehouseman cannot be compelled to deliver the

Q: Coco was issued by a Warehouseman a actual possession of the goods until the receipt is
negotiable receipt for safekeeping by the latter surrendered to it or impounded by the court.
of his goods. Can the judgment creditor of Coco
levy by execution the goods covered by the Q: Assuming that prior to the levy, the receipt
negotiable receipt? was sold to Yoyo on the basis of which he filed a
claim with the sheriff. Would Yoyo have better
A: The goods cannot, while in the possession of the rights to the goods than the creditor? Explain
warehouseman, be attached by garnishment or your answer. (1999 Bar)
otherwise, or be levied upon under an execution
unless the receipt is first surrendered to the A: YES. Yoyo, as a holder for value of the receipt, has
warehouseman, or its negotiation enjoined. The a better right to the goods than the creditor. It is

20
 WAREHOUSE RECEIPTS LAW
Yoyo that can surrender the receipt which is in its b. A non-negotiable warehouse receipt is
possession and can comply with the other transferred thru simple assignment. Since Alex
requirements which will oblige the warehouseman negotiated it instead of having it assigned, the
to deliver the goods, namely, to sign a receipt for the conveyance of the warehouse receipt to Caloy is
delivery of the goods, and to pay the not valid. Hence, Alex is still the owner of the
warehouseman's liens and fees and other charges. said goods. Dario could now attach or levy the
goods.
Q: What is the proper recourse of the
warehouseman if he is uncertain as to who is Q: Jojo deposited several cartons of goods with
entitled to the goods? Explain. (2005 Bar) SN Warehouse Corporation. The
correseponding warehouse receipt was issued
A: Since there is a conflicting claim of ownership or to the order of Jojo. He endorsed the warehouse
title, the warehouseman should file a complaint in receipt to EJ who paid the value of the goods
interpleader requiring the claimants to interplead. deposited. Before EJ could withdraw the goods,
The matter involves a judicial question as to whose Melchor informed SN Warehouse Corporation
claim is valid. that the goods belonged to him and were taken
by Jojo without his consent. Melchor wants to get
Rule where a warehouse receipt is transferred the goods, but EJ also wants to withdraw the
to secure payment of a loan by way of pledge or same.
mortgage
a. Who has a better right to the goods? Why?
The pledgee or mortgagee does not automatically b. If SN Warehouse Corporation is uncertain as
become the owner of the goods but merely retains to who is entitled to the property, what is the
the right to keep, and with the consent of the owner proper recourse of the corporation? Explain
to sell them so as to satisfy the obligation from the (2005 Bar)
proceeds for the simple reason that the transaction A:
is not a sale but only a mortgage or pledge. Likewise, a. Ej has better right to the goods. The goods are
if the property is lost without the fault or negligence covered by a negotiable warehouse receipt
of the mortgagee or pledgee, then said goods are to which was indorsed to EJ for value. The
be regarded as lost on account of the real owner, negotiation to EJ was not impaired by the fact
mortgagor or pledgor (PNB vs. Sayo, Jr., G.R. No. that Jojo took the goods without the consent of
129198, July 9, 1998). Melchor, as EJ had no notice of such fact.
Moreover, EJ is in possession of the warehouse
Q: Alex deposited goods for which Billy, receipt and only he can surrender it to the
warehouseman, issued a negotiable warehouse warehouseman (Sec. 8, WHL).
receipt wherein the goods were deliverable to b. Under the Sec. 17 of Act 2137, Warehouse
Alex or order. Alex negotiated the receipt to Receipts Law, SN Warehouse Corporation may
Caloy. Thereafter, Dario, a creditor secured file an action for interpleader and implead EJ
judgment against Alex and served notice of levy and Melchor to determine who is entitled to the
over the goods on the warehouseman. said goods.

a. To whom should the warehouseman deliver Q: T delivers two refrigerators to the warehouse
goods upon demand? of W who then issues a negotiable receipt
b. Would your answer be the same if the undertaking the delivery of the refrigerators to
warehouseman issued a non-negotiable “T or bearer.” T entrusted the receipt to B for
werehouse receipt? (2007 Bar) safekeeping only. B negotiated it, however, to F
who bought it in good faith and for value. Who is
A: entitled to the delivery of the refrigerators?
a. Billy should deliver the goods to Caloy. Under (2011 Bar)
the Warehouse Receipts Act, the goods covered
by the negotiable receipt cannot be attached or A: F, since he is a purchaser in good faith and for
levied upon directly by the creditor. The value.
creditor must resort to attaching or levying the
receipt itself, not the goods, while in the Between the real owner of the goods and an
possession of the debtor, Alex. Since Alex has innocent purchaser for value acquiring the
already negotiated it to Caloy, Dario cannot Warehouse Receipt from a thief, the former
anymore attach or levy the goods under the prevails
warehouse receipt.

21
 MERCANTILE LAW
If the goods were stolen from the owner and c. Refusal to sign the Acknowledgement
deposited to the warehouseman who subsequently receipt, acknowledging the receipt of the
issued a warehouse receipt which in turn was duly goods from the warehouse;
negotiated to an innocent purchaser for value, the
owner has the better right than the holder of the 5. The failure was not due to any Fault on the part
negotiable warehouse receipt. This is because a of the warehouseman:
thief transfers no title. a. Upon request by or on behalf of the person
lawfully entitled (WHR Law, Sec. 10).
b. If the goods are lost, due to a fortuitous
event exclusively.
DUTIES OF A WAREHOUSEMAN c. If the warehouseman needs reasonable
time to ascertain the validity of the claim if
someone other than the depositor claims
OBLIGATIONS OF A WAREHOUSEMAN title to the goods (WHR Law, Sec. 18).
(TD [sasusi] K) d. If he had information that the delivery
about to be made was to one not lawfully
1. Take care of the goods entrusted to his entitled (WHR Law, Sec. 10)
safekeeping with the same care as a reasonably e. If several persons claim the goods (WHR
careful owner of similar goods would exercise. Law, Sec. 17).
2. Deliver them to the holder of the receipt or the
depositor provided there is demand by the Q: The warehouseman, by issuing the
depositor accompanied by either: warehouse receipt, acknowledges that the
a. An offer to satisfy the warehouseman’s lien goods are in his possession, but he can refuse to
b. An offer to surrender the receipt, if deliver the goods to the holder of the warehouse
negotiable with such indorsements as receipt covering the goods if - (2012 Bar)
would be necessary for the negotiation of
the receipts A: A warehouseman is bound to deliver the goods
c. A readiness and willingness to sign, when upon a demand made if such is accompanied with
the goods are delivered, an (1) an offer to satisfy the warehouseman’s lien; (2)
acknowledgment that they have been offer to surrender the receipt if negotiable; and (3)
delivered, if such signature is requested by readiness to sign an acknowledgment receipt when
the warehouseman (WHR Law, Sec. 8). the goods are delivered (WHR Law, Sec. 8).

3. Keep the goods separate from the goods of other HOWEVER, Sec. 31 of the said Law expressly
depositors, except if authorized by agreement or provides that a warehouseman having a lien valid
by custom, fungible goods may be mingled with against the person demanding the goods may refuse
other goods of the same kind and grade. to deliver the goods to him until the lien is satisfied.

Instance when the need for a demand by the Further, Sec. 13 provided that the alteration of a
depositor is not necessary receipt shall not excuse the warehouseman who
issued it from any liability if such alteration was: (1)
A demand by the depositor is not necessary when the immaterial, (2) authorized, or (3) made without
warehouseman has rendered it beyond his power to fraudulent intent.
deliver the goods.
NOTE: Warehouseman has no cause of action for
Justified refusal to deliver by the warehouseman repossession and damages on the basis of a falsified
delivery permit. Warehouseman has no cause of
1. If the warehouseman’s lien is not satisfied by the action against the person to whom it delivered
claimants (WHR Law, Sec. 31); deposited articles where the real parties interested
2. Where the goods have already been sold to in the questioned articles have not yet sued the
satisfy the warehouseman’s lien or because of warehouseman for damages on account of wrongful
their perishable or hazardous nature (WHR delivery (Consolidated Terminals Inc. vs. Artex
Law, Sec. 34); Development Co. Inc. G.R. No. L-25748, March 10,
3. If the warehouse receipt is negotiated back to 1975).
him;
4. When the holder does not satisfy the conditions REMEDY IF THE WAREHOUSE RECEIPT IS LOST
prescribed in Sec. 8, WHR Law: OR DESTROYED
a. Non-satisfaction of warehouseman’s lien.
b. Failure to surrender warehouse receipt.

22
 WAREHOUSE RECEIPTS LAW
A court of competent jurisdiction may order the 4. Material alteration fraudulently made –
delivery of the goods only: warehouseman is liable according to the
original tenor of the receipt to a purchaser of
a. Upon satisfactory proof of the loss or the receipt for value without notice, and even to
destruction of the receipt; and the alterer and subsequent purchasers with
b. Upon the giving of a bond with sufficient notice except that as regards to the last two, the
sureties to be approved by the court (WHR Law, warehouseman’s liability is limited only to
Sec. 14). delivery as he is excused from any liability

The delivery of the goods under an order of the INSTANCES WHERE A WAREHOUSE MAN IS
court shall NOT relieve the warehouseman from CRIMINALLY LIABLE FOR HIS ACTS
liability to a person to whom the negotiable receipt (GF-DOOM-C)
has been or shall be negotiated for value without
notice of the proceedings or of the delivery of the 1. Issuance of warehouse receipts for Good not
goods (ibid.). received (WHR Law, Sec. 50).
2. Issuance of receipt containing False statement
Instances when the duty to insure the goods (WHR Law, Sec. 51).
arise (RIEL) 3. Issuance of Duplicate negotiable warehouse
receipt not marked as such (WHR Law, Sec. 52).
1. Where the warehouse receipt contains a 4. Issuance of a negotiable warehouse receipt of
Representation to that effect. which he is an Owner without stating such fact
2. Where it was an Inducement for the depositor of ownership (WHR Law, Sec. 53).
to enter into the contract; 5. Delivery of goods without Obtaining negotiable
3. Established practice; or warehouse receipt (WHR Law, Sec. 54).
4. Where the Law provides 6. Negotiation of receipt for Mortgaged goods
(WHR Law, Sec. 55).
Conversion 7. Commingling of goods (WHR Law, Sec. 24).

It is an unauthorized assumption and exercise of the Other acts for which Warehouse Man is liable
right of ownership over goods belonging to another (DuMP-SICC)
through the alteration of their condition or the
exclusion of the owner’s right (Bouvier’s Law 1. Failure to stamp “Duplicate” on copies of
Dictionary). negotiable receipt (WHR Law, Sec.6).
2. Misdelivery of goods (WHR Law, Sec. 10).
Instances where a Warehouseman is liable for 3. Failure to Place “non-negotiable” or “not-
conversion negotiable” on a non-negotiable receipt (WHR
Law, Sec. 7).
1. Where the delivery is made to person other 4. Failure to give notice in case of Sale of goods to
than those authorized; satisfy lien (WHR Law, Sec. 33) or because the
2. Even if delivered to persons entitled, he may goods are perishable or hazardous (WHR Law,
still be liable for conversion if prior to delivery: Sec. 34).
a. He had been requested not to make such 5. Issuing receipt for non-existing goods or
delivery; or misdescribed goods (WHR Law, Sec.20).
b. He had received notice of the adverse claim 6. Failure to take Care of the goods (Sec. 21, WHR
or title of a third person. Law).
7. Failure to effect Cancellation of a negotiable
EFFECTS OF ALTERATION OF THE RECEIPT ON receipt upon delivery of the goods (WHR Law,
THE LIABILITY OF THE WAREHOUSEMAN Sec. 11).

1. Alteration immaterial – whether fraudulent or

not, whether authorized or not, the
warehouseman is liable on the altered receipt WAREHOUSEMAN’S LIEN
according to its original tenor
2. Authorized material alteration – the
warehouseman is liable according to the terms CHARGES COVERED BY A WAREHOUSEMAN’S
of the receipt as altered LIEN
3. Material alteration innocently made – the (PMA)
warehouseman is liable on the altered receipt
according to its original receipt

23
 MERCANTILE LAW
1. Charges for storage and Preservation of the Manner of conducting the execution sale to
goods (insurance and others may be included as satisfy the warehouseman’s lien
long as it is stipulated)
2. Money advanced, interest, insurance, 1. Notice of the sale
transportation, labor, weighing, coopering and a. published once a week for two consecutive
other charges and expenses in relation to such weeks in a newspaper published in the
goods place where such sale is to be held; or
3. Charges and expenses for notice, and b. If there is no newspaper published in such
Advertisements of sale, and for sale of the goods place, the advertisement shall be posted at
where default had been made in satisfying the least ten days before such sale in not less
warehouseman’s lien (WHR Law, Sec. 27). than six conspicuous places therein.

REMEDIES AVAILABLE TO A WAREHOUSEMAN NOTE: The notice shall indicate the following:
TO ENFORCE HIS WAREHOUSEMAN’S LIEN a. Description of the goods to be sold;
(REC) b. Name of the owner or person on whose
account the goods are held; and
1. By Refusing to deliver the goods until the lien is c. Time and place of the sale
satisfied;
2. By causing the Extrajudicial sale of the property 2. Sale shall be held not less than fifteen days from
and applying the proceeds of the value of the the time of the first publication.
lien; 3. In the place where the lien was acquired.
3. By filing a civil action for Collection of the
unpaid charges or by way of counterclaim in an NOTE: The balance, if any, of the proceeds of the
action to recover the property from him or such execution sale shall be held by thewarehouseman
other remedies allowed by law for the and delivered on demand to the person to whom he
enforcement of a lien against personal property would have been bound to deliver or justified in
or to a creditor against his debtor, for the delivering goods (WHR Law, Sec.31).
collection from the depositor of all the charges
which the depositor has bound himself to pay. Effect of the non-publication of the notice of sale

Lien over the goods does not preclude the Where the sale was made without the publication
warehouseman to avail all other remedies required and before the time provided by law, such
sale is void and the purchases of the goods acquires
Whether a warehouseman has or has not a lien upon no title to them.
the goods, he is entitled to all remedies allowed by
law to a creditor against a debtor for the collection A person claiming right over the property may
from the depositor of all charges and advances stop the execution sale of the goods
which the depositor has expressly or impliedly
contracted with the warehouseman to pay (WHR At any time before the goods are so sold, any person
Law, Sec 32). claiming a right of property or possession therein
may pay the warehouseman the amount necessary
Enforcement of a Lien to satisfy his lien and to pay the reasonable
expenses and liabilities incurred inserving notices
The lien may be enforced against the goods of the and advertising and preparing for the sale up to the
following: time of such payment (WHR Law, Sec.33).

1. Goods belonging to the person who is liable as Instances when a warehouseman may lose his
debtor; and lien
2. Goods belonging to others which have been
deposited at any time by the debtor with 1. By surrendering possession thereof, or
authority to make a valid pledge (WHR Law, Sec. 2. By refusing to deliver the goods when a
28). demand is made with which he is bound to
comply (WHR Law Sec. 29).
The warehouseman shall not thereafter be liable for
failure to deliver the goods to the depositor or NOTE: Where a negotiable receipt is issued, with
owner of the goods or to a holder of the receipt the exception of the charges for the storage or
given for the goods when they were deposited, even preservation of goods for which a negotiable receipt
if such receipt be negotiable (WHR Law, Sec. 36). has been issued, the lien exists only for other
charges expressly enumerated inthe receipt so far

24
 NEGOTIABLE INSTRUMENTS LAW
as they are written although the amount of the said 2. Negotiation – transfer from one person to
charge is not stated. another so as to constitute the transferee a
holder;
3. Presentment for acceptance (in certain kinds of
When Warehouseman fees and charges cease to Bills of Exchange) (NIL., Sec. 143)
accrue 4. Acceptance – written assent of the drawee to
the order;
The warehouseman fees and charges cease to 5. Dishonor by non-acceptance – refusal to accept
accrue from the date of rejection by the by the drawee;
warehouseman to heed the lawful demand by the 6. Presentment for payment – the instrument is
endorsee of the quedan for the release of the goods shown to the maker or drawee/ acceptor for
(PNB v. Sayo, Jr., Supra) him to pay;
7. Dishonor by non-payment – refusal to pay by
the maker or drawee/ acceptor
NEGOTIABLE INSTRUMENTS LAW
8. Notice of dishonor – notice to the persons
Negotiable Instrument secondarily liable that the maker or the
drawee/ acceptor refused to pay or to accept
It is a written contract for the payment of money instrument;
which is intended as a substitute for money and 9. Protest
passes from one person to another as money, in 10. Discharge
such a manner as to give a holder in due course the
right to hold the instrument free from defenses Negotiable Instruments are not legal tender
available to prior parties (Sundiang Sr. & Aquino,
2011). Negotiable instruments are neither money nor legal
tender; they are mere substitutes for money (NCBA,
Laws governing Negotiable Instruments Sec. 60).

1. NIL - For instruments which meet the requisites GR: The delivery of a negotiable instrument does
of negotiability. not by itself produce the effect of payment (Roman
2. New Civil Code (NCC) – Applies suppletorily in Catholic Bishop of Malolos vs. Intermediate Appellate
cases of assignment and demand for payment of Court, G.R. No. 72110, November 16, 1990).
an NIL.
3. Code of Commerce (CC) – Applies suppletorily to XPNs: Negotiable instruments shall produce the
NIL in cases of crossed checks. effect of payment when:

1. When they have been cashed, or when through

Characteristics or features of a negotiable
the fault of the creditor they have been
instrument
impaired (NCC, Art. 1249).
1. Negotiability – The note may pass from hand to 2. If a check representing demand deposit has
hand similar to money so as to give the holder been cleared and credited to the account of the
in due course (HIDC) the right to hold the creditor, such shall be equivalent to delivery to
instrument and collect the sum payable for the creditor of cash (NCBA, Sec. 60).
himself free from any infirmity in the
Q: Negotiable instruments are used as
instrument or defect in the title of any of the
substitutes for money, which means - (2012 Bar)
prior parties or defenses available to them
among themselves. A: When negotiated, negotiable instruments can be
2. Accumulation of secondary contracts– A used to pay indebtedness.
characteristic of a negotiable instrument where
additional parties become involved as they are FORMS AND INTERPRETATIONS
transferred from one person to another. Once
an instrument is issued, additional parties can Rules governing the use of phrases in the
become involved (De Leon, 2010). Negotiable Instruments

Incidents in the life of a negotiable instrument 1. As to promissory note

a. The word “promise” need not be used. Any
1. Issue – first delivery of the instrument to the expression equivalent to a promise is
payee; sufficient.
b. Mere acknowledgment of a debt is not a
promissory note.

25
 MERCANTILE LAW
c. Language used must indicate a written Manner of Can be Can be
undertaking to pay. Transfer transferred by transferred only
negotiation or by assignment.
2. As to bill of exchange by assignment.
a. It must contain an order for payment as
distinguished from a mere request. Status of The transferee The transferee
b. The order is not invalidated because it Transferee can be a holder can never be a
contains words of civility. Thus, insertion of in due course holder in due
polite words like “please” does not alter the if all the course but
character of the instrument; as long as the requirements remains to be
language expresses the drawer’s will that of Section 52 an assignee.
the money be paid. of the NIL are
complied with.
Rules of construction in case of ambiguities in a
Negotiable Instrument Defenses All defenses
Available available to
1. Words prevail over figures. prior parties
2. If date from which interest is to run is may be raised
unspecified, interest runs from the date of the against the last
instrument; if undated, from the issue thereof. transferee.
3. If undated, instrument is considered dated as of (Sundiang Sr. &
the time it was issued. Aquino, 2014).
4. Written provisions prevail over printed.
5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election. Requisites of Negotiability
6. When not clear in what capacity it was signed,
deemed signed as an indorser. An instrument to be negotiable must conform to the
7. When two or more persons signed a negotiable following requirements: (WU-POA)
instrument stating "I promise to pay,"in case of
liability, they shall be deemed to be jointly and 1. It must be in Writing and signed by the maker or
severally liable (NIL, Sec. 17). drawer;
2. Must contain an Unconditional promise or order
REQUISITES OF NEGOTIABILITY to pay a sum certain in money;
3. Must be Payable on demand, or at a fixed or
Factors to determine the negotiability (FRI) determinable future time;
4. Must be payable to Order or to bearer; and
1. Words that appear on the Face of negotiable 5. Where the instrument is Addressed to a drawee,
instrument he must be named or otherwise indicated therein
2. Requirements enumerated in Section 1 of NIL with reasonable certainty (NIL, Sec.1).
3. Intention of the parties by considering the
whole of the instrument. NOTE: The requirements stated in Sec. 1 must
appear on the face of the instrument otherwise the
Negotiable Instrument vs. Non-negotiable instrument would not be negotiable.
Instrument
A NI need not follow the exact language of NIL, as
NON- long as the terms are sufficient which clearly
NEGOTIABLE indicate an intention to conform to the
BASIS NEGOTIABLE
INSTRUMENT requirements of the law (NIL, Sec. 10).
INSTRUMENT
Governing NIL. The Civil Code
Law or pertinent The instrument must be in writing
special laws
It must be reduced in writing or in tangible form.
should apply
The negotiability or non-negotiability of an
(GSIS v. CA,
instrument is determined from the writing on the
G.R. No. L-
face of the instrument itself (De Leon, 2010).
40824, February
23, 1989). The instrument must be signed by the maker or
drawer

It is placed at the lower right hand corner of the

26
 NEGOTIABLE INSTRUMENTS LAW
instrument. Nonetheless, it may appear in any part requires mathematical computation (Sundiang Sr. &
of the instrument whether at the top, middle or Aquino, 2014).
bottom or at the margin (De Leon, 2010).
Payment with interest
However, where a signature is so placed upon the
instrument that it is not clear in what capacity the Interest at fixed rate or at increased or reduced rate
person making the same intended to sign, he is to be will not destroy negotiability because the presence
deemed an indorser (NIL, Sec. 17 [f]). of such interest does not make uncertain the sum
payable. In the absence of a date as to which interest
NOTE: The signature is valid and binding as long as is to run, it shall be from the date of instrument, or
it appears that a person intended to make the in the absence thereof, at the date of issue. In the
instrument his own. The signature is prima facie absence of interest rate, it shall be the legal rate.
evidence of a person’s intention to be bound as
either maker or drawer. Payment by installment
Unconditional promise or order to pay
Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for
An unqualified order or promise to pay is
each installment is stated (NIL, Sec. 2; Sundiang Sr. &
unconditional though coupled with:
Aquino, 2009).
1. An indication of particular fund out of which
Q: Discuss the negotiability or non-negotiability:
reimbursement is to be made or a particular
account to be debited with the amount; or
Manila, June 3, 1993
2. A statement of the transaction which gave rise
P10,000.00
to the instrument. But an order or promise to
pay out of a particular fund is conditional (NIL,
For value received, I promise to pay Sergio Dee
Sec 3).
or order the sum of P10,000.00 in five (5)
The word “promise” or “order” need not appear in installments, with the first installment payable
the instrument to satisfy the requirements of on October 5, 1993 and the other installments
Section 1(b) of the NIL (Sundiang Sr. & Aquino, on or before the fifth day of the succeeding
2014). The promise or order to pay must not be month or thereafter.
subject to any condition or contingency. An
instrument payable upon a contingency is not (Sgd.) Lito Villa (1993 Bar)
negotiable even if the condition thereon has been
fulfilled. A: The instrument is negotiable because it complied
with the requirements provided by section 1 of the
Certainty as to sum NIL. The fact that it is payable in installments does
not make the instrument non-negotiable as long as
The sum payable is a sum certain within the the dates of each installment is fixed or at least
meaning of this Act, although it is to be paid: determinable and the amount to be paid for each
(ISDEA) installment is stated (NIL, Sec. 2[b]).

1. With Interest; or Payment with an acceleration clause

2. By Stated installments; or
3. By stated installments, with a provision upon Acceleration clause is a provision, that upon default
Default in payment of any installment or of in payment of any installment or interest, the whole
interest, the whole shall become due ( shall become due (NIL, Sec.2[c]).
acceleration clause); 1. Negotiable – If the option to accelerate the
4. With Exchange, whether at a fixed rate or at the maturity is on the maker, whether such option
current rate; or is absolute or conditional.
5. With cost of collection or an Attorney’s fees, in 2. Negotiable – Where acceleration is at the option
case payment shall not be made at maturity of the holder and can only be exercised upon the
(NIL, Sec. 2). happening of the specified event.
3. Not negotiable – Where the holder’s right to
A sum is certain within the contemplation of Section accelerate is unconditional, the time of payment
1(b) of the NIL if the amount that is to be is rendered uncertain.
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it Extension Clause

27
 MERCANTILE LAW
Extension Clauses are provisions extending the time Payable in Philippine Peso
of payment.
The “money” referred into may be our legal tender
GR: An extension clause does not affect the or foreign currency. An instrument is still negotiable
negotiability of the instrument. although the amount to be paid is expressed in
currency that is not legal tender so long as it is
XPN: Where a note with a fixed maturity provides expressed in money (PNB v Zulueta, G.R. No., L-7271,
that the maker has the option to extend time of August 30, 1957).
payment until the happening of a contingency, the
date is uncertain and the instrument is non- NOTE: An agreement to pay in foreign currency is
negotiable. The time for payment may never come valid (RA 8183).
at all.
Effect if a bill or note is payable other than in
NOTE: If the right is given to the holder, the time of money
payment need not contain a new fixed maturity date
or the length of extension does not have to be GR: The note or bill must be payable in money. If
specified. The reason is that the holder is free to payable in goods, wares, or merchandise, or in
demand payment at maturity date or any time after property, the same is not negotiable.
said date. On the other hand, if the obligor is the one
given the right to extend payment, the interest of the XPNs: Negotiability is not affected if the note
extension must be specified to keep the instrument contains an additional provision which: (SECo Law)
negotiable, for of the right to extend is without limit,
it cannot be determined with absolute certainty 1. Authorizes the sale of collateral Securities in
when the holder will have the absolute right to be case the instrument be not paid at maturity; or
paid. Thus, where the maker of the note is given the 2. Gives the holder an Election to require
right to extend the time of payment “for no longer something to be done in lieu of payment of
than a reasonable time” after maturity date, the note money; or
is non-negotiable because the definite time 3. Authorizes a Confession of judgment if the
requirement is not met (De Leon, 2010) instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for the
Sum to be paid with exchange advantage or protection of the obligor (NIL, Sec.
5).
The exchange is the charge for the expense of
providing funds at the place where the instrument Payable on demand or at a fixed or determinable
is payable to cover such instrument which is issued future time
at another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills (De 1. Payable on demand – The holder may call for
Leon, 2010). payment any time, likewise, the maker may also
pay any time and the refusal of the holder to
Inland Bill of Exchange vs. Foreign Bill of accept payment shall stop the running of
Exchange interest should there be any, but obligation to
pay the note subsist.
An inland bill of exchange is one which is, or on its
face purports to be, both drawn and payable within An instrument is payable on demand:
the Philippines. Any other bill is a foreign bill. a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
Unless the contrary appears on the face of the bill, b. In which no time for payment is expressed
the holder may treat it as an inland bill (NIL, Sec. (NIL, Sec 7).
109). c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
Sum to be paid with costs of collection and/or person so issuing, accepting, or indorsing it,
attorney’s fees payable on demand (ibid).

It does not affect the certainty of the amount 2. At a fixed time – A term or time instrument is
payable at maturity since the increase in the amount payable only upon the arrival of the time for
due, even if uncertain, takes place after maturity payment.
when the instrument ceases to be negotiable in the 3. At a determinable future time-An instrument is
full commercial sense (De Leon, 2010). payable at a determinable future time which is
expressed to be payable:

28
 NEGOTIABLE INSTRUMENTS LAW
a. At a fixed period after date or sight; or was known to the person making it so payable;
b. On or before a fixed or determinable future (e.g. Pay to John Doe or order)
time specified therein; or 4. When the name of the Payee does not purport
c. On or at a fixed period after the occurrence to be the name of any person; (Pay to cash)
of a specified event which is certain to 5. When the only or the Last indorsement is an
happen, though the time of happening be indorsement in blank (NIL, Sec 9).
uncertain (NIL, Sec. 4).
Illustration:
Indication of particular fund for reimbursement
vs. Indication of particular fund for payment Back of NI (indorsement)

FUND FOR FUND FOR PAYMENT Pay to A Sgd. P

REIMBURSEMENT
Pay to B Sgd. A
The drawee pays the There is only one act -
payee from his own the drawee pays Sgd. B
funds. directly from the
The drawee pays particular fund A promissory note which does not have the words
himself from the indicated. "or order" or "or bearer" will render the promissory
particular fund note non-negotiable, and therefore the note can still
indicated. be assigned and the maker made liable. (2012 Bar)
Particular fund Particular fund
indicated is not the indicated is the direct Q:
direct source of source of payment. A. MP bought a used cell phone from JR. JR
payment. preferred cash but MP is a friend so JR accepted
Instrument is Instrument is non- MR‘s promissory note for P10,000. JR thought of
negotiable. negotiable. The fund converting the note into cash by endorsing it to
specified is the direct his brother KR. The promissory note is a piece of
source of payment; paper with the following hand-printed notation:
therefore, it is subject ― MP WILL PAY JR TEN THOUSAND PESOS IN
to the availability of PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
fund, hence conditional. TODAY. Below this notation MP‘s signature with
(Sundiang Sr. & Aquino, ―8/1/00 next to it, indicating the date of the
2014). promissory note. When JR presented MP‘s note
to KR, the latter said it was not a negotiable
instrument under the law and so could not be a
Payable to order valid substitute for cash. JR took the opposite
view, insisting on the note‘s negotiability. You
The instrument is payable to order where it is are asked to referee. Which of the opposing
drawn payable to the order of a specified person or views is correct?
to him or to his order. It may be drawn payable to
the order of: B. TH is an indorsee of a promissory note that
simply states: ― PAY TO JUAN TAN OR ORDER
1. A Payee who is not a maker, drawer, or drawee;
400 PESOS. The note has no date, no place of
2. The Drawer or maker; or payment and no consideration mentioned. It
3. The Drawee; or
was signed by MK and written under his
4. Two or more payees Jointly; or
letterhead specifying the address, which
5. One or some of Several payees; or happens to be his residence. TH accepted the
6. The Holder of an office for the time being (Sec.
promissory note as payment for services
8, NIL).
rendered to SH, who in turn received the note
from Juan Tan as payment for a prepaid cell
Payable to bearer (ENaF PaLa) phone card worth 450 pesos. The payee
acknowledged having received the note on
1. When it is Expressed to be so payable; (e.g. I
August 1, 2000. A Bar reviewee had told TH, who
promise to pay to bearer P10,000.00) happens to be your friend, that TH is not a
2. When it is payable to a person Named therein
holder in due course under Article 52 of the
or bearer; (e.g. Pay to P or bearer P10,000.00)
Negotiable Instruments Law (Act 2031) and
3. When it is payable to the order of a Fictitious therefore does not enjoy the rights and
person or non-existing person, and such fact
protection under the statute. TH asks for our

29
 MERCANTILE LAW
advice specifically in connection with the note whereby the drawee bank acts dishonestly and is a
being undated and not mentioning a place of party to the fraudulent scheme. The check is
payment and any consideration. What would deemed payable to order, and consequently, the
your advice be? (2000 Bar) drawee bank bears the loss (Ibid).

A: When drawee must be named with reasonable

a. The view of KR is correct. The note is payable to certainty
a specific person hence it is not negotiable. The
law provides that for an instrument to be 1. In a bill of exchange, the drawee must be named
negotiable, it must comply with the or otherwise designated with reasonable
requirements of section 1 of the NIL pertaining certainty (NIL, Sec. 1).
to the part that a note must be payable to order 2. A bill may be addressed to two or more drawees
or bearer. In the given case, there were no jointly, but not to two or more drawees in the
words of negotiability and it is silent as to alternative or in succession (NIL, Sec. 127). Eg.
whether it is payable to order or bearer. Hence, An instrument may be addressed “to A and B”
the instrument is non-negotiable. but not “to A or B”.
b. The place and date are not essential to the 3. An instrument payable “to the order of the
negotiability of the instrument except in certain bearer” has been held to be an instrument
cases when [a] the date is necessary say to payable to “order” (10 C.J.S. 575-576).
determine when the note is due; or [b] the
interest is to run when the payment of interest Q: Indicate and explain whether the promissory
has been stipulated or whether the holder is note is negotiable or non-negotiable.
barred by the statute of limitations from
enforcing the note. The fact that there is no a. I promise to pay A or bearer Php100,000.00
mention of consideration is not essential from my inheritance which I will get after
because it is presumed. the death of my father.
b. I promise to pay A or bearer Php100,000
Difference between having a check payable to a plus the interest rate of ninety (90) – day
fictitious payee and payable to a specified payee treasury bills.
c. I promise to pay A or bearer the sum of
If a check is payable to a specified payee, it is an Php100,000 if A passes the 2012 bar exams.
order instrument, which requires indorsement d. I promise to pay A or bearer the sum of
from the payee or holder before it may be validly Php100.000 on or before December 30,
negotiated; but it may nevertheless be considered 2012.
as a bearer instrument if it is payable to the order of e. I promise to pay A or bearer the sum of
a fictitious or non-existing person, and such fact is Php100,000. (2012 Bar)
known to the person making it so payable. Thus,
checks issued to “Prinsipe Abante” or “Si Malakas at A:
si Maganda,” who are well-known characters in a. NON-NEGOTIABLE. It is based on a
Philippine mythology, are bearer instruments contingency and not an unconditional promise
because the named payees are fictitious and non- or order to pay sum certain in money. (NIL, Sec.
existent (De Leon, 2010). 1 [b])
b. NEGOTIABLE. The instrument is negotiable
Fictitious-Payee rule despite the inclusion of interest since the sum
to be paid with said interest is still certain. (NIL,
The fictitious-payee rule contemplates that the Sec. 2 [a])
payee is fictitious or not intended to be true c. NON-NEGOTIABLE. The instrument is not an
recipient of the proceeds. The check is considered a unconditional promise or order to pay a sum
bearer instrument negotiable by delivery alone. The certain in money since payment depends upon
underlying theory is that the maker of the check the happening of an event. (NIL, Sec. 1 (b])
knew that the fictitious payee cannot indorse the d. NEGOTIABLE. There is certainty in payment
instrument so that he must have intended for it to since it is payable on or before a fixed or
be negotiated by mere delivery. (PNB v. Rodriguez, determinable future time specified. (NIL, Sec.
G.R. No. 170325, September 26, 2008) 4(b])
e. NEGOTIABLE. It is a bearer instrument that is
GR: In case of controversy, the drawer is liable and payable upon demand. (NIL, Sec. 7 [b] and Sec. 9
the drawee bank is absolved from liability. [b]).

XPN: When there is commercial bad faith, Q: Antonio issued the following instrument:

30
 NEGOTIABLE INSTRUMENTS LAW
August 10, 2013 prevailing 91-day Treasury Bill rate as
Makati City published at the beginning of such calendar
quarter.
P100,000.00 c. The PN gives the maker the option to make
payment either in money or in quantity of
Sixty days after date, I promise to pay Bobby or palay or equivalent value.
his designated representative the sum of ONE d. The PN gives the holder the option either to
HUNDRED THOUSAND PESOS (P100,000.00) require payment in money or to require the
from my BPI Acct. No. 1234 if, by this due date, maker to serve as the bodyguard or escort of
the sun still sets in the west to usher in the the holder for 30 days. (2002 Bar)
evening and rises in the east the following
morning to welcome the day. A:
a. NOT AFFECTED. Date is not one of the
(Sgd.) Antonio Reyes requirements for negotiability therefore it is
not essential except when the date is necessary
Explain each requirement of negotiability to determine when the note is due
present or absent in the instrument. (2013 Bar) b. NOT AFFECTED. An instrument payable with
interest determinable at a fixed time is
A: The instrument contains a promise to pay and negotiable. The law provides under section 2a
was signed by the maker, Antonio Reyes (NIL, Sec. of the NIL, a sum is still considered as certain
1[a]). although it is to be paid within interest. It does
not make the promise unconditional
The promise to pay is unconditional insofar as the c. AFFECTED. An option given to the maker
reference to the setting of the sun in the west in the makes the promise conditional
evening and its rising in the east in the morning are d. NOT AFFECTED. An option given to the holder
concerned. These are certain to happen (NIL, Sec. does not make the promise conditional
4[c). The promise to pay is conditional, because the
money will be taken from a particular fund, the BPI Q: B borrowed Php1 million from L and offered
Account No. 1234. The instrument contains a to him his BMW car worth Php 1 Million as
promise to pay a sum certain in money, P100,000.00 collateral. B then executed a promissory note
. The money is payable at a determinable future that reads: “I, B, promise to pay L or bearer the
time, sixty days after August 10, 2013. The amount of Php1 Million and to keep my BMW car
instrument is not payable to order or to bearer (loan collateral) free from any other
encumbrance. Signed, B.” Is this note
Provisions that do not affect the negotiability of negotiable? (2011 Bar)
an instrument
A: NO, since it contains a promise to do an act in
1. Omission of date addition to the payment of money.
2. Non-specification of value given or that any
value had been given NOTE: What will not affect the negotiability of the
3. Non-specification of place where it is drawn or instrument is an additional provision which gives an
payable election to require something to be done in lieu of
4. Bears a seal payment of money.
5. Designation of particular kind of currency in
which payment is to be made. (Sec. 6, NIL.) Q: A writes a promissory note in favor of his
creditor, B. It says: “Subject to my option, I
Q: Which of the following stipulations or promise to pay B Php1 Million or his order or
features of a promissory note (PN) affect or do give Php1 Million worth of cement or to
not affect its negotiability, assuming that the PN authorize him to sell my house worth Php1
is otherwise negotiable? Indicate your answer Million. Signed, A.” Is the note negotiable? (2011
by writing the paragraph number of the Bar)
stipulation or feature of the PN as shown below
and your corresponding answer, either A: NO, because the exercise of the option to pay lies
―Affected or ―Not affected. Explain. with A, the maker and debtor.

a. The date of the PN is ―February 30, 2002. NOTE: In order not to affect the negotiability of the
b. The PN bears interest payable on the last instrument, the option must be with the
day of each calendar quarter at a rate equal holder/creditor.
to five percent (5%) above the then

31
 MERCANTILE LAW

Q: Distinguish a negotiable document from a negotiable instrument (2005 Bar)

BASIS NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT

A written contract which is intended as Held to be non-negotiable in the technical
Substitute for
a substitute for money like promissory sense because they do not have the
money
notes and bill of exchange. requisites under the NIL.
It has various forms such as but not limited
It may either be a bill of exchange or a
Forms to bill of lading, stock certificates,
promissory note.
warehouse receipts and pawn tickets.
The subject matter is a sum certain in
Subject Matter Actually stands for the goods it covers.
money.
Capability of Capable of accumulating secondary Not capable of accumulating secondary
Accumulating contracts resulting from indorsements contracts resulting from indorsements at
Secondary Contracts at the back thereof. the back thereof.

KINDS OF NEGOTIABLE INSTRUMENTS A bill of exchange itself does not operate as an

assignment of the funds in the hands of the drawee
Kinds of negotiable instruments available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the
1. Promissory notes (PN) – An unconditional same (NIL, Sec. 127).
promise in writing made by one person to
another, signed by the maker, engaging to pay A bill of exchange may be addressed to two or more
on demand, or at a fixed or determinable future drawees jointly, whether partners or not; but not to
time, a sum certain in money to order or to two or more drawees in the alternative or in
bearer (NIL, Sec. 184). succession (NIL, Sec. 128).

2. Bill of exchange (BOE) – An unconditional order When a bill of exchange may be treated as
in writing addressed by one person to another promissory note (2015 Bar)
signed by the person giving it, requiring the
person to whom it is addressed to pay on 1. Where in a bill the drawer and the drawee are
demand or at a fixed or determinable future the same person (NIL, Sec. 130)
time a sum certain in money to order or to 2. The drawee is a fictitious person (NIL, Sec. 130)
bearer (NIL, Sec. 126). 3. The drawee does not have the capacity to
contract (NIL, Sec. 130)
3. Check – A bill of exchange drawn on a bank 4. When the instrument is so ambiguous that
payable on demand (NIL, Sec. 185). there is doubt whether it is a bill or a note, the
holder may treat it either at his election (NIL,
Promissory note vs. Bill of exchange Sec. 17[e])

PROMISSORY BILL OF Q: State and explain whether the following are

BASIS NOTE EXCHANGE negotiable instruments under the Negotiable
Undertaking Promise to pay Order to pay Instruments Law:
3 parties (upon
As to number of a. Postal Money Order
2 parties acceptance of the
original parties b. A certificate of time deposit which states
drawee)
Drawer is “This is to certify that bearer has deposited
As to liability of Maker is in this bank the sum of FOUR THOUSAND
secondarily
parties primarily liable PESOS (P4,000) only, repayable to the
liable
2 presentments depositor 200 days after date.”
Only 1 c. Letters of Credit
As to number of (for acceptance
presentment d. Warehouse Receipts
presentments and for payment)
(for payment) is e. Treasury warrants payable from a specific
needed are generally
needed fund
needed

32
 NEGOTIABLE INSTRUMENTS LAW
f. Certificate of Indebtedness under Sec. 1 of the NIL. It is merely considered
g. Electronic messages as a negotiable document that does not result in
the accumulation of contracts.
e. A treasury warrant require appropriations
A:
from the national government which means
a. Postal money order is not a negotiable
that the particular fund may or may not exists
instrument because, as held in Phil. Education
which renders it conditional, thereby non-
Co. vs Soriano, there are many restrictions
negotiable.
which make them incompatible with concepts
f. Not negotiable. A certificate of indebtedness
of negotiable instruments, thereby making the
merely acknowledges to pay a sum of money to
order conditional, in contrast to Sec. 1 of the
a specified persons or entity. Since a certificate
NIL. Furthermore, such is governed by postal
of indebtedness which is not payable to order
rules and regulation and it may only be
or bearer but is payable to a specific person is
negotiated once.
not negotiable, the assignee takes it subject to
b. The certificate of time deposit is a negotiable
the defect in the title of the assignor. Thus,
instrument because it is an acknowledgement
when the person who signed the deed of
in writing by the bank of the amount of deposit
assignment was not authorized by the board of
with a promise to repay the same to the
directors, the assignor had no title to convey to
depositor or bearer thereof at a specific time
the assignee (Traders Royal Bank vs. Court of
(Caltex (Philippines), Inc. vs. Court of Appeals
Appeals, Filriters Guaranty Assurance
and Security Bank and Trust Company, G.R. No.
Corporation and Central Bank of the
97753, August 10, 1992).
Philippines, G.R. No. 93397, March 3, 1997).
c. A letter of credit is not negotiable because it is
g. The electronic messages are not signed by the
generally conditional and has limited
investor-clients as supposed drawers of a bill
negotiability - it is issued in favor of a specific
of exchange; they do not contain an
person. But the Supreme Court held in Lee vs.
unconditional order to pay a sum certain in
Court of Appeals, that the drafts issued in
money as the payment is supposed to come
connection with the letters of credit are
from a specific fund or account of the investor-
negotiable instruments.
clients; and, they are not payable to order or
d. A warehouse receipt is not a negotiable
bearer but to a specifically designated third
instrument because the obligation of a
party. Thus, the electronic messages are not
warehouseman is not to pay but to deliver the
bills of exchange (Hongkong & Shanghai
goods under the warehouse receipt which fails
Banking Corporation v. CIR, G.R. Nos. 166018 &
to comply with the requirements set forth
167728, 04 June 2014).

Parties to a negotiable instrument and their liabilities

BASIS PARTIES FUNCTION LIABILITY

One who makes the promise and signs Primarily liable; cannot limit his
Maker
the instrument. liability.
PN
The party to whom payment is
Payee
originally payable.
Secondarily liable, except when
The person who issues and draws drawee refused to accept; can limit
Drawer
the bill. his liability by putting “without
recourse.”
The party upon whom the bill is
BOE Drawee Not liable until he becomes acceptor.
drawn.
The party to whom payment is The party to whom payment is
Payee
originally payable. originally payable.
The acceptor is the drawee who
Acceptor Primarily liable.
accepts the bill.

Referee in case of need BOE is dishonored by non-acceptance or non-

payment. It is the option of the holder to refer to the
Referee in case of need is the person named by the referee in case of need or not as he may see fit (NIL,
drawer or indorser in the Negotiable Instrument as Sec. 131).
the one to whom the holder may resort in case the

33
 MERCANTILE LAW
Acceptance of the bill of exchange by the drawee Jun is liable to Marie, being a holder in due
is not an important requisite for the course, for the incomplete instrument which he
instrument’s negotiability delivered to Ruth.
b. NO. The check is an incomplete instrument not
The acceptance of a BOE is not important in the delivered in contemplation of law. An
determination of its negotiability. The nature of incomplete instrument not delivered is not a
acceptance is important only in the determination valid contract in the hands of any holder as
of the kind of liabilities of the parties involved against any person whose signature was placed
(Philippine Bank of Commerce v. Aruego, G.R. Nos. L- thereon before delivery. As such, Jun is not
25836-37, Jan. 31, 1981). liable to Marie since he does not assume any
responsibility whatsoever upon the said check
COMPLETION AND DELIVERY (NIL, Sec. 15)

Steps in the issuance of a negotiable instrument Various situations involving negotiable

instruments
1. The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of 1. Incomplete instrument
NIL. a. Delivered
2. Delivery - The transfer of possession, actual or i. With forgery and alteration
constructive, from one person to another (NIL, ii. Without forgery and alteration
Sec. 191), with the intent to transfer title to b. Not delivered
payee and recognize him as holder thereof. i. With forgery and alteration
ii. Without forgery and alteration
Q: Jun was about to leave for a business trip. As
his usual practice, he signed several blank 2. Complete instrument
checks. He instructed Ruth, his secretary, to fill a. Delivered
them as payment for his obligations. Ruth filled i. With forgery and alteration
one check with her name as payee, placed ii. Without forgery and alteration
P30,000.00 thereon, endorsed and delivered it b. Not delivered
to Marie. She accepted the check in good faith as i. With forgery and alteration
payment for goods she delivered to Ruth. ii. Without forgery and alteration
Eventually, Ruth regretted what she did and
apologized to Jun. Immediately he directed the NOTE: If an instrument is complete and delivered
drawee bank to dishonor the check. When without forgery and alteration, all parties are
Marie encashed the check it was dishonored. bound.

a. Is Jun liable to Marie? INSERTION OF DATE

b. Supposing the check was stolen while in
Ruth's possession and a thief filled the blank GR: The date is not essential to the negotiability of
check, endorsed and delivered it to Marie in the instrument (not one of the requirements under
payment for the goods he purchased from Sec. 1).
her, is Jun liable to Marie if the check is
dishonored? (2006 Bar) XPNs: Date is important to determine maturity:

A: 1. Where the instrument is payable within a

a. YES. When a delivered instrument is wanting in specified period after date, or after sight.
any material particular (NIL, Sec. 14), the 2. When the instrument is payable on demand,
person in possession thereof has prima facie date is necessary to determine whether the
authority to complete it by filling up the blanks. instrument was presented within a reasonable
But if it was not filled up strictly in accordance time from issue, or from the last negotiation.
with the authority given, it cannot be enforced 3. When the instrument is an interest-bearing one,
against any person who became party thereto to determine when the interest starts to run.
prior to its completion. However, if it is
negotiated to a holder in due course, then it is Insertion of a wrong date
valid and effective for all purpose in his hands
because the defense of not filling it up in The insertion of a wrong date does not avoid the
accordance with the authority given is only a instrument in the hands of a subsequent holder in
personal defense that cannot be raised against due course, but as to a HIDC, the date so inserted is
a holder in due course. Based on the foregoing, to be regarded as the true date (ibid.).

34
 NEGOTIABLE INSTRUMENTS LAW
With respect to the person who inserted the wrong A signature on a blank paper delivered by the
date, however, the instrument is avoided (Bank of person making the signature in order that the paper
Houston v. Day, 145 Mo. Appl. 410, 122 SW 756). may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as
Ante-dating or post-dating an instrument such for any amount. In order, however, that any
such instrument when completed may be enforced
If the instrument is ante-dated or post-dated, the against any person who became a party thereto
instrument is not invalid by that fact alone, provided prior to its completion, it must be filled up strictly in
it is not done for illegal or fraudulent purpose (NIL, accordance with the authority given and within a
Sec. 12). reasonable time (NIL, Sec. 14).

Q: Can a bill of exchange or a promissory note NOTE: While under the law, the one in possession
qualify as a negotiable instrument if: had a prima facie authority to complete the check,
such prima facie authority does not extend to its
a. it is not dated; use (i.e., subsequent transfer or negotiation) once
b. or the day and the month, but not the year of the check is completed (Patrimonio v. Gutierrez,
its maturity, is given; or G.R. No. 187769, June 4, 2014).
c. it is payable to ―cash
d. it names two alternative drawees (1997 Q: To secure certain advances from the bank, X
Bar) and Y executed several promissory notes. When
the obligation became due, X and Y failed to pay
A: the same despite repeated demands. To evade
a. YES. Date is not an essential requirement for their liability, they claimed that they signed the
the negotiability of an instrument as provided promissory notes in blank and they had not
for in section 1 of the NIL. received the value of said notes. Is their defense
b. NO. Since the year is not determined, the time tenable?
for payment is not determinable.
c. YES. When the name of the payee does not A: NO. It is no defense that the promissory notes
purport to be the name of any person, the law were signed in blank as Section 14 of the Negotiable
provides in section 9d of the NIL that the maker Instruments Law concedes the prima facie authority
or drawer intends the same to be payable to of the person in possession of negotiable
bearer, hence the instrument qualifies as a instruments to fill in the blanks (Quirino Gonzales
negotiable instrument. Logging Concessionaire vs. Court of Appeals, G.R. No.
d. NO. When the bill is addressed to two or more 126568, April 30, 2003).
payees in the alternative, the law provides in
section 128 of the NIL that it is conditional and Effect if a completed instrument was negotiated
therefore non-negotiable. to a holder in due course

Holder may insert the date in an instrument in After completion, the completed instrument which
the following instances was subsequently negotiated to an HIDC, is valid
and effectual for all purposes in his hands, and he
1. Where an instrument expressed to be payable may enforce it as if it had been filled up strictly in
at a fixed period after date is issued undated; or accordance with the authority given and within a
2. Where the acceptance of an instrument payable reasonable time (ibid).
at a fixed period after sight is undated (NIL, Sec.
13). NOTE: Hence, the defense that the blanks were
filled up beyond the authority given and/ or beyond
COMPLETION OF BLANKS the reasonable time, is not available as against a
HIDC. This defense is merely a personal one.
Meaning of a material particular
Enforcement of an incomplete but delivered
It is any particular proper to be inserted in a instrument
negotiable instrument to make it complete.
In order that any such instrument when completed
INCOMPLETE BUT DELIVERED INSTRUMENTS may be enforced against any person who became a
(NIL, SEC. 14) party thereto prior to its completion, it must be
filled up strictly in accordance with the authority
Prima facie authority to fill up the blanks given and within reasonable time.

35
 MERCANTILE LAW
If such instrument, after completion, is negotiated to Where an incomplete instrument has not been
a holder in due course, it is valid and effectual for all delivered, it will not, if completed and negotiated
purposes in his hands, and he may enforce it as if it without authority, be a valid contract in the hands
had been filled up strictly in accordance with the of any holder, as against any person whose
authority given and within reasonable time (Ibid). signature was placed thereon before delivery (NIL,
Sec. 15).
Non-delivery of complete instrument is a personal
defense. Non-delivery of an incomplete instrument is a real
defense which may be set up even against a holder
Q: Lorenzo signed several blank checks in due course.
instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one Enforcement of the instrument against the party
check with her name as payee, placed whose signature was placed after delivery
P30,000.00 thereon, endorsed and delivered it
to Evelyn as payment for goods the latter The instrument can be validly enforced against the
delivered to the former. When Lorenzo found party whose signature was placed after delivery like
out about the transaction, he directed the an indorser because the indorser warrants the
drawee bank to dishonor the check. When instrument to be genuine and in all respect what it
Evelyn encashed the check, it was dishonored. Is purports to be.
Lorenzo liable to Evelyn? (2006 Bar)
Q:
A: YES. This covers the delivery of an incomplete A. PN makes a promissory note for P5,000.00,
instrument, under Section 14 of the Negotiable but leaves the name of the payee in blank
Instruments Law, which provides that there was because he wanted to verify its correct
prima facie authority on the part of Nicky to fill-up spelling first. He mindlessly left the note on
any of the material particulars thereof. Having done top of his desk at the end of the workday.
so, and when it is first completed before it is When he returned the following morning,
negotiated to an HIDC like Evelyn, it is valid for all the note was missing. It turned up later
purposes, and she may enforce it within a when X presented it to PN for payment.
reasonable time, as if it had been filled up strictly in Before X, T who turned out to have filched
accordance with the authority given. the note from PN’s office, had endorsed the
note after inserting his own name in the
Q: AX, a businessman, was preparing for a blank space as the payee. PN dishonored the
business trip abroad. As he usually did in the note, contending that he did not authorize
past, he signed several checks in blank and its completion and delivery. But X said he
entrusted them to his secretary with instruction had no participation in, or knowledge about
to safeguard them and fill them out only when the pilferage and alteration of the note and
required to pay accounts during his absence. OB, therefore he enjoys the rights of a holder in
his secretary, filled out one of the checks by due course under the Negotiable
placing her name as the payee. She filled out the Instruments Law. Who is correct and why?
amount, endorsed and delivered the check to
KC, who accepted it in good faith for payment of B. Can the payee in a promissory note be a
gems that KC sold to OB. Later, OB told AX of “holder in due course” within the meaning of
what she did with regrets. AX timely directed the the Negotiable Instruments Law (Act 2031)?
bank to dishonor the check. Could AX be held Explain your answer (2000 Bar)
liable to KC? Answer and reason briefly. (2004
Bar) A:
A. Since the negotiable instrument is still
A: YES. AX could be held liable to KC. This is a case incomplete and has not yet been delivered, PN
of an incomplete check, which has been delivered. is correct in dishonoring the said instrument.
Under Section 14 of the NIL, KC, as a holder in due Sec. 15 of Act 2031 provides that where an
course, can enforce payment of the check as if it had incomplete instrument has not been delivered,
been filled up strictly in accordance with the it will not, if completed and negotiated without
authority given by AX to OB and within a reasonable authority, be a valid contract in the hands of any
time. holder, as against any person whose signature
was placed thereon before delivery. Thus,
INCOMPLETE AND UNDELIVERED under this section, it is a real defense that can
INSTRUMENTS even be interposed against a holder in due
(NIL, SEC. 15) course.

36
 NEGOTIABLE INSTRUMENTS LAW
B. A payee in a promissory note cannot be a delivery or of its special purpose), the instrument is
“holder in due course” within the meaning of treated as if there is no condition if such delivery
the Negotiable Instrument Law, because a was made to a holder not in due course, prior
payee is an immediate party in relation to the parties are not bound by the instrument (NIL, Sec.
maker. The payee is subject to whatever 16).
defenses, real or personal, available to the
maker of the promissory note. NOTE: The law contemplates that the condition is
orally or verbally conveyed to the holder upon
COMPLETE BUT UNDELIVERED delivery, because of the rule that the negotiability is
INSTRUMENTS determined only upon the face of the instrument.
(SEC. 16)
Presumption as to delivery
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, If the instrument is in the possession of an HIDC,
Sec. 16). Delivery is essential to the validity of any valid delivery is conclusively presumed.
negotiable instrument (Sundiang Sr. & Aquino,
2009). If the instrument is in the possession of a party
other than an HIDC, possession of such party
Where a debtor who drew two checks payable to his constitutes only prima facie presumption of
creditor never delivered the checks to his creditor delivery.
and a third party was able to collect the proceeds of
the checks by forging the endorsement of the Immediate Parties
creditor as payee, the creditor has no cause of action
against anyone on the basis of the checks, since the Immediate parties are persons having knowledge of
payee acquires no interest in the check until its the conditions or limitations placed upon the
delivery to him (Development Bank of Rizal v. Sim delivery of an instrument. It means privity, and not
Wei, G.R. No. 85419, March 9, 1993). proximity.

However, in another case, the payee’s was forged to A payee who is a holder in due course is not an
make it appear that he had made an indorsement in immediate party in the sense of Section 16. (Liberty
favor of the forger. Such signature should be Trust Co. v. Tilton, 105 N.E. 05.)
deemed as inoperative and ineffectual. The
collecting bank, grossly erred in making payment by Remote Parties
virtue of said forged signature. The payee should
Persons without knowledge as to the conditions or
therefore be allowed to recover from the collecting
limitations placed upon the delivery of an
bank even if the check was not delivered to the
instrument, even if he is the next party physically or
payee (Westmont Bank v. Ong, G.R 132560, January parties who are not in direct contractual relation to
30, 2002). each other, but if they are chargeable, for example,
with knowledge or notice of any infirmities in the
NOTE: The defense of want of delivery of a complete
instrument or defect in the title of the person
instrument is only a personal defense which means
negotiating the same, they will be considered as
that it is only available against a holder NOT in due
immediate parties for purposes of Section16.
course.
SIGNATURE
Issuance of an instrument
Validity of signature in a negotiable instrument
The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
A party may use his full name, surname, initials or
person who takes it as holder (NIL, Sec. 191).
even any mark in signing a negotiable instrument to
indicate his intention to bind himself.
Conditional delivery or delivery for a special
purpose
A signature may be made in any manner as long as
the person signing has the intention to be bound.
The delivery is made conditional or for a special
purpose if it was made not for the purpose of
Persons liable on an instrument
transferring the property (title) to the instrument.
In such case, if the instrument lands in the hands of
GR: Only persons whose signatures appear on an
an HIDC (one who does not know of the conditional
instrument are liable thereon (NIL, Sec. 18).

37
 MERCANTILE LAW
XPNs: Notwithstanding the absence of their Legal effects of an agent’s signature
signatures in their own names, the following
persons are deemed liable: (TraP FAP) The agent’s signature, provided that the above
requisites are complied with, will bind his principal
1. Person who signs in Trade or assumed name and he will be exempt from personal liability.
(NIL, Sec. 18) – Party who signed must have
intended to be bound by his signature. Procuration
2. Principal who signs through a duly authorized
agent and such agent discloses the name of his It is the act by which a principal gives power to
principal and adding words to show he is another to act in his place as he could himself (Fink
merely signing in a representative capacity v. Scott, 143 S.E. 305).
(NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23) It operates as notice or a warning that the agent has
4. Acceptor, who makes his acceptance of a bill on but a limited authority to sign and the principal is
a separate paper (NIL, Sec. 134) bound only in case the agent in so signing acted
5. Person, who makes a written Promise to accept within the actual limits of his authority (NIL, Sec.
the bill before it is drawn (NIL, Sec. 135) 21).

Where a signature is so placed upon the instrument INDORSEMENT OF A MINOR OR A

that it is not clear in what capacity the person CORPORATION
signed, he is deemed to be an indorser (NIL, Sec.
17[f]), not a maker or drawer. Indorsement made by an infant or a corporation

Q: Juan borrowed P10,000.00 from Joe as 1. Minor – A contract entered into by a minor is
evidenced by a promissory note. All other voidable, at the option of the minor. It is a real
requisites of negotiability are present except defense that can be invoked only by the minor.
that Juan did not affix his usual signature
thereon as he was ailing at that time and was
only able to put “X” in the blank space meant for While a minor is not bound by his indorsement
the signature of the maker. Is the requisite that for lack of capacity, he is however not
the instrument must be signed by the maker incapacitated to transfer his rights.
complied with?
Where a minor committed actual fraud by
A: YES. The letter “X” is sufficient to comply with the specifically stating that he is of legal age, a
requirement. It appears from the problem that such minor can be bound by his signature in an
letter was adopted by Juan with the intent to instrument (PNB v. CA, G.R. No. L-34404, June 25,
authenticate the instrument. It is not necessary that 1980).
the signature is the usual signature of the maker.
2. Incapacitated person – An incapacitated person
SIGNING IN TRADE NAME may also use as a real defense his incapacity to
enter into a contract. Contract entered into by
As a general rule, only persons whose signatures the incapacitated are voidable. Incapacitated
appear on an instrument are liable thereon. But one persons include: a) insane or demented persons
who signs in a trade or assumed name is liable as if and b) deaf and blind who does not know how
he signed his own name (NIL, Sec. 18). It is to write.
necessary, however, that the party who signed 3. Corporation- Issuance or indorsement of an
intended to be bound by his signature. instrument by a corporation acting beyond its
powers (ultra vires) is a real defense.
SIGNATURE OF AGENT
Q: A executed a promissory note in favor of M
Requisites for an agent to be exempt from which reads:
liability
I promise to pay P (16 years old) or order
1. He is duly Authorized P10,000.
2. He adds Words to his signature indicating that Sgd. M
he signs as an agent/representative and
3. He Discloses the name of his principal (NIL, Sec. P indorsed it to A.
20).

38
 NEGOTIABLE INSTRUMENTS LAW
a. May A collect from M notwithstanding that P, persons. The payee is allowed to directly recover
the indorser is a minor? from the collecting bank to simplify proceedings
b. In case that A cannot collect from M, can he (Westmont Bank v. Ong, supra).
collect from P?
Effects of forgery
A:
a. YES. A can collect from M. Notwithstanding the GR: It does not avoid the instrument but only the
fact that A is a minor, the indorsement of P (the forged signature. The signature is wholly
minor) passes title to A (the holder. M cannot inoperative. In other words, rights may still exist
invoke the defense of minority because such and be enforced by virtue of such instrument as to
defense would only be available to P. those signatures thereto are found to be genuine.
b. NO. A cannot collect from P, as he has a real
defense of minority on his part. XPNs:
1. If the party against whom it is sought to enforce
FORGERY such right is precluded from setting up forgery
or want of authority (NIL, Sec. 23).
It is the counterfeit making or fraudulent alteration 2. Where the forged signature is not necessary to
of any writing. It happens when a signature is the holder’s title, in which case, the forgery may
affixed by one who does not claim to act as an agent be disregarded (NIL, Sec. 48)
and who has no authority to bind the person whose .
signature he has forged (NIL, Sec. 23). Persons precluded from setting up the defense
of forgery (2010 Bar)
Burden of proof in proving forgery
1. Those who admit orwarrant the genuineness of
Forgery, as any other mechanism of fraud must be the signature such as indorsers, persons
proven clearly and convincingly, and the burden of negotiating by delivery and acceptor; (NIL, Sec
proof lies on the party alleging forgery (Chiang Yia 56).
Min v. CA, G.R. No. 137932, Mar. 28, 2001). 2. Those who by their acts, silence, or negligence,
are estopped from claiming forgery;
Illustration 3. A holder of a bearer instrument who
subsequently negotiates such instrument with a
Pay to P or order P10,000 30 days after sight. prior forged indorsement (forged indorsement
is not necessary to his title it being a bearer
(Sgd)D, (forged by P) instrument).
To X
Cut-off Principle
P presented the instrument for acceptance. X
accepted the instrument without detecting the In order instruments, parties prior to forgery are
forgery. P then indorses the bill to A, A to B, B to C, relieved or cut-off of liability. They cannot be held
the present holder. In this case, if after 30 days the liable by any holder, including a holder in due
holder presented the instrument to X for payment course.
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of Liabilities of the parties to a negotiable
the drawer’s signature (NIL, Sec. 62) instrument where an indorsement is forged

A payee may sue the collecting bank for the

amount of the checks it paid under a forged Illustration
indorsement even when the instrument has not
been delivered to the payee

The collecting bank is liable to the payee and must

bear the loss because it is its legal duty to ascertain
that the payee’s indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
since the payee merely used one action to reach, by a. If the instrument is payable to order and the
desirable shortcut, the person who ought in any indorsement of one of the indorsers is forged, C can
event to be ultimately liable as among the innocent enforce the note against X and B but not against M,

39
 MERCANTILE LAW
P or A, because were it not for the forgery of X the bank is an indorser who warrants that the
instrument will not reach the possession of C. instrument is genuine and in all respect what it
purports to be (NIL, Sec. 16). The collecting
b. If the instrument is payable to bearer, the bank had no right to be paid by the drawee bank
indorsement of X is not necessary to vest title to C since the forged indorsement is inoperative.
because negotiation on bearer instrument requires The collecting bank my ultimately recover from
only delivery. the forger (Pre-Week Reviewer in Commercial
Law, Dimaampao and Escalante).
Legal consequences when a bank honors a
forged check XPN: When the drawee bank is guilty of
negligence, he must bear the loss (Ibid).
1. When drawer's signature is forged
Q: X Corporation opened an account with Y Bank
GR: Drawee bank is liable because the bank is with its President and Secretary/Treasurer as
bound to know the signature of its customers signatories. While they are abroad, several
and if it pays a forged check, it must be checks bearing their signatures were presented
considered as making the payment out of its to and approved by the bank. The amount of
own funds and cannot ordinarily charge the these checks were then debited against the
amount so paid to the account of the depositor account of corporation. Upon noticing the
whose name was forged. It is also in a superior deductions in their account, they requested the
position to detect the forgery because it has a bank to credit back the same amount, claiming
specimen of the signature of the maker. Lastly, that the deductions were unauthorized and
by accepting the instrument, it becomes an fraudulently made. The bank refused to restore
acceptor who admits the genuineness of the the amount. Who should bear the loss?
drawer’s signature (Pre-Week Reviewer in
Commercial Law, Dimaampao and Escalante). A: As between a bank and its depositor, where the
bank’s negligence is the proximate cause of the loss
XPN: When the drawer is guilty of negligence, and the depositor is guilty of contributory
he should bear the loss. He is precluded from negligence, the greater proportion of the loss shall
setting up forgery because the proximate cause be borne by the bank. The bank was negligent
of the loss is his own negligence (Ibid). because it did not properly verify the genuineness
of the signatures in the applications for manager’s
2. When the payee’s signature is forged checks while the depositor was negligent because it
clothed its accountant/bookkeeper with apparent
GR: Drawee bank is liable because it owes to the authority to transact business with the Bank and it
drawer-depositor an absolute and contractual did not examine its monthly statement of account
duty to pay the check only to the person to and report the discrepancy to the Bank (Philippine
whom it is made payable. Drawee bank, in such National Bank vs. FF Cruz and Company, G.R. No.
case, should credit back and restore to drawer’s 173259, July 25, 2011).
account the value of the check wrongfully
encashed (Ibid). Q: X fraudulently obtained possession of the
check and forged P’s signature and then
XPN: When the drawer is guilty of negligence, indorsed and deposited the check with XYZ bank
he should bear the loss. He is precluded from which honored the check and placed the amount
setting up forgery because the proximate cause thereof to his credit. Thereafter, XYZ Bank
of the loss is his own negligence (Ibid). indorsed the check to the drawee bank-ABC
bank which paid it and charged the account of
3. When the indorser’s signature is forged the drawer.
GR: Drawee bank bears the loss as it is under Illustrate the liability of a drawer and a drawee-
strict liability to pay the check to the order of bank in an 1) instrument payable to order and
the payee. Payment under forged indorsement in an 2) instrument payable to bearer in case of
is not to the drawer’s order. Ensuingly, if the a forgery on payee’s signature.
drawee bank pays a check bearing forged
signature of indorser, it does so at its own peril.
Pay to P or order P10,000.
However, the drawee bank may pass the
(Sgd)D
liability to the collecting bank who cannot
To: ABC Bank
interpose the defense of forgery. The collecting

40
 NEGOTIABLE INSTRUMENTS LAW
bank liable for the amounts withdrawn by the
A: secretary?
1. If the instrument is payable to order:
A: NO, he is precluded from setting up the forgery
a. The drawee bank is liable to the drawer for due to his own negligence in entrusting to his
the amount of the check and his account secretary his credit cards and check book including
cannot be charged because the the verification of his statements of account
indorsement of the payee is a forgery. (Ilusorio v. CA, G.R. No. 139130, November 27, 2002).
Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the Q: The drawer’s signature was forged. There is,
drawer for its payment. however, a provision in the monthly bank
b. XYZ Bank is however, liable to the drawee statement that if the drawer’s signature was
bank because of his warranty as an forged, the drawer should report it within 10
indorser. (NIL, Sec. 66) days from receipt of the statement to the
c. D, the drawer, is not liable on the check drawee. The drawer, however, failed to do so.
because its order is to pay P or his order What will be its effect insofar as the drawer’s
and not to any other person. right is concerned?

A: The failure of the drawer to report the forgery

2. If the instrument is payable to bearer:
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
a. ABC Bank, the drawee-bank, may charge
the drawer from questioning the mistake of the
the amount thereof to the account of the
drawee bank despite the provision (BPI v. CASA
drawer because the forged indorsement
Montessori Internationale, supra).
did not prevent the transfer of title. The
remedy of the drawer is against the forger.
Q: If forgery was committed by an employee of
b. Drawer has no cause of action against
the drawer whose signature was forged, does
collecting bank, since the duty of collecting
the relationship amount to estoppel such that
bank is only to the payee (Manila Lighter
the drawer is precluded in recovering from the
Transportation, Inc. v. CA, G.R. No. L-50373
drawee bank?
February 15, 1990). The drawee-bank can
recover from the collecting bank because
A: The bare fact that the forgery was committed by
even if the indorsement on the check
an employee of the party whose signature was
deposited by the bank's client is forged,
forged can not necessarily imply that such party’s
collecting bank is bound by its warranties
negligence was the cause of the forgery in the
as an indorser and cannot set up defense of
absence of some circumstances raising estoppel
forgery as against drawee bank (Associated
against the drawer (Samsung Construction Co. v. Far
Bank v. CA, supra).
East Bank and Trust Company, G.R. No. 129015,
August 13, 2004).
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of
CONSIDERATION
the sale, M wrote a promissory note promising
to pay P or his order Php5,000.00. P then
Consideration
indorsed the note to X (who did not know about
the shabu), and X to Y. Unable to collect from P,
It is an inducement to a contract that is the cause,
Y then sued X on the note. X set up the defense of
price or impelling influence, which induces a party
illegality of consideration. Is he correct? (2011
to enter into a contract.
Bar)
NOTE: Every negotiable instrument is deemed
A: NO, since X, a general indorser, warrants that the
prima facie to have been issued for a valuable
note is valid and subsisting.
consideration (NIL, Sec. 24).
Q: X entrusted his check books, credit cards,
A check constitutes an evidence of indebtedness and
passbooks, bank statements and cancelled
is a veritable proof of an obligation. Thus, based on
checks to his secretary. He also introduced the
Sec. 24 of the NIL, checks complete and delivered to
secretary to the bank for purposes of
a person by another are sufficient by themselves to
reconciliation of his accounts. Subsequently, X’s
prove the existence of the loan obligation obtained
secretary forged his signature on the checks and
by the latter from the former. (Ting Ting Pua v.
was able to withdraw his money. Is the drawee

41
 MERCANTILE LAW
Spouses Tiong and Caroline Teng, G.R. No. 198660, Cayanan with violation of the Bouncing Checks
October 23, 2013, in Divina, 2014) Law. Engr. Cayanan insists that the US$85,000
sent to View Sea Ventures was not sent for the
Q: Lorenzo drew a bill of exchange in the amount account of North Star but for the account of
of P100,000.00 payable to Barbara or order, Virginia as her investment. Engr. Cayanan
with his wife, Diana, as drawee. At the time the claims that North Star did not give any valuable
bill was drawn, Diana was unaware that Barbara consideration for the checks since the
is Lorenzo’s paramour. Barbara then negotiated US$85,000 was taken from the personal dollar
the bill to her sister, Elena, who paid for it for account of Virginia and not the corporate funds
value, and who did not know who Lorenzo was. of North Star.
On due date, Elena presented the bill to Diana
for payment, but the latter promptly dishonored A: Upon issuance of a negotiable check, in the
the instrument because, by then, Diana had absence of evidence to the contrary, it is presumed
already learned of her husband’s dalliance. Does that the same was issued for valuable consideration
the illicit cause or consideration adversely affect which may consist either in some right, interest,
the negotiability of the bill? Explain. (2009 Bar) profit or benefit accruing to the party who makes
the contract, or some forbearance, detriment, loss
A: NO, the bill of exchange is negotiable or some responsibility, to act, or labor, or service
notwithstanding the illegality of consideration, given, suffered or undertaken by the other side.
provided all the requisites under Sec. 1 of NIL are Under the Negotiable Instruments Law, it is
complied with. The fact that Barbara, the payee, was presumed that every party to an instrument
the paramour of Lorenzo does not militate against acquires the same for a consideration or for value.
negotiability. The requisites of negotiability are not As Engr. Cayanan alleged that there was no
concerned with the validity of consideration. consideration for the issuance of the subject checks,
Validity is an issue distinct and separate from the it devolved upon him to present convincing
question of negotiability. The negotiability of the bill evidence to overthrow the presumption and prove
of exchange is determined by ascertaining whether that the checks were in fact issued without valuable
the requisites of Sec. 1 of NIL appear on the face of consideration. Engr. Cayanan, however, has not
the instrument (Dimaampao and Escalante, 2014). presented any credible evidence to rebut the
presumption, as well as North Star’s assertion, that
Q: R issued a check for P1M which he used to pay the checks were issued as payment for the
S for killing his political enemy. Can the check be US$85,000 Engr. Cayanan owed to the corporation
considered a negotiable instrument? (2007 Bar) and not to the manager who facilitate the fund
transfer. (Engr. Cayanan v. North Star International
A: YES. The check can be considered as a negotiable
Travel Inc., G.R. No. 172954, October 5, 2011).
instrument since it complied with the requirements
of negotiability under Sec. 1 of the Negotiable
Holder for value
Instruments Law. The unlawful consideration for
the issuance of the check is of no moment and will
A holder for value is one who has given a valuable
not affect the negotiability of the check as it merely
consideration for the instrument. A holder for value
constitutes a defect of title under Sec. 55 of the NIL.
is deemed as such not only as regards the party to
whom the value has been given to by him but also in
Q: Virginia, the General Manager of North Star,
respect to all those who became parties prior to the
in accommodation and upon the instruction of
time when value was given.
its client, Engr. Cayanan, sent the amount of
US$60,000 to View Sea Ventures Ltd., in Nigeria
NOTE: Where the holder has a lien on the
from her personal account in Citibank Makati.
instrument arising either from contract or by
Virginia again sent US$40,000 to View Sea
implication of law, he is deemed a holder for value
Ventures by telegraphic transfer, with
to the extent of his lien (NIL, Sec. 27).
US$15,000 coming from Engr. Cayanan. To cover
payment of the foregoing obligations, Engr.
Value
Cayanan issued five checks to North Star. When
presented for payment, two of the checks were
It is any consideration sufficient to support a simple
dishonored for insufficiency of funds while the
contract. An antecedent or pre-existing debt
other three checks were dishonored because of
constitutes value and is deemed such whether the
a stop payment order from Engr. Cayanan. North
instrument is payable on demand or at a future time
Star demanded payment, but Engr. Cayanan
(NIL, Sec. 25).
failed to settle his obligations. Hence, North Star
instituted a criminal case, charging Engr.

42
 NEGOTIABLE INSTRUMENTS LAW
Want or absence of consideration vs. Failure of 1. Accommodation party must sign as maker,
consideration (1996, 2007 Bar) drawer, acceptor or indorser;
2. No value is received by the accommodation
WANT OR ABSENCE FAILURE OF party from the accommodated party; and
OF CONSIDERATION CONSIDERATION 3. The purpose is to lend the name.
Total lack of any valid Failure or refusal of one
consideration for the of the parties to do, NOTE: It does not mean, however, that one cannot
contract perform or comply with be an accommodation party merely because he has
the consideration agreed received some consideration for the use of his name.
upon The phrase “without receiving value therefor” only
means that no value has been received “for the
Effect of want of consideration instrument” and not “for lending his name.”

It becomes a matter of defense as against any person Q: Susan Kawada borrowed P500,000 from XYZ
not a holder in due course, thus, a personal defense Bank which required her, together with Rose
(NIL, Sec. 28). Reyes who did not receive any amount from the
bank, to execute a promissory note payable to
Partial failure of consideration the bank, or its order on stated maturities. The
note was executed as so agreed. What kind of
Partial failure of consideration is a defense pro liability was incurred by Rose, that of an
tanto, whether the failure is an ascertained and accommodation party or that of a solidary
liquidated amount or otherwise (ibid.). debtor? Explain. (2003 Bar)

Inadequacy of consideration A: Rose incurs the liability of an accommodation

party since she executed the promissory without
GR: Inadequacy of consideration does not invalidate receiving value therefor and for the purpose of
the instrument. lending his name to Susan Kawada, the
accommodated party. Nonetheless, as an
XPN: There has been fraud, mistake or undue accommodation maker, Rose is primarily and
influence (NCC, Art. 1355). unconditionally liable on the promissory note to a
holder for value, regardless of whether she stands
NOTE: However, knowledge of inadequacy of as a surety or solidary co-debtor since such
consideration would render the holder not HIDC distinction would be entirely immaterial and
liable (NIL, Sec. 53). inconsequential as far as a holder for value is
concerned.
Q: X borrowed money from Y in the amount
of Php 1Million and as payment, issued a check. Q: Juan Sy purchased from “A” Appliance Center
Y then indorsed the check to his sister Z for no one generator set on installment with chattel
consideration. When Z deposited the check to mortgage in favor of the vendor. After getting
her account, the check was dishonored for hold of the generator set, Juan Sy immediately
insufficiency of funds. Is Z a holder in due sold it without consent of the vendor. Juan Sy
course? Explain your answer (2012 Bar) was criminally charged with estafa. To settle the
case extra judicially, Juan Sy paid the sum of
A: NO, Z is not an HIDC. Under Sec. 52 (c), NIL, it is P20,000 and for the balance of P5,000.00 he
expressly provided that the instrument must be executed a promissory note for said amount
acquired in good faith and for value to consider him with Ben Lopez as an accommodation party.
a HIDC. Juan Sy failed to pay the balance.

ACCOMMODATION PARTY a. What is the liability of Ben Lopez as an

accommodation party? Explain.
Accommodation party b. What is the liability of Juan Sy? (2003 Bar)

An accommodation party is one who has signed the A:

instrument as maker, drawer, acceptor, or indorser, a. Section 29 of the Negotiable Instruments Law
without receiving value therefor, and for the provides that an accommodation party is liable
purpose of lending his name to some other person on the instrument to a holder for value,
(NIL, Sec. 29). notwithstanding that such holder at the time of
taking the instrument knew him to be only an
Requisites to be an accommodation party accommodation party. As an accommodation

43
 MERCANTILE LAW
party, Ben Lopez is primarily and said credit line through the issuance of check.
unconditionally liable on the promissory note Gonzales issued a check in favor of Rene Unson,
to a holder for value as if the contract was not drawn against the credit line. However, upon
for accommodation. presentment for payment by Unson of said
b. Under Section 14 of the NIL, Juan Sy is primarily check, it was dishonored by PCIB due to the
liable to the extent of P5,000 in the hands of a termination by PCIB of the credit line under
holder in due course. However, if Ben Lopez COHLA for the unpaid periodic interest dues
paid the note, Juan Sy has the obligation to from the loans of Gonzales and the spouses
reimburse the former to the extent of the Panlilio. Gonzales, through counsel, wrote PCIB
amount paid. insisting that the check he issued had been fully
funded, and demanded the return of the
Q: Dagul has a business arrangement with proceeds of his FCD as well as damages for the
Facundo. The latter would lend money to unjust dishonor of the check. Was it proper for
another, through Dagul, whose name would PCIB to dishonor the check issued by Gonzales
appear in the promissory note as the lender. against the credit line under the COHLA?
Dagul would then immediately indorse the note
to Facundo. Is Dagul an accommodation party? A: NO. While a maker who signed a promissory note
Explain. (2005 Bar) for the benefit of his co-maker (who received the
loan proceeds) is considered as an accommodation
A: NO. An accommodation note is one to which the party, he is, nevertheless, entitled to a written notice
accommodation party has put his name, without on the default and the outstanding obligation of the
consideration, for the purpose of accommodating party accommodated. There being no such written
some other party who is to use it and is expected to notice, the Bank is grossly negligent in terminating
pay it. The accommodation is not one to the person the credit line of the accommodation party for the
who takes the note — that is, the payee or indorsee, unpaid interest dues from the loans of the party
but one to the maker or indorser of the note. In this accommodated and in dishonoring a check drawn
case, the indorser, Dagul, in making the against such credit line (Eusebio Gonzales v.
indorsement to the lender, Facundo, was merely Philippine Commercial and International Bank, Edna
acting as agent for the latter or, as a mere vehicle for Ocampo, and Roberto Noceda, G.R. No. 180257,
the transference of the naked title from the February 23, 2011).
borrower or maker of the note and was not acting
as an accommodation party. Extent of liability of an accommodation party

Accommodation party vs. Regular party 1. Right to revoke accommodation – before the
instrument has been negotiated for value.
ACCOMMODATION 2. Right to reimbursement from the accommodated
REGULAR PARTY
PARTY party – the accommodated party is the real
Signs an instrument debtor. Hence, the cause of action is not on the
Signs the instrument for instrument but on an implied contract of
without receiving value
value (NIL, Sec. 24) reimbursement.
therefor (NIL, Sec. 29)
Purpose of signing is to 3. Right to contribution from other solidary
lend his name to another Not for that purpose accommodation maker (Sadaya v. Sevilla, G.R.
person (NIL, Sec. 29) No. L-17845, April 27, 1967).
May always show, by Cannot disclaim
parol evidence, that he is personal liability by Accommodation party cannot raise the defense
only such parol evidence of absence or want of consideration
Cannot avail of the
defense of An accommodation party who lends his name to
May avail of such enable the accommodated party to obtain credit or
absence/failure of
defense raise money is liable on the instrument to a holder
consideration against a
holder not in due course for value even if he receives no part of the
May sue reimbursement consideration. He assumes the obligation to the
after paying the other party and binds himself to pay the note on its
May not sue due date. By signing the note, the accommodation
holder/subsequent
party party thus became liable for the debt even if he had
no direct personal interest in the obligation or did
Q: PCIB granted a credit line to Gonzales through not receive any benefit therefrom (Dela Rama v.
the execution of the COHLA. Gonzales drew from Admiral United Savings Bank, G.R. No. 154740, April
16, 2008).

44
 NEGOTIABLE INSTRUMENTS LAW
Holder for value may recover from an a. YES, Y may recover from Pedro. Section 29 of
accommodation party notwithstanding his the NIL provides that a person who has signed
knowledge that the accommodation party is the instrument as maker, drawer, acceptor, or
only signing as such indorser, without receiving value therefor, and
for the purpose of lending his name to some
This is so because an accommodation party is liable other person is liable on the instrument to a
on the instrument to a holder for value, holder for value, notwithstanding the fact that
notwithstanding that such holder at the time of such holder at the time of taking the instrument
taking the instrument knew him to be only an knew him to be only an accommodation party.
accommodation party. The accommodation party is Pedro, being an accommodation maker of a
liable to a holder for value as if the contract was not note, may thus be held primarily and
for accommodation. It is not a valid defense that the unconditionally liable therefor.
accommodation party did not receive any valuable b. YES, Pedro may recover from X. When the
consideration when he executed the instrument. accommodation party makes payment to the
Nor is it correct to say that the holder for value is not holder of the note, he has the right to sue the
a holder in due course merely because at the time he accommodated party for reimbursement, since
acquired the instrument, he knew that the indorser the relation between them is in effect that of
was only an accommodation party (Ang Tiong v. principal and surety, the accommodation party
Ting, G.R. No. L-26767, February 22, 1968). being the surety. Thus, after paying the holder,
Pedro may seek reimbursement from X, the
Q: To accommodate Carmen, maker of a accommodated party.
promissory note, Jorge signed as indorser
thereon, and the instrument was negotiated to Q: As a rule under the NIL, a subsequent party
Raffy, a holder for value. At the time Raffy took may hold a prior party liable but not vice-versa.
the instrument, he knew Jorge to be an Give 2 instances where a prior party may hold a
accommodation party only. When the subsequent party liable. (2008 Bar)
promissory note was not paid, and Raffy
discovered that Carmen had no funds, he sued A: A party may hold a subsequent party liable in the
Jorge. Jorge pleads in defense the fact that he following instances: (1) in case of an accommodated
had endorsed the instrument without receiving party; and (2) in case of an acceptor for honor. An
value therefor, and the further fact that Raffy accommodation party may hold the party
knew that at the time he took the instrument accommodated liable to him, even if the party
Jorge had not received any value or accommodated is a subsequent party. The relation
consideration of any kind for his indorsement. between them is that of principal and surety. For the
Is Jorge liable? Discuss. (1990, 1996 Bar) same reason, an acceptor for honor may hold the
party for whose honor he accepted a bill of exchange
A: YES, Jorge is liable. By the clear mandate of liable to him. A payer for honor is subrogated to the
section 29 of the Negotiable Instruments Law, an rights of the holder as regards the party for whose
accommodation party is "liable on the instrument to honor he paid and all parties liable to the latter.
a holder for value, notwithstanding that such holder
at the time of taking the instrument knew him to be Accommodation made by a corporation
only an accommodation party." It is not a valid
defense that the accommodation party did not The issue or indorsement of a negotiable paper by a
receive any valuable consideration when he corporation without consideration and for the
executed the instrument (Ang Tiong vs Ting, supra). accommodation of another is ultra vires. Hence, one
who has taken the instrument with knowledge of
Q: For the purpose of lending his name without the accommodation nature thereof cannot recover
receiving value therefor, Pedro makes a note for against a corporation where it is only an
P20,000 payable to the order of X, who in turn accommodation party (Crisologo-Jose v. CA, G.R. No.
negotiates it to Y, the latter knowing that Pedro 80599, September 15, 1989).
is not a party for value.
Q: On June 1, 1990, A obtained a loan of
a. May Y recover from Pedro if the latter
₱100,000 from B, payable not later than
interposes the absence of consideration?
December 20, 1990. B required A to issue him a
b. Supposing under the same facts, Pedro pays
check for that amount to be dated December 20,
the said Php20,000.00 may he recover the
1990. Since he does not have any checking
same amount from X? (1998 Bar)
account, A, with the knowledge of B, requested
his friend, C, President of Saad Banking
A: Corporation (Saad) to accommodate him. C

45
 MERCANTILE LAW
agreed, he signed a check for the aforesaid 2. Negotiation
amount dated December 20, 1990, drawn 3. Assignment – transfer of the title to the
against Saad’s account with the ABC Commercial instrument, with the assignee generally taking
Banking Co. The By-laws of Saad requires that only such title as his assignor has, subject to all
checks issued by it must be signed by the defenses available against the assignor.
President and the Treasurer or the Vice-
President. Since the Treasurer was absent, C DISTINGUISHED FROM ASSIGNMENT
requested the Vice-President to co-sign the
check, which the latter reluctantly did. The NEGOTIATION ASSIGNMENT
check was delivered to B. The check was Non-negotiable
dishonoured upon presentment on due date for instrument may be
insufficiency of funds. Only a negotiable
assigned absent any
instrument may be
prohibition against
a. Is Saad liable on the check as an negotiated.
assignment written on
accommodation party?
its face.
b. If it is not, who then, under the above facts,
is/are liable? (1991 Bar) The transferee can
The transferee, if he is
have no better right
A: a HIDC may acquire
than his transferor; he
a. NO, Saad is not liable as an accommodation better rights than his
merely steps into the
party. This is because the issue or indorsement transferor.
shoes of the assignor.
of negotiable paper by a corporation without
consideration and for the accommodation of The holder can hold
another is ultra vires. Hence, one who has taken The transferee has no
the drawer and the
the instrument with knowledge of the right of recourse for
indorsers liable if the
accommodation nature thereof cannot recover payment against
party primarily liable
against a corporation where it is only an immediate parties.
does not pay.
accommodation party. While it may be legally
possible for a corporation whose business is to
provide financial accommodations in the MODES OF NEGOTIATION
ordinary course of business, such as one given
by a financing company, to be an Modes of negotiation
accommodation party, this situation, however,
is not the case at bar. 1. If payable to bearer- it is negotiated by mere
b. Considering that both the President and the delivery
Vice-President were signatories to the 2. If payable to order- it is negotiated by the
accommodation, they themselves can be indorsement of the holder completed by
subject to the liabilities of accommodation delivery (NIL, Sec. 30).
parties to the instrument in their personal
capacity (Crisologo-Jose v. CA, G.R. No. 80499, Q: Ligaray charged Wagas with estafa, alleging
September 15, 1989). that Wagas placed an order of 200 bags of rice
over the telephone with a post-dated check
NEGOTIATION payable to cash as payment. The seller Ligaray
delivered the rice to Cañada, brother-in-law of
Negotiation Wagas. In turn Ligaray received a post-dated
check issued by Wagas, which was later on
Negotiation is the transfer of an instrument from dishonored due to insufficiency of funds.
one person to another so as to constitute the
transferee the holder thereof (NIL, Sec. 30). During trial, Wagas averred that he issued the
check to Cañada, and that it was the latter who
NOTE: A holder is the payee or indorsee of a bill or had transacted with Ligaray. While admitting
note, who is in possession of it, or the bearer thereof that he signed a letter acknowledging his debt to
(NIL, Sec. 191). Ligaray, Wagas insisted that he signed the same
just to accommodate the please of his sister and
Methods of transferring an instrument her husband Cañada.

1. Issuance – first delivery of the instrument Is Wagas guilty of estafa?

complete in form to a person who takes it as a
holder.

46
 NEGOTIABLE INSTRUMENTS LAW
A: NO. In order to constitute estafa under Article the rule that A BEARER INSTRUMENT IS ALWAYS A
315, paragraph 2(d) of the RPC, as amended, the act BEARER INSTRUMENT.
of postdating or issuing a check in payment of an
obligation must be the efficient cause of the Q: A makes a promissory note payable to bearer
defraudation. This means that the offender must be and delivers the same to B. B, however, endorses
able to obtain money or property from the offended it to C in this manner:
party by reason of the issuance of the check,
whether dated or postdated. In other words, the "Payable to C. Signed: B."
Prosecution must show that the person to whom the
check was delivered would not have parted with his Later, C, without indorsing the promissory note,
money or property were it not for the issuance of transfers and delivers the same to D. The note is
the check by the offender. subsequently dishonored by A. May D proceed
against A for the note? (1998 Bar)
Under the NIL (Sec. 9 and Sec. 30), a check made
payable to cash is payable to the bearer and could A: YES. D may collect from A. The note made by A is
be negotiated by mere delivery without the need of a bearer instrument. Where an instrument, payable
indorsement. to bearer, is indorsed, it may nevertheless be further
negotiated by delivery. Despite the special
This rendered it highly probable that Wagas had indorsement made by B, the note remained a bearer
issued the check not to Ligaray, but to somebody instrument and can be negotiated by mere delivery.
else like Cañada, his brother-in-law, who then When C delivered and transferred the note to D, the
negotiated it to Ligaray. Relevantly, Ligaray latter became a holder thereof. As such, D can
confirmed that he did not himself see or meet Wagas proceed against A.
at the time of the transaction and thereafter, and
expressly stated that the person who signed for and Q: X executed a promissory note with a face
received the stocks of rice was Cañada. value of Php50,000.00, payable to the order of Y.
Y indorsed the note to Z, to whom Y owed
It bears stressing that the accused, to be guilty of Php30,000.00. If X has no defense at all against
estafa as charged, must have used the check in order Y, for how much may Z collect from X? (2011
to defraud the complainant. What the law punishes Bar)
is the fraud or deceit, not the mere issuance of the
worthless check. Wagas could not be held guilty of A: Php 50,000.00, but with the obligation to hold
estafa simply because he had issued the check used Php20,000.00 for Y's benefit.
to defraud Ligaray. The proof of guilt must still
clearly show that it had been Wagas as the drawer Assignment of a negotiable instrument
who had defrauded Ligaray by means of the check
(People v. Gilbert Wagas, G.R. No. 157943, September The transferee does not become a holder and he
4, 2013). merely steps into the shoes of the transferor. Any
defense available against the transferor is available
Delivery of negotiable instrument against the transferee (Salas v. CA, G.R. No. 76788,
January 22, 1990).
Delivery means transfer of possession, actual or
constructive, from one person or another (NIL, Sec. Delivery of an order instrument without
191). indorsement

NOTE: Where the instrument is no longer in the If an order instrument is not indorsed, the
possession of the party whose signature appears negotiation is incomplete and the instrument is in
thereon, there is a prima facie presumption of a effect merely assigned. The transferee acquires the
valid and intentional delivery by him (NIL, Sec. 16). right to have the indorsement of the transferor. It is
only at the time of indorsement that negotiation
Bearer instrument is negotiated by indorsement takes effect and the transferee acquires the rights of
and delivery a holder (NIL, Sec. 49).

A bearer instrument, even when indorsed specially, Negotiation by a prior party

may nevertheless be further negotiated by delivery,
but the person indorsing specially is liable as Where an instrument is negotiated back to a prior
indorser to only such holders who acquired title party, such party may reissue and further negotiate
through his indorsement (NIL, Sec. 40). This spawns the same. But, he is not entitled to enforce payment
thereof against any intervening party to whom he

47
 MERCANTILE LAW
was personally liable (NIL, Sec. 50). However, he delivery (once a bearer always a bearer) (NIL,
may strike out the intervening indorsements Sec. 40).
because they are not necessary for his title and he is
liable to them because of his initial indorsement 2. Blank (NIL, Sec. 34) –Specifies no indorsee.
(NIL, Sec. 48). a. Instrument is payable to bearer and may
be negotiated by delivery;
e.g. “A” payee indorsed the instrument to B, then B b. May be converted to special indorsement
indorsed it to C, C to D, then D to B. B can further by writing over the signature of the
negotiate the instrument. He may also strike out the indorser in blank any contract consistent
indorsement of C and D (Sundiang Sr. & Aquino, with the character of indorsement (NIL,
2014). Sec. 35).

Limitations on re-negotiation 3. Restrictive (NIL, Sec. 36)–When the instrument:

a. Prohibits further negotiation of the
In the following cases, a prior party cannot further instrument (it destroys the negotiability of
negotiate the instrument: the instrument);
b. Constitutes the indorsee the agent of the
1. Where it is payable to the order of a third indorser;
person, and it has been paid by the drawer (NIL, c. Vests the title in the indorsee in trust for
Sec. 121[a]). or to the use of some persons.
2. Where it was made or accepted for
accommodation and has been paid by the party But mere absence of words implying power to
accommodated (NIL, Sec. 121[b]). negotiate does not make an instrument
3. In other cases, where the instrument is restrictive.
discharged when acquired by a prior party (NIL,
Sec. 119[e]). 4. Qualified (NIL, Sec. 38) – Constitutes the
indorser a mere assignor of the title to the
KINDS OF INDORSEMENT instrument made by adding to the indorser’s
signature words like, without recourse, sans
Indorsement recourse or at the indorsee’s own risk (this
serves as an ordinary equitable assignment).
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the 5. Absolute – The indorser binds himself to pay:
same. a. Upon no other condition than failure of
prior parties to do so;
GR: Indorsement must be of the entire instrument b. Upon due notice to him of such failure
(NIL, Sec. 32).
6. Conditional (NIL, Sec. 39)–Right of the indorsee
XPN: When the instrument has been paid in part. is made to depend on the happening of a
contingent event. The party required to pay
Indorsement to two or more indorsees severally may disregard the conditions.
does NOT operate as a negotiation of the
instrument. NOTE: The condition refers to the indorsement
not on the instrument itself.
Indorsement should be placed:
1. On the instrument itself; or 7. Joint (NIL, Sec. 41) – Indorsement made payable
2. On a separate piece of paper attached to the to 2 or more persons who are not partners.
instrument called “allonge” (NIL, Sec. 31)
All of them must indorse unless the one
Kinds of indorsement indorsing has authority to indorse for the
others.
1. Special (NIL, Sec. 34) – Specifies the person to
whom or to whose order the instrument is to be 8. Irregular (NIL, Sec. 64) – A person who, not
payable. It is also known as specific otherwise a party to an instrument, places
indorsement, or indorsement in full. thereon his signature in blank before delivery.

An instrument payable to bearer indorsed 9. Facultative –Indorser waives presentment and

specially may nevertheless be negotiated by notice of dishonor, enlarging his liability and his
indorsement.

48
 NEGOTIABLE INSTRUMENTS LAW
10. Successive – Indorsement to two persons or GR: All must indorse in order for the transaction to
more in succession. operate as a negotiation (NIL, Sec. 41).

Any of them can indorse to effect negotiation of XPN: Only one of them may indorse in case the:
the instrument.
1. Payees or indorsees are partners; and
Restrictive Indorsement 2. Payee or indorsee indorsing has authority to
indorse for the others.
Indorsee has the following rights in a restrictive
indorsement: Indorsing an instrument as cashier or other
officers of a corporation
1. To receive payment of the instrument;
2. To bring any action thereon that the indorser The negotiable instrument is deemed prima facie
could bring; and payable to the corporation of which said person is
3. To transfer his rights as such indorsee, where such an officer. It may be negotiated further by
the form of the indorsement authorizes him to either indorsement of the corporation or
do so (NIL, Sec. 37,). indorsement of the officer (NIL, Sec. 42).

All subsequent indorsees acquire only the title of Date of indorsement

the 1st indorsee under the restrictive indorsement
(NIL, Sec. 37). GR: Every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
An instrument negotiable in origin is always
negotiable until paid, which is still true even if the XPN: Except where an indorsement bears date after
NI was dishonored or is already overdue, unless the the maturity of the instrument (NIL, Sec. 45).
instrument has been restrictively indorsed or when
discharged by payment or otherwise (NIL, Sec. 47) Striking out of an indorsement

Qualified indorsement The holder may, at any time, strike out any
indorsement which is not necessary to his title.
A qualified indorsement does NOT destroy the Indorser whose indorsement is struck out, and all
negotiability of the instrument. It only means that indorsers subsequent to him are relieved from
the qualified indorser is NOT liable when the maker liability on the instrument (NIL, Sec. 48).
is insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or RIGHTS OF A HOLDER
non-payment due to:
Holder
1. Forgery;
2. Lack of good title on the part of the indorser; The payee or indorsee of a bill or note who is in
3. Lack of capacity to indorse on the part of the possession of it or the bearer thereof (NIL, Sec. 191).
prior parties; or
4. The fact that at the time of the indorsement, the In general, a holder has the right to sue and to
instrument was valueless or not valid at the receive payment (NIL, Sec. 51).
time of the indorsement which fact was known
Classes of holders
to him.
1. Holders in general (Simple Holders) (NIL, Sec.
Instances when the indorsement is considered 51).
only as equitable assignment 2. Holders for value (NIL, Sec. 26).
3. Holders in due course (NIL, Secs. 52, 57).
1. Indorsement of only a part of the amount of the
instrument (NIL, Sec. 32) HOLDER IN DUE COURSE (HIDC)
2. In cases of qualified indorsement (NIL, Sec. 38)
3. Transfer of an instrument payable to order by To be considered as a HIDC, the requisites under
mere delivery (NIL, Sec. 49). Sec. 52 of the NIL must be complied with: (COFI)

Joint indorsement 1. That is Complete and regular upon its face;

49
 MERCANTILE LAW
2. Became the holder before it was Overdue, and a. Can Devi enforce the note against Larry and
without notice that it has been previously if she can, for how much? Explain.
dishonored, if such was the fact; b. Supposing Devi endorses the note to Baby
3. Took it in good Faith and for value; for value but who has knowledge of the
4. At the time it was negotiated to him, he had no infirmity, can the latter enforce the note
notice of any Infirmity in the instrument or against Larry? (1993 Bar)
defect in the title of the person negotiating it.
(NIL, Sec. 52) A:
a. Devi can enforce the note against Larry since
An instrument is complete when it is not wanting in she is a holder in due course. Since the
any material particular and regular when there is no document delivered to Evelyn is in blank and
alteration apparent on the face of the instrument. she was authorized to fill up the amount in the
promissory note, Devi can enforce against Larry
If the instrument is payable on demand, the date of the amount of P5,000.00 as this case falls
maturity is determined by the date of presentment, squarely under Sec 14 of the Negotiable
which must be made within a reasonable time after Instruments Law. As against a holder in due
its issue, if it is a note, or after the last negotiation course, the instrument is always valid and
thereof, if it is a bill of exchange (NIL, Secs. 71 and enforceable to the full extent. The defense of
143[a]) filing-up contrary to authorization is a mere
personal or equitable defense (Villanueva,
Where the transferee receives notice of any 2009).
infirmity in the instrument or defect in the title of b. Baby cannot enforce the note against Larry
the person negotiating the same before he had paid since she is not a holder in due course because
the full amount agreed to be paid, he will be deemed Larry could interpose the real and personal
a holder in due course only to the extent of the defenses to defeat the claim of Baby. However,
amount paid by him (NIL, Sec. 54). because of the shelter principle in Negotiable
Instruments Law, Baby could be elevated to a
Q: R issued a check for P1M which he used to pay status of a holder in due course since a person
S for killing his political enemy. not holder in due course steps in the shoes of
the prior party. Therefore, Baby could enforce
a. Does S have a cause of action against R in
the note against Larry the same way as Devi
case of dishonor by the drawee bank?
could enforce it.
b. If S negotiated the check to T, who accepted
it in good faith and for value, may R be held
Q: X borrowed money from Y in the amount of
secondarily liable by T? (2007 Bar)
Php 1 Million and as payment, issued a check. Y
then indorsed the check to his sister Z for no
A:
consideration. When Z deposited the check to
a. NO. S does not have a cause of action against R
her account, the check was dishonored for
in case of dishonor by the drawee bank. S is not
insufficiency of funds. Is Z a holder in due
a holder in due course, thus, R can raise the
course? Explain your answer. (2012 Bar)
defense that the check was issued for an illegal
consideration.
A: NO. A holder in due course is a holder who has
b. YES. R may be held liable by T since T is a holder
taken the instrument under the following
in due course of the instrument. The unlawful
conditions: (a)That it is complete and regular upon
consideration of the check is only a personal
its face; (b) That he became the holder of it before it
defense that cannot be interposed to a holder in
was overdue, and without notice that it had been
due course who receives the check free from the
previously dishonored, if such was the fact; (c) That
defect of title of S.
he took it in good faith and for value; (d) That at the
time it was negotiated to him he had no notice of any
Q: Larry issued a negotiable promissory note to
infirmity in the instrument or defect in the title of
Evelyn and authorized the latter to fill up the
the person negotiating it. All of the four conditions
amount in blank with his loan account in the
must concur in order for a holder to qualify as a
sum of P1,000. However, Evelyn inserted P5,000
holder in due course. In the case at hand, Z did not
in violation of the instruction. She negotiated
acquire the instrument for value. As such she cannot
the note to Julie who had no knowledge of the
be considered as a holder in due course.
infirmity. Julie in turn negotiated said note to
Devi for value and who had no knowledge of the
A holder is presumed to be an HIDC (1993, 2007
infirmity.
Bar)

50
 NEGOTIABLE INSTRUMENTS LAW
GR: Every holder is deemed prima facie to be an 2. Non-payment
HIDC.
That he took it in good faith and for value
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective. Good faith is the holder’s well founded or honest
But this is only as regards a party who became such belief that the person from whom he received the
after the acquisition of the defective title (NIL, instrument was the owner thereof, with the right to
Sec.59). transfer it (Duran v IAC, G.R. No. L-64159, September
10, 1985).
Payment in due course
Value may be some right, interest, profit or benefit
In order for payment to constitute payment in due to the party who makes the contract or some
course, it must be made: forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15,
1. At or after the maturity of the instrument 2007).
2. To the holder thereof, in good faith and without
notice that his title is defective (NIL, Sec. 88). At the time it was negotiated to him, he had no
notice of any infirmity in the instrument or
Shelter principle or Holder in Due Course by defect in the title of the person negotiating it
Subrogration
The person to whom it is negotiated must have had
Under the "shelter principle," the HIDC, by actual knowledge of such facts or knowledge of
negotiating the instrument, to a party not an HIDC, other facts that his action in taking the instrument
transfers all his rights as such holder to the latter amounted to bad faith (NIL, Sec. 56).
and acquires the right to enforce the instrument as
if he was an HIDC. The principle applies to a Presence or absence of defect or infirmity must be
"sheltered" holder who is not a party to any fraud or determined at the time the instrument was
illegality impairing the validity of the instrument. negotiated to the holder.

Specifically, a holder is entitled to the following Infirmity vs. Defect

rights: (1998, 2007, 2009 Bar)
INFIRMITY DEFECT
1. Hold the instrument free from defenses Refers to those that Refers to how he
available to parties among themselves; vitiate the instrument obtained the
2. Hold the instrument free from any defect of title itself instrument or the
of prior parties; signature thereto, as
3. Receive payment; by fraud, duress, or
4. Enforce payment of the instrument for the full force and fear, or other
amount thereof against all parties liable; and unlawful means, or for
5. Sue an illegal
consideration or when
That he became the holder before it was he negotiates it in
overdue breach of faith, or
under any other
An overdue instrument is still negotiable although it circumstances as
is subject to defenses existing at the time of transfer. amount to a fraud.
A negotiable instrument in circulation past its (NIL, Sec. 55)
maturity date carries strong indication that it has
been dishonored. An overdue instrument puts all Instances when the title of a transferor is
person on notice that it might not have been paid defective
because of a valid defense to such payment (De Leon,
2010). 1. In its acquisition – When he obtained the
instrument, or any signature thereto, by fraud,
Without notice that it has been previously duress, or force and fear, or other unlawful
dishonored, if such was the fact means, or for an illegal consideration.
2. In the negotiation – When he negotiates it in
An instrument may be dishonored either by: breach of faith, or under such circumstances as
amount to a fraud (NIL, Sec. 55).
1. Non-acceptance (refers to a bill of exchange) or

51
 MERCANTILE LAW
Q: A drawer issued a check for the payment of a Drawee as holder in due course
car, which check was delivered to the agent of
the owner of the car for safekeeping. The check A drawee does not become a HIDC by simply paying
was then used by the agent to pay the medical a bill. A holder refers to one who has taken the
bills of his wife in a clinic. The projected instrument as it passes along in the course of
purchase did not materialize. Is the clinic negotiation; whereas a drawee, upon acceptance
considered a holder in due course? and payment, strips the instrument of negotiability
and reduces it to a mere voucher or proof of
A: NO, the rule that a possessor of the instrument is payment.
prima facie a HIDC does not apply to the clinic
because it cannot be said to have acquired the Person is deemed not a holder in due course
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the 1. A holder who acquires the instrument after its
instrument was not payable “to the agent or to date of maturity.
bearer;” also the drawer had no account with the 2. Where an instrument payable on demand is
clinic, the agent did not show or tell the payee why negotiated for an unreasonable length of time
he had the check in his possession and why he was after its issue (NIL, Sec. 53).
using it for the payment of his own account.
NOTE: A note payable on demand is due when
As the holder’s title was defective or suspicious, it payment is demanded. A check becomes
cannot be stated that the payee acquired the check overdue when it is not presented for payment
without knowledge of said defect in holder’s title, within a reasonable time, usually 6 months
the presumption that the clinic is a HIDC does not from date the thereof, afterwards, it becomes a
exist (De Ocampo & Co. v. Gatchalian, G.R. No. L- stale check.
15126, November 30, 1961).
3. Where the instrument contains an acceleration
Possession of a negotiable instrument after clause, knowledge of the holder at the time of
presentment and dishonor acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
It does not make the possessor a holder for value overdue.
within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or Rights of a holder who is not a holder in due
indorsers (STELCO Marketing Corp. vs. CA, G.R. No. course
96160, June 17, 1992).
The rights of a holder not an HIDC are similar to an
Q: Is a corporation to which four crossed checks assignee. The other rights are:
were indorsed by the payee corporation a
holder in due course and hence entitled to 1. He may receive payment and if the payment is
recover the amount of the checks when the same in due course, the instrument is discharged;
had been dishonored for the reason of “payment 2. He is entitled to the instrument but holds it
stopped”? subject to the same defenses as if it were non-
negotiable;
A: NO. The checks were crossed checks and 3. He may sue on the instrument in his own name
specifically indorsed for deposit to payee’s account (NIL, Sec. 51).
only. From the beginning, the corporation was
aware of the fact that the checks were all for deposit DEFENSES AGAINST THE HOLDER
only to payee’s account. Clearly then, it could not be
considered an HIDC (Atrium Management Corp. v. Defenses against the holder
CA, G.R. No. 109491, February 28, 2001).
The defenses available against the holder are
Payee as holder in due course classified as follows:

There can be no doubt that a proper interpretation 1. Real or Absolute Defenses – those that are
of Negotiable Instruments Law as a whole leads to attached to the instrument itself and are
the conclusion that a payee may be a holder in due available against all parties, both immediate
course under the circumstances in which he meets and remote, including holders in due course.
the requirements of Sec. 52 (De Ocampo v. 2. Personal or Equitable Defenses –defenses which
Gatchalian, supra). are only available against a holder not in due
course. Those which grow out of the agreement

52
 NEGOTIABLE INSTRUMENTS LAW
or conduct of a particular person which renders title, to enforce it against the party sought to be
it inequitable for him, though holding the legal made liable.

Real defenses available against a holder vs. Personal defenses

REAL DEFENSES PERSONAL DEFENSES

(IM In Ultra. AFForD PODIF) (InnocentS2 ADD FUn In Fraud)
1. Incomplete and undelivered instrument 1. Innocent alteration or spoliation
2. Minority (available only to the minor) 2. Discharge of party Secondarily liable by discharge
3. Incapacity as far as incapacitated persons are of prior party.
concerned 3. Set-off between immediate parties
4. Ultra –vires acts of a corporation 4. Filling up of blanks not in accordance with the
5. Want of Authority, apparent and real Authority given
6. Fraudulent alteration 5. Acquisition of instrument by Duress or force and
7. Forgery fear; unlawful means or for an illegal consideration
8. Duress amounting to Forgery 6. Discharge by payment or renunciation or release
9. Prescription before maturity
10. Other infirmities appearing on the face of the 7. Failure or absence of consideration.
instrument 8. Undelivered complete instrument
11. Discharge in insolvency 9. Insertion of a wrong date
12. Illegal Contract 10. Fraud in inducement or simple fraud
13. Fraud in Factum or Esse Contractus

NOTE: Fraud in factum exists in those cases in which NOTE: Fraud in inducement relates to the quality,
a person, without negligence, has signed an quantity, value or character of the consideration of
instrument, but was deceived as to the character of the instrument. Here, deceit is not in the character of
the instrument and without knowledge of it, as where the instrument but in its amount or terms. This exists
a note was signed by one under the belief that he was when a person is induced to sign a note for the price
signing as a witness to a deed. This kind of fraud is a of a worthless stock which was fraudulently
real defense because there is no contract, since the represented by the payee as to its value. Such type of
person did not know what he was signing (De Leon, fraud is only a personal defense because it does not
2010). prevent a contract (De Leon, 2010).

Q: Eva issued to Imelda a check in the amount of prior parties among themselves. Eva can invoke the
P50,000 post-dated Sept. 30, 1995, as security defense of absence of consideration against MT only
for a diamond ring to be sold on commission. On if the latter was a privy to the purpose for which the
Sept. 15, 1995, Imelda negotiated the check to checks were issued and, therefore, not a holder in
MT investment which paid the amount of due course. Second, it is not a ground for the
P40,000 to her. discharge of the post-dated check as against a
holder in due course that it was issued merely as
Eva failed to sell the ring, so she returned it to security. The only grounds for the discharge of a
Imelda on Sept. 19, 1995. Unable to retrieve her negotiable instrument is enumerated in the
check, Eva withdrew her funds from the drawee Negotiable Instruments Law and none of those
bank. Thus, when MT Investment presented the grounds are available to Eva. The latter may not
check for payment, the drawee bank dishonored unilaterally discharge herself from her liability by
it. Later on, when MT Investment sued her, Eva mere expediency of withdrawing her funds from the
raised the defense of absence of consideration, drawee bank.
the check having been issued merely as security
for the ring that she could not sell. Does Eva have Q: X makes a promissory note for P10,000
a valid defense? Explain. (1996 Bar) payable to A, a minor, to help him buy school
books. A endorses the note to B for value, who in
A: NO, Eva does not have a valid defense. First, MT turn endorses the note to C. C knows A is a
Investment is a holder in due course and, as such, minor. If C sues X on the note, can X set up the
holds the post-dated check free from any defect of defenses of minority and lack of consideration?
title of prior parties and from defenses available to (1998 Bar)

53
 MERCANTILE LAW
A: X cannot set-up the defense of minority to defeat 1. Drawer of a bill; and
the claim of C since only A, the minor could invoke 2. Indorser of a note or a bill
minority as a defense. X cannot set up the defense
against C. Lack of consideration is a personal Negotiable instrument should be presented for
defense which is only available between immediate payment to the party primarily liable (NIL, Sec.
parties who are not holders in due course. C’s 72[d]):
knowledge that A is a minor does not prevent C from
being a holder of due course. C took the promissory PRIMARILY LIABLE SECONDARILY LIABLE
from a holder for value B. Unconditionally
Conditionally bound
bound
Q: A bill of exchange has T for its drawee, U as Undertakes to pay only
drawer, and F as holder. When F went to T for after the ff. conditions
presentment, F learned that T is only 15 years have been fulfilled:
old. F wants to recover from U but the latter 1. Due presentment for
insists that a notice of dishonor must first be Absolutely required payment or acceptance
made, the instrument being a bill of exchange. Is to pay the to primary party (NIL,
he correct? (2011 Bar) instrument upon Sec. 143);
maturity 2. Dishonor by such
A: NO, since F can treat U as maker due to the party (NIL, Sec.70);
minority of T, the drawee. 3. Taking of
proceedings required
Q: Brad was in desperate need of money to pay by law (NIL, Sec.152)
his debt to Pete, a loan shark. Pete threatened to
take Brad’s life if he failed to pay. Brad and Pete The drawee is not liable for payment of a bill of
went to see Señorita Isobel, Brad’s rich cousin, exchange
and asked her if she could sign a promissory
note in his favor in the amount of P10,000.00 to The mere issuance of a bill of exchange does not
pay Pete. Fearing that Pete would kill Brad, operate as an assignment of the funds in the hands
Señorita Isobel acceded to the request. She of a drawee. The drawee must accept the
affixed her signature on a piece of paper with the instrument (thus, becomes an acceptor) in order
assurance of Brad that he will just fill it up later. that he may be primarily liable for the payment of a
Brad then filled up the blank paper, making a bill of exchange.
promissory note for the amount of P100,000.00.
He then indorsed and delivered the same to Pete MAKER
who accepted the note as payment of the debt.
Maker
What defense or defenses can Señorita Isobel set
up against Pete? Explain. (2005 Bar) The maker of a negotiable instrument, by making
such instrument:
A: Señorita Isobel may set up the defenses of:
a. Incomplete but delivered instrument. The 1. Engages that he will pay it according to its
authority she gave Brad was to fill up the note tenor, and
for P10,000.00 only and not P100,000.00. This 2. Admits the existence of the payee and his then
is a personal defense that may be raised against capacity to indorse (NIL, Sec. 60; 1995, 2001
Pete who is clearly not a holder in due course. Bar).
b. Force and intimidation. Señorita Isobel was
forced and intimidated into writing and issuing The maker is liable the moment he makes the NI. His
the note as she was threatened that Pete would liability is primary and unconditional.
kill Brad, her cousin if the debt is not paid.
Q: A issued a promissory note payable to B or
LIABILITIES OF PARTIES bearer. A delivered the note to B. B indorsed the
note to C. C placed the note in his drawer, which
Parties primarily liable was stolen by the janitor X. X indorsed the note
to D by forging C's signature. D indorsed the note
1. Maker – of a promissory note; to E who in turn delivered the note to F, a holder
2. Acceptor – of a bill of exchange; and in due course, without indorsement. Discuss the
3. Certifier of a check individual liabilities to F of A, B and C. (2001,
1997 Bar)
Parties secondarily liable

54
 NEGOTIABLE INSTRUMENTS LAW
A: A is primarily and unconditionally liable to F as Later, X, without endorsing the promissory note,
the maker of the promissory note. Section 60 transfers and delivers the same to Napoleon.
provides that, by making the instrument, the maker The note is subsequently dishonored by Richard
obliges himself to pay according to the tenor of the Clinton. May Napoleon proceed against Richard
instrument. He is liable to both payee and Clinton for the note? (1998 Bar)
subsequent holder in due course. Despite the
presence of the special indorsements on the note, A: YES, Richard Clinton is liable for the promissory
these do not detract from the fact that a bearer note. Under Section 60 of the NIL, the maker of a
instrument, like the promissory note in question, is negotiable instrument, by making the same, engages
always negotiable by mere delivery, until it is that he will pay according to its tenor, and admits
indorsed restrictively “For Deposit Only.” the existence of the payee and his then capacity to
indorse. The liability of the maker is primary which
B as a general indorser is secondarily liable to F. By means he is absolutely and unconditionally
placing his signature on the bearer instrument, he required to pay. He engages to pay the instrument
warrants that the instrument is genuine and in all according to its terms without any condition. He is
respects what it purports to be; that he has good not only liable to the payee but also to the
title to it; that all prior parties had capacity to subsequent holder in due course. Since the
contract; that he has no knowledge of any fact which instrument is a bearer instrument (which nature
would impair the validity of the instrument or was not changed even if it was specially indorsed by
render it valueless; that at the time of indorsement, Aurora), Napoleon became a legal holder thereof by
the instrument is valid and subsisting; and that on mere delivery from X to him. Thus, as a legal holder
due presentment, it shall be accepted or paid, or of the promissory note, he is entitled to proceed
both, according to its tenor, and that if it be against the maker thereof, Richard Clinton.
dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount DRAWER
thereof to the holder, or to any subsequent indorser
who may be compelled to pay. Drawer

C, however, cannot be held liable because the The drawer, by drawing the instrument:
signature purporting to be his is a product of 1. Admits the existence of the payee and his then
forgery. C can raise the defense of forgery since it his capacity to indorse; and
signature that was forged. 2. Engages that on due presentment the
instrument will be accepted or dishonored; and
Q: On the right bottom margin of a PN appeared 3. That if the necessary proceedings on dishonor
the signature of the corporation’s president and be duly taken, he will pay the amount thereof to
treasurer above their printed names with the the holder, or to any subsequent indorser who
phrase “and in his personal capacity.” The may be compelled to pay it (Sec. 61, NIL; 1991
corporation failed to pay its obligation. Are the Bar).
officers liable?
The drawer is secondarily liable to the holder or to
A: YES, persons who sign their names on the face of any subsequent indorser who may be compelled to
promissory notes are makers and liable as such. As pay. But the drawer may insert in the NI an express
the promissory notes are stereotype ones issued by stipulation negating or limiting his own liability to
the bank in printed form with blank spaces filled up the holder (NIL, Sec. 61).
as per agreed terms of the loan, following customary
procedures, leaving the debtors to do nothing but Q: A delivers a bearer instrument to B. B then
read the terms and conditions therein and to sign as specially indorses it to C and C later indorses it
makers or co-makers. The officers are co-makers in blank to D. E steals the instrument from D and,
and as such, they cannot escape liability arising forging the instrument of D, succeeds in
therefrom (Republic Planters Bank v. CA, G.R. No. "negotiating" it to F who acquires the
93073, December 21, 1992). instrument in good faith and for value.
a. If for any reason, the drawee bank refuses to
Q: Richard Clinton makes a promissory note
honor the check, can F enforce the
payable to bearer and delivers the same to
instrument against the drawer?
Aurora Page. Aurora Page, however, endorses it
b. In case of the dishonor of the check by both
to X in this manner: "Payable to X. Signed:
the drawee and the drawer, can F hold any
Aurora Page."
of B, C and D liable secondarily on the
instrument? (1997 Bar)

55
 MERCANTILE LAW
Party who can accept the bill of exchange
A:
a. YES, F can proceed against the drawer, A, in GR: Only the drawee may accept. A stranger or
case of dishonor by the drawee bank. Section 61 volunteer is not bound by acceptance.
of the NIL provides that by drawing the
instrument, the drawer engages that the XPN: In case of a bill which is accepted for honor
instrument will be accepted or paid or both supra protest (NIL, Sec. 161).
according to its tenor. Not only is the drawer
obliged to pay the amount of the instrument to NOTE: Honor supra protest or acceptance for honor
the holder, but he shall likewise be liable to the is an undertaking by a stranger to a bill after protest
subsequent indorser who was compelled to pay for the benefit of any party liable thereon or for the
it. The forged signature is unnecessary to honor of the person for whose account the bill is
presume the juridical relation between or drawn which acceptance inures also to the benefit
among the parties prior to the forgery and the of all parties subsequent to the person for whose
parties after the forgery. Moreover, the only honor it is accepted, and conditioned to pay the bill
party who can raise the defense of forgery when it becomes due if the original drawee does not
against a holder in due course is the person pay it. (De Leon, 2010)
whose signature is forged.
b. Only B and C can be held liable by F. According NOTE: Drawee does not become liable until he
to Section 67, when a person puts his signature accepts the instrument in which case he becomes an
on a bearer instrument as a form of acceptor. An acceptor engages to pay according to
indorsement, he becomes subject to all the tenor of his acceptance, which may not be the
liabilities of an indorser. D cannot be held liable same as the tenor of the bill itself because the
as an indorser because his signature is forged acceptance may be qualified.
by E--hence, there was no consent from D. The
forged signature is deemed inoperative and no Difference between the liability of an acceptor
right can arise out of it. However, the effect of or drawee-acceptor and a maker
being inoperative affects only the signature
which is the product of forgery. It will not deem While both are primarily liable, the acceptor
to affect other signatures subscribed with engages to pay the negotiable instrument according
knowledge and voluntariness. Therefore, B and to the tenor of his acceptance. On the other hand, the
C are liable as indorsers. maker engages to pay the negotiable instrument
according to the tenor of the bill itself.
Q: D draws a bill of exchange that states: “One
month from date, pay to B or his order Q: X draws a check against his current account
Php100,000.00. Signed, D.” The drawee named with Bonifacio Bank in favor of B. Although X
in the bill is E. B negotiated the bill to M, M to N, does not have sufficient funds, the bank honors
N to O, and O to P. Due to non-acceptance and the check when it is presented for payment.
after proceedings for dishonor were made, P Apparently, X has conspired with the bank's
asked O to pay, which O did. From whom may O bookkeeper so that his ledger card would show
recover? (2011 Bar) that he still has sufficient funds.The bank files an
action for recovery of the amount paid to B
A: D, being the drawer. because the check presented has no sufficient
funds. Decide the case (1998 Bar).
ACCEPTOR
A: The bank cannot recover the amount paid to B for
Acceptor the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
The acceptor, by accepting the instrument: primarily and directly liable to the payee/holder B.

1. Engages that he will pay the NI according to the The recourse of the bank should be against X and its
tenor of his acceptance; and bookkeeper who conspired to make X's ledger show
2. Admits the existence of the drawer, the that he has sufficient funds.
genuineness of his signature and his capacity
and authority to draw the instrument; INDORSER
3. Admits the existence of the payee and his then
capacity to indorse (NIL, Sec. 62, 1992; 1998 Indorser
Bar).

56
 NEGOTIABLE INSTRUMENTS LAW
A person placing his signature upon an instrument Order of liability among the indorsers
otherwise than as maker or acceptor is deemed to
be an indorser, unless he clearly indicates by 1. Among themselves – Liable prima facie in the
appropriate words his intention to be bound in order in which they indorse (NIL, Sec. 68)
some other capacity (NIL, Sec. 63). 2. To the holder – In any order

NOTE: A person who places his indorsement on a Every indorser is liable prima facie to all indorsers
bearer instrument incurs all liabilities of an subsequent to him, but not those indorsers prior to
indorser (NIL, Sec. 67). him (NIL, Sec. 68)

General indorser vs. Irregular indorser (2005 Liability of an agent or broker who negotiates an
Bar) instrument without indorsement

GENERAL INDORSER IRREGULAR He incurs all the liabilities prescribed to a general

INDORSER indorser unless he discloses the name of his
Makes either a blank or Always makes a principal and the fact that he is acting only as an
special indorsement blank indorsement agent (NIL, Sec. 69)
Indorses the Indorses before its
instrument after its delivery to the payee NOTE: Parol evidence is NOT admissible to relieve
delivery to the payee an agent or broker whose endorsement brings him
Liable only to parties Liable to the payee within the above liability.
subsequent to him and subsequent
parties unless he Q: Can a collecting bank debit the account of the
signs for the depositor when the checks indorsed to it (bank)
accommodation of were forged?
the payee in which
case he is liable only A: YES, because the depositor of a check as indorser
to all parties warrants that it is genuine and in all respects what
subsequent to the it purports to be. Thus, when the checks deposited
payee had forged indorsements and the collecting bank, as
a consequence of such forgery, was made to pay the
(NIL, Secs. 64, 66; De Leon, supra) drawee bank, the collecting bank can debit the
account of the depositor for his breach of warranty
NOTE: The holder or subsequent indorser who tries (Jai-Alai Corporation of The Philippines v. BPI, G.R.
to claim under the instrument which had been No. L-29432, August 6, 1975).
dishonored for "irregular indorsement" must not be
the irregular indorser himself who gave cause for Q: Phebean, the drawer issued a check to James.
the dishonor. (Gonzales v. Rizal Commercial Banking James, subsequently indorsed it to Trude. When
Corporation, G.R. No. 156294, Novembber 29, 2006) Trude is about to encash the check, the drawee
Union Bank refused to encash it due to
Qualified indorser insufficiency of funds. Trude sued James for
payment of money. James alleged that the suit
A qualified indorser is a person who indorses should be dismissed because Phebean is an
without recourse (NIL, Sec. 65). indispensable party. Does James’ argument hold
water?
Drawer vs. Indorser
A: NO, there is no privity between the drawer and
DRAWER INDORSER the holder. The drawer is merely secondarily liable.
Party only to a bill Party either a bill or As indorser, the buyer warranted that upon due
note presentment, the checks were to be accepted or
Makes admission as to No such admission paid, or both, according to their tenor, and that in
the existence of the case they were dishonored, she would pay the
payee and his capacity corresponding amount. After an instrument is
to indorse dishonored by non-payment, indorsers cease to be
Makes no warranties, Has warranties merely secondarily liable; they become principal
but engages to pay debtors whose liability becomes identical to that of
after certain the original obligor (Tuazon v. Heirs of Bartolome
conditions are Ramos, G.R. No. 156262, July 14, 2005).
complied with

57
 MERCANTILE LAW
Q: X is the holder of an instrument payable to now sues X for collection. Will it prosper? (2011
him (X) or his order, with Y as maker. X then Bar)
indorsed it as follows: “Subject to no recourse,
pay to Z. Signed, X.” When Z went to collect from A: YES, because X, as a qualified indorser, warrants
Y, it turned out that Y's signature was forged. Z that the note is genuine.

Warranties and liabilities of parties who are secondarily liable

ABSOLUTE LIABILITY LIMITED LIABILITY

Drawer of a BOE Qualified Indorser
Warrants: Warrants that the:
a. The existence of payee and his then capacity to a. Instrument is genuine;
indorse; b. He has good title to it;
b. That the instrument will be accepted or paid c. Capacity to contract of all prior parties; and;
upon due presentment by the party primarily d. No knowledge of any fact which would impair
liable according to its tenor; and the validity of the instrument. (NIL, Sec.65)
c. That if dishonored, he will pay the party
entitled to be paid. (NIL, Sec. 61.) NOTE: He is liable to all parties who derive their title
through his indorsement.
General indorser Person negotiating by delivery
a. Warrants that: Same warranties as a qualified indorser. But unlike a
i. Instrument is genuine qualified indorser, a person negotiating by mere
ii. He had good title to it delivery is liable only to his immediate transferee.
iii. All prior parties had capacity to contract (NIL, par. 2, Sec. 65)
iv. Instrument, at the time of indorse- ment, was
valid and subsisting; NOTE: Person negotiating by mere delivery and a
qualified indorser’s secondary liability is limited,
b. On due presentment, it shall be accepted or paid, namely, to their warranties
or both according to its tenor
c. If the instrument is dishonored and the ne-
cessary proceedings on dishonor be duly taken,
he will pay the holder. (NIL, Sec. 66.)
Irregular indorser
a. In an order instrument, liable to the payee and all
subsequent parties

b. If bearer instrument or payable to order of maker

or drawer, liable to all parties subsequent to the
maker or drawer
c. If he signs for accommodation of the payee, liable
to all parties subsequent to payee. (NIL, Sec. 64.)

WARRANTIES qualified indorser may incur liability for breach of

implied warranties. As warrantor, his liability is
The following are the warranties a person provides unconditional.
in negotiating an instrument:
Q: Distinguish an irregular indorser from a
1. That the instrument is genuine and in all general indorser (2005 Bar)
respects what it purports to be;
2. That he has good title to it; A: Irregular Indorser is not a party to the instrument
3. That all prior parties had capacity to contract; but he places his signature in blank before delivery.
4. That he has no knowledge of any fact which He is not a party but he becomes one because of his
would impair the validity of the instrument or signature in the instrument. Because his signature
render it useless. he is considered an indorser and he is liable to the
parties in the instrument.
NOTE: Indorser’s liability as warrantor is distinct
from his liability to pay the instrument. Even a

58
 NEGOTIABLE INSTRUMENTS LAW
A General Indorser warrants that the instrument is blank to him. Is CD still liable to EF by virtue
genuine, that he has a good title to it, that all prior of the indorsement in blank? Why? (2002
parties had capacity to contract; that the instrument Bar)
at the time of the indorsement is valid and
subsisting; and that on due presentment, the A:
instrument will be accepted or paid or both a. Since the instrument became a bearer
accepted and paid according to its tenor, and that if instrument, EF could no longer claim payment
it is dishonored, he will pay if the necessary from AB. EF is not a holder of the promissory
proceedings for dishonor are made. note. To make the presentment for payment, it
is necessary to exhibit the instrument, which EF
PRESENTMENT FOR PAYMENT cannot do because he is not in possession
thereof.
It is the presentation of an instrument to the person b. NO, because CD negotiated the instrument by
primarily liable for the purpose of demanding and delivery.
receiving payment.
NECESSITY OF PRESENTMENT FOR
Manner of presentment PAYMENT

GR: Instrument must be exhibited to the person Presentment for payment is not necessary in order
from whom payment is demanded; when paid, it to charge the person primarily liable on the
must be delivered to the person paying it (NIL, Sec. instrument. It is only necessary to charge persons
74). secondarily liable—drawer and indorsers (NIL, Sec.
70).
XPNs: When exhibition is excused: 1. As to drawer, where he has no right to expect or
require that the drawee or acceptor will pay the
1. Debtor does not demand to see the instrument instrument (Sec. 79, NIL).
and refuses payment on some other grounds; or 2. As to indorser where the instrument was made
2. Instrument is lost or destroyed. or accepted for his accommodation and he has
no reason to expect that the instrument will be
The bank remains liable to the holder if it paid the paid if presented (NIL, Sec. 80).
certificate of deposit payable to bearer without 3. When dispensed with under Sec. 82, NIL such
requiring its surrender (Far East Bank & Trust as:
Company v. Querimit, G.R. No. 148582, January 16, a. Where, after the exercise of reasonable
2002). diligence, presentment cannot be made;
b. Where the drawee is a fictitious person;
Payee cannot claim payment for a promissory note c. By waiver of presentment, express or
which was stolen and as such is not in his implied.
possession. To make presentment for payment, it is
necessary to exhibit the instrument, which he Requisites for a sufficient presentment for
cannot do because he is not in possession thereof. payment (1994, 2002 Bar)

Q: AB issued a promissory note for P1,000 Presentment for payment, to be sufficient, must be
payable to CD or his order on September 15, made:
2002. CD indorsed the note in blank and 1. By the holder, or his agent authorized to receive
delivered the same to EF. GH stole the note from payment on his behalf;
EF and on September 14, 2002 presented it to AB 2. At a reasonable hour on a business day;
for payment. When asked by AB, GH said CD gave 3. At a proper place;
him the note in payment for two cavans of rice. 4. To the person primarily liable, or if he is absent
AB therefore paid GH P1,000 on the same date. or inaccessible, to any person found at the place
On September 15, 2002, EF discovered that the where the presentment is made (NIL, Sec. 72).
note of AB was not in his possession and he went
to AB. It was then that EF found out that AB had If the instrument is, by its terms, payable at a special
already made payment on the note. place, and the person primarily liable is able and
willing to pay it there at maturity, such ability and
a. Can EF still claim payment from AB? Why? willingness are equivalent to a tender of payment
b. As a sequel to the same facts narrated above, upon his part (Sec. 70, NIL).
EF, out of pity for AB who had already paid
P1,000 to GH, decided to forgive AB and Time for presentment for payment
instead go after CD who indorsed the note in

59
 MERCANTILE LAW
INSTRUMENT TIME FOR PRESENTMENT Only the delay in presentment is excused and not
GR: On the day it falls due (NIL, the presentment itself. Hence, as soon as the cause
Sec. 85) of delay ceases to operate, presentment must be
made with reasonable diligence (ibid.).
XPN: If the due date falls on a
Payable at a Saturday, presentment must be Q: Is the bank liable to the payee for depositing
fixed or made on the next Monday. and encashing the crossed checks to an
determinable unauthorized person?
future time NOTE: If presentment for
payment is made before A: YES, the effects of crossing a check relate to the
maturity, it will not result to a mode of its presentment for payment. Under Sec. 72
discharge of the instrument (NIL, of the NIL, presentment for payment, to be
Sec. 50). sufficient, must be made by the holder or by some
Promissory person authorized to receive on his behalf. The
Within a reasonable time after its checks here had been crossed and issued “for
note payable
issue. payee’s account only.” This only signifies that the
on demand
Within a reasonable time after drawer had intended the same for deposit only by
the last negotiation thereof (NIL, the person indicated (Associated Bank v. CA, G.R. No.
Sec. 71). 89802, May 7, 1992).

NOTE: “Last negotiation” means Order of preference with regard to the place of
the last transfer for value. presentment
Subsequent transfers between
Bill of 1. Specified place in the instrument
banks for purposes of collection
exchange
are not negotiations within Sec. 2. Address of the person to make the payment if
payable on
71. given in the instrument
demand
3. Usual place of business or residence of the
“Reasonable time” means not person to make the payment
more than 6 months from the 4. Wherever he can be found; or
date of issue. Beyond said period, 5. At his last known place of business or residence
the check becomes stale and (NIL, Sec. 73).
valueless and thus, should not be
paid. Instrument is payable at a bank

NOTE: Every NI is payable at the time fixed therein When the instrument is payable at bank,
without grace. presentment must be made during banking hours,
unless the person to make payment has no funds
Rules on presentment for payment when there to meet it at any time during the day, in which
maturity date is fixed case presentment at any hour before the bank is
closed on that day is sufficient (NIL, Sec. 75).
TIME OF MATURITY WHEN TO PRESENT
OF INSTRUMENT FOR PAYMENT Requisites of payment in due course
On a Sunday or holiday On the next succeeding
business day Payment is made in due course when (MHG):
On a Saturday On the next succeeding
business day 1. It is made at or after the date of Maturity;
If instrument which Before 12:00 noon on 2. To the Holder thereof;
falls due on a Saturday Saturday, or on 3. In Good faith and without notice that holder’s
is payable on demand Monday, at the option of title is defective (NIL, Sec. 88).
the holder
The term “in good faith” refers to the maker or
Delay in making presentment is excused acceptor and not to the holder.

PARTIES TO WHOM PRESENTMENT FOR

1. When caused by circumstances beyond the
control of the holder; and PAYMENT SHOULD BE MADE
2. Not imputable to his default, misconduct, or
GR: Presentment for payment must be made to the:
negligence (NIL, Sec. 81).
1. The maker in case of a promissory note, or

60
 NEGOTIABLE INSTRUMENTS LAW
2. The acceptor in case of an accepted bill. If the a. Reasonable time is relative. Regard is to be had
bill of exchange or check is payable on demand, to the facts of each case, usage of business and
the presentment must be made to the drawee trade, and the nature of the instrument. With
although he is not automatically liable on the respect to checks, current banking practice
bill. dictates that the check becomes stale if it is not
presented for payment within 6 months from
XPNs: Where the person/s primarily liable is/are: issuance.
b. NO. Gemma is discharged from secondary
1. Dead – presentment for payment must be made liability under the check because presentment
to his personal representative (NIL, Sec. 76). and notice of dishonor were made after an
2. Liable as partners and no place of payment unreasonable length of time. The check was
specified – presentment for payment may be already stale at the time of presentment.
made to any of them though there has been
dissolution of the firm (NIL, Sec. 77). DISHONOR BY NON-PAYMENT
3. Several persons, not partners, and no place of
payment is specified – presentment for payment Subject to the provisions of the law, when the
must be made to all of them (NIL, Sec. 78). instrument is dishonored by non-payment, an
4. If the person primarily liable is absent or immediate right of recourse to all parties
inaccessible, then presentment for payment secondarily liable thereon accrues to the holder
must be made to any person of sufficient (NIL, Sec. 84).
discretion at the proper place of presentment
(NIL, Sec. 72[d]). Instances when an instrument is dishonored by
non-payment
DISPENSATION WITH PRESENTMENT FOR
PAYMENT NON-PAYMENT UPON NON-PAYMENT
DUE PRESENTATION W/OUT
GR: Drawer and the indorsers are discharged from PRESENTATION
their secondary liability when presentment is not The instrument is duly Presentment is excused
made. presented for payment and the instrument is
to party primarily overdue and unpaid
XPNs: liable and it is either
1. Presentment for payment is not required to refused or cannot be
charge drawer and indorser when: obtained
a. Drawer- when he has no right to expect or (NIL, Sec. 83).
require that the drawee or acceptor will
pay the instrument (NIL, Sec. 79). NOTICE OF DISHONOR
b. Indorser – When the NI was made or
accepted for his accommodation and he has It is a notice given by the holder to the parties
no reason to expect that the instrument will secondarily liable, drawer and each indorser, that
be paid if presented (NIL, Sec. 80). the instrument was dishonored by non-payment or
2. When presentment for payment is dispensed non-acceptance by the drawee/maker.
with under Sec. 82, NIL
3. When the BOE has been dishonored by non- Persons primarily liable need not be given notice of
acceptance, since no Presentment for Payment dishonor because they are the ones who dishonored
for is necessary (NIL, Sec. 151). the instrument.

Q: Gemma drew a check on September 13, 2010. Purposes for requiring notice of dishonor
The holder presented the check to the drawee
bank only on March 5, 2012. The bank 1. To inform parties secondarily liable that the
dishonored the check on the same date. After maker or acceptor has failed to meet his
dishonor by the drawee bank, the holder gave a engagement; and
formal notice of dishonor. 2. To advise them that they are required to make
payment.
a. What is meant by reasonable time as applied
to presentment? Q: Notice of dishonor is not required to be made
b. Is Gemma still liable to the holder? in all cases. One instance where such notice is
not necessary is when the indorser is the one to
A: whom the instrument is supposed to be

61
 MERCANTILE LAW
presented for payment. The rationale here is 1. Not paid (that is, payment is refused or not
that the indorser (2011 Bar) obtained) when presented for payment at
maturity; or
A: Already knows of the dishonor and it makes no 2. Where presentment is excused or waived and
sense to notify him of it. the instrument is overdue and unpaid (NIL, Sec.
83).
Time and place of giving the notice of dishonor
Liability of a person secondarily liable when the
1. GR: As soon as instrument was dishonored instrument is dishonored
(NIL, Sec. 10.)–Party is allowed one entire day
for the purpose of giving notice. After the necessary proceedings for dishonor had
been duly taken, an immediate right of recourse to
XPN: Delay is excused (NIL, Sec. 113,). all parties secondarily liable thereon accrues to the
holder (NIL, Sec. 84).
NOTE: An instrument cannot be dishonored by
non-payment until after the maturity. PARTIES TO BE NOTIFIED

2. Parties reside in the same place Parties to whom notice must be given
a. Place of business – Before close of business
hours on the day following Notice of dishonor should be given to:
b. Residence – Before the usual hours of rest 1. The drawer; or
on the day following 2. Indorser; or
c. By mail – Deposited in the post office in 3. His agent (NIL, Sec. 97)
time to reach him in the usual course on the 4. Where party is dead – to a personal
day following (NIL, Sec. 103) representative or sent to the last residence or
3. Parties reside in different places last place of business of the deceased (NIL, Sec.
a. By mail – Deposited in the post office in 98)
time to go by mail (actual departure in the 5. When the parties to be notified are partners –
course of mail from the post office in which notice to any one partner though there has been
the notice was deposited) the day following a dissolution (NIL, Sec. 99)
the day of dishonor. 6. Notice to joint parties who are not partners
b. If no mail – At a convenient hour (of the must be given to each of them (NIL, Sec. 100)
sender) on that day, by the next mail 7. Where a party has been adjudged a bankrupt –
thereafter to the party himself or to his trustee or assignee
c. Other than by post office (e.g. personal (NIL, Sec. 101)
messenger) – Within the time that notice
would have been received in due course of In case the instrument was dishonored in the hands
mail, if it has been deposited in the post of the agent, notice of dishonor should be given:
office within the time specified in (a) (NIL, 1. To the parties secondarily liable – Within the
Sec. 104). time fixed by Secs. 102-104, and 107, otherwise,
4. Time of notice to antecedent parties – Same they are discharged.
time for giving notice that the holder has after 2. To his principal – The principal must give notice
the dishonor (NIL, Sec. 107). to parties secondarily liable as if his agent were
an independent holder (NIL, Sec. 94).
NOTE: Actual receipt of the party within the time
specified by law is sufficient though not sent in the A party who receives notice of dishonor is entitled
places specified above (NIL, Sec. 108). to give notice of such dishonor to prior parties
within the same period of time that the holder has
Instances when a negotiable instrument is after the dishonor, as if he were the said holder (NIL,
considered dishonored Sec. 107).

For BOE: PARTIES WHO MAY GIVE NOTICE OF DISHONOR

1. If not accepted when presented for acceptance; The parties who may give notice of dishonor are
or 1. Holder;
2. If presentment for acceptance is excused and 2. Another in behalf of the holder
the bill is not accepted (NIL, Sec. 149). 3. Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
For PN,

62
 NEGOTIABLE INSTRUMENTS LAW
would have a right to reimbursement from the
party to whom notice is given (NIL, Sec. 90). 1. Express; or
2. Implied (e.g. Payment by an indorser after he
EFFECTS OF NOTICE OF DISHONOR learns of the default of the maker; admission of
liability after dishonor) (NIL, Sec. 109).
Notice of dishonor, if given by or on behalf of the
holder, inures to the benefit of: Parties affected by the waiver of notice
1. All holders subsequent to the holder who has
given notice; and 1. All parties (if embodied on the face of the
2. All parties prior to the holder but subsequent to instrument); or
the party to whom notice has been given and 2. Particular indorser (if written above the
against whom they may have a right of recourse signature of such indorser) (NIL, Sec. 110).
(NIL, Sec. 92)
Waiver of protest
Notice of dishonor if given by party entitled thereto,
inures to the benefit of: It is the waiver of the formal instrument executed
1. The holder; and usually by a notary public certifying that the legal
2. All parties subsequent to the party to whom steps necessary to fix the liability of the drawee and
notice is given (NIL, Sec. 93). the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
FORM OF NOTICE presentment and notice of dishonor (NIL, Sec. 111).

Form and contents of a notice of dishonor DISPENSATION WITH NOTICE

1. Oral; or Instances when notice of dishonor is not

2. In writing; necessary
3. It may be given by personal delivery, or by mail
(NIL, Sec. 96) 1. Waiver of notice (NIL, Sec. 109)
4. Must contain the following: 2. Waiver of protest (NIL, Sec. 111)
a. Description of the instrument; 3. When notice is dispensed with when after
b. Statement that it has been presented for exercise of reasonable diligence, notice cannot
payment or for acceptance and that it has be given or does not reach the parties sought to
been dishonored (If protest is necessary, be charged (NIL, Sec. 112)
notice must also contain a statement that it 4. Drawer in cases under Sec. 114, NIL.
has been protested); and 5. Indorser in cases under Sec. 115, NIL.; and
c. Statement that the party giving the notice 6. Where due notice of dishonor by non-
intends to look for the party addressed for acceptance has been given (notice of dishonor
payment. by non-payment not necessary). (NIL, Sec. 116.)

NOTE: A written notice need not be signed, and an Instances when a notice of dishonor to the
insufficient notice may be supplemented or drawer may be dispensed with
validated by verbal communication. A
misdescription of the instrument does not vitiate 1. When drawer and drawee is the same person
the notice unless the party to whom the notice is 2. Drawee is fictitious or does not have the
given is in fact misled thereby (NIL, Sec. 95). capacity to contract
3. Drawer is the person to whom the instrument is
WAIVER presented for payment (he is the one who
dishonored the instrument)
It is the willingness on the part of the drawer or 4. Drawer has no right to expect or require that
indorser to be bound as such even without due the drawee or acceptor will honor the
notice of dishonor. instrument.
5. Drawer has countermanded the payment (e.g.
Waiver of notice maybe given: stop payment order) (NIL, Sec. 114.)

1. Before the time of giving notice has arrived; or NOTE: The holder of two checks which were
2. After the omission to give due notice (NIL, Sec. dishonored because the drawer withdrew her funds
109). from the bank can hold the drawer liable even if no
notice of dishonor was given to the drawer, since
Ways to give a waiver of notice the drawer had no right to expect that the drawee

63
 MERCANTILE LAW
bank would honor the checks. (State Investment 1. Waiver (NIL, Sec. 109)
House, Inc. vs. Court of Appeals, G.R. No. 101163, 2. Notice is dispensed with (NIL, Sec. 112)
January 11, 1993) 3. Notice not necessary to drawer (NIL, Sec. 114)
4. Notice not necessary to indorser (NIL, Sec. 115)
Q: P authorized A to sign a negotiable
instrument in his (P’s) name. It reads: “Pay to B NOTE: Holder is not required to notify all indorsers,
or order the sum of Php1 million. Signed, A (for he may select to hold only one or more indorsers.
and in behalf of P).” The instrument shows that Indorsers who are discharged from liability by
it was drawn on P. B then indorsed to C, C to D, reason that no notice of dishonor was given to them
and D to E. E then treated it as a bill of exchange. is still liable for breach of warranties as to the NI.
Is presentment for acceptance necessary in this
case? (2011 Bar) Effect of lack of notice of dishonor on the
instrument which is payable in installments
A: NO, since the drawer and drawee are the same
person. 1. No acceleration clause – Failure to give notice of
dishonor on a previous installment does not
Q: Juben issued to Y two post-dated checks as discharge drawers and indorsers as to
security for pieces of jewelry to be sold. Y succeeding installments.
negotiated the check to S. When Juben failed to 2. With acceleration clause – It depends upon
sell the jewelry, he withdrew all his funds from whether the clause is automatic or optional.
the drawee bank. After dishonor, Juben a. Automatic – failure to give notice of
contends that the holder failed to give him a dishonor as to a previous installment will
notice of dishonor. Is notice of dishonor discharge the persons secondarily liable as
necessary? to the succeeding installments;
b. Optional – if not exercised, the rule would
A: NO, Juben was responsible for the dishonor of his be the same as if there is no acceleration
checks, hence, there was no need to serve him notice clause. If exercised, the rule would be the
of dishonor (State Investment House, Inc. v. CA, same as if the installment contains an
supra.). automatic acceleration clause (Town
Savings Bank v. CA, G.R. No. 106011, June 17,
Instances when it is not necessary to give a 1993).
notice of dishonor to the indorser
DISCHARGE OF NEGOTIABLE INSTRUMENT
1. Drawee is fictitious or has no capacity to
contract, and indorser was aware of these facts It is the release of all parties, whether primary or
at the time he indorsed the instrument; secondary, from the obligations arising thereunder.
2. Indorser is person to whom the instrument is It renders the instrument without force and effect,
presented for payment; or and consequently, it can no longer be negotiated.
3. Instrument was made or accepted for his
accommodation (NIL, Sec. 115). Methods for discharge of instrument

EFFECT OF FAILURE TO GIVE NOTICE 1. Payment by principal debtor:

a. By or on behalf of principal debtor
Effect of the omission of a previous holder to b. At or after its maturity
give notice of dishonor by non-acceptance c. To the holder thereof
d. In good faith and without notice that the
It does not prejudice the rights of a holder in due holder’s title is defective
course subsequent to the omission to present the 2. Payment by accommodated party
instrument to the drawee for acceptance and notify 3. Intentional cancellation of instrument by the
the drawer and indorsers if acceptance is refused holder (by expressly stating it in the instrument
(NIL, Sec. 117). or when the instrument is torn up, burned or
destroyed)
Effect of failure to give notice of dishonor 4. Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
GR: Any person to whom such notice is not given is NCC specifically remission, novation, and
discharged, but he will still be liable for breach of merger.
warranties pertaining to the instrument.
NOTE: Loss of the negotiable instrument will not
XPNs: extinguish liability; compensation is not available so

64
 NEGOTIABLE INSTRUMENTS LAW
long as an obligation is evidenced by a negotiable In this case, J.Y. Bros.’s acceptance of the Solid Bank
instrument (Villanueva, 2009). check, which replaced the dishonored Prudential
Bank check, did not result to novation as there was
5. Reacquisition by principal debtor in his own no express agreement to establish that Salazar was
right. Reacquisition must be: already discharged from his liability. Neither was
a. By the principal debtor there any incompatibility, since both checks were
b. In his own right given to terminate a single obligation arising from
c. At or after date of maturity (instrument is the same transaction (Anamer Salazar v. J.Y.
discharged; if made before, it may be Brothers Marketing Corporation, G.R. No. 171998,
renegotiated) (NIL, Sec. 119). October 20, 2010, in Divina 2014).

Q: Salazar with Calleja and Kallos procured from DISCHARGE OF SECONDARY PARTIES
J. Y. Bros. 300 cavans of rice. As payment, Salazar
negotiated and indorsed to J.Y. Bros. Prudential Methods of discharge of secondary parties (ACS
Bank Check issued by Timario with the TReE)
assurance that the check is good as cash. On that
assurance, J.Y. Bros. parted with 300 cavans of 1. Any Act which discharges the instrument;
rice to Salazar. However, upon presentment, the 2. Intentional Cancellation of his signature by the
check was dishonored due to "closed account." holder
Calleja, Kallos and Salazar delivered to J.Y. Bros. 3. Discharge of prior party which may be made
a replacement cross Solid Bank Check again when signature is Stricken out
issued which bounced due to insufficient funds. 4. Valid Tender of payment by a prior party;
Despite demands, Salazar failed to settle the 5. Release of the principal debtor, unless holder
amount due. J.Y. Bros., charged Salazar and expressly reserves his right of recourse against
Timario with the estafa. the said subsequent parties
6. Extension of time of payment, unless:
Salazar contends that the issuance of the Solid a. Extension is consented to by such party
Bank check and the acceptance thereof by J.Y. b. Holder expressly reserves his right of
Bros, in replacement of the dishonored recourse against such party (NIL, Sec. 120)
Prudential Bank check, amounted to novation
that discharged the latter check; that Q: The rule is that the intentional cancellation of
respondent's acceptance of the Solid Bank a person secondarily liable results in the
check, notwithstanding its eventual dishonor by discharge of the latter. With respect to an
the drawee bank, had the effect of erasing indorser, the holder's right to cancel his
whatever criminal responsibility, under Article signature is: (2011 Bar)
315 of the RPC, the drawer or indorser of the
Prudential Bank check would have incurred in A: Limited to the case where the indorsement is not
the issuance thereof; and that a check is a necessary to his title.
contract which is susceptible to a novation just
like any other contract. Is Salazar correct? Effects of payment by persons secondarily liable

A: NO. While Section 119 of the NIL in relation to 1. Instrument is not discharged
Article 1231 of the Civil Code provides that one of 2. It only cancels his own liability and that of the
the modes of discharging a negotiable instrument is parties subsequent to him
by any other act which will discharge a simple 3. GR: Instrument may be renegotiated
contract for the payment of money, such as
novation, the acceptance by the holder of another XPNs:
check which replaced the dishonored bank check a. Where it is payable to the order of a third
did not result to novation. person, and has been paid by the drawer;
and
There are only two ways which indicate the b. Where it is paid by the accommodated
presence of novation and thereby produce the effect party.
of extinguishing an obligation by another which
substitutes the same. First, novation must be NOTE: (a) and (b) has the same effect as payment
explicitly stated and declared in unequivocal terms by the party primarily liable.
as novation is never presumed. Secondly, the old
and the new obligations must be incompatible on 4. Person paying is remitted to his former rights
every point. (as regards prior parties) and he may strike out

65
 MERCANTILE LAW
his own and all subsequent indorsements (NIL, CONCEPT
Sec. 121).
Material alteration
RIGHTS OF THE PARTY WHO DISCHARGED THE
INSTRUMENT It is any change in the instrument which affects or
changes the liability of the parties in any way. It
GR: The party so discharging the instrument is means an unauthorized change in an instrument
remitted to his former rights as regards all prior that purports to modify in any respect the obligation
parties, and he may strike out his own and all of a party or an unauthorized addition of words or
subsequent indorsements, and again negotiate the numbers or other change to an incomplete
instrument. instrument relating to the obligation of a party.

XPNs: Instances that constitute material alteration

1. Where it is payable to the order of a third Any alteration which changes:

person, and has been paid by the drawee; and
2. It was made or accepted for accommodation, 1. Date
and has been paid by the party accommodated. 2. Sum payable, either for principal or interest
3. The time or place of payment
RENUNCIATION BY THE HOLDER 4. Number or the relations of the parties
5. Currency in which payment is to be made
Renunciation 6. Adds a place of payment where no place is
specified
It is the act of surrendering a claim or right with or 7. Any other change or addition which alters the
without recompense (a PERSONAL defense). effect of the instrument (NIL, Sec. 125.)

Manner of making renunciation by the holder The change in the date of indorsement is not material
where the date is not necessary to fix the maturity
1. Must be written of the instrument.
2. If oral, the instrument must be surrendered to
the person primarily liable (NIL, Sec. 122). There is no material alteration when the serial
number of a check had been altered. The alteration
Effects of renunciation of the serial number of a check did not change the
relations between the parties nor the effect of the
1. Made in favor of principal debtor made at or instrument. Hence, the alteration on the serial
after the maturity (made absolutely and number of a check is not a material alteration
unconditionally) of the instrument – discharges (International Corporate Bank v. CA, G.R. No. 141968,
the instrument (NIL, Sec. 122). February 12, 2001).
2. Made in favor of a secondary party may be made
by the holder before, at or after maturity – Spoliation
discharges only the secondary parties and all
subsequent to him (NIL, Sec. 122). It refers to material alteration of an instrument
3. Renunciation does not affect the rights of a done by a stranger. It has the same effect as
holder in due course without notice (NIL, Sec. alteration.
120).
EFFECT OF MATERIAL ALTERATION
Rule regarding the cancellation of an
instrument Material alteration of a negotiable instrument,
without the assent of all parties liable thereon, has
It is presumed intentional. It is inoperative if the following effects:
unintentional, or under a mistake or without the 1. Avoids the instrument except against:
authority of the holder. But where an instrument or a. A party who has made the alteration;
any signature appears to have been cancelled, the b. A party who authorized or assented to the
burden of proof lies on the party alleging that the alteration; or
cancellation was made unintentionally, or under a c. The indorsers who indorsed subsequent to
mistake or without authority (NIL, Sec. 123). the alteration (because of their
warranties).
MATERIAL ALTERATION 2. If negotiated to an HIDC, he may enforce the
payment thereof according to its original tenor

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 NEGOTIABLE INSTRUMENTS LAW
against the person not a party to the alteration. A: YES, since a drawee is allowed to effect a
He may also enforce payment thereof against qualified acceptance in which case he shall be liable
the party responsible for the alteration for the according to the tenor of his acceptance.
altered amount.
3. If negotiated to a holder not an HIDC, he cannot Q: X, drawee of a bill of exchange, wrote the
enforce payment against the person not a party words: “Accepted, with promise to make
prior to the alteration. He may, however payment within two days. Signed, X.” The
enforce payment according to the altered tenor drawer questioned the acceptance as invalid. Is
from the person who caused the alteration and the acceptance valid?
from the indorsers (NIL, Sec. 12).
A: YES, because the acceptance is in reality a clear
A drawee who accepts a materially altered check assent to the order of the drawer to pay. Qualified
cannot recover from the holder and the drawer acceptance as to time is allowed (NIL, Sec. 141 [d]).
(2011 Bar).
MANNER
A material alteration of an instrument without the
assent of all parties liable thereon results in its Manner of making an acceptance
avoidance, except against a party who has made,
authorized or assented to the alteration and Acceptance may be made
subsequent indorser. (2011 Bar)
1. On the bill itself,
ACCEPTANCE 2. On a separate paper; and if on a separate paper
a. It may be acceptance as to an existing bill;
DEFINITION or
b. It may be acceptance as to a non-existing
Acceptance of a bill bill.

It is a signification by the drawee of his assent to the If the bill is non-existent, the acceptance on a
order of the drawer (NIL, Sec. 132). separate paper must comply with following
requirements:
Requisites for acceptance
1. The contemplated drawee shall describe the bill
1. In writing, except constructive acceptance and to be drawn and promise to accept it;
to a foreign bill payable in another state (unless 2. Bill shall be drawn within a reasonable time
the other state requires for written after such promise is written; and
acceptance); 3. The holder shall take the bill upon the credit of
2. Signed by the drawee (without it, he is not the promise.
liable);
3. Must express a promise to pay money (not Kinds of acceptance
goods);
4. Delivered to the holder (before delivery or 1. General Acceptance -It assents without
notification, acceptor may revoke or cancel his qualification to the order of the drawer (NIL,
acceptance). Sec. 139).
2. Qualified Acceptance - An acceptance which in
Upon acceptance, the bill, in effect becomes a note. express terms varies the effect of the bill as
The drawee who thereby becomes an acceptor drawn (ibid.).
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser. NOTE: A holder may refuse to accept a qualified
acceptance and if he does not obtain an unqualified
Q: A bill of exchange states on its face: “One (1) acceptance, he may treat the bill as dishonored by
month after sight, pay to the order of Mr. R the non-acceptance (NIL, Sec. 142).
amount of Php50,000.00, chargeable to the
account of Mr. S. Signed, Mr. T.” Mr. S, the Kinds of qualified acceptance
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay 1. Conditional – makes payment by the acceptor
Php30,000.00 three (3) months after sight.” May dependent on the fulfillment of a condition
he accept under such terms, which varies the therein stated.
command in the bill of exchange? (2011 Bar) 2. Partial – an acceptance to pay part only of the
amount for which the bill is drawn.

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 MERCANTILE LAW
3. Local – an acceptance to pay only at a particular 1. When they have expressly or impliedly
place. authorized the holder to take a qualified
4. Qualified as to time– a bill is accepted to be paid acceptance; or
on or after a specified date. 2. Subsequently assent thereto;
5. As to drawee - acceptance of some one or more 3. Implied assent (when they did not express their
of the drawees but not of all (NIL, Sec. 141). dissent to the holder within a reasonable time
when they received a notice of qualified
Other kinds of acceptance acceptance) (NIL, Sec. 142).

1. Constructive/implied (NIL, Sec. 137). When the drawer or indorser receives notice of a
a. Drawee to whom the bill is delivered for qualified acceptance, he must, within a reasonable
acceptance destroys it; or time, express his dissent to the holder or he will be
b. Drawee refuses, within 24 hours after such deemed to have assented thereto (Sundiang Sr. &
delivery, or within such time as is given Aquino, 2014).
him, to return the bill accepted or non-
accepted Acceptance of an incomplete bill

2. Extrinsic– the acceptance is written on a paper Acceptance may be made before the bill has been
other than the bill itself. To be binding upon the signed by the drawer or while otherwise
acceptor: incomplete, or after it is overdue, or even after it has
a. Acceptance must be shown to the person to been dishonored by non-acceptance or non-
whom the instrument is negotiated; and payment (NIL, Sec. 138).
b. Such person must take the bill for value on
the faith of such acceptance (NIL, Sec. 134). Effect of the certification by the drawee bank

3. Virtual Certification implies that the check is drawn upon

a. Unconditional promise in writing to accept sufficient funds in the hands of the drawee, that they
a bill have been set apart for its satisfaction and that they
b. Promise made before it is drawn shall be so applied whenever the check is presented
c. Any person who, upon faith thereof, for payment. Where a check is certified by the bank
receives the bill for value (NIL, Sec. 135). on which it is drawn, the certification is equivalent
to acceptance (NIL, Secs. 187, 189; New Pacific
TIME FOR ACCEPTANCE Timber v. Seneris, G.R. No. L-41764, December. 19,
1980).
The drawer has 24 hours after presentment to
decide whether or not he will accept the bill. The PRESENTMENT FOR ACCEPTANCE
acceptance, if given, dates as of the day of
presentation (NIL, Sec. 136). Presentment for acceptance

Drawee bank is not entitled to 24 hours to decide It is the production or exhibition of a bill of exchange
whether or not to pay a check since a check is to the drawee for his acceptance or payment (also
presented for payment, not acceptance. includes presentment for payment).

RULES GOVERNING ACCEPTANCE GR: Acceptance is not necessary to render any party
to the bill liable (NIL, Sec. 143, par. 2).
Effect of accepting an instrument with a
qualified acceptance XPNs:

GR: When the holder takes a qualified acceptance 1. Where bill is payable after sight, or when it is
the drawer and indorsers are discharged from necessary in order to fix the maturity of the
liability on the bill. instrument;
2. When bill expressly stipulates that it shall be
The holder may refuse to take a qualified acceptance presented for acceptance; or
and if he does not obtain an unqualified acceptance, 3. Where the bill is drawn payable elsewhere than
he may treat the bill as dishonored by non- at the residence or place of business of the
acceptance (Sundiang Sr. & Aquino, 2014). drawee (NIL, Sec. 143, par. 1).

XPNs: The holder must either present it for acceptance or

negotiate it within a reasonable time, otherwise, the

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 NEGOTIABLE INSTRUMENTS LAW
drawer and all indorsers are discharged (NIL, Sec. 1. Where the drawee is dead, or has absconded, or
144). is a fictitious person not having capacity to
contract by bill;
TIME/PLACE/MANNER OF ACCEPTANCE 2. Where, after exercise of reasonable diligence,
presentment cannot be made; or
Proper presentment for acceptance 3. Where, although presentment has been
irregular, acceptance has been refused on some
It must be made: other ground (NIL, Sec. 148).

1. By or on behalf of the holder DISHONOR BY NON-ACCEPTANCE

2. At a reasonable hour on a business day
3. Before the bill is overdue; and Instances when a bill is dishonored by non-
4. To the drawee or some person authorized to acceptance
accept or refuse to accept on his behalf (NIL, Sec.
145). 1. When it is duly presented for acceptance and
such an acceptance is refused or cannot be
WHEN PRESENTMENT MUST BE obtained; or
MADE TO 2. When presentment for acceptance is excused,
Bill addressed to 2 All of them unless one has and the bill is not accepted (NIL, Sec. 149).
or more drawees authority to accept or
who are not refuse acceptance for all, in It is not sufficient that presentment for acceptance
partners which case presentment is excused, it is also necessary that the bill remains
may be made to him only not accepted.
(NIL, Sec. 145, [a]).
Duty of the holder where bill is not accepted
Drawee is dead Drawee's personal
representative (NIL, Sec. If within 24 hours after due presentment, the bill is
145, [b]). not accepted, the person presenting it must treat the
bill as dishonored by non-acceptance otherwise he
NOTE: Presentment is will lose the right of recourse against the drawer
merely permissive since it is and indorsers (NIL, Sec. 150).
excused by (NIL, Sec.148
[a]). Rules when a bill is dishonored by non-
acceptance
Drawee is adjudged To drawee or his trustee/
a bankrupt or assignee (NIL, Sec 145, [c]). 1. Right of recourse against all secondary party
insolvent or has accrues to the holder.
made an 2. No presentment for payment is necessary since
assignment for the dishonor of the instrument by non-payment is
benefit of creditors to be expected.
3. If the instrument is accepted after it has been
PRESENTMENT FOR ACCEPTANCE dishonored by non-acceptance, presentment
for payment is necessary upon maturity.
Failure to make such presentment will discharge the 4. In case of non-payment, holder must give the
drawer from liability or to the extent of the loss corresponding notice of dishonor; otherwise,
caused by the delay (NIL, Sec. 186; Republic of the secondary parties are discharged.
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961). Rights of a holder when bill is not accepted

However, delay in presentment may be excused When a bill is dishonored by non-acceptance, an

where the holder of a bill drawn payable elsewhere immediate right of recourse against the drawer and
than at the place of business or the residence of the indorsers accrues to the holder, and no presentment
drawee has no time with the exercise of reasonable for payment is necessary (NIL, Sec. 151).
diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls due Acceptance for honor
(NIL, Sec. 147).
It is an undertaking by a stranger to a bill after
Instances when presentment is excused protest for the benefit of any party liable thereon or

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 MERCANTILE LAW
for the honor of the person for whose account the 10. Judgment Note – this is a note to which a power
bill is drawn which acceptance inures to the benefit of attorney is added enabling the payee to take
of all parties subsequent to the person for whose judgment against the maker without the
honor it is accepted, and conditioned to pay the bill formality of a trial if the note is not paid on its
when it becomes due if the original drawee does not due date (De Leon, supra).
pay it (NIL, Sec. 161).
Q: Prudential Bank received from the CIR a Final
Requisites of acceptance for honor (WIS) Assessment Notice and a Demand Letter for
deficiency Documentary Stamp Tax for the
1. Must be in Writing taxable year 1995 on its Repurchase Agreement
2. Must Indicate that it is an acceptance for honor; with the BSP, Purchase of Treasury Bills from
3. Must be Signed by the acceptor for honor (NIL, the BSP, and on its SAP product. Prudential Bank
Sec. 162) protested the assessment on the ground that the
documents subject matter of the assessment are
PROMISSORY NOTE not subject to DST. It contends that its SAP is not
subject to DST because it is not included in the
Promissory note list of documents under Section 180 of the old
NIRC, as amended. Prudential Bank insists that
An unconditional promise in writing made by one unlike a time deposit, its SAP is evidenced by a
person to another, signed by the maker, engaging to passbook and not by a deposit certificate. In
pay on demand, or at a fixed or determinable future addition, its SAP is payable on demand and not
time, a sum certain in money to order or to bearer on a fixed determinable future. To support its
(NIL, Sec. 184). position, petitioner relies on the legislative
intent of the law prior to Republic Act (RA) No.
Special types of promissory notes 9243 and the historical background of the
taxability of certificates of deposit.
1. Certificate of deposit – a written
acknowledgment by a bank of the receipt of Prudential Bank further contends that even
money on deposit on which the bank promises assuming that its SAP is subject to DST, the CTA
to pay to the depositor or to him or his order or En Banc nonetheless erred in denying
to some other person or to him or his order, or Prudential Bank’s withdrawal of its petition
to a specified person or bearer, on demand or considering that it has paid under the IVAP,
on a fixed date, often with interest. which it claims is 100% of the basic tax of the
2. Bonds – an evidence of indebtedness issued by original assessment BIR. Prudential Bank insists
a public or private corporation which that the payment it made should be deemed
constitutes a promise, under seal, to pay money. substantial compliance considering the refusal
It runs for a longer period of time than a PN. of the CIR to issue the letter of termination and
3. Registered Bond – one payable only to the authority to cancel assessment. Is Prudential
person whose name appears on the face of the Bank’s contention tenable?
certificate.
4. Coupon Bond – one to which are attached A: NO. A certificate of deposit is defined as a written
coupons which entitle the holder to interest acknowledgment by a bank or banker of the receipt
when due. of a sum of money on deposit which the bank or
5. Bank Note – instrument issued by a bank for banker promises to pay to the depositor, to the
circulation as money payable to bearer on order of the depositor, or to some other person or
demand. his order, whereby the relation of debtor and
6. Due Bill - PN which shows on its face that one creditor between the bank and the depositor is
person acknowledges his indebtedness to created. A document to be considered a certificate
another. The word “due” is commonly used. of deposit need not be in a specific form. Thus, a
7. Mortgage Note – an instrument secured by passbook issued by a bank qualifies as a certificate
either a real (REM) or personal property of deposit drawing interest because it is considered
(Chattel). a written acknowledgement by a bank that it has
8. Title-Retaining Note – an instrument used to accepted a deposit of a sum of money from a
secure the purchase price of goods. It ordinarily depositor. Thus, it is subject to documentary stamp
provides that title to the goods shall remain in tax (Prudential Bank v. Commissioner of Internal
payee’s name until the note is paid in full. Revenue, G.R. No. 180390, July 27, 2011, in Divina,
9. Collateral Note – it is used when the maker 2014).
pledges securities to the payee to secure the
payment of the amount of the note.

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 NEGOTIABLE INSTRUMENTS LAW
Instances when a bill of exchange may be treated P35,147.59. He issued a post-dated PCIB check
as a promissory note (2015 Bar) in favor of SLI in the amount of P34,588.72. After
clearing, the amount of the check was
1. The drawer and the drawee are the same immediately debited by EPCIB from Tan’s
person; account thereby leaving him with a balance of
2. The drawee is a fictitious person; only P558.87. He thereafter issued three (3)
3. The drawee has no capacity to contract; checks payable to ASELCO, ANECO, and the other
4. The instrument is so ambiguous that there is payable in cash. When the latter were presented
doubt whether it is a bill or a note (Sundiang Sr. for payment, the three (3) checks were
& Aquino, 2014, citing NIL, Secs. 17[e] and 130). dishonored for being drawn against insufficient
funds. As a result, the electric power supply for
CHECK the two mini-sawmills owned and operated by
Tan, was cut off and it was restored only after
DEFINITION sometime. After trial, the RTC ruled in favor of
EPCIB and dismissed the complaint. On appeal
It is a bill of exchange drawn on a bank and payable the CA reversed the decision of the RTC. Is EPCIB
on demand (NIL, Sec. 185). liable due to its premature debiting of the post-
dated check, thereby affecting Tan’s business
A check must be presented for payment within a operations?
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the A: YES. The premature debiting of the postdated
loss caused by the delay. check by the bank which resulted to insufficiency of
funds that brought about the dishonor of two checks
Essential characteristics of checks causing the electric supply to be cut-off and affected
business operations indicates the negligence of the
1. They are drawn on a bank; and bank. For its failure to exercise extra-ordinary
2. Payable instantly on demand. diligence, it should be made liable in the case
(Equitable PCI Bank v. Arcelito B. Tan, G.R. No.
Q: Tan maintained a current and savings 165339, August 23, 2010, in Divina, 2014).
account with PCIB, now EPCIB, with a balance of

Check vs. Bill of Exchange

BASIS CHECKS BOE

Drawee Always drawn on a bank or banker May or may not be drawn on a bank and
against a previous deposit of funds need not be drawn against a deposit
Payability Always payable on demand Either payable on demand or at a fixed or
determinable future time (NIL, Sec.4)
Function Ordinarily intended for immediate Intended for circulation as instrument of
payment credit
Presentment for Must be presented for payment within a Must be presented for payment within a
Payment reasonable time after its issue(NIL, reasonable time after its last negotiation
Sec.186) (NIL, Sec. 171)
Discharge of When a check is accepted or certified, the They remain liable despiteacceptance
Liability drawer & indorsers are discharged from (NIL, Sec. 84)
liability thereon (NIL, Sec. 188)
Effect of the Death Death of the drawer of a check with the Death of the drawer of an ordinary bill
of the Drawer knowledge of the bank revokes the does not revoke the authority of the
authority of the bank to pay. drawee to pay.
Presentment Need not be presented for acceptance Must be presented for acceptance in
for Acceptance (NIL, Sec. 185) certain cases (NIL, Sec. 143)

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 MERCANTILE LAW
Q: A check was dishonored due to material 1. Cashier’s Check – a BOE drawn by the bank upon
alteration. The creditor then filed an action itself and is accepted at its issuance. It is usually
against drawee bank for the amount. Will the signed by the cashier of the bank.
action prosper? 2. Manager’s Check – a BOE drawn by the bank
upon itself and is accepted at its issuance and
A: NO. If a bank refuses to pay a check signed by a manager on behalf of a bank.
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections A manager’s check is as good as cash. It is a
185 and 189 of the NIL, sue the bank. The payee check drawn by the bank against itself. It is
should instead sue the drawer who might in turn deemed pre-accepted by the bank from the
sue the bank. This is so because no privity of moment of issuance. The check becomes the
contract exists between the drawee-bank and the primary obligation of the bank which issues it
payee (Villanueva v. Nite, G.R. No. 148211, July 25, and constitutes its written promise to pay. By
2006). issuing it, the bank in effect commits its total
resources, integrity and honor behind the check
NOTE: A check of itself does not operate as an (Metrobank and Trust Company vs Chiok, GR No.
assignment of any part of the funds to the credit of 172652, November 26, 2014). (2015 Bar)
the drawer with the bank, and the bank is not liable
to the holder, unless and until it accepts or certifies 3. Certified Check – Drawn by a depositor upon
the check (NIL, Sec. 189). funds to his credit in a bank which an officer of
a bank certifies will be paid on presentation.
Stopping payment 4. Crossed Check – Done by writing 2 parallel lines
on the left top portion of the check. The
The drawer has the right to order the drawee to stop marking signifies that the bank should pay only
payment of a check and this right flows from the rule with the intervention of the company only.
that the issuance of a check by itself is not an 5. Memorandum Check – A check with
assignment of funds by the drawee. If a bank pays a “Memorandum” written on its face. The writing
check after it has been notified to stop payment, it signifies that the drawer engages to pay the
pays in its own responsibility and will not be bona fide holder absolutely, without any
permitted to charge the account. The drawer may condition concerning its presentment.
countermand payment if he has a valid defense 6. Traveler’s Checks – Instruments purchased from
against the holder of the check. Thus, banks or express companies which can be used
countermanding of a check is proper where the like cash upon the second signature by the
payee failed to deliver the goods that he was purchaser (De Leon, supra).
supposed to deliver (Sundiang Sr. & Aquino, 2014,
citing Bataan Cigar and Cigarette Factory v. CA, GR. Crossed check
No. 93048, March 3, 1994).
A crossed check is a check with two (2) parallel
Effect of erasure or alteration on checks lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
Pursuant to Philippine Clearing House Corporation payment must be made to the right party; otherwise
Memorandum Circular No. 15-460A effective January the bank has no authority to use the drawer's funds
4, 2016, the following shall no longer be eligible or deposited with the bank.
acceptable for clearing:
The purpose is to insure payment to the payee. It
a. Any check that shows or indicates on its face can only be deposited but may not be converted into
erasure or alteration regardless of any cash by the drawer. Crossing a check does not
signature or initials that appear to indicate destroy its negotiability but the check may be
authorization of the alteration or erasure; or negotiated only once – to one who has an account
b. Does not indicate the date, payee, amount with the bank (De Ocampo v. Gatchalian, G.R. No. L-
payable in figures, amount payable in words, or 15126, November 30, 1961).
signature of the drawer
The effects of crossing a check are:
KINDS 1. That the check may not be encashed but only
deposited in the bank;
Special types of checks 2. That the check may be negotiated only once- to
one who has an account with a bank;
3. That the act of crossing the check serves as a
warning to the holder that the check has been

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 NEGOTIABLE INSTRUMENTS LAW
issued for definite purpose so that he must On the other hand, Ramos filed an Answer
inquire if he has received the check pursuant to denying any knowledge of Balmacedas scheme.
the purpose. Otherwise, he is not an HIDC (State The RTC issued a decision in favor of PCIB. On
Investment House v. IAC, G.R. No. 72764, July 13, appeal, the CA dismissed the complaint against
1989). Ramos. According to the CA, the mere fact that
Balmaceda made Ramos the payee in some of
Q: Po Press issued in favor of Jose a postdated the Managers checks does not suffice to prove
crossed check, in payment of newsprint which that Ramos was complicit in Balmacedas
Jose promised to deliver. Jose sold and fraudulent scheme. Is PCIB itself at fault as
negotiated the check to Excel Inc. at a discount. employer?
Excel did not ask Jose the purpose of crossing
the check. Since Jose failed to deliver the A: YES. While its manager forged the signature of
newsprint, Po ordered the drawee bank to stop the authorized signatories of clients in the
payment on the check. Efforts of Excel to collect application for manager’s checks and forged the
from Po failed. Excel wants to know from you as signatures of the payees thereof, the drawee bank
counsel: also failed to exercise the highest degree of diligence
required of banks in the case at bar. It allowed its
a. Whether as second indorser and holder of manager to encash the manager’s checks that were
the crossed check, is it a holder in due plainly crossed checks. A crossed check is one
course? where two parallel lines are drawn across its face or
b. Whether Po’s defense of lack of across its corner. Based on jurisprudence, the
consideration as against Jose is also crossing of a check has the following effects: (a) the
available as against Excel? (1994, 1995, check may not be encashed but only deposited in the
2005 Bar) bank; (b) the check may be negotiated only once —
to the one who has an account with the bank; and
A: (c) the act of crossing the check serves as a warning
a. Excel Inc. is not a holder in due course. The act to the holder that the check has been issued for a
of crossing the check imposes upon the holder definite purpose and he must inquire if he received
thereof the duty to ascertain the indorser’s, title the check pursuant to this purpose; otherwise, he is
to the check or the nature of his possession or not a holder in due course. In other words, the
the purpose for which it was issued. Excel is crossing of a check is a warning that the check
guilty of gross negligence amounting to legal should be deposited only in the account of the
absence of good faith for its failure to inquire payee. When a check is crossed, it is the duty of the
from Jose the purpose for which the three collecting bank to ascertain that the check is only
checks were crossed despite the warning of the deposited to the payee’s account. In complete
crossing, hence, it is not deemed a holder in due disregard of this duty, PCIB’s systems allowed
course. Balmaceda to encash 26 manager’s checks which
b. YES, the defense of lack of consideration as were all crossed checks, or checks payable to the
against Jose is also available as against Excel. “payee’s account only.” (PCIB v. Balmaceda and
For not being a holder in due course, Excel is Ramos, G.R. No. 158143 September 21, 2011, in
subject to personal defenses as if the check DIvina, 2014).
were non-negotiable, such as lack of
consideration between Po Press and Jose. In Crossed check with notation “Account Payee
this case, Jose’s failure to deliver the newsprint Only”
resulted in the absence of consideration for the
issuance of the check. Consequently, Po Press A crossed check with the notation account payee
cannot be made liable to pay the face value of only can only be deposited in the named payees
the check. account. It is gross negligence for a bank to ignore
this rule solely on the basis of a third partys’ oral
Q: PCIB filed an action against Balmaceda, it representations of having a good title thereto.
alleging that between 1991 and 1993, by taking
advantage of his position as branch manager, he The fact that a person, other than the named payee
fraudulently obtained and encashed 31 of the crossed check, was presenting it for deposit
Managers checks in the P10,782,150.00. PCIB should have put the bank on guard. It should have
moved to be allowed to file an amended verified if the payee authorized the holder to
complaint to implead Rolando Ramos as one of present the same in its behalf or indorsed it to him.
the recipients of a portion of the proceeds from The bank’s reliance on the holder’s assurance that
Balmacedas alleged fraud. Since Balmaceda did he had good title to the three checks constitutes
not file an Answer, he was declared in default. gross negligence even though the holder was

73
 MERCANTILE LAW
related to the majority stockholder of the payee. a complaint against Pentium and CD Bytes for
While the check was not delivered to the payee, the the payment of the dishonored check, will the
suite may still prosper because the payee did not complaint prosper? Explain (1996 Bar)
assert a right based on the undelivered check but on
quasi-delict (Equitable Banking Corporation v. A: The case will prosper as against the CD Bytes, the
Special Steel Products, G.R. No. 175350, June 13, 2012, immediate indorser but not as against Pentium
in Divina, 2014). Company. The effect of crossing a check relates to
the mode of its presentment for payment which
Q: Distinguish clearly crossed checks from must be made by the holder, or by some person
cancelled checks (2004 Bar) authorized to receive payment on his behalf. Thus,
in the absence of due presentment, as in this case
A: A crossed check is one with two parallel lines where the check was not presented by the payee
drawn diagonally on the left portion of the check. On (CD Bytes) or the proper party authorized to make
the other hand, a cancelled check is one marked or presentment of the checks, the drawer (Pentium
stamped "paid" and/or "cancelled" by or on behalf Company) cannot be held liable. However, Fund
of a drawee bank to indicate payment thereof. House may recover from the immediate indorser, if
the latter has no valid excuse for refusing payment.
Q: On Oct 12, 1993, Chelsea Straights, a
corporation engaged in the manufacture of Stale check
cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed A check which has not been presented for payment
checks postdated 15 Mar 94 and 15 Apr 94 in full within a reasonable time after its issue. It is
payment therefor. On 19 Jan 94 Moises sold to valueless and thus, should not be paid. A check
Dragon Investment House at a discount the two becomes stale 6 months from date of issue.
checks drawn by Chelsea in his favor. Moises
failed to deliver the bales of tobacco as agreed Memorandum check
despite Chelsea’s demand. Consequently, on 1
Mar 94 Chelsea issued a “stop payment” order A memorandum check is an evidence of debt against
on the 2 checks issued to Moises. Dragon, the drawer and although may not be intended to be
claiming to be a holder in due course, filed a presented, has the same effect as an ordinary check
complaint for collection against Chelsea for the and if passed on to a third person, will be valid in his
value of the checks. Rule on the complaint of hands like any other check (People v. Nitafan, G.R.
Dragon. Give your legal basis. (1995 Bar) No. 75954, October 22, 1992).

A: The complaint should be dismissed. The act of When drawer of check discharged from liability
crossing the check imposes upon the holder thereof
the duty to ascertain the indorser’s, in this case 1. The check is not presented within a reasonable
Moises’ title to the check or the nature of his time after its issue;
possession. Failing in this respect, Dragon cannot be 2. The drawer suffers loss; and
deemed a holder in due course and as such, Moises 3. The loss suffered by the drawer is attributable
is subject to personal defenses as if the check were to the delay (De Leon, 2010).
non-negotiable, such as lack of consideration
between Chelsea and Moises for Moises’ failure to PRESENTMENT FOR PAYMENT
deliver the bales of tobacco. There being no
consideration for the issuance of the check, Chelsea TIME
cannot thus be made liable to pay the face value of
the check and this constitutes a defense not only A check must be presented for payment within a
against Moises but even against Dragon who is not a reasonable time after its issue (NIL, Sec. 186).
holder in due course.
EFFECTS OF DELAY
Q: On March 1, 1996, Pentium Company ordered
a computer from CD Bytes, and issued a crossed Effects of delay
check in the amount of P30,000 post-dated Mar
31, 1996. Upon receipt of the check, CD Bytes 1. The drawer will be discharged from liability
discounted the check with Fund House. On April thereon to the extent of the loss caused by the
1, 1996, Pentium stopped payment of the check delay. (ibid.)
for failure of CD Bytes to deliver the computer. 2. The indorser shall be discharged from liability
Thus, when Fund House deposited the check, the (PNB vs. Seeto, G.R. No. L-4388, August 13, 1952).
drawee bank dishonored it. If Fund House files

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 INSURANCE CODE
Q: X and Y are disputing over a property. To instrument, then ownership of the check was not
settle the dispute, they entered into a transferred to SMC.
compromise agreement by which they agreed to
have the property in dispute be sold. X bought The evidence of SMC failed to establish that the
the property and delivered a manager’s check to check was given in payment of the obligation of
Y. Y refused to accept the same, hence it was Puzon. There was no provisional receipt or official
consigned with the court. Y later accepted the receipt issued for the amount of the check. What
check and three years after acceptance, he filed was issued was a receipt for the document, a
an action alleging that the check payment did POSTDATED CHECK SLIP.
not amount to legal tender and that he never
even encashed the check. Is the contention of Y Furthermore, SMC’s demand letter sent to Puzon
tenable? states: “As per company policies on receivables, all
issuances are to be covered by post-dated checks.
A: NO. It is true that a check is not a legal tender and However, you have deviated from this policy by
while delivery of a check produces the effect of forcibly taking away the check you have issued to us
payment only when it is encashed, the rule is to cover the December issuance. Notably, the term
otherwise if the debtor (X) was prejudiced by the payment was not used instead the terms covered
creditor’s (Y) unreasonable delay in presentment. and cover were used” (San Miguel Corporation v.
Acceptance of a check implies an undertaking of due Bartolome Puzon, Jr., G.R. No. 167567, September 22,
diligence in presenting it for payment. If no such 2011).
presentment was made, the drawer cannot be held
liable irrespective of loss or injury sustained by the INSURANCE CODE
payee. Payment will be deemed effected and the
obligation for which the check was given as
conditional payment will be discharged (Pio Laws governing contracts of insurance in the
Barretto Realty Development Corp. vs. Court of Philippines
Appeals, G.R. No. 132362, June 28, 2001).
1. R.A. 10607
Q: To ensure payment and as a business 2. New Civil Code
practice, SMC required Puzon to issue postdated 3. Special Laws
checks equivalent to the value of the products
purchased on credit before the same were CONCEPT OF INSURANCE
released to him. Said checks were returned to
Puzon when the transactions covered by these Contract of insurance
checks were paid or settled in full. Puzon
purchased products on credit and issued to SMC, It is an agreement whereby one undertakes for a
two (2) BPI checks to cover the said transaction. consideration to indemnify another against the loss,
During on of his visits to the SMC Paranaque damage or liability arising from an unknown or
Sales Office, he allegedly requested to see BPI contingent event. (IC, Sec. 2[a])
Check No. 17657. However, when he got hold of
BPI Check No. 27903 which was attached to a A contract of insurance, to be binding from the date
bond paper together with BPI Check No. 17657, of application, must have been a completed contract
he allegedly immediately left the office with his (Perez vs. CA, GR No. 112329, January 28, 2000).
accountant, bringing the checks with them. SMC Thus, it must have all the essential elements of a
sent a letter to Puzon, demanding the return of valid contract as enumerated in Art. 1318 of the New
the said checks. Puzon ignored the demand Civil Code:
hence SMC filed a complaint against him for
theft. The investigating prosecutor 1. Subject matter in which the insured has an
recommended the dismissal of the case for lack insurable interest;
of evidence. On appeal, the CA agreed with the 2. Consideration, which is the premium paid by
prosecutor. Were the prosecutor and the DOJ the insured, for the insurer’s promise to
correct in finding no probable cause for theft? indemnify the former upon the happening of
the event or peril insured against;
A: Yes. If the subject check was given by Puzon to 3. Meeting of minds of the parties.
SMC in payment of the obligation, the purpose of
giving effect to the instrument is evident thus title “Doing an insurance business” or “transacting
to or ownership of the check was transferred upon an insurance business” (ISRA)
delivery. However, if the check was not given as
payment, there being no intent to give effect to the

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