Commercial+Law+Review+Lecture

CommercialLawReview

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If it does not comply with the requisites of negotiability, it is still a contract, but not covered by the NIL.

Glenn Tuazon, 4-A Atty. Jack Jimenez SY 2010-11

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Either:

4 Quizzes (50 each) + MT (100) + Finals (100) divided by 4 = Final Grade

Part 1: NegotiableInstrumentsLaw •

HISTORY: contrast a negotiable instrument with a non-negotiable PN: o

First objection: a person stepping into the shoes of the seller is exposed otherwise to the defenses that the buyer may launch against the seller 

o

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Law’s solution – exempt from personal defenses

Payable to order – negotiated by indorsement, and delivery

o

Payable to bearer – delivery is sufficient

o

N.B. If payable to a specific person, it is not negotiable

Four basic contracts involved: o

1. Making

o

2. Drawing

o

3. Negotiating

o

4. Accepting

Second objection: “I don’t know the maker, I just know the one negotiating it to me. How will I know he’s solvent?” 

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•

o

Law’s solution – will make the indorser liable regardless (Accumulation of secondary contracts) The more indorsers, the more you can sue

 o •

1 – what makes an instrument negotiable

o

2 – rights and obligations of parties

Two basic forms: o

Promise to pay (PN)

o

Order to pay (bill of exchange)

N.B. But for all, there must be delivery

Basic principles: NIL is for justice. o

1. Bad faith: So if a person is in BF, he cannot invoke defenses. (Ex. Issued a negotiable instrument to pay for a car that is defective. The indorsee knows that the car is defective, he is in bad faith.)

o

2. Estoppel – ex. A father allowing a son to steal a check and forge his signature is estopped from denying it

o

3. Comparative fault

Two general parts in the law: o

To show consent



If a bank honors a check with a forged signature, the bank is considered negligent too



o

But if the negligence of the drawer outweighs the negligence of the bank, the law shifts the fault to the drawer



Need not use exact words, even equivalent words are fine



Creates a NEW obligation to pay, not a mere acknowledgement of an old debt

4. The law will only protect you from personal defenses if you are a holder in due course (Sec. 52) 

Good faith

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With value

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Before overdue (see below)



With no notice of defenses

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o

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5. General rule: there must be demand , before an instrument becomes overdue. Exception: If time is of the essence. 

Ex. Reserve requirements of banks must be kept afloat, so overnight, banks sometimes transact with each other



“An overdue instrument is shouting to the high heavens – I have been dishonored!”

Requirements – found in Sec 1. 2-9 are elaborations of such. o

1a. It must be in writing

o

1b. It must be signed – symbol of consent

o



If one signed another name or a symbol, it will bind him if he intended for it to bind him



Location is immaterial

2a. Must contain a promise or order to pay

o

o

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Exception 1: date of payment is mentioned, or at least, a date of maturity

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Exception 2: insertion of “or order” (words of negotiability) in the old terms

Authorization to pay or a mere request does not create a binding obligation to pay.

2b. The promise to pay or order must be unconditional 

Do not look into evidence aliunde. You must confine yourself within the four corners of the instrument to deem whether it is absolute.



Fall back on obligations and contracts – distinguish between uncertain events and certain events, although indeterminate (ex. Moment of death of mother-in-law)

2c. Sum certain, and payable in money 

Because it is meant to be a substitute for money



Also, specify the denomination. number.

Cannot just be a

o

3. Payable on demand or on a determinable future time

o

4. Payable to order or bearer 

Need not use exact words



But there must be reasonable certainty so people know from whom they could demand payment

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Ex. instead of “order”  pay to X or his indorsees; pay to X or his assigns

o

If there is an acceleration clause – failure to pay an installment will make the entire balance due and demandable.

Ex. instead of “bearer”  pay to X or holder; pay to X or possessor

o

It is now valid to stipulate payment in foreign currency.

o

If you talk about an exchange rate, you have to talk about at least 2 currencies. It cannot be just one.

o

Under Civil Code, general rule is attorney’s fees are not recoverable, except when there is written stipulation. Stipulating such makes the NI more attractive.

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o

5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty 

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If name of the drawee is left blank, it is an incomplete instrument which can be filled up as a remedy

Most cases involve fraud, by taking advantage of the features of the law.

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Sec 2: when a sum is certain o

Even when there is a stipulation of interest. writing.

o

The stipulated rate controls – there is no more ceiling on interest rate. But it is unconscionable, it is void, and the rate is reduced to 12% (in circular 416).

It must be in

o

If there is stipulated interest, without a rate, 12% as well.

o

If payment is by installment, for the instrument to be valid, the amount of installments must be indicated and the date of maturity of each installment is specified. 

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Ex. “I will pay reasonable attorney’s fees in case there is failure to pay” – is this a sumcertain? Yes. Because you know how much is due at the date of maturity (it doesn’t matter what you pay after maturity). This is the reckoning point – at the date of maturity, is the sum certain? ALSO, stipulations on attorney’s fees is always subject to court control anyway.

Sec 3: promise is unconditional o

“Promise to pay Jose Cruz or order P100,000 in 10 installments.”  not negotiable

You have to specify both AMOUNT and WHEN EACH is due. You cannot just give the starting point (ex. Nov 2005)

o

Instructions on how payment will be entered into the books of account does not affect unconditional nature 

Neither does “reimburse yourself” affect



TEST: it must indicate the source of reimbursement, not source of payment. The latter is not negotiable.

Statement of how the original obligation came about does not affect conditionality

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o

o

•

o

Elizalde: Person bought cars. He issued a PN, secured with a CM over vehicles. The PN said that the payment is secured by the CM. It was negotiated to Elizalde by the car selling company. Elizalde sought to collect. Issue is whether the statement of security (CM) made it non-negotiable. HELD: Negotiable, because the promise to pay is still conditional, and is not dependent to the CM. Test: does the promise to pay rely on the terms and conditions of the security? If so, it is not negotiable. Else, it is negotiable. Abubakar: A Treasury Warrant is not negotiable. It is payable out of a particular fund, so you do not apply Sec. 66. “No money should be paid out of the Treasury without an appropriation for that purpose” (Constitution). 

o

But it will become non-negotiable if mention of the prior contract (ex. deed of sale) makes the NI subject to the terms and conditions of the contract. This makes it conditional.

FACTS here: X deposited treasury warrants with a rural bank. The rural bank deposited with Metrobank. Even before the treasury warrants were cleared by the clearing house, Metrobank allowed withdrawal. The warrants were spurious. Metrobank is suing the rural bank to recover, since the rural bank warranted the treasury warrants by negotiating it to Metrobank. HELD: Metrobank is wrong, because the treasury warrants are not negotiable instruments.

BUT a reference from which fund the obligation would be paid does not destroy negotiability if payment is not limited to come from such fund.

Sec 4; payable at determinable future time

o

1st situation: “Pay Jose Cruz or order… if the holder feels insecure, he may demand that I post reasonable securities, and if I fail to do so, he can declare the entire balance due and demandable.” 

One view: non-negotiable – because date of maturity becomes uncertain because holder can accelerate payment, and there is an additional undertaking other than payment of money.



Other view: negotiable – because the undertaking to put up a security is merely an accessory obligation. The date of maturity is not uncertain because acceleration is within control of the maker; he can prevent it by complying with the additional security. (better view)

2nd situation: “same… if the holder feels unsecure, he can declare the entire balance due and demandable.” 

o

It is not negotiable, because here, the holder has the absolute option to make the obligation due and demandable.

Differentiate: 

When the maker may choose to pay before a certain date, it is still negotiable (ex. “on or before June 15”  maker can pay before June 15 at his option) •



Effect: all other secondary contracts are discharged. It benefits everybody.

When the holder may absolutely choose to have the obligation due, it is not

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Effect: everybody becomes secondarily liable by ripening their obligation. Thus, this is not valid.

o

If hinged upon a contingency, non-negotiable even if the event or condition happens.

o

Philippine Education v. Soriano: A money order is not negotiable, because although it says “pay to the order of,” under Postal Regulations, obligation to pay is conditional, depending on different grounds where the post office can refuse to pay. Also, it can only be indorsed once.

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o

GENERAL RULE: Other obligation or undertaking aside from payment of money makes it non-negotiable (“secured by CM over my car, which I will keep in good condition”)

Sec 6: omissions which do not affect o

1. Not dated

o

2. Failure to mention consideration 

Sec 5: additional provisions that do not affect negotiability

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If option is upon holder to demand either cash or rice, it is still negotiable because the holder can ALWAYS demand money

It is presumed in this contract

o

3. Does not specify place where it is drawn or payable

o

4. Bears a seal

o

5. Designates currency in which payment will be made

Sec 7: When it is payable on demand

o

EXCEPTIONS:

o

Upon sight or presentation

o

Authority for holder to foreclose pledge/CM or collateral securities

o

Instrument is silent on when payment is made

o

When it is overdue

o

Authorizes confession of judgment if instrument not paid upon maturity 

o

o

N.B. the SC said, however, this is a void stipulation

Waiver of benefit of law

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As to the maker, he is discharged

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BUT as to the indorser, it is upon demand

Sec 8: When it is payable to order

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Waiver of notice of dishonor

o

[It may be upon order of]



Waiver of venue

o

1. Order of payee who is not maker, drawer, or drawee

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Waiver of exemption from execution

o

2. Drawer

Holder can require something other than payment of money



Ex. Jose Cruz writing a check saying “Pay to the order of Jose Cruz” – this is better than making a



check paid to cash, which anyone can encash if lost and found 

o

3. Drawee

o

4. Two or more payees jointly 

o

Ex. Pay to the order of Jose Cruz AND Manuel Santos

5. One or some of several payees 

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In this example, it is not complete until Jose indorses it, because there has to be delivery (at least two parties to a contract)

Ex. Pay to the order of Jose Cruz OR Manuel Santos

o

6. Holder of an office for the time being (ex. Treasurer of the city of Makati)

o

If the drawee is not indicated with reasonable certainty, then it is not negotiable.

Sec 9: When it is payable to bearer o

1. Expressed as such 

Caltex: [unclear facts] Caltex required collateral for a credit line. Requestor had as security a time deposit (Security Bank). Caltex accepted it. [yada yada yada] Bottomline, requestor maxed his credit line and disappeared. Caltex and Security bank are in dispute. HELD: It says that the deposit is payable to the depositor, and the depositor is bearer. It is a bearer instrument.

[As explained by Phil. Law Library]: The Certificates of Time Deposit are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. (Caltex)

o

2. To person or bearer

o

3. Order of fictitious person 

GENERAL RULE of the following three cases: there must be intent by the maker or drawer of the NI that the instrument be issued to a fictitious person (knowledge is paramount)

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Weller and Martin: Either partner can sign or issue checks. X wanted to steal money from the partnership. He drew a check payable to a corporation where he was just the corporate secretary. He was just the corp. sec., and was not authorized to indorse; but he indorsed the check to himself nonetheless. Y, his partner, sued the bank for restoration of the amount. HELD: it is payable to bearer. The Drawer did not intend the payee (the Corporation) to get the proceeds of the check, EVEN IF the payee actually existed or not. It fell under this provision. •

Assume same facts. If, however, the company required two signatories to all checks, and X signed it with intent to steal,

and Y signed it not knowing X’s intent, then it does not become payable to bearer. For the payee to be fictitious, both must have same intent. 

American Sash: Had a payroll clerk, who prepares checks payable to employees. He then makes the officers sign the checks. Clerk padded payroll with ghost employees, had the officers sign the checks (the officers did not know that the employees didn’t exist), and the clerk collected money. Issue: is this payable to fictitious persons. These ghost employees did not actually exist. HELD: [N.B. first, the court found that there was forgery because the drawer did not know the payees were fictitious.] It was not a bearer instrument. The DRAWERS were the officers who signed the checks. Their intent controls. So the checks DID NOT become payable to bearer because they DID NOT KNOW that the ghost employees were not part of the payroll.

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Rodriguez v. PNB: Employees of PNB formed a savings and loan association (SLA). Rodriguez spouses meanwhile, had current accounts with PNB. Whenever the SLA lends to members, it issues postdated checks. But most of the time, the SLA does not have enough money. The borrowers thus endorse the checks to Rodriguez; in turn, Rodriguez rediscounts the checks (issuing checks lower than face value). The SLA has a policy: when a member has an outstanding loan, they cannot get another loan. So the officers who wanted to borrow more, to circumvent this, they made it appear that it is the other members who are borrowing. The SLA, in accordance with the usual procedure, issued postdated checks to the “supposed borrowers” (but really

for the officers). The officers indorsed the checks to Rodriguez. Rodriguez issued discounted checks. PNB found out about this and closed the SLA account. Meanwhile, the checks issued to Rodriguez, which bounced because the SLA account was shut down – since the checks they issued were cleared, and the checks issued to them were from a closed account. Contention of spouses: How can PNB accept the indorsement of those checks, when the ones who indorsed were the officers and not the supposed borrowers. Contention of PNB: it is intended for fictitious persons, since there was no intent that they actually get the money (even if the supposed borrowers really exist). HELD: Rodriguez spouses won. For the checks to be considered as payable to fictitious persons, the fact must be known to the person issuing the negotiable instrument. Here, the Rodriguez spouses did not know that the supposed payees were not the real borrowers (when it fact it was the officers). PNB must reinstate the amounts to the Rodriguez spouses. o

4. Name of payee is not name of existing person 

o

Classic example: payable to cash

5. Last indorsement is in blank

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Sec 12: Ante-dating or post-dating does not affect negotiability

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Sec 13: o

When the date of acceptance is not inserted by the drawee, the holder may insert date of issue or date of acceptance

o

Whatif he placesthe wrongdate?

o

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If negotiated to a holder in due course, that is the correct date as far as the holder in due course is concerned – even if it is not

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Purpose: the law protects a holder in due course, who is relying on that date in good faith

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o

o  o

A check drawn by X says “Pay to the order of Y P10000 thirty days after sight.” It was accepted by E on Sept. 15, but did not date the instrument. Y negotiated it to Z, telling the latter that the instrument was accepted November 1. Z placed in the instrument this date. •

Whatare the two requirementsfor this instrumentto be enforceable? 

1. It must be filled up in accordance with the authority given to him

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2. It must be filled up within reasonable time

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o

X gave a check with a blank amount to Y, telling Y that he should fill it up according to what X ultimately owes Y, but not over P50000. X owes Y P30000, but Y put P60000. 

Canhe collect fromE? o

No. He is not a HIDC.

Sec 14: When it is wanting of a material particular – the person possessing it has prima facie authority to fill up the blanks

CanY collectP60000fromX? •

Yes, even if it is more than 30 days from acceptance. Z is a HIDC and the Nov 2 date is true as to him.

If Y inserted the wrong date instead and did not indorseit to Z, can he collectfromE? o

o

The amount inserted by the bank controls.

Not valid. Cannot claim.

SAMPLE QUESTION: 

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In a case, a person signed an instrument in blank and left it with the bank. The bankfilled it up with an amount. Whathappens? 

But what if the one who put the wrongdate presentedit for paymentto the acceptor/drawee?

CONTROLLING FACTOR: The blank or incomplete instrument must have been delivered with intent that the holder turn it into a negotiable instrument



Y indorsed the check to Z, a HIDC. Can Z collect P60000 fromX? •

o

No. It was beyond the authority given him.

Yes. The defense does not apply to him.

Case: X works abroad, but allows property to be rented out, and the payments are deposited in an account. The husband (retired lawyer) however withdraws money from that account for his own support, to X’s ire. X asked her inaanak to hire a lawyer for this purpose. The inaanak hired a lawyer but subsequently terminated the services so she asked for a return of the acceptance fee. The lawyer said that he will return the fee in installments. X asked the inaanak to sign a piece of paper claiming that it was a “witness” signature that the lawyer

will pay X back. But X actually made it appear that it was a PN where the inaanak promised to pay money to her five years prior, corresponding to the attorney’s fees. HELD: The court believed the contention that the inaanak never intended for the signature to be for a PN. There must be intent to leave a signature to make a PN. •

employee used it to pay for somebody else’s local taxes. HELD: There was no payment because BPI never delivered it to the city treasurer, so BPI cannot claim to have paid. o

Associated Bank: Somebody was selling RTW clothes, and shopping malls (buyers) issued crossed checks. Somehow, the checks fell into the hands of someone else, who indorsed it to someone else, and were deposited to Associated Bank. The seller was wondering why she wasn’t being paid. [If you are legalistic, the RTW seller must sue the shopping malls, etc., because the checks were not delivered to her. In turn, the shopping malls, etc. must sue the drawee banks, and then the drawee banks sue Associated Bank why it cleared the checks. HELD: The SC allowed the RTW seller to sue Associated Bank directly because it cleared the checks. (Same in Westmont Bank case)

o

It may be showed that delivery between immediate parties is conditional, or for a special purpose.

o

Ex. A godson is taking the CPA test, but X is not in the Philippines. He gave P10,000 check on the condition that he pass the test. The godson cannot enforce payment on the check. BUT if the godson negotiates the check to a holder in due course, the law will protect the HDC.

Sec 15: incomplete and undelivered instrument o

Will not be a valid contract in the hands of any holder, as against the person whose signature was placed on the instrument prior to delivery (real defense) 

o

BUT indorsers are liable

Ex. Left signed checks, and an employee took them and filled up amounts.  Incomplete and undelivered instrument.

o

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Ex. Officers of country club went abroad and left signed checks for payment of checks. Abusive employees put their own names and signed their own names. HELD: By presigning checks and leaving them with employees, it became possible for them to do this. The officers were negligent and shared in the loss (60-40).

Sec 16: Complete but undelivered instruments. o

NI is incomplete until delivered

o

Ex. You cannot sue if you hold checks that were not delivered to you. You never acquired a right over them. 

o

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Sec 17: Rule of interpretation o

Words prevail over figures 

BUT a HIDC will not be subject to this defense (Like Sec. 14)

BPI Family Savings: BPI issued a check payable to City Treasurer of Iloilo to pay for local taxes. They did not deliver it to the treasurer, and just gave it to the employee. The

o

Romero: Amount indicated in words is One Million Two Hundred Pesos. Amount in figures: 1,200,000. Balance in the account is 1,100,000. The check bounced. The words prevailed.

Payment of interest  

Runs from date from instrument



To avoid liability as signing agent:

o

Not dated  assumed to be dated from time of issue

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A) agent must disclose he is an agent

o

Written > printed provisions

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B) disclose his principal

o

If ambiguous whether a bill or note, the holder has the option to treat it as either

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C) he has authority

o

Ambiguous role of signature  deemed an indorser 

o

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o

Or if none, date of issue

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Minority/incapacity of corporation o

Maker of a PN cannot refuse to pay to a holder on the ground that the indorser is a minor. Neither can he raise the defense that the prior indorsee is a minor. ONLY the minor can raise the defense of minority, no one else.

o

Can apply this principle by analogy to other incapacitated persons (Ex. corporation action ultra vires)

o

Exceptions:

Because the indorser has the least liability among all characters in a NI

If “I promise to pay” note is signed by two or more persons  deemed solidarily liable

Sec 18 – o

o

GENERAL RULE: person whose signature does not appear on the instrument is not liable

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1. The minor actively misrepresented his age and it appears that he is physically of such age

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2. Minor kept fruits/benefits

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3. Minor spent the money in good faith

EXCEPTIONS: 

1. Duly authorized agent signing for principal

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2. Forger liable for signature he forges

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3. Signature in separate paper (“allonge”) because the instrument has no more space

Sec 23 – Forgery

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4. Estoppel

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5. Signing under trade/assumed name

o

The person whose signature is forged did not give consent to the contract 

o 

There are different instances of forgery:

6. Instrument can be negotiated by mere delivery 

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Sec 19/20

Except when he is estopped

1. Signature is copied •

May be done by tracing.

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o

Indorsing an instrument that need not be indorsed leads to a warrant of such

2. Fraud in esse contractus •

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Fraud in factum.

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Misled to signing instrument, not knowing it was a negotiable instrument, when he thought it was something else.

3. Duress amounting to forgery •

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o

Practices imitating a specimen signature

It must be duress in the execution (ex. Grab the hand of the intimidated), NOT duress in inducement

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[ORDER INSTRUMENT] A-B-C (signature forged by D)-D-E o

E cannot collect from A or B (since it is an order instrument, there is a cut-off to A and B, since C’s signature is forged)

o

E cannot collect from C (no consent)

o

E can collect from D as indorser

A B or bearer-C (signature forged by D)-D-E

4. Fraudulent impersonation •

In this case, in general, it is NOT a forgery

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The person to whom the note was given is presumed to be intended to receive the note (because he knew the intended payee)

o

NOTE: This is an instrument payable to bearer; delivery is sufficient, no need for indorsement.

o

CanE collectfromA? 

Depends. If E is not a holder in due course, A will claim that there was no delivery of complete instrument by B since C stole it from him



If E is a holder in due course, he may collect from A since it is payable to bearer

Different situations: 

1. Promissory note •

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A (signature forged by B)-B-C-D-E o

E cannot collect from A

o

E can collect from B (forger)

o

E can collect from C, D as indorsers (warranted the instrument)

EVEN if it is a bearer instrument, then A (signature forged by B)-B-C-D-E

o

CanE run after C? 

No, C’s indorsement was forged.

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Neither can he run after A or B, because he cannot trace his right to them [cut off by the forgery].

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o

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He can run after D, because by indorsing the instrument (even if bearer), he warranted it.

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NOTE: if a bearer instrument is indorsed even if it is not needed, the indorser warrants the instrument as what it purports to be.

CanE run after B? o

Yes. Forger

o

CanE run after C and D? 

2. Bill of Exchange •

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A. Drawer o

1. Order  

o

•

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2. Bearer 

Accepted



Unaccepted

No. No consent.

CanE run after X? o

Yes.

o

Sec. 62, the acceptor admits the instrument is genuine when he accepts and pays.

o

Whatis X’s remedy?

But the same answers apply for the others.

NOTE: Apply the same rules on indorsement of a bearer instrument  if there was indorsement even if there is no need to do so, there is warrant of the genuineness of the instrument by the indorsers.

Unaccepted

A’s signature on an order instrument was forged by B and then indorsedto C-D-E. X acceptedas drawee.Can E collect fromA? o

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Yes. Warranted by indorsement

NOTE: If X did not accept, then he cannot be recovered from, because he did not accept. o

Accepted

To sue B, the forger.

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NOTE: If it’s a bearer instrument, even if C’s indorsement to D is forged, then the payee can still collect from A (because he just promised to pay the bearer). Remedy of the acceptor is to just run after the thief.

A issueda BOE payable to B or order. B C. D forged C’s signature  D  E. X acceptedand paid. •

X cannot debit A’s account, because A ordered to pay B or order. C did not order X to pay D. B’s order was cut off by forgery.

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X can get money back from E because X only admits A’s signature is genuine (which it is), and not the indorsers.

•

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E cannot run after A (cut off) or B or C. He can run after D, who forged.



Drawer can check the statements sent by the bank to him

A issuedBOEpayableto B or bearer. Indorsedto C. C’s signaturewas forged,indorsedto D, thenE. X acceptedthe BOE. Whathappens?



Test: If the drawer had acted quickly, would the drawee have been able to stop or freeze payment?

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X can debit A’s account because A promised to pay bearer.

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X cannot get back the money from E. E is the bearer.

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C can run after D, the forger.

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PNBv Quimpo: o

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A issuedBOEpayableto B or bearer. Indorsedto C. C’s signaturewas forged, indorsed to D, then E. X did not accept the BOE. What happensto E’s claim? •

Cannot go after X, did not accept.

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Cannot go after C, no consent.

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Can go after D, indorsed (warranted)

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Cannot go after B, cannot trace title to him since C’s signature is forged.

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Can go after A if E is a HDC. Cannot go after A if E is not HDC.

EXCEPTIONS to general rules: o

1. When there is estoppel (ex. father saying that his son’s forgery of his signature was genuine)

o

2. When there is unreasonable delay by the drawer in informing the drawee about the forgery

Left check book with his friend, who was in the car. The friend forged his signature in a check book left lying there. HELD: Not negligent; no reason to suspect friend of bad faith.

BPI v. CasaMontessori: o

An external auditor was hired to reconcile records. He managed to forge the signatures of the officers of Casa Montessori over a long time. Sued bank, which refused to reinstate the amounts. Bank argued Casa was negligent. HELD: An external auditor is not an employee. It is an independent contractor, so you cannot blame Casa for negligence in hiring an employee.

o

Estoppel does not apply, because Casa had no way to know the auditor was stealing money, because he was precisely the one tasked with safeguarding the school records and comparing with bank records.

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Cases on Comparative fault principle

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SecurityBankv. TriumphLumber: o

Robbers broke into Triumph Lumber. Check book was stolen, but triumph did not report it to the bank. Robbers were able to cash checks. HELD: Triumph was negligent for not reporting the theft.

o

But JJ believes that the bank should have been held negligent for authenticating the checks.

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o

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Ilusorio was leaving for abroad and he left his checkbook with his secretary, who he asked to reconcile bank statements. Secretary forged his signature. HELD: Ilusorio should bear the loss for his negligence. He trusted his secretary.

o

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o

Gempesaw owes several groceries. She trusted a bookkeeper blindly. When she ordered supplies, the bookkeeper prepared the checks, and Gempesaw signed the checks without verifying the statements. The bookkeeper was able to steal more than P1M. HELD: Negligent; did not confirm or examine the invoices, receipts, etc. before signing the checks used to pay the suppliers. Split accountability – 50-50

Provinceof Tarlac: o

Province of Tarlac had account with PNB. Province issues checks to the physician/head of the clinic. The cashier already retired, but he was still hanging around. Cashier was able to forge when he picked up the checks. HELD: Province was negligent, for allowing the cashier to pick up the checks even when he was retired, so he was able to indorse the checks through forgeries.

If the indorsement is forged, the collecting bank must return the money to the drawee bank 

Basis: Sec 23 – because the payee did not indorse the check



This is NOT a case of negotiation, but presentment for payment. So you cannot use the “warranty argument”

Mellicor: o

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Split accountability – 50-50

General rule:

Gempesaw: o

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MWSS did not have their checks printed by the central bank. They had a private printing press print their checks. The signatures of the officers of MWSS were forged. PNB paid them. HELD: MWSS must bear the loss for failing to exercise caution – did not ask printing press to surrender plates, account for spoilage, and MWSS did not examine the signatures in the bank returns.

Ilusorio: o

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o

MWSSv. CA:

Maasim forged endorsement of Mellicor, and then PNB presented check to HSBC for payment. The person was able to withdraw money for HSBC. Great Eastern sued for return. HELD: HSBC must return, because Mellicor (drawer) never indorsed the check. [?]

FordPhilippines: o

Before, you file your ITR with the BIR. So the employee of Ford was tasked to pay sales tax (P18M), made payable to a payee (for payee’s account only), which is the Insular Bank of America, the authorized collecting agent of BIR. The employee showed a fake BIR receipt (“See, I paid BIR na.”) to Ford. Instead, they deposited a worthless check with Insular Bank of America (not funded), which they substituted with the check issued by Ford Philippines. In their internal records, they made it appear the worthless check was deposited. Citibank honored the check. The person who deposited collected from Bank of America. Ford had to pay BIR again. They sued.

o

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o

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4. A person negotiating an instrument after forgery is liable (due to warranties)

Rules on clearing o

Checks are brought to a clearing house and are run through a clearing house. They check the magnetic strips on the checks. The amount will then be transferred to the collecting bank.

JJ doesn’t agree with the court as regards Insular Bank of America’s liability.

o

Then the checks will be physically given to the drawee bank. The drawee bank has 24 hours to honor/dishonor the check.

Check:G.R. 12141329 Jan. 2001

o

If it dishonors it, the drawee bank returns the check to the clearing house. The computer will return the amounts paid.

o

Any return beyond 24 hours: time-barred.

o

Citibank was guilty only of negligence.

o

The bank manager (who was complicit) was criminally liable.

o

o

Pricev. Neal o

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HELD: Citibank must return the money to Ford, because Ford ordered it to pay the BIR, which Citibank disobeyed. It says “for payee’s account only” and there was no indorsement from BIR.

See Jack notes 

Here, the doctrine applies to the forged signature of the drawer.

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BUT this 24 hour rule SHOULD NOT apply when it is the payee’s or indorsee’s signature that is forged, because the drawee bank has no way to find out, until the drawer informs them.

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But the SC wrongly applied the 24 hour rule to the payee’s forged signature.

PNBv. CA o

See Jack notes, too

o

Acceptor cannot get back the money, when it paid, because it admits the genuineness of the signature of the drawer

Four general rules: o

1. A party whose signature is forged is not liable 

Unless he’s in estoppel

o

2. An acceptor who pays on a BOE cannot recover the money because he admits the genuineness of the signature of the drawer

o

3. A Holder in Due Course acquires good title if forged indorsement is not necessary for his title 

(ex. in a bearer instrument)

o

New rules (to prevent ping-pong of checks): 

If a check is dishonored, you can only present it one more time. [Usual reason why one failure is allowed – drawn against insufficient funds]

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What is the effect when the drawee does not return the check within 24 hours?

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The drawee cannot ask the computer to reverse the entries.

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BUT you are not precluded from suing to collect after. But since the computer cannot reverse, while you are litigating, you do not have the amount.

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Rule on holder who has a lien on the instrument: He is a holder for value only to the extent of the lien. o

Company appealing a lost case posts supersedeas bond (ex. P500,000). Surety company asks for collateral (ex. cash, time deposit, money market placement, treasury bills, etc.)

o

The surety company is a holder for value to the extent of P500K, even if the company issued a certificate of time deposit negotiable for P1M.

Consideration •

Under the law, consideration is presumed o

Travel Inc.: Travel agency sued on the basis of a bouncing check issued by a guy bringing in passengers. The CA was wrong for asking the agency to prove the value of the ticket purchased. There is a presumption of valuable consideration, and that the check was for such amount.

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Ex. in BP 22, there is no need to prove the check was issued for valuable consideration

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In civil law, generosity, love, affection, etc. are valid consideration. o

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D is a holder for value with respect to A, B, and C because C gave value. A and b are parties who became bound prior to the value given.

[Glenn’s note: Sundiang says love and affection, etc. cannot be consideredvaluable consideration. But Jack says that a donation is a “simple contract” and the law simply requires consideration sufficient to support a simple contract. So love and affection is valuable consideration.]

Rule on holder for value vis-à-vis prior parties: o

o

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Absence of consideration is a matter of defense against a person not a HIDC (personal defense)

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Partial failure of consideration is a proportionate defense. Somebody issued a check for P20000 for 10 sacks of rice. The check bounced. The seller however only delivered 5 sacks of rice. HELD: He can only sue for P10000

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Want of consideration between drawer and payee cannot be invoked as defense of drawee who accepted a BOE (Cornell) o

A drew a BOE for the amount of P10M in favor of B, the payee, in exchangefor 10 cars. B only delivered5 cars.

o

[Same facts] X, the drawee, did not accept. Can A launch the defense of partial failureof considerationagainstB?

Rule: Where value is given for the NI, the holder is a holder for value in respect to all parties who became such prior to [the time consideration was given] A issueda PN to B, but thereis no consideration. B indorsedit to C for consideration. C, thento D. Whatis D’s statusas holderfor value?

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o

Yes. Want of consideration is a defense against the payee.

[Same facts] X accepted. Can X refuse to pay on account of partial failureof consideration?

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Prudencio: (JJ doesn’t agree) o

Construction project. Borrowed from PNB for working capital. The bank required two other signors. The firm got the Prudencio spouses who issued checks. The project was failing. PNB agreed to release part of the security money to help the project. But the project died anyway. PNB sued Prudencio spouses. HELD: Prudencio spouses are accommodation parties. The court held that PNB is not a holder in due course, because it knew that the spouses did not receive consideration. When PNB released a portion of the money, it was in BF.

o

JJ’s comment: the law says “Holder for value” not “HIDC.” You cannot claim PNB was in bad faith when it released the money because the project was already failing. PNB took a risk, rather than ensure the certain failure of the project, the released funds could have improved the project.

o

Sec. 52: definition of HIDC – point in which a person must be is in GF is when he took the instrument. The release of the funds happened long after.

o

SO IF YOU FOLLOW THE IMPORT OF SEC 29, which makes accommodation parties liable to holders for value, then the Prudencio spouses should pay PNB because PNB is a holder for value!!!

Accommodation parties o

Signs as party but does not received consideration or value therefore, from the underlying contract. Only lends his credit. 

o

Liable to a holder for value, even if the holder for value knowing him as merely an accommodation party at the time that holder took the instrument.

Ex. Some banks try to get borrowers to get surety companies to sign borrowing agreements. Surety companies charge premiums for signing as co-makers. The surety company, not receiving any part of the proceeds, is deemed an accommodation party. 

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No. The acceptor cannot use want of consideration as defense. By accepting, he admits authority of the drawer to draw the instrument, and that he will pay.

Clark: But note that independent consideration for the surety/accommodation is not an absolute prerequisite. The consideration that supports the surety is the same consideration for the original obligation.

Jose: o

Dispute over parcel of land. Decided to settle. The other party’s lawyer, Beltran, helped settle by issuing a company check (check of a corporation, signed by the President, and countersigned by the VP). Mrs. Jose sued the corporation. HELD: Here, the issuance of the check was ultra vires. It was not pursuant to the corporation’s business. The client of Beltran was supposed to pay, not the corporation. Sue agents for acting in excess of authority. As a general rule: a corporation cannot be an accommodation party to an instrument, because there is no business purpose to such [unless that is the business of the corporation].

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Maniego: o

X was exchanging a post-dated check for cash to the disbursing officer of AFP. AFP asked Y, X’s sister, to sign as accommodation indorser. The check bounced. Y was acquitted for conspiracy charges, but was held civilly liable. Correct? HELD: Yes. That’s what an accommodation party is tasked to do – when the check bounces, she pays.

Negotiation •

When a bearer instrument is indorsed although unnecessary, but it still ultimately negotiated. o

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This ensures that the order instrument does not become a bearer instrument

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Ex. A issueda PN to B or order for P10K. B indorsesit to C, but in blank. Whatcan C do?

See Caltex case. When pledging a NI, there are no specific provisions. Fall back on the NCC. Must comply with requirements of putting it in a public instrument and indorsement.

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C can insert “To C” over the signature to keep it an order instrument.

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C CANNOT put “To C, waiving notice of dishonor.” The contract must be consistent with the tenor of the indorsement

Indorsement must appear on the instrument itself. o

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Or to a paper attached to it

Indorsement must be of the entire instrument. o

Indorsing only part of the amount will make it cumbersome.

o

Prohibited to indorse to 2 or more indorsees severally. Ex: A check for P100K is negotiated to Jose Cruz for 50K and Manuel Santos for P50K.

o

PARTIAL indorsement is treated under law as an assignment. It is subject to personal defenses.

o

EXCEPTION: When it has been paid in part (ex. on installments)

Types of indorsements: o

Special – specified person to whom it is being indorsed

o

Blank – does not name any person 

Indorsement of an order instrument in blank  can convert the indorsement into a special indorsement by writing his name

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Types of restrictive indorsements Negotiability

Passing title Yes

of

Consideration presumed Yes

Pay to Jose Cruz only

X

To Jose Cruz, for collection only (as agent only)

Yes, but subject to same restriction that he only holds it for collection

X, because the indorsee is a mere agent of the indorser

X, because there is no transfer of title

To Jose Cruz, as trustee for Glenn Tuazon

Yes, but subject to same trust

Yes

Yes, because there is transfer of title

Defense available X, because indorsee is a HIDC, defenses against indorser cannot apply to him Yes, defenses against indorser can be raised against indorsee because he is just an agent X, because title transfers

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(indorsee named as trustee)

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Rights of indorsee in restrictive indorsement: o

A) collect payment

o

B) bring action indorser could bring

o

C) transfer rights, if allowed to do so

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o

Done by writing ‘without recourse’ – although the instrument is still negotiable

o

This can be done if the instrument will fall due for a long time (ex. 5 years), and the indorser does not want to be insecure for such a long time.

Genuine as to what it purports to be •

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Warrants his valid title

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All prior parties have capacity to contract

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That he is not aware of any fact that makes the instrument valueless •

o

(ex. not forged or materially altered)

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Yes, more so. He warranted his valid title to E.

Conditional indorsement o

The maker (or acceptor) may disregard the condition because the maker made an unconditional promise to pay. The indorser cannot change the original obligation

o

The maker can also say “let’s wait and see if the condition is fulfilled”

o

If the maker pays, but the conditioned turned out to be unfulfilled after, the remedy of the conditional indorser to run after the indorsee to get back the money. The conditional indorser cannot run after the maker/acceptor because the M/A has every right to dispose of his obligation while he feels solvent.

But qualified indorser still has some warranties under Sec. 65; 

Yes. Because he warranted that the instrument is genuine as to what it purports to be.

If D turned out to have forged C’s indorsementto him, can E collectfromD? •

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No. The indorsement is qualified.

If A’s signature turned out to be forged, can E collect from D? •

Qualified indorsement

o

CanE collectfromD?

Signing of an instrument payable to bearer

(ex. that the maker is insolvent)

Ex. A issuesa PN to B or order for P50K. B indorsesto C, then C to D. D indorsesto E “withoutrecourse.”

o

[wait for discussion on Sec 65]

o

It can still be indorsed through mere delivery

o

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But the special indorser is only liable to those who can make title through his indorsement

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Law of that country will govern as to questions of indorsement

Not every restrictive indorsement will destroy negotiability

Payable to two or more payees – o

All must endorse

o

But if they are partners, there is mutual agency

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o

Only that in subsection A will destroy

o

Crossed check is still negotiable

Can strike out an indorsement not needed for his title

Instrument payable to cashier or fiscal officer o o

Assumed that the instrument is payable to the corporation he represents

Example – bearer instrument: can strike out indorsements B to E 

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If it’s an orderinstrument,can E strike out B?

If name is misspelled • o

Must indorse the instrument according to the misspelled name, because other parties will not know that there was a mistake made

o

If he wants, after signing as the misspelled name, he can sign his real name, so it will appear wrong name indorsed to real name

o

No. Because it is payable to the order of B. You cannot take him out, or else, E cannot draw title to the instrument.

ABCDE. E cancels the indorsement of C to D. He loses the right to run after C. D is also discharged, because D lost his chance to run after C.

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Indorsed as an agent o o

Must state that he is negotiating as an agent, and disclose the principal, and that he is duly authorized

RULE: The indorser who is struck out and ALL indorsers after him are eliminated 

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If there is date attached to the negotiation o

Presumed to be correct, but rebuttable

o

If no date, the negotiation is presumed to have been done before it was overdue 

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Indicates a place

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Ex. If there is indorsement from A to Z, and you cancel C, persons C to Y are discharged.

Instruments transferred without indorsement: o

Transferee will only step into the shoes of the transferor

o

So defenses against transferor apply to the transferee too

o

But the transferee can compel the transferor to indorse it

Useful to establish HIDC

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BUT in determining whether he is HIDC, the reckoning point is that time of indorsement

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Ex. Did not know necklace was fake at time of transfer; knew it was fake at time of indorsement = not HIDC

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4. When he took, no notice of infirmity in instrument or defect in title of the indorser •

This elaborates #3

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Defect in title of indorser = if he took it through unlawful means, illegal consideration, or negotiated it in breach of faith

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Fraud  ex. issuing it for a fake ring

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Duress  ex. ransom money

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Unlawful means  ex. stolen check

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Illegal consideration marijuana

Indorsement to a prior indorser o

A-B-C-D-E-B

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Can B run after C, D, and E? 

No. Because they in turn can run after B too!

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There is compensation under law. The law will not allow them to run around in circles.

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ex.

issued

for

Rights of the Holder •

o

Can sue in own name

o

Payment in due course discharges the instrument 

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o

Rights of a holder

Payment at or after maturity is in due course, and without notice his title is defective

Sec 52 – Holderin due course [very important] o

Requisites: 

1. Instrument is complete and regular on its face

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2. Must have become a holder before it was overdue and without notice of prior dishonor, if so

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3. Took it in GF and for value

Rule on instruments payable on installments:

Statuson payment An installment has not been paid and there is no acceleration clause An installment is not paid and there is an acceleration clause (automatic) An installment is not paid and there is an acceleration clause (automatic) An installment is not paid and there is an optional acceleration clause An installment is not paid and there is an optional acceleration

Knowledge Holder is aware

Holder is aware

Effect HDC as to installments not due on the face of the instrument Not a HDC

Holder is not aware

HDC as to installments not due on the face of the instrument

Holder not aware of the exercise of this option

HDC as to installments not due on the face of the instrument

Holder is aware of its exercise

Not a HDC

o

clause

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A holder must be aware that something is wrong, but chose not to investigate further as to not be a HDC. The test: • o

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Did he take it? Was is honest for him to take the instrument under these circumstances?

Mesina: o

X left a cashier’s check (issued by ABC bank) payable to X’s order. Y stole it and indorsed it to Z. ABC refused to pay. Z sued.

o

HELD: Z was not a HIDC because Z refused to explain how the check was indorsed to him.

o

JJ thinks it’s better to use forgery as the theory of this case. Y forged X’s indorsement. But the court used HDC anyway.

Gatchalian: o

X issued a crossed check to Y, in order to buy a car from Z. However, Y took the check and paid it to ABC hospital, and the value of the check was greater than his bill to ABC hospital (which gave change). X stopped payment. ABC sued X. X launched defense of failure of consideration.

o

Issue: is ABC a HDC?

o

No. Since the check was crossed, it can only be deposited. ABC should have inquired as to the title of Y, but it did not. 

Similar case: State Investment House and Bataan

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GENERAL RULE: If the checks are crossed, the taker must inquire as to the nature of the indorser’s title

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Stelco: o

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Banco Atlantico: o

o

X paid Y a check, drawn against ABC bank. Y altered the amounts. Y deposited it in DEF (her bank). Y told DEF not to present the check for payment right away, even if it was already due, and to let Y to draw the amount anyway. The alteration was discovered. ABC refused to pay. DEF sued to recover. Issue: is DEF a HDC?

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The claimant received a check that was not indorsed to it by the payee, and the check had a notice of prior dishonor due to DAIF (drawn against insufficient funds). Claimant is not a HDC.

Salas and State Investment House (2): o

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No. The circumstances show that the check was already due but Y asked DEF not to present it for payment yet. And DEF allowed Y to withdraw even if the check has not been cleared yet.

In both cases there was lack or failure of consideration between the maker/drawer and payee of the NI. In one case, it was merely issued as security, and in the other, the car delivered had the wrong chassis number. But in both cases, the payee already indorsed the check to another person. Those persons are HDCs and the defense of failure/lack of consideration does not vest.

Maya payeebe a HDC? o

Yes, because the law simply provides “holder.” A payee is a holder, too.

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(53) Negotiation of an instrument payable on demand after an unreasonable length of time  the holder is not a HDC. o

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(54) A transferee who receives notice of infirmity before he has paid the amount agreed for the instrument is a HDC only to the extent of the amount paid by him. o

o

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Consider the nature of the instrument, customs, and particular facts

Ex. X issued a post-dated check to Y with value of P100K, and X told Y to just pay him P80K right away because X could not wait for the maturity of the check. Y has only paid P40K so far. Then Y found out that the check was issued for a fake ring. The check was presented but it was dishonored. Y sued Z, the drawer. Can he collect? HELD: Yes, but only to P50K, since that is half the value of the check, and Y only paid half of the agreed consideration. He is a HDC only to the extent of half the check.

Rightsof HDC: o

1. Sue in own name and receive payment

o

2. Free from personal defenses

o

3. May enforce payment against all parties liable thereon

o

Exception: when he cannot recover full payment – 

37 – restrictive indorsement [GT: I don’t know why.] •

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Maybe JJ meant qualified indorsement under 38?

54 – notice before full amount is paid

124 – when materially altered, a HDC may still enforce against the maker/drawee according to the original tenor of the instrument

o

General rule: the instrument is avoided as to those not party to the alteration or did not indorse it

But not everyone can invoke real defenses against a HDC. For instance, an indorser warrants an instrument is genuine in all respects it purports to be. Also, an acceptor warrants the authority of the drawer to pay.

Personaldefenses There’s a contract with some inequitable or iniquitous fact behind it Voidable contract Ex: no consideration, undelivered complete instrument, acquired by force/illegal means, illegal consideration, negotiation in breach of faith, mistake, ultra vires act of corporation Not applicable to HDC

Real defenses No contract because an element is missing; or void against public policy Void contract Ex; material alteration (so the consent is not anymore to this instrument); undelivered incomplete instrument (no consent); forgery (no consent); minority (lack of capacity) Applicable to HDC

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Personal defenses are available against a non-HDC. This does not mean the non-HDC cannot collect. It just means that personal defenses may be raised against him.

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(58b)  IMPT. ShelterPrinciple(GT) o

What it simply says is that a holder who (1) derives title from a HDC (2) and is not a party to the illegality or fraud has the same rights as the HDC as to the prior parties to the indorser, even if he is not.

o

o

Ex. A was induced by B through fraud to issue a PN to B or order. B  C, who was NOT aware of the fraud (HDC). C  D who was aware of the fraud but not a party to it. What is the effect? 

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D is a holder in due course as to the parties prior to the indorser (A and B)

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PRESUMPTION: o

General rule – every holder is a HDC

o

Exception – if it is shown that the title of the negotiator is defective, then the holder has to prove that either the holder or the negotiator is a HDC

o

Exception to the exception – the exception does not apply to a party that has become bound to the instrument prior to the acquisition of defective title Ex. A – B – C – D – E. D swindled C, then indorsed to E. •

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Fossum:

The burden of proof shifts upon Z to prove that either Z or Y is a HIDC. In this case, it failed to do so.

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In this case, Z loses the presumption of being HDC because Y’s title, as negotiating party, is defective. Y has no benefit of the presumption because it is not a holder anymore.

Since E derives title from D, who is not an HDC, E does not have the rights of an HDC.

There can be no “curing.” So D can’t indorse the instrument to F, an HDC, and have it re-indorsed back to him to “cure” his title. He resumes his position as not a HDC.

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Whatif D indorsesit to E, whois not an HDC? •

o

X issued a check to Y, a HIDC. Y negotiated to Z, which was not a HIDC (it was aware of the failure of consideration between X and Y). Z sued X to collect. X refused and raised personal defense of lack of consideration. What is the implication?

When E runs after A, he is not required to prove that he is a HDC because A was bound to the instrument before the defective title occurred.

Liabilities of parties Party Maker

Obligations Pay according to tenor

Drawer

If dishonored, and process of dishonor completed: 1. He will pay the amount to holder, 2. Or to a subsequent indorser who pays for it Pay according to tenor of acceptance

Acceptor

Qualified indorser or indorser by delivery

Warranties 1. Existence of payee 2. Capacity of payee to indorse 1. Existence of payee 2. Capacity of payee to indorse 3. On due presentment, it will be accepted/paid according to its tenor

1. Existence of drawer, 2. Genuineness of drawer’s signature 3. Drawer’s capacity and authority to draw 4. Existence of payee and capacity to indorse 1. Instrument is genuine and is what it purports to be

General indorser

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Either: 1. Upon due presentment he will accept/pay according to tenor 2. Or if DH, he will pay the amount to the holder, or to a subsequent indorser compelled to pay it

2. He has good title 3. All prior parties had capacity to contract 4. Has no knowledge of any fact that would impair the instrument 1. Instrument is genuine and is what it purports to be 2. He has good title 3. All prior parties had capacity to contract 4. The instrument is valid and subsisting at the time of his indorsement

o

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Cebu International Finance v. CA: 

D issued a check to P, drawn against BPI. P presented for payment, and BPI debited D’s account. However, P was unable to receive the money because BPI withheld payment [pending investigation of some anomalies]. P sought to collect from D.

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HELD: D must pay, even if his account has already been debited. He warranted that P will be paid, and if not, he will make good the check.

Liability of acceptor o

X issued a check for P4000 to Y. Y indorsed it to Z. Z altered the amount to P40000, and negotiated to H. H presentedit for acceptance to E. E acceptedit. For how much can the check be enforcedagainst the acceptor? 

View 1: P40000 because that is the tenor of the acceptance.

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View 2 (better view): Acceptance is assent to the order of the drawer (132), which is just P4000. He did not consent to P40000, since there must be knowledge. (124) In fact, for a HDC, even if there is alteration, he can enforce payment according to the original tenor.

Liability of Maker o

Araneta: X issued a PN to Y. Y collected, by X failed to pay. He lodged the defense that he used the money to pay for his sick daughter’s expenses, and his daughter is a beneficiary of a trust administered by Y.

o

HELD: X must pay. He made an unconditional promise to pay. What he did with the money is none of the court’s business.

o

Acceptor admits existence of drawer because without the drawer, the BOE cannot exist. He admits authority of the drawer to draw.

Liability of drawer o

Is merely secondary – liable only if the instrument is dishonored.

o

Acceptor admits existence and capacity of payee to indorse, because the instrument is meant to circulate.

o

He can put “without recourse” to limit his liability.

o

Acceptor does not admit signature of indorser.

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Far East Bank: o

o

o

Sec 64 – irregular indorser o

Someone wanted to buy jewelry in the amount of 200k. He had a draft for 300+K from Land bank. The jewelry store accepted the draft but set aside the jewelry. Deposited the check with account in FEB. Landbank paid. Being cleared, the jewelry store guy delivered the jewelry to the buyer, and even paid the buyer change for the 100K difference. Later, Landbank told FEB that the amount was altered from 30 pesos to 300K. FEB returned the 300K to Landbank and debited the account of the jewelry store. FEB sued for the difference against Landbank.



o

HELD: FEB cannot collect. The provision on acceptance applies to payment. Since the tenor is that it is for 300K pesos, Landbank bound itself to pay that amount. FEB should not have returned the money to Landbank and debited the account of the jewelry store. [Huh? Read again.] JJ: the better view might be that a drawee who pays/accepts a draft must be bound to pay the higher amount – 

Acceptance is always inseparably linked to the order.



Sec 61. Sec 139 – acceptance assents to the order of the drawer. There is nothing said that the acceptor warrants that the amount accepted is the same tenor of the bill, as drawn. Consent should imply knowledge.



If the acceptor was deceived, it should not be bound to an amountnot in the originaltenor.



“The acceptor cannot recover the amount from the payee on the ground that the drawer’s signature is forged.”

He signs in blank accommodation party

•

before

delivery.

Is

actually

an

Must be an additional party (not a regular party – signing again will not increase the credit value of the check)

A – (X irregularindorser)– B – C – D – E: 

X is liable to B, C, D and E.



RULE: liable to all subsequent parties. (If payable to the maker or drawer or bearer, he is liable to all parties subsequent to the maker or drawer)



Whatif X indorsedfor the accommodationof B? •

X is liable to C, D, and E.

•

If for the accommodation of the PAYEE (example if here, for the accommodation of B), he is liable to all parties subsequent to the payee.

o

He is called such because you would normally expect the payee as the first signature there. But here, the irregular indorser’s signature is found there first.

o

P v. Maniego: accused had his sister indorse a stolen check before the payee did. The law says…

Sec 65 – warranty where negotiation by delivery o

See the list of warranties in the law [see table]

o

Person negotiating by delivery – only liable to the person to whom he delivered the instrument. Not liable to subsequent parties

o

Unlike a general indorser, a qualified indorser does not warrant that the instrument will be paid. He is liable only if the maker or acceptor is insolvent and he is aware of that fact (since here, there is a breach of warranty).

o

o

•

NOTE: SO IN GENERAL, a qualified indorser or one negotiating by delivery DOES NOT ANSWER FOR SOLVENCY. It only warrants the four listed warranties and is liable for breach of such. Examples: 

Breach of warranty 1: the instrument is forged



Breach of W2: He stole the NI



Breach of W3: Prior party is a minor



Breach of W4: Knew that M/D was insolvent; or that there was failure of consideration

Underlying this principle  same as Statute of Frauds. An undertaking to answer for the debt of another must be in writing to be enforceable. He must be only liable to the person he dealt with

Sec 66 – liability of general indorser o

Same as first 3 warranties of qualified indorser

o

Last – he warrants that the instrument is valid and subsisting

o

If maker is insolvent, even if the indorser was not aware, he is liable.

o

Chartered Bank:

o



X deposited (through indorsement) a check with ABC bank, drawn against DEF bank. X was able to withdraw money although not cleared. Eventually, the check bounced. ABC asked for return of money.



HELD: X must pay. When you indorsed, you warranted. If for any reason (whatever reason) the drawee does not pay, you are liable.

BPI v. CA: Somebody had a manager’s check purportedly issued by American bank payable to cash. But he did not have a dollar account. Asked a friend if he could accommodate him – have the check deposited in the friend’s dollar account. Deposited the check there. They agreed that after clearance, the first friend would withdraw. The friend gave the first guy a withdrawal slip duly signed. When the first guy returned, although the check had not been cleared, BPI (deposit bank) paid. But American bank dishonored it. BPI sued. 

o

HELD: The proximate cause of the loss is the bank itself. Why did it allow the first guy to withdraw when the bank was not cleared. The depositor even kept the passbook: did not give it to his friend.

RCBC: There is a 45-day holding period if the check deposited is drawn abroad. But RCBC accommodates employees, allowing them to withdraw right away. The employee, a mother, received a check, and deposited. Bank required the employee to indorse the check as an irregular indorser. She was then allowed to withdraw. Some employee placed below the indorsement: “valid up 75,000 pesos only.” The drawee bank dishonored the check, since the indorsement was irregular. RCBC asked the employee to return the immediately withdrawn money. 

HELD: RCBC cannot collect. The check was dishonored because of the partial indorsement made

by its employee. dishonored. o

This is why the American bank

Presentment for payment •

Sec 70 –

Far East Bank: (see the details above) o 

o

Signature of indorser was forged. Payee presented the check for payment to the drawee. It was paid. Payee signed at the back. Then the forgerywasdiscovered. Mustpayeereimbursedrawee? 

o



Maker and acceptor



If the instrument is payable in special place and he is able and willing to pay there at maturity = such willingness is equivalent to tender of payment •

No. It did not indorse the check. The signature is to acknowledge payment.

Sec 68 – indorsers are presumed to be liable in the manner in which they indorsed

If the person primarily liable is there on the place where it is payable on the stated time, holder loses right to recover interest due subsequent to maturity + costs of collection

o

BUT he does not lose the right to get paid

But for those secondarily liable (indorsers and drawer) – there is need for presentment for payment 

o

Parole evidence however may be accepted to prove otherwise

o

For example A  B  C, C can prove that while B’s signature appears first, C indorsed it to him

What if the holder does not make presentmentto the person primarilyliable? •

Those secondarily liable are discharged

•

But he can still go after the person primarily liable

•

So, the bottomline: the instrument must be presented for payment on date it is due to charge the secondarily liable persons – see

Sec 69 – indorsement by agent o

o

Whether general or qualified o

•

Whatdoesthis imply?

JJ doesn’t think so.

Sec 67 – indorsed when not required  incurs liabilities of an indorser o

•

Presentment for payment not necessary to charge the primarily liable person

The law mentions that warranties of general indorser apply only to HDC. Shouldwe followthis? 

•

It is actually a case of restrictive indorsement (only for collection). Sec 66 (general indorsement) is not applicable.

If he fails to disclose that he is just an agent, or fails to disclose his principal, he will be liable as an indorser

Quiz  up to section69

Sec. 71 for special rules on when an instrument mustbe presented o

Whatis presentment? 

o

•

Production of BOE to drawee for acceptance or payment, or acceptor for payment, or of a PN to the maker for payment

o

Whatconstitutespresentment? 

1. Personal demand for payment



2. Readiness to present the note and surrender it if paid



2. Presentment cannot reasonable diligence



3. Although presentment is irregular, acceptance was refused on some other ground

be

made

even

after

Step 2: Give notice of dishonor by non-acceptance to secondarily liable persons 

EXCEPT, no need to give notice: if instrument was made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented



AND will not prejudice rights of HIDC after omission to give notice of dishonor



IF foreign bill,

[Step-by-stepguideon presentmentfor payment] o

Step 1: Presentment for acceptance required if – 

1. BOE is payable after sight, or acceptance is needed to fix the maturity of the instrument



2. BOE expressly acceptance



requires

presentment

for

Protest for non-acceptance or protest for non-payment needed

•

Except – o

1. If instrument was made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented

o

2. Delay is excused for fortuitous circumstances

3. BOE payable elsewhere apart from residence or place of business of drawee

o

OTHER OPTION – May choose to negotiate it within a reasonable time

o

Consequence: will discharge drawer and all other indorsers

o

EXCEPTIONS – no need to present if/or treated as dishonored if: 

•

1. Drawee is dead, has absconded, fictitious, or lacks capacity to contract

•

o

Except: will not prejudice rights of HIDC after omission to protest

Step 3: Give notice of dishonor by non-payment to secondarily liable persons (if dishonored by non-payment)

•



See notes above



3. At proper place defined



EXCEPT: When presentment for payment is excused –



4. To person primarily liable

•

1. Drawee is fictitious person

•

2. Presentment cannot be made even after reasonable diligence

•

3. Waiver of presentment, express or implied

Instrument not payable on demand 

o

instrument payable on demand 

Must be presented within reasonable time from issue



If it’s a BOE, you make it after a reasonable time after last negotiation

There is a wife who presented a negotiable certificate of time deposit. Bank refused to pay her because they paid the husband. HELD: it was not presented by the husband, but the wife. Bank should pay the wife.

Sec 73 – proper place for presentment o

If there is a stipulation where presentment must be made, it must be made there.

o

If none provided, but address of maker is stated, go there

o

If none provided, to usual place of business/residence

o

Wherever he may business/residence

•

be

found/last

known

place

of

Sec 74

Whatdoes“negotiation”herecover? o

Negotiation for value, not negotiation for collection between banks

Sec 72 – when presentment is sufficient o

Is absent/inaccessible – to any person found in place where presentment is made

Make presentment on date due

•

•

o

•

Sec 71 – o

•

REQUISITES: 

1. Made by holder or agent



2. Reasonable hour on business day

o

NI must be exhibited to the person from whom payment is demanded

o

So he can check genuineness

o

This is why telephone as demand is not allowed

o

First Pacific (?) – Check negotiated by car dealer to financing company. When the instrument not paid, company sued maker and indorser. Indorser said he was discharged because there was no proper presentment for payment. HELD: Letter of demand is not sufficient. Law requires that the instrument

o

be shown to the maker. Therefore, presentment not valid and indorsement is discharged.

If partners, to any of the partners 

o

o 

1) Instrument was lost



2) payment refused on some other ground

•

o

•

Ex. no funds, and not because it was not shown

DRAWER – presentment not required to charge the drawer when there is no reasonable expectation that the drawee or acceptor will pay the instrument 

Sec 75 o

If joint debtors, to all of them

When presentment is not required to charge those secondarily liable: o

•

•

Even if dissolved already

Failure excused on two grounds:

Presentment where instrument payable at bank – must be made during banking hours. Law assumes that the bank will be the source of the funds. But if presentment is made beyond banking hours, it is valid if the funds will not come from the bank, as long as it falls on the date of maturity.

o

Ex. knows there are no funds or there is stoppage of payment

INDORSER – when instrument was made/accepted for indorser’s accommodation, and indorser has no reason to expect it will be paid if presented

•

Fortuitous event – excuses delay in presentment

•

Presentment for PAYMENT excused if:

Sec 76-78 o

o

1. Cannot be done even after reasonable diligence

o

2. Drawee is fictitious person

o

3. Waiver of presentment – express or implied

Applies when principal debtors is:   

Dead Liable as partners Liable as Joint debtors

o

If there is an address stipulated, pay there.

o

If dead, give to executor/admin 

•

If there is one, and he can be found with reasonable diligence

•

When is an instrument dishonored by non-payment? o

1. Duly presented for payment and payment is refused or cannot be obtained

o

2. Presentment is excused and it is overdue and unpaid

What is the effect of dishonor by non-payment?

o

•

Under the law, the moment it is dishonored, there is immediately a right of recourse against those secondarily liable. NO NEED to go to the primarily liable.

First National bank: PN payable at FNB. Maker had sufficient funds. But holder did not show up at day of maturity. Dillydallied – then the maker became insolvent. Had he shown up by then, he would have been paid. HELD: No. The fact remains that he is the maker, so he is primarily liable, and should pay.

o

N.B. Remember, failure to make proper presentment only discharges those secondarily liable. The primarily liable person is still liable, although the holder may not claim interest subsequent to maturity and costs of collection.

Sec 85 o

If payable in a fixed period, it must be paid on that day

o

If on a Sunday or holiday, then go to next business day

o

If on a Saturday 



o

On next business day. Because even if some offices hold business on Saturday, they are usually half day. The law wants a whole business day

•

Except instruments payable on demand  can present before 12 noon, Saturday, if it is not a holiday

Contrast: 



•

o

Sec 88 – Payment in due course o

1. At or after maturity

o

2. To the holder

o

3. By the debtor, in GF and w/o notice that the holder’s title is defective

Ex. Payable on Friday. But it was declared a public holiday. So it becomes Saturday. But the law says present it on next business day. So Monday.

Notice of dishonor

Ex. BUT if it is payable on demand – then the maker/acceptor MUST pay provided it is presented on working hours of Saturday.

o

Give notice of dishonor

o

Any party may be compelled to pay it to the holder with right of reimbursement

o

ABCDE

•

Sec 89 – dishonor

Sec 86 o

Time – exclude first day, include last day 

•

D giving notice to B will benefit E

Sec 87 – when instrument is payable at a bank o

o

Notice given by a holder benefits all subsequent holders and prior parties that have right of recourse against the one given notice against

o

Notice may be given by holder himself or agent of the holder.

Implied: that it is an order to the bank to pay for account of the principal debtor

•

o

1. Holder

o

2. Agent of holder

o

3. Party to the instrument who may be compelled to pay the holder, but only to those other parties he may seek reimbursement from

o

4. Agent of such party

o

Whataboutstrangers?

o

•

In writing or oral 

As long as it sufficiently describes the instrument and indicates that it has been dishonored



Misdescription does not vitiate notice unless the party to whom it is given is in fact misled

Cannot give notice, except as agents



Party discharged from the instrument



Person primarily liable who dishonored the instrument

Because this is prejudicial

Form of notice: o

Whois considereda stranger?

B) notify parties who are secondarily liable

If agent receives notice of dishonor, he must be authorized 

o



•



Sec 90 – Who can give notice of dishonor

o

Personal or through mail

o

If written, need not be signed 

In sufficient written notice may be supplemented by verbal/oral communication

Sec 91 – •

o

Notice may be given by a party or an agent

o

Agent need not be authorized by the party

Rule as to jointly liable parties: o

If partners? 

 o

o If the agent wants to give notice, on a instrument dishonored on Monday, two options: 

Notice to one is notice to all

Because this is beneficial



A) notify principal •

On Tuesday

•

Principal has until Wednesday to notify secondarily liable parties

If joint payeesor joint indorseeswhoindorse?

o

If joint drawers or joint accommodation indorsers, and others not coveredby 68? 

•

Sec 68 treats them as solidarily liable

Give notice to all

Sec 103 and 104 – time within which notice must given

o

Know the difference in rules where parties reside in the same place (103) or different places (104)

o

1. Post office nearest to residence or where he is accustomed to receiving letters

o

SAME PLACE:

o

2. To place of business or residence

o

3. Place where he is sojourning

o

If notice is actually received, although not according to these provisions,what happens?





1. If given at place of business – before close of business hours the next day 2. If given at residence – before usual hours of rest the next day

  o



•

1. If by post office – in time to go by mail the next day; if no mail at a convenient hour that day, the next mail 2. If not by post office – within the time it would have been received in due course had it been sent by post office

o

Whencan therebe waiverof noticeof dishonor?

N.B. This same time is counted again, after a party receives notice of dishonor, to give that party a chance to give notice to antecedent parties

Sec 105 – if notice was duly addressed and deposited in the post-office, due notice is deemed given

o

1. Before actual time for giving it comes

o

2. Or after failure to give it

o

Canwaiverbe implied? 

•

Whatis the effect of miscarriagein mails? o

•

•

DIFF PLACES: 

o

3. If by mail – sufficient to reach him the next day

It is still valid

•

Whois affectedby a waiverin an instrument? o

If written on the instrument – all the parties

o

If written over a signature – just that person

Waiver of protest o

Whatis “depositin the post office”? 

Deposited in any branch of the P.O.



Deposited in any P.O. box

Sec 108: WHERE notice must be sent –

•

Yes.

Includes presentment and notice of dishonor (steps to hold a person secondarily liable)

Sec 114 – when notice need not be given o

When the drawer and drawee is the same person 

Ex. manager’s check

o •

Drawee is fictitious person

o

2. Indorser is the person to whom presentment for payment was made

o

3. Instrument was made or accepted for his accommodation

Whenis noticeof DH not neededto be givento drawer? o

1. Drawer and drawee are the same person

o

2. Drawee is fictitious person or has no capacity to contract

o

3. Drawer is the person to whom instrument was presented for payment 

Ex. C went to the office of X, the drawee, but he was not there. But R, the drawer, who was the office manager, was there. And the drawer dishonored.

Drawer Drawer and drawee same person Drawee fictitious or no capacity Drawer is to whom instrument was presented for payment Drawer has no right to expect it will be paid by drawee

Indorser Drawee is fictitious or no capacity, and indorser knows Indorser is to whom instrument was presented for payment Made or accepted for indorser’s accommodation (same principle: no right to expect it will be paid)

Drawer countermanded o

4. Drawer has no right to expect that drawee or acceptor will honor 

o

5. Drawer countermanded payment 

o

•

•

Ex. X withdrew her money from her bank account and issued a check to cover for expected proceeds of jewelry she had to sell. She failed to sell the jewelry. The check was in the hands of Y who had ABC investment house rediscount it. The check bounced. HELD: X had no right to expect the bank will pay because she withdrew all her funds.

If an instrument was not accepted, and notice of dishonor by non-acceptance is given,is thereneedto give noticeof dishonorby non-payment? o

No.

o

Whatis the exception? 

•

Meaning, drawer stopped payment.

Failure to give notice of dishonor by non-acceptance does not prejudice rights of a HIDC subsequent to the omission. o

N.B. In all these cases, the drawer KNEW that there was or would be dishonor.

Whenis noticeof DH not neededto be givento indorser? o

1. Drawee is fictitious person or has no capacity to contract and the indorser is aware of this fact upon indorsement

If it was accepted in the meantime.

Ex. A drew a BOE payable to B. B indorsed to C. C presented the BOE for acceptance to X. X dishonored the instrument. C did not give notice of dishonor to A or B. C indorsed the instrument to D, a HIDC. D will not be precluded by C’s failure to give notice of DH to A and B.

Discharge •

How a negotiable instrument is discharged:

•

o

1. Payment in due course by holder

o

2. Payment in due course by accommodated party

o

3. Intentional cancellation by holder

o

4. Any other act that discharges simple contract for money

o

It must be absolute and unconditional

o

5. Principal debtor becomes holder of instrument in his own right

o

If it is merely oral and the instrument is not surrendered, the renunciation is not effective.

o

It is not effective if not unintentionally, by mistake, etc.

•

When person secondarily liable is discharged:

But it does not affect subsequent HIDC. So if C renounces all claims against A and B, then negotiates it to D, who is a HIDC, D is not prejudiced by the prior renunciation.

Whatis the formof renunciation?

o

1. Discharge of instrument

o

2. Intentional cancellation of his signature by the holder

o

Discharges all parties not party to the alteration

o

3. Discharge of a prior party

o

o

4. Valid tender of payment by prior party

Binds the one who made the alteration, those who assented, and subsequent indorsers

o

5. Release of principal debtor, unless holder’s right of recourse against secondarily liable party is expressly reserved

o

Whatis the right of a HIDC?

o

•

o

6. By extension of time of payment or right to enforce instrument

•

Whatis the effect of a material alteration?



o

If he is not party to the alteration, he may enforce it according to the instrument’s original tenor

Whatis a materialalteration?



Except if secondarily liable party assents



1. Date  goes into the obligation



Or right to recourse is expressly reserved



2. Sum payable, principal or interest  into amount



3. Time or place of payment  into enforcement



4. Number or relations of parties  into obligation



5. Medium or currency of payment  into amount

Whatis the effect of an absoluteand unconditionalrenunciation? o

A holder renouncing against prior parties  terminates recourse to that party

o

If against primarily liable person  discharges the instrument

o

•



A issueda PN to B for 4K. B indorsedto C. C changedthe amount to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is E’s right? 

Enforce the instrument for 4K against A or B



Enforce the instrument for 40K against C (made the alteration) or D (indorsed and warranted)

•

It does not bind the drawee, except to someone to whom it is shown and receives the bill for value upon faith thereof

•

NB: this applies when the bill exists as of time of acceptance

Sections48. 89. 122. 142. 186. 188.  OTHER methods of discharge  o

48 – striking out indorsements (relieves that person and all those subsequent to him)

o

89 – those secondarily liable to whom notice was not given

o

122 – renunciation by holder

o

142 – qualified acceptance by drawee  discharges those secondarily liable 

Unless they assent to it. Failure to dissent within reasonable time is an assent

o •

Whatif thereis a promiseto acceptin writing? •

Deemed an actual acceptance in favor of those who receive the bill for value upon faith thereof

•

NB: this applies for bills that do not exist yet when the promise is made (Ex. BOE pursuant to a LOC)

Cannot be other than payment of money

Must accept within 24 hours from presentment

o

186 – stale check

o

Acceptance deemed done on date of presentment

o

188 – holder of a check procures it to be accepted or certified

o

Whenis a bill deemedaccepted?

Acceptance •

What if the acceptance is written on a different sheet of paper?



Acceptance – assent to order of drawer o

•

Must be in writing and signed by drawee 

If drawee refused to write and sign, holder may treat it as dishonored

Does the drawee have a right to retain the bill for the whole24 hours? o

Whatif the draweerefusesto sign? •

Failed to act on it within 24 hours



Destroys the bill

No. The holder can ask for it back. But the drawee will still have the rest of the 24 hours to decide.

• o

NB: destruction must be on purpose

Whatare the specialsituationswhencan the draweeacceptpa rin? 

1. Before it is signed by the drawer



2. Even when it is incomplete



3. When it is overdue



4. Dishonored by prior non-acceptance or nonpayment

o

Holder can deem it DH by non-acceptance

o

If holder allows qualified acceptance, indorser and drawer discharged 

Unless they assent



Failure to dissent is assent

Presentment for acceptance



What is the special rule if the bill was dishonored by prior non-acceptance,but it wasacceptedthereafter? •

•

The holder can consider the date of first presentment as date of acceptance

Whenis presentmentfor acceptanceneeded? o

1. Bill payable after sight or acceptance needed to fix maturity of instrument

o

2. Bill expressly requires acceptance

o

3. Bill is payable elsewhere than residence or place of business of drawee

o

Whataboutothercases?

Kinds of acceptance: o

1. General 

o

•

•



Includes local but not confined only at a particular place

2. Qualified

•

No need for presentment for acceptance to render any party to the bill liable

Whatis the optionof the holder?



Conditional

o

Must present the bill for acceptance within reasonable time



Partial

o

Or negotiate the bill within reasonable time



Local (ONLY at a particular place)



As to time



Only some of drawees, but not all

Whatis the right of partiesas to qualifiedacceptance?

•

Whatis the consequenceof failureto presentfor acceptance? o

•

Discharges those secondarily liable

Time for presentment – same as presentment for payment

•

Special rule when there is little time to present for acceptancebefore presenting for payment,wherepresentmentfor acceptanceis needed? o

•

•

Delay caused by prior presentment for acceptance is excused and does not discharge those secondarily liable

Whenis presentmentfor acceptanceexcused?

•

Made by Notary Public or respectable resident + two or more credible witnesses

•

Whenmustit be done?

1. Drawee is dead, has absconded, fictitious, lacks capacity

o

Day of DH

o

2. Cannot make presentment even after reasonable diligence

o

If bill is noted in the notarial register, protest may be made anytime

o

3. Although presentment is irregular, acceptance refused on some other ground

•

Whatif a bill is DH by non-acceptance? Immediate recourse to secondarily liable parties avail; no need for presentment for payment •

BOE

•

Protest necessary for DH of a bill that on its face appears to be a foreign bill

o

o

•

•

Cana BOEbe addressedto morethanone drawee? o

Depends. If joint drawees, yes.

o

If alternative or successive, no.

Where? o

Place of DH

o

Except when expressly payable at the residence/business of another person apart from the drawee

Whatis protestfor bettersecurity? o

If the drawee was adjudged bankrupt or insolvent, or made assignment for benefit of creditors – even before the bill matures

o

Is this mandatory?

Whencan a BOEbe considereda PN? o

1. Drawer and drawee are the same person

o

2. Drawee is fictitious person or has no capacity to contract

o

But can the holdertreat it as a BOEstill? 

Protest

Yes.

 o

Whatis the purpose? 

•

Nope

To inform the drawer/indorsers that the drawee is insolvent and therefore they should prepare to pay

Whenis protestexcusedor dispensedwith? o

Dispensed with – for same grounds notice of DH is dispensed with

o •

Excused – for fortuitous event

•

Whenis protestalsodone? o

When bill is lost, destroyed, wrongly detained – protest made on copy/written particulars of the bill

Check – special kind of BOE o

No need to present for acceptance – you can present them for payment immediately

o

Rules on BOE apply to checks too, such as the 24 hour acceptance rule. If you don’t return it in 24 hours, it is deemed accepted

Bills in set •

•

Main Principle: each part of the bill, numbered and referring to the other parts, the whole of the parts constitute one bill o

[usually, it is done to ensure that bills can be collected from even if one part is lost in the mail or so]

o

[So usually bills in a set are several copies of the same thing, sent separately]

Whatif differentpartsare negotiatedto differentHIDCs? o

The one whose title accrues first is the true owner

o

But the one who gets acceptance or payment first is the one who will be able to collect

•

Indorser of two different parts is liable on every such part

•

Howshouldthe draweeaccept? o

o

•

Accept on any part, and on one part ONLY. If he accepts on multiple parts and these are severed, he is liable on all parts. If he pays and did not get back the part with the acceptance, and it once again falls in the hands of an HIDC, he can still be liable

•

Cashier’s and manager’s checks  drawer and drawee is the same

•

Memorandum checks  just usually used as evidence of credit, by the drawer who got goods. He usually redeems it for cash

•

Traveler’s check  you sign it twice (first as a specimen signature, and second when paying. You present your passport too)

•

Crossing a check has three consequences: o

1. Can be negotiated only once

o

2. Cannot be encashed; must be deposited

o



General – can be deposited in any bank



Special – must be deposited only in that bank

3. To be a HIDC, the holder must inquire as to what purpose the check was issued for

•

STILL negotiable though

•

If you attempt to encash it, and it is obviously denied, you cannot run after the drawer because there is no proper presentment for payment

•

Sec. 185 – provisions applicable to BOE are applicable to checks

•

Case: Payee of a check presented a check in the morning, the bank said the drawer had insufficient funds. Presented again in the

Discharge of one part is discharge of all

Promissory notes and checks

o

afternoon, but the computers are offline, so the bank accepted it. Bank found out after and chased after the payee to recover. HELD: Sec 62 – by accepting, the bank admitted authority of drawer to draw. •

•

Case: Customer bought manager’s check and asked that his account be debited to purchase it. The bank realized that it made a mistake because the account was actually closed. The customer already used the check to buy goods. HELD: It was a manager’s check so the store owner was a HIDC.

•

•

Lettersof credit •

Certified checks: o

Letter of credit – instrument issued by banks on behalf of a customer authorizing a beneficiary to draw a draft/drafts which will be honored upon presentation to the bank o

Banks usually do not do this anymore

Check must be presented for payment within reasonable amount of time o

Banking practice: 6 months, or else stale

o

Whathappenswhenthe checkgoesstale? 

View one (2 cases): the obligation is discharged. Payment of an obligation with an NI – the obligation is discharged when there is encashment or the value is impaired due to the fault of the holder.



View two: the obligation remains because the drawer’s bank account was not prejudiced. And there was no loss caused by the delay. This will only happen if the bank becomes insolvent, that if the payee didn’t dilly-dally, he would have received money.

Sito: When the payee delays in presenting a check for payment, the indorsers are discharged, because they have an interest to discharge their potential secondary liability. Unreasonable delay will discharge them.

So contrast the rules: the drawer will not be discharged; the indorsers will bes discharged

Must be drawn in accordance with the terms and conditions specified in the letter of credit

•

Purpose: to ensure certainty of payment

•

Ex. ABC Company wants to buy chemicals from Dupont. But Dupont has no assurance that when it ships chemicals, it will be paid. So ABC gets a letter of credit (LOC) with PBC. PBC then corresponds with a bank in the US (ex. Citibank) – PBC will transmit to Citibank the text of the LOC, through SWIFT. Dupont then finds out that when it delivers the chemicals, the bank will pay him. Since the bank is more trustworthy, Dupont is now willing to sell the materials.

•

o

Dupont ships the chemicals to PBC. So when the bill of lading arrives, PBC will tell ABC Company that the goods arrived. PBC tells ABC Company that it will release the goods if there is a trust receipt arrangement between them. So the proceeds of the goods can be used to pay PBC if ABC does not pay.

o

Dupont will not collect directly from PBC. Dupont will issue a BOE addressed to PBC, to pay it. Dupont then submits the bill of lading, delivery receipt, etc. to PBC as proof of delivery so that Dupont will be paid.

Transphil: Two types of LOC

o

Commercial LOC – issued as payment pursuant to contract of sale 

o

The seller will be paid if the seller gives proof that he complied with obligation to deliver

Governed now by UCP 600 (Uniform Customs and Practice for Documentary Credits). This is revised every 10 years or so.

•

There are 3 underlying contracts in a LOC:

o

Distinguish between out and out fraud vis-à-vis failure to meet specifications:

COMMERCIAL 

•

PBC v. Chua Tiep Seng: The bank does not guarantee the genuineness of the documents submitted to it. All that is required is the bank act in good faith.

Stand-by LOC

•

o

o

1. Application of customer for LOC – where customer undertakes that he will reimburse the bank when it pays the draft, and pays for bank charged



2. LOC – bank tells beneficiary that if it draws the draft, it will pay him after submitting documents



3. Underlying contract

A bank which issued a LOC is obliged to pay the draft so long as the beneficiary submits the documents required by the LOC, without verifying if he actually complied with the obligation in the underlying contract

o

“Banks deal with documents only!” They do not deal with goods nor are they required to examine them. 

Something Fabric case: The beneficiary submitted the documents required, so the bank must pay. This, even if the goods delivered turned out to be fake.

•

In a landmark case by the CA of New York, instead of the seller delivering goods, he delivered rubbish. The court allowed the buyer to have a preliminary injunction to stop payment be issued because this involves out-and-out fraud.



However, if there is mere failure to specifications, you cannot enjoin payment.

meet

o

There was a case (Feati Bank) where somebody shipped timber to someone abroad. There was an agreement that payment is by LOC. Among the documents is a certification of the buyer that the goods delivered were the proper goods. The buyer collected the goods but refused to send the certification! HELD: The LOC requires buyer’s certification, so the bank need not pay. (This is a stupid move by the seller, because he is at the mercy of the buyer.)

o

A seller can commit fraud by submitted forged or false documents. To combat this, the buyer may require a surveyor’s certificate to examine the goods. But the seller may always give a fake one if he really wanted to defraud the buyer.

Independence principle (always asked in Bar) o



Interpretation of Letters of Credit – MUST BE STRICT o

1. Particulargenus– If the LOC requires that the seller submit an invoice for pine lumber, but the invoice states “pine timber,” the bank may refuse to pay

o

2. Quality specifications – If the LOC requires Italian marble and the document just says “marble,” the bank may refuse to pay

o

•

requires that the company open a stand-by LOC with a bank, which will pay the surety firm if the company is held liable. This LOC will most likely contain an evergreen clause, to keep renewing it until the case is over.

3. Misspellings – If the LOC requires noodles but the document says “woodles” the Bank may refuse to pay – who knows what a woodle is or could be.

Whenthe bankdiscoversa discrepancy,what doesit do? • o

o

•

Cojack: Buyer is a con artist, so it ordered 3M worth of bags from Cojac company. It opened a letter of credit, and the condition is that an invoice from “Cojack” be submitted. Cojac submitted an invoice, of course, without the misspelled K. The bank asked the buyer if he waives the discrepancy; the buyer refused. The bank did not pay. Later, the buyer just paid 1M to Cojac.

“Redclause” o

•

It forwards the documents to the buyer and notifies the latter of discrepancies it discovered. If the buyer agrees to waive the discrepancy, then the bank pays. If the buyer does not waive, the bank does not pay.

A clause, usually written in red ink, where the beneficiary/seller may get payment in advance, meaning, even if the beneficiary/seller has not yet delivered the goods to the buyer. This is usually because the beneficiary will purchase goods from a thirty party producer that does not accept anything but cash (hunters, lumberjacks, etc.). If the beneficiary does not deliver the goods, too bad. The buyer still bears the risk.

May the seller in the Feati bank case (where the buyer refused to issue a certification so the seller was not paid) sue the correspondentbankwhen it failedor advancefunds? o

•

•

No. The correspondent bank cannot be sued unless it confirmed the letter of credit. It becomes solidarily liable.

Revocable,irrevocable– o

Revocable: no need to notify the beneficiary, can be done anytime

o

Usually it’s irrevocable, for certainty of payment

Revolvingletter of credit o

Automatically replenishes, whether per month, when the amount is finished, or cumulative, etc.

•

Nature of LOC – a contract between the customer who applied for it and the bank, with a stipulation in favor of a third person

•

An LOC is a primary, absolute, and unconditional obligation o

It cannot be affected by defects in the underlying obligation

o

Philamlife: X took a loan from ABC. ABC required X to open a standby LOC from Z bank. Z bank issued the LOC, payable when ABC shows documents proving that X defaulted on the loan. ABC gave this document. Z bank, however, refused to pay the whole amount stating that X informed it that X had already made some payments, so these have to be deducted. HELD: Cannot do this! The LOC is a primary, absolute, and

“Evergreenclause” o

A provision that allows an expiring LOC to be automatically extended for indefinite number of periods until the issuing bank informs the beneficiary of its termination.

o

Ex. A foreign company not doing business here sues and asks for a provisional remedy. The court requires a bond, so the company obtains one from a surety firm. The surety firm

unconditional obligation. It is not an accessory obligation, so the defect in the underlying contract cannot affect it. If there really was overpayment, X just has to run after ABC. •

•

Note: if the entrustee returns the goods, he does not incur any further liability. The entruster/bank then sells the goods

•

Allied Banking: X imported goods, and opened a LOC with ABC bank. When the equipment arrived, X took the goods from ABC and issued a trust receipt in ABC’s favor. X installed the goods in his factory. X failed to pay. ABC sued X for violation of PD 115. X claimed the goods were not covered because he did not sell nor manufacture/process them. HELD: The goods were covered. It says “sell or otherwise dispose.” “Otherwise dispose” covers the installed goods.

Usual stipulation in a LOC if the applicant has a deposit there, too. In a case, where the depositor/applicant owed the bank for a LOC, but he also assigned the certificate of time deposit to a third party, who has the better right? HELD: The bank. It had a lien on the deposit.

Cantherebe enjoinmentof paymentin a stand-by LOC? o

•

o 1) Proof of fraud is strong, 2) fraud must involve abuse of independence principle, 3) irreparable injury •

Metro v. Daway: Case for corporate rehabilitation does not suspend payment from a stand-by LOC. It is a solidary obligation, there is no need to exhaust the resources of the applicant corporation that applied for the stand-by LOC.

o

Meralco/steel towers case: X fabricated steel towers (hired by Meralco). X imported materials, which X received and gave a trust receipt to ABC bank for. X used the materials to build the steel towers. But Meralco hasn’t paid X yet, so X couldn’t pay ABC bank. ABC sued X for estafa. HELD: No estafa, no misappropriation.

o

Another case: X could not sell the goods covered by the TR. X tried returning the goods to ABC, but it refused. HELD: X did not commit estafa.

Trust receipt transaction (TRT) – transaction where; o

The entruster, who has absolute title over the goods, releases these to the entrustee (bank)

o

The entrustee executes and delivers a trust receipt, where: (buyer) 

1. He holds the goods in trust for the entruster



2. Sell or otherwise dispose of the goods



3. Turn over to the bank/entruster the proceeds of the sale to the extent he is indebted

•

Canthe trusteeexecutea Chattel Mortgageover the goodscoveredby the TR? o

•

“Otherwise dispose” can cover giving goods to a sister company

For estafa, there has to be misappropriation

Trustreceipts •

4. Or turn over the goods to the bank, in case unsold

Banklien over applicant’sproperty o

•



No. He does not have free disposition of the property.

X purchased goods. Independent of this purchase, X applied for a credit facility with ABC bank. ABC bank required X to sign a trust receipt for the goods he just purchased. HELD: This is invalid. The bank did not have any lien or title to the goods; they were purchased separately from the credit application.

•

TR can apply even in domestic transactions

•

Nature of ownership/security interest – Vintola:



• o

o

X imported puka shells, covered by a trust receipt with ABC bank. X failed to sell the puka shells. X decided to return the shells and claim he is not liable anymore because X claimed ABC was the real ownership of the shells and X just held it in trust. HELD: X is wrong. ABC can still recover the money. A TRT is a security transaction, and the buyer is still really the owner of the goods; it just relies on a legal fiction to create a lien. ABC still has the right to recover the money; or it can sell the goods. PNBCase: The bank getting back the goods does not terminate the obligation. It just has a lien, and to realize it, the bank must foreclose – otherwise, it is pactum comissorium. The bank then returns the excess or runs after the deficiency.

•

Whatare the obligationsof the WHM? o

1. Safeguard the goods

o

2. Deliver the goods

Whatare the conditionsbeforethe WHMdeliversthe goods? o

1. Holder pays the WHM’s liens

o

2. If the WHR is negotiable, to surrender the receipt

o

3. Readiness and willingness to sign an acknowledgment of receipt of the goods

Whenis a WHRnegotiable? • o

If payable to order or bearer

o

If payable to order or bearer, can one insert a stipulationthat it is nonnegotiable? 

•

Same as non-negotiable – if the holder though in GF that it was the original, he could sue the WHM for damages

To deliver

WarehouseReceiptsLaw •

Whatis the rule on duplicateWHR? o

•

If someone relied in GF that it is negotiable and acted upon it, it will be treated as negotiable.

To whommustthe WHMdeliverthe goodsto dischargehis liability? o

1. Person lawfully entitled to the goods or his agent

o

2. Person entitled to delivery under non-negotiable WHR or who has authority from the person entitled to delivery (SPA)

o

3. For negotiable WHR, the person in possession

No. The stipulation is void.

Whenis it non-negotiable? • o

o

Not payable to order or bearer AND there is a large print, usually in red, that it is non-negotiable Whatis the consequenceof not doingso?

Ruleson refusalto deliver: o

1. WHM cannot refuse to deliver the goods just because of a third party claim

 o

o •

•

o

Whatif the WHMmakespartial deliveryof the goods?

Unlike in NIL, it does not discharge the WHM. The WHM is liable under the original tenor of the WHR.



He must cancel the WHR and issue a new one reflecting the balance of the goods, or indicate partial delivery on the receipt.



Again, failure to do so makes him liable to one who takes the WHR in GF and for value.

The claimant has to file a case in court and get a court order telling the WHM to deliver the goods, after proof of loss. He also has to post a bond, in case the WHR falls in the hands of a person who took it in GF and for value. The latter goes against the bond.

To safeguard •

If the goods are lost, he is presumed to be at fault

•

But not for fortuitous events

•

Whatis the duty in keepinggoods?

How does a creditor go about attaching/levying the goods covered by a negotiableWHR? o

•

He is liable for damages to any person who takes the WHR in GF and for value.

3. WHM is excused for selling perishable or hazardous goods

Whatis the effect of loss of the receipt? o

•

2. WHM is excused for failure to deliver if he sold the goods to satisfy an unpaid lien

o

Whatis the effect of alteration? o

•

But he may submit the situation for interpleader

Ask for enjoinment of indorsement or renegotiation of the receipt – have the WHR frozen or surrendered, so it doesn’t end up in the hands of someone who takes it for value and in GF. Until this is done, the WHM cannot be compelled to deliver.

The WHMin general, as a bailee, cannot claim ownership over the goods. What are the exceptions? o

1. WHR negotiated to him, so takes the goods in his own right

o

2. Has unpaid lien, so he foreclosed it and bought the goods during auction

Whatif the WHMdeliversthe goodswithoutaskingfor surrenderof the WHR?

•

o

He must segregate the goods belonging to different depositors

o

But he is allowed to commingle if: 

It is stipulated



It is customary to do so

Whatare the ruleson commingledgoods? o

Each depositor gets a pro rata portion of the common mass upon claim

o

Whathappensif thereis partial loss? 

•



INSURANCE

Ex. teenagers will be charged higher insurance over cars.

In general •

o Elements o

•

•

o

2. Insured is subject to risk of loss

o

3. As consideration, the insured pays premium

Someone organized a jeepney association. You give membership fees and if a driver gets into an accident, the association pays indemnity. Sued by Insurance Commission for not having license to do Insurance Business. o

Held: Was conducting insurance business without license. Al requisites concurred.

o

Contra Maxicare: Even if all elements are present, but if primary purpose of contract is to provide services, then it is not an insurance contract. In Maxicare there is no insurance contract because physicians pay for the first six sessions of therapy after injury or loss, but the main purpose is to give medical services. But here, even if you did not get injured or sick, you can avail of medical checkup.

It is an aleatory contract. o

•

1. Insured possesses interest susceptible of pecuniary estimation

•

It is unilateral o

It is conditional

•

Whatis the structureof the insurancecode? o

•

Parties, elements of contract, form of the contract, performance of the contract (for what losses), special types of contract (marine, fire, etc.), regulation of insurance companies

You cannot insure the winning of the lottery. This is wagering.

Parties •

Who can be the insurer? o

•

One authorized by the Insurance Commission

Who can be insured? o

If you don’t lose what was insured, there is no indemnity.

It does not adhere to the property insured because the personality of both parties is crucial and is the primary consideration for the contract.

It is only the insurer that has an obligation to perform (the insured already paid).

•

Anyone except a public enemy 

It is a personal contract. o

The buyer of a car, for instance, will only be insured if the insurance company allows for an endorsement of the seller’s insurance contract.

o

Citizen of a country with which the Philippines is at war with.

Wenfeld: German company filed claim with Insurance Company, and the Philippines was under US at that time. The Germany and USA were at war (WWII) so the company cannot collect.

•

Sec. 8 – The mortgagor can sue the insurance company if it does not pay. If the mortgagor performs an act that prejudices, the mortgagee cannot collect. o

Ex. The Mortgagor brought fireworks to the building and it exploded. The mortgagee cannot collect.

o

The mortgagor can have the mortgagee perform acts that benefit the contract

o



Whereas in life, you cannot put value over life of a person



EXCEPT: if there is a way to place pecuniary value in the life of the person.

The interest must exist when the policy takes effect AND when loss occurs. 

In life, need only exist when the policy takes effect

Insurable interest o •

In life insurance, one can name anyone to be the beneficiary.

Insurable interest over life  o

1. Over own life, spouse and children

o

2. Over any person on whom he depends solely or in part for education or support, or in whom he has pecuniary interest

• 



Ex. a key basketball player you signed for your team; a concert impresario in an opera you organized o

o

3. Any person with legal obligation to pay money to him, or respecting property or services – whose death might delay or prevent performance

o

4. Any person upon whose life any estate or interest vested in him depends 

•

Ex. You are a married couple allowed to stay in the family home as usufruct. They have interest to continue the life of their parents

Over property o

MAIN DIFFERENCE: there must be a valid legal interest

o

The insurance cannot go beyond the value of the property

Only exception: you cannot name one to whom you are prohibited to make donations to

•

Ex. co-guilty party of adultery/concubinage

You can insure anyone’s life, but you have to get his consent + you must have insurable interest

Case: There was a couple that hatched a diabolical scheme with an insurance company (in cahoots). Picked up a boy from the straits and adopted him, promised to raise him well. Then they insured his life, with themselves as beneficiary. But they were planning to kill him. The first boy disappeared. They did the same for a second boy and killed him. The second boy’s fingerprints did not match the first boy’s prints, so the insurance company did not pay. Then they were found out.

Insured can change the beneficiary UNLESS it was made irrevocable in the policy. o

If the beneficiaryis irrevocable,can it still be changed? 

Yes. But if irrevocable, can only change beneficiary with the latter’s consent.

o

•

o

Harvardian Colleges was allowed to use a building by the owner, as a school. It insured the building. It caught fire. HELD: There was insurable interest.

Inchoate interest founded upon existing interest 

Whendoesthe beneficiaryforfeit?

Ex. stocks, which is based on subscription contract

o

Partners, over the property of a partnership

o

If he causes the insured’s death.

o

Carrier, over goods it is transporting since he will be liable

o

EXCEPTIONS?

o

WH man, over goods for safekeeping since he will be liable



o

•



Case: The father made the child an irrevocable beneficiary of an insurance contract. The father wanted to revoke. The company said the child must consent. The father said he is the legal guardian anyway. HELD: father is wrong. He must go through guardianship proceedings to have another one make the decision for the child. But how does he prove that revoking is for the best interest of the child?

When the killing is lawful (ex. self-defense, the beneficiary is the executioner in death penalty)

•

If killing is unlawful the benefits go to the estate of the insured (the beneficiary cannot benefit)

Insurable interest over property: o

A mere contingent interest over something: - NOT insurable o

Creditor with no collateral over properties of buyer

o

Expectant heir

o

Fictitious contract of sale (completely simulated) 

Filipino Merchant: The importer has insurable interest in goods he is buying even if undelivered, because he can compel delivery. The seller also has insurable interest because he has legal title.

o

A person leases property. In the contract, it said that the lessor may shares of stock of a lessee… [See “chuck” case in transcript]

Smuggled property – against public policy

o

Contractor: has insurable interest over the building

o

Mortgagee has insurable interest

o

When the policy takes effect and when loss occurs

o

Also, under the law, he bears the risk of loss prior to completion

o

Need not exist in the meantime

o

Lessor and lessee both have insurable interest

o

Mere possessor.

•

Whenmustinterestexist?



Ex. Owned a car, insured, then sold it. repurchased, and then loss in fire.

Then

o

A person mortgaged his building. The property had been sold in foreclosure. Then it was lost by fire. He had no more right to redemption. HELD: Lost insurable interest.

o

Whatif he still possessedthe right of redemption?

•

Stipulation that there need not be an insurance interest for an insurance contract – NULL AND VOID.

Title IV – concealment

 •

He still has insurable interest

For life: interest need only exist upon taking effect. o

X insured his wife’s life. They annulled their marriage. But the wife failed to revoke the insurance. X can collect.

•

If you sold your car, if the buyer wants insurance, you have to endorse the policy.

•

Change in interest after the loss does not change indemnity. already an accrued liability at this time. It is a chose in action.

•

Change in interest in one or more listed things: o

•

Taxi company insured 20 units. insurance over 16 is still valid.

Sold 4 of them.

It is

•

Failure to communicate what a party knows and ought to communicate

•

Consequence: injured party can rescind

•

Need not be intentional

•

Requisites: o

 o

The

Change of interest in will or succession does not avoid insurance. o

o

X insured Family Home against fire. X died and children inherited. The house burned. The children can collect.



Test: the other party would not have entered into the contract had he known of the fact concealed



Or the conditions in the K would have been different



Life insurance: usually involves failure to disclose serious ailments



Case: Couple got an insurance policy for their mongoloid baby, but they did not say he was a mongoloid. HELD: concealment



There is a law prohibiting insurance companies from refusing to issue insurance to someone with AIDS, as long as he discloses that he has AIDS



Need not disclose very minor sickness/injury

Insurance does not transfer.

X Y and Z co-owned a house. X bought Y and Z’s shares and became sole owner. The house burned. Insurance company must pay because X was part of the original insured.

o

Ex. he did not know he had cancer

2. Must be material to the policy

What if the childrenboughtthe housefromthe father whenhe was still alive? 

o

1. Party must have known the fact concealed

3. Party must make no warranty of the fact concealed



o

o

In this case, if there was a warranty, the violation is not a concealment but a breach of contract

4. Other party has no means to ascertain the fact concealed • 

•

•

Yes. Either express (in the terms of insurance) or implied (as when there is failure to make follow up inquiries as to facts already communicated0.

Case; If a party discloses that he has been hospitalized and gave the contact # of the hospital, the insurer’s failure to look into his records – there were means to ascertain the fact

Is there need to disclose nature or amount of one’s interest? o

•

If the agent commits a concealment, the applicant will be bound by that, the insured made the agent his own agent for the purpose of filling up the application form

No. EXCEPT if one is not the absolute owner of the insured property.

Need not disclose matters which pertain to excluded or excepted risks. o

Ex. need not disclose that members of NPA are burning houses in their neighborhood if the fire insurance policy exempts rebellion/coup/etc.-related destruction

There are matters the party need not indicate: Misrepresentation o

o

o

The inspectors went to the place and found that it was near a squatter’s area. But the company issued a fire insurance policy anyway. A fire broke out. The insurance company cannot use the defense that it was near a squatter’s area, because it sent inspectors.

•

Insured an oil tanker. Cannot use the defense, “why did you not disclose that there was a war in Afghanistan.” They should have known. Nurse with a personal accident policy. Insurance refused, saying that she did not disclose there was a problem with peace and order in Pampanga. HELD: Insurance company should have known it was the center of the HUK movement before.

•

Even if you die from another reason apart from the fact concealed, the company is still not liable because it wouldn’t have issued a policy.

•

Not required to disclose information of one’s own judgment.

•

Cantherebe waiver?

•

Statements made to induce the other party to enter into the contract o

1. Untrue statement

o

2. With knowledge and intent to deceive; or stated as true without knowing it to be true and which tends to mislead

o

3. Fact is material

Consequence – voidable at option of insurer o

But waived for acceptance of premium payments despite knowledge of ground for rescission

•

Misrepresentation as to the future is deemed a promise

•

Can be written or oral

•

Misrepresentation is not part of the contract. inducement. o

But it may qualify as an implied warranty

It is a collateral

•

As a rule, parole evidence is not allowed to vary the terms and conditions of the contract. It may qualify an implied warranty. It is imposed by law.

•

A representation is presumed to refer to the date on which the policy goes into effect. o

•

•

o

There is a question in life insurance about medical history of the family. If one thinks his father died as a soldier, in action, when he actually died of AIDS, and he says the former.

o

But if the info came from the insured’s agent, and exercise of due diligence was possible, he is liable for the truth of the statement

Insured filled up the application form, the Insurance company said that they will only accept if the applicant is not more than 60 years old. He was more than 60 years old. Held: he wrote on the application form his date of birth, but the company still issued a policy. There was no misrepresentation.

•

“Do you take alcoholic beverages?” Applicant said no. But he has been drinking since he was 16. He died of liver failure – Misrep. But if he only drank small amounts on cocktail parties, it is not material. There is no misrep.

•

Application did not disclose incidents of defalcation by clients. There was another such case. Insurance company found out. Applicant claimed that the question asked whether there was criminal conviction. Insurer said that the application did not require that. The bank threatened to sue, but never did. [JJ’s stories]

•

Test of materiality – SAME AS CONCEALMENT.

Representation is false if facts do not coincide with what was asserted

o

Test for defense: “substantially true” in every particular material to the risk EXCEPT: Marine insurance – where what is required is the exact and whole truth

Ng Gan Zee: o

There is no misrepresentation because he relied on what the physician told him.

“Have you ever applied for a life insurance policy and the application was rejected?” He said no. But before, he had an application denied, but then accepted on reconsideration. HELD: No misrepresentation.

•

If the insured has no personal knowledge of a fact, he may repeat the information he has on the subject which he believes to be true

o

•

If somebody applied to insure his vessel. Ex. voyage from Manila to Cebu. “Where is the vessel?” “It is anchored in Manila Yacht Club.” But it is actually in Curimao. However, when the policy takes effect and the vessel is in Manila already, there is no misrepresentation.

o

o

If the other party would not have entered into the contract, or under different conditions

Sec48(a) – action to rescind •

If insurer has right to rescind, insurer must rescind prior to commencement of action on the contract

•

Tender of premiums and notice that the policy is cancelled before suit is deemed a rescission

Sec 48(b) – incontestability clause

•

If a life insurance policy has been in force for at least 2 years since first effect or last reinstatement – insurer is BARRED from questioning it or alleging misrepresentation or concealment, or deceit/fraud o

•

N.B. Really, what you are barring are defenses against fraudulent misrepresentation or concealment, but not anything else

1. Life insurance

o

2. Payable proceeds upon death

o

3. In force for 2 years since issuance or reinstatement

•

In old days, there was no such clause.

•

If the policy lapsed and was reinstated, the 2 year period will run again.

•

BUT there are still defenses that can be invoked even in this period: o

1. Claimant has no insurable interest

o

2. Uncovered risks (ex. insured engaged in car racing)

o

3. Policy lapsed and insured did not pay

o

4. Policy was entered into pursuant to scheme to kill insured (“vicious fraud”)

o

5. Someone substituted for the insured during medical test 

o

This fraud is not barred by the clause – there is NO perfected contract with the insured because it was another person

6. If insured is riding in a plane and it is not a commercial flight (ex. 8-seater plane)

7. Entered into military without consent

o

8. Failure to furnish proof of death

o

9. Action not filed on time

•

If there is concealment or misrepresentation, insurance company is still liable even if the cause was not due to the cause concealed or misrepresented.

•

In one case, the insured died within two year clause. This was invoked by the insurance company. Beneficiary delayed claim after two years have lapsed. SC said that when the person died, there is no more policy; liability has accrued. So count from death.

Requisites o

o

o

JJ agrees with the result, but not the interpretation

o

JJ: If the insured did not disclose that he had tuberculosis and he died after, the beneficiary CANNOT delay claim to beyond two years and invoke the incontestability clause. THE LAPSE OF THE TWO YEAR PERIOD MUST HAVE LAPSED WHILE THE INSURED IS ALIVE. This is the proper meaning.

The Policy •

Preliminary policy/cover note o

Has terms and conditions of policy that would have been issued. Insurance company cannot collect separate premium on preliminary policy and actual policy.

o

Common in car insurance and marine insurance 

But there is still some delay or information to be determined (ex. looking for third-party liability in car insurance first [give to LTO the cover note] or looking for adequate carrier for goods for marine goods – since the policy depends on the state of the boat]

•

Law requires that policies are in printed form. It can’t be handwriting anymore. Before you issue a new policy, the terms and conditions have to be approved by insurance commission.

•

Whatis the rule on ridersand additionalattachedclauses?

•

Whendoes insurancetaken by one partner or part-owner apply to the interest of his co-partnersor co-owners? o

o

•

•

Does not bind insured UNLESS the descriptive name/title of the rider or clause is mentioned and written on the blank spaces in the policy

Whatis the rule on additionalridersor clausesissued after the original? o

Must be countersigned by the insured or owner

o

N.B. No need for signature of insured otherwise

Rules on interpretation: o

If the provision is clear, there is no room to interpret

o

[SPACED OUT]

o

Tantoco Terminal: had two mills. Old mill was insured. When the new mill was finished it was insured. The policy however mentioned the old mill. Burned. Insurer refused. HELD: Clearly they intended the new mill to be insured, not the old one even if the policy says otherwise.

o

Fortune: HELD: Security guard and driver of armored van had possession of the money. They stole money. Insurance company refused to pay because it claimed they were not employees of the company, but the agency. HELD: The insurance company lost. The very purpose of the insurance is to insure against acts of those holding the money, which in this case are the two.

If a cover note was issued within 60 days, the policy must be issued. o

In marine insurance, this is a problem because 60 days have lapsed but no vessel has been found by the exporter.

o

The law says if the cover note extends beyond 60 days, written agreement of insured must be obtained. 

•

•

NOW: there is a circular that allows cover notes to extend beyond 60 days.

Insurance proceeds applied exclusively to person in whose name or for whose benefit the policy is made o

o

•

Aboitiz: One vessel got burned in shipyard. Asked Cebu Shipyard to pay. Held; policy clearly mentions Aboitiz as sole insured. Cannot claim Cebu Shipyard is also insured. [?] If description is so general that it may comprehend any class or persons, only he who can show it was intended to include him can claim the benefit.

•

The terms of the policy must be applicable to the joint or common interest

Open policy – o

There must be a maximum amount mentioned. maximum liability of the insurer.

o

So there can be an amount mentioned, but you still have to quantify the value within this amount.

It is a

Valued policy – o

One expressing a policy that the thing be valued at a specified sum

o •

Marine policies are usually this

the insured will be less than 1 year from the time cause of action accrues.

Running policy – o o

Successive insurances

o

Ex. Goodyear, instead of getting insurance whenever it ships tires to distributors, it gets a running policy that covers all of these

o

•

•

In any case, it would have to notify the insurance company which would issue an indorsement, for it to be covered

(64) Non-life policies cannot be cancelled without prior notice and only for the grounds stated in law here o

1. Non-payment of premium

o

2. Conviction of crime from acts increasing hazard insured against

o

3. Discovery of fraud/material misrepresentation

o

4. Discovery of willful or reckless acts increasing hazard insured against

Whatis the rule on validityof agreementslimitingtimesfor commencingaction? o

o

In general, a clause in an insurance policy that action upon the policy must be brought upon by the insured within a certain period is valid But if the period fixed is less than one year from the time cause of action accrues, the stipulation is void (the period becomes the default 10 years, from a written contract) 

o



In industrial life insurance – period cannot be less than 6 months from accrual of cause of action

From rejection of the claim by the insurer, because prior to this, there is no necessity to bring suit yet



What if the clausesays that actionmust be broughtone year fromloss?

5. Physical changes in property that makes it uninsurable

o

6. Determination by Commissioner that continuation of policy will place the insurer in violation of the code 

• •

It’s void, because you have to submit your claim to the insurer first, and this takes time. The insurer might decide beyond one year sometimes. In this case, the action given to

Ex. a bus company that always gets into accidents every week

o

Whendoescauseof actionaccrue? 

N.B. One year period to file a case is not like period for appeal. Asking for reconsideration from the company does not suspend running of the period.

Ex. Maximum risk it can insure is 20% of its net worth (Ex. 100M net worth, so they can issue up to 20M). It can issue policies beyond that but it must be reinsured.

Notice of cancellation: o

Must be in writing

o

State ground for cancellation

•

o

State that if the insured asks for the facts as basis, the insurer will disclose

o

* Prudent thing: to send by registered mail

(66) Insured in a non-life policy can automatically renew the policy as long as he is willing to pay the premium o

Unless 45 days before expiration of policy, the insurer informs him that it will not renew 

•

•

•

If insurer does not do this, insured can renew as a matter of right

Policy written for term longer than 1 year, it will be treated as written for successive terms of 1 year o

Ex. construction contract requires policy covering the building as it is completed. There were 2 fires, and 3 years. It will be treated as if it is expiring at every anniversary of the policy.

•

May relate to: o

Past – ex. warranty that insured was never confined

o

Present – ex. warranty that insured is in good health

o

Future – ex. warranty in fire insurance that owner of property will not store flammable materials

Whendoesnon-compliancewith a futurewarrantynot avoidthe policy? o

1. Loss occurs

o

2. Performance becomes unlawful

o

3. Performance becomes impossible

Givean example o

Somebody tried to insure his house for fire. Inspectors said his neighborhood is not nice. Insurer said that it will insure, but insured must put up a firewall within 30 days. A fire razed his house in 10 days. HELD: the insurer is liable.

o

Same if there is no cement available

o

Or if it becomes unlawful

Warranties •

•

Express or implied o

Express – found in terms and conditions

o

Implied – imposed by law

Usually embodied in a rider o

•

•

o

These riders, issued with the policy, need not be signed

Warranties are express and placed in the contract

o

Representations are not written and are but collateral inducements

Canthe insuredarguethat it is not material? 

Whatis the differenceof warrantiesfromrepresentations? o

Violation of warranty allows the other party to rescind.

•

No. The fact that it is in the policy entitles the insurer to rescind. The basis is not materiality but breach of contract.

If there is a breach of warranty, and loss occurs EVEN IF not related to the breach of warranty, the insurer is not liable.

o

Ex. cannot bring explosive materials into his house. He brought fireworks inside. His kitchen caught fire without relation to the fireworks. Insurer not liable.

o

Because the risk increased regardless.

o

Whatis the exception?

Another example, Qua Chee Gan, where there was gasoline in the warehouse for consumption of the owner’s car within 2 days.



Or mothballs in a drug store.

Double insurance  not just to those he acquired before but also the future. Failure to give information is a breach of warranty. o

X obtainedfire insuranceover his house with Insurer A. He warranted against past and future double insurance. Then he obtained fire insuranceover his housewith Insurer B. The sameclauseis included. The houseburnsdown. Is InsurerA liable? Is insurerB liable? 

•

When it is merely incidental to the business. For instance, placing alcohol to retouch the varnish of one’s insured furniture store does not breach the warranty against placing inflammable materials.



Both are not liable. There was breach of future double insurance warranty for contract A and breach of past double insurance for contract B.

Geagonia case: X insured his stocks in trade. Mortgaged them, and insured them again, where there is loss proceeds go to mortgagee. Fire destroyed the things. Insurer said X did not disclose second insurance. HELD: No need to disclose. Different interests involved. First goes to the mortgagor. Second goes to the mortgagee. It is not double insurance.

Whenis there a waiverby the insurer? o

•



•

•

When despite knowledge of the breach, it accepts the renewal premium

Case on motor vehicle policies. X was issued an ordinary driver’s license. Can only drive 4 wheeled vehicles. He drove a 10 wheeler. Vehicle involved in accident. Insurer not liable because X is not authorized to drive the 10 wheeled vehicle. o

Palermo case: ASKED IN BAR. Insurance contains provision that the driver must be owner or the third party authorized with valid driver license. Brought car to repair shop, and it was driven for a road test. Employees drove it for a road test. If it’s a third party driving [check?]

o

Stokes [?] case: European driving with his own license (which is valid for a period, but not after).

•

…[spaced out]

•

“Under influence of liquor” clause – no need to actually be drunk, as long as he is under the influence

•

Violation of material warrant entitles the other to rescind. Even if not rescinded, it can be launched as defense by the insurer.

•

When there is breach of warranty, it is presumed to be material.

•

Whenthere is breachof warrantywithoutfraud, whatis the rule? o

It only exempts the insurer from the time the breach occurred.

o

Givean example. 

X obtained fire insurance over his house. Warranted against storage of inflammable materials. On Sept 31, a fire broke out. On December 31 he stored

inflammable materials (fireworks), then a fire broke out. The insurer is not liable for the Dec 31 fire, but is liable for the Sept fire. o

Whatif there was fraud, i.e. there were inflammablematerialsinsidethe house? 

The policy doesn’t attach in the first place.

•

[I give up. Not listening today. warranty. Page 17-18 transcript]

•

[The next day…]

•

The insurer is not liable for loss caused by connivance of insured o

•

Ex. told someone to steal his car, sell parts, and claim insurance

•

o

But for fire insurance, the burden is on the insured to prove that it is not under an exempted risk

o

Ratio: because the thing is in possession of the insured, so he can best give an explanation for the loss

o

Radio Mindanao Case: [wrong interpretation of this rule]

Fire insurance – notice must be given without unnecessary delay o

If reported an unreasonable time later – ex. 6 months – opportunity is gone

o

Usually fire policies have a provision that claims must be filed within a certain time. Beyond that, barred.

o

Look at purpose  to give the insurer a chance to investigate the claim

Ex. committed arson

Ex. fire insurance policy covers store and stocks in trade. The house across the street caught fire. Everyone congregated. While distracted, robbers broke into the store and stole the stocks in trade. Fire is just a remote cause.

•

When proof is required, insured is not required to give proof that stands in court

Loss, the proximate cause of which is an excepted risk o

•

Just read transcript on breach of

Burden is on the insurer to prove that it is an excepted risk

Loss in which peril insured against is only a remote cause o

•

•

Loss from unlawful act – not liable o

•

boat arrived, the SMC rep met the captain and told the latter that the boat should be moved to a safer place since there is a typhoon brewing. The captain ignored it and tied the barge to the wharf. During the typhoon the rope broke, the barge was cut loose. Claim against insurance – the captain was grossly negligent. There insurer is not liable.

o Fire insurance policies say that they do not cover loss due to coup d’etat, rebellion, riots, etc.

•

Noda: police report should be sufficient

Defects in the notice or substantiation thereof which the insurer didn’t specify  waived

Loss where the insured is guilty of gross negligence o

SMC hired a shipping company to transport thousand cases of beer. Loaded on a barge. Towed by a tug boat. When the tug

o

Because the insured is usually a layman

•

Delay in presentation of a claim/proof of loss is waived if the insurance company did not invoke that as a reason to deny the claim

•

A reinsurer cannot intervene in the case of insurer and insured because the reinsurer has his own interest anyway

•

If the policy requires a certificate, and the insured cannot produce it, it is

•

After first layer, the subsequent layers are called reprocession

enough to say that he cannot produce it not because … [eh]  check section 92

•

…

•

Insurance is covered by the rule of blah blah blah fides

•

Take note of the cut-through clause

o

“I cannot submit the report not because the contents of the report are prejudicial, but because the investigator is abroad and cannot be found”

Double insurance

o

Insured can go straight to the reinsurer

•

o

Ok in California, invalid in England

Requisites: o

1. Insured must be the same 

Perils of the sea:

2. Several insurers

o

1. Connected with navigation

o

3. Same subject matter

o

2. Unusual movement of the sea/winds

o

Cathay: pipes arrived in rusty condition because it was stored in the hull of sea. The insurer was liable because it was perils

Ex. factory and stocks in trade – not the same

o

4. Same interest

o

5. Risk is the same

of the sea.  WRONG! Because nothing was unusual •

Barratry o

Learn the rules on reimbursement •

Reinsurance •

•

o



•

Ex. mortgagor mortgagee – not the same

Marine insurance

Willful misconduct, not mere wrong judgment

Answers for general average

Two types:

o

Those who were saved will contribute to the general average

o

Treaty

o

Insurance policy will cover share in general average

o

Facultative – case by case

o

DOES NOT cover particular average

 •

•

Ex. fruits became rotten due to nature of the fruits

•

“Arrest of the vessel”  covers order by administrative officials, and does not cover arrest order of court

Deviation o

Check the three types of deviations

o

Check when it is proper to make deviations

DOESN’T ANSWER for perils of the ship  o

Ship is unseaworthy

•

Rule on concealment is stricter, because the ship is usually in the high seas so the insurer is at a disadvantage – harder to inspect.

•

Marine insurance – belief of a third person as regards what is material

•

Once the vessel deviates, even if it returns to the original route, the insurer is exonerated.

•

Loss is either total or partial o

o

•

•

Any other deviation is not proper

Ex. surveyor saying that the ship is not seaworthy MUST BE DISCLOSED – it is material

Actual total loss  actual loss of the thing 

o

[On flag of the ship, etc.  spaced out

Renders it valueless

Constructive total loss is unique in marine insurance

o

Use of simulated papers, etc.]



Abandonment is act of insured after constructive total loss. He relinquishes his share to the insurer

o

If the loss was not due to these, even if these were committed, the insurer is STILLLL liable



If damage is more than ¾ of value of property insured, insured can declare constructive total loss

IMPLIED WARRANTIES • o

1. Sea worthy

o

2. will not deviate

o

3. Will not engage in illegal ventures

o

4. It will carry necessary papers if nationality was stipulated

Insurer is liable for those acts of insured in good faith o

•

Warranty of seaworthiness extends from the hull  also that it is properly laden, and the complement of the vessel (master, etc.) is

•

If there are different portions of the voyage, it must be seaworthy in all such portions

Ex. salvor’s fee, repairs in GF

•

If abandonment is proper but insurer refuses unjustly,

•

Silence for unreasonable period of time = acceptance

•

Marine insurer liable for all expenses (repairs, labor for recovery of property, etc.)

•



Motor vehicle liability insurance •

“Third party” excludes o

Driver, etc.

o

Relative by affinity/consanguinity within 2nd degree

o

Employee [see qualification]

• IntellectualProperty •

•

o

Even if you haven’t registered yet with the National Library

o

Unilever: Came out with an advertisement that is similar to PNG’s prior commercial. Unilever said that PNG’s commercial is not yet registered with the National Library. But the law is clear – no need to register to have rights over intellectual creation.

Are email and letters also covered?

This involves judgment of, for instance, the best Filipino short stories. So he has to get the consent of those whose stories he included in the compilation.

o

And if someone else wants to make another compilation, he cannot use the same set of stories since these were chosen by the first compiler; unless, of course, he gets permission.

Even choreography, musical compositions, architecture, sculptures, computer etc.

•

Paglinawan: A dictionary can be copyrighted. He came up with a Spanish-English dictionary where he borrowed 87% of the entries. He argued that you cannot have a monopoly on words. Court held that the original writer used his judgment in selecting which words will be used.

drawings,

To be protected it must be original. This is the main principle.

•

Plagiarism is different from infringement.

•

If the writer is anonymous, then it is the publisher that represents. But if the writer can still be identified (ex. Nick Joaquin as Quijano de Manila), then the writer still gives consent.

paintings,

Pilita Corales adopted A Million Thanks To You as her final song in concerts. In response, someone printed the word “thanks” a million times and it was not allowed to be registered because it is not an intellectual creation. Are derivativeworksalso created? o

•

Yes. Any form of text is covered.

•

•

o

Rights of intellectual creator exists from moment of creation

o

•

Whataboutcompilations?

o

•

If there are several writers and the parts are distinct, they only have copyright over the parts they prepare.

For DVDs? o

The producer, music composer, director of photography, screenwriter, author of the work on which the movie is based, etc.

o

But for collecting, the producer has the right.

•

If the work is done for hire or is part of his duties, then the employer will own the copyright.

•

Torrens system.

Yes, but you have to get the consent of the original creator. o

o

Examples of translations.

o

Or adaptations (ex. Miss Saigon, from Madame Buttefly)

these

are

dramatizations

of

novels,

or •

If you sell, mortgage, convey your copyright, you must register it with the National Library to bind third parties.

Owner can object to the distortion of his work.

•

Transfer of the work to new media will not violate… [?]

•

Howlongdo theserightslast?

•

o

Modern rights last up to 50 years after the death of the author.

o

They are not assignable.

The economic rights of author – need permission: o

Reproduction or substantial reproduction (ex. photocopying an entire book)

o

Derivative works

o

Public distribution or exhibition

•

Businesses started playing certain songs to drum up business. Technically, this is economic exploitation of the work.

•

The character Charlie Brown is copyrighted. So sporting goods cannot use Charlie Brown on their goods. Or a bakery cannot use Cookie Monster.

•

Someartist connoisseursboughtX’s paintingsfor a cheapprice. Then they sold the paintingsfor a fortunewhenhe becamefamous. Whatis X’s right? o

•

He must get 5% of the selling price.