Negotiable Instruments (Sundiang K-notes).pdf

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

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

PROMISSORY NOTE 1. preparation and signing (writing)

6. presentment for payment or dishonor by non-payment *drawee either pays the bill or refuses to pay it 7. notice of dishonor *in case of dishonor, notice of dishonor is required to be given to persons secondarily liable, informing them that the maker or drawer/acceptor refused to pay or accept the instrument 8. protest (required only for FOREIGN bills of exchange) 9. discharge

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

2. issuance, first delivery to the payee 2. issuance, first delivery to the payee 3. negotiation 3. negotiation, transfer from one person to another so as to constitute the transferee a holder 4. presentment for acceptance, applicable only to CERTAIN TYPES of bills of exchange, presentment to the drawee in order for him to signify his assent to the order of the drawer 5. acceptance or dishonor by nonacceptance *drawee either accepts or dishonors the bill

4. presentment for payment or dishonor by non-payment 5. notice of dishonor 6. discharge **presentment for acceptance is not necessary in promissory notes because the drawer already knows that he is liable to pay, and his liability is primary in character.

PROMISSORY NOTE An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer

BILL OF EXCHANGE An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time, a sum certain in money to order or to bearer

CHECK A bill of exchange drawn on a bank, payable on demand

Q: Are negotiable instruments legal tender?

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact No; they are not ‘fully guaranteed’ by the government to be used for the payment of debts, as required by sec.52 of the new central bank act. Also, art.1249, NCC specifically states that negotiable papers and other mercantile documents do not produce the effect of payment until they are encashed or when through the fault of the creditor, they have been impaired. (art.1249, NCC; sec.52,NCBA) Q: What is the difference between a bill of exchange and a promissory note? BILL OF EXCHANGE - is in the nature of an unconditional ORDER

PROMISSORY NOTE - in the nature of an unconditional PROMISE

- signed by the DRAWER

- signed by the MAKER

- requires ACCEPTANCE before presentment for payment

- acceptance prior to presentment for payment is not necessary

Q: Differentiate a bill of exchange from a check? BILL OF EXCHANGE -may or may not be drawn on a bank

CHECK -always drawn on a bank

-payable on demand or at a fixed determinable future time

-always payable on demand

-requires presentment for acceptance

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

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

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

-death of the drawer does not revoke the drawee’s authority to pay

-death of drawer revokes the bank’s authority to pay

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

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

II. NEGOTIABILITY vs. NON-NEGOTIABILITY Q: What are the essential requisites of a negotiable instrument? An instrument to be negotiable must conform to the following requirements: (a) It must be in writing, and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named therein with reasonable certainty (sec.1, NIL) Q: How is negotiability determined? 1. By considering only what appears on the face of the instrument 2. By ascertaining the presence/absence of the requisites under sec.1, NIL 3. By considering the whole of the instrument *NB: if what appears on the face of the instrument is ambiguous, the provisions of Sec.17, NIL should be followed

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact Q: Does the phrase ‘a sum certain in money’ mean the same thing as a ‘certain sum of money’? No, they don’t mean the same thing. ‘A sum certain in money’ refers to a fixed amount, whereas ‘A certain sum of money’ makes no reference to a fixed amount. Q: would an additional fee to the principal amount payable and stated on the face of the instrument affect negotiability? No, the instrument is still negotiable as per sec.2, NIL Q: what are the requirements for the said installments? 1. The number of installments must be stated 2. The maturity dates for each installment must be stated Q: Suppose the 2nd installment’s maturity date wasn’t fixed? The instrument is still negotiable, the installment shall be payable on demand Q: the instrument says ‘I promise to pay Juan php100,000 from my salary in san beda college of law’. Is it negotiable> No, the promise is conditional (on the availability of funds), it contravenes sec.1, NIL Q: Is there a difference between the phrase ‘bearer, Juan dela Cruz’ and ‘Juan dela Cruz or bearer’? Yes, the former phrase employs the word ‘bearer’ as an adjective, the latter, a noun. Consequently, the former phrase would make an instrument non-negotiable. Q: What is the difference between a negotiable instrument and one that is non-negotiable? *Refer to table contained in the notes on Summary of Doctrines, pages 1 and 2

Q: What is the effect should the payee fail to give notice of dishonor to an endorser? The endorser is discharged Q: Does sec.1(e) apply to a promissory note? Obviously not. There is no ‘drawee’ to speak of, in terms of promissory note Q: Suppose the instrument gives the holder an option to require something to be done instead of demanding payment in money, is the instrument negotiable? Yes, if the HOLDER is the one given the option. If, on the other hand, it is the DRAWER/MAKER who can choose to do anything other than pay the holder in money, the instrument is not negotiable. *see: sec.3(d), NIL Q: When can we say that the instrument is still negotiable when it states a source of funds for the payment of the instrument? The general test is to ascertain whether or not the source of funds so stated carries the GENERAL CREDIT of the maker or drawer. If it does, the instrument is negotiable. If it does not, and it merely carries the credit of a PARTICULAR fund, the instrument is no longer negotiable. *Recall: one of the essential requisites of negotiability is that the promise or order to pay a sum certain in money must be UNCONDITIONAL Q: If an instrument states a particular fund out of which reimbursement is to be made by the drawee, is it rendered non-negotiable? No, what renders the instrument non-negotiable is when the fund for PAYMENT is particularly specified, not one for reimbursement.

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact There is a difference between a fund for payment and a fund for reimbursement. *Notice here that negotiability is NOT affected because the order to pay is still unconditional. The drawee must pay, and then later on reimburse himself. If there aren’t enough funds for reimbursement, well that’s between the drawer and the drawee. The important thing is that the obligation to pay the payee or holder has been met unconditionally. Q: When do we say that the sum payable is ‘certain’? When the amount that is to be paid can be determined on the face of the instrument in accordance with Sec.2, NIL

Q: Who is a ‘holder’? The ‘holder’ is a payee or endorsee in possession of the instrument. Depending on the TYPE of instrument, the holder is – 1. A payee or endorsee who is IN POSSESSION of the instrument, if the same is an ORDER instrument; or 2. The one IN POSSESSION of the instrument, if the same is a BEARER instrument Q: What is the difference between Negotiability and Assignability? NEGOTIABILITY pertains to special kinds of contracts (i.e.: those involving negotiable instruments or documents) HDC is free from personal defenses

Re: CONTRACTS INVOLVED

Q: when is an instrument payable on demand? (Sec.7, NIL) Q: When is it payable to bearer? (sec.9, NIL) Q: When the only or last endorsement is one in blank, what is the effect? As per sec.9(e), NIL, the instrument shall be payable to bearer. Q: Correlating sec.9(e) and sec.40, NIL, what conclusion can be drawn? The cardinal rule in negotiable instruments: once a bearer instrument, always a bearer instrument. *If the only or last endorsement is an endorsement in blank, the instrument is payable to bearer under sec.9(e). Sec.40, on the other hand, states that ‘where an instrument, payable to bearer, is endorsed specially, it may nevertheless be further negotiated by delivery xxx’. This means that once an instrument is endorsed in blank, it becomes payable to bearer, and even if a subsequent endorser endorses it specially, the instrument is NOT CONVERTED into an order instrument, but remains a bearer instrument which can ‘be further negotiated by delivery’.

Re: AVAILABLE DEFENSES Re: CAUSE FOR THE CONTRACTS Re: LIABILITIES OF ENDORSER

Re: WARRANTIES

Re: ACQUISITION OF A BETTER RIGHT BY HOLDER OR ASSIGNEE

cause is presumed endorser is not liable unless there be presentment for payment/acceptance a general endorser warrants the solvency of the principal debtor a holder may acquire a better right than the prior endorser (i.e. as in the case of a HDC under the shelter rule)

ASSIGNABILITY pertains to all manner of contracts in general

assignee is not immune from defenses between and among prior parties cause is presumed

assignor does not warrant the solvency of the principal debtor acquisition of a better right by the assignee is precluded subrogation, the assignee merely steps into the shoes of the assignor

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

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact

Q: If an instrument has a stipulation as to the CURRENCY which would be used for payment, is it rendered non-negotiable? No, by ‘sum certain in money’, sec.1 does NOT equate ‘money’ with ‘legal tender’. Parties can therefore validly agree that the ‘money’ may be paid in currency other than pesos. Q: Is the phrase ‘pay to X or order’ the same as ‘pay to the order of X’? Not quite. ‘pay to X or order’ means that the instrument is to be paid either to (a) X, the bearer or (b) to whoever X might want to be paid (i.e.: his order). On the other hand ‘pay to the order of X’ does not, at face value, include X as a payee but rather the person/s whom X might order to be paid. However, it MAY mean the same thing, if X intends to endorse the instrument to himself, make it payable to himself. In that event, the distinction between the two phrases disappears. Q: If the instrument is ambiguous on its face or bears omissions, how do we construe it? In accordance with Sec.17, NIL Q: If it is not clear whether the instrument is a bill or not, what can the holder do? The holder can treat the instrument as either one or the other at his election (sec.17[e]) Q: Suppose there is ambiguity as to whether the instrument is a note or a bill. What is more advantageous to the holder – to treat it as a note, or as a bill? As a promissory note, because of the primary liability of the maker, and the relatively more expedient steps in obtaining the discharge of the instrument

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

II. TRANSFER AND NEGOTIATION Q: What is meant by ‘negotiation’? The transfer of the instrument from one person to another so as to constitute the transferee the holder thereof (Sec.191) Q: How is negotiation effected? Depending on the type of instrument involved – 1. An ORDER instrument is negotiated by endorsement, completed by delivery 2. A BEARER instrument is negotiated by mere delivery Q: What is an endorsement? An endorsement is a transaction effected by writing on the instrument or on an attached paper thereto (i.e.: an allonge) of one’s own name and signature, specifying to whom or to whose order the instrument is to be payable (sec.30, NIL)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact Q: What are the types of endorsements?

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

1. SPECIAL -specifies the person to whom or to whose order the instrument is to be payable -legal effect: for subsequent negotiations, the instrument requires the endorsement of the person so specified

BASIC TYPES OF ENDORSEMENTS *see: sec.9(e); sec.40; sec.34, sec.35

2. BLANK -does not specify any person to whom or to whose order the instrument is payable -legal effect: the instrument is payable to bearer (if it was originally an order instrument, it ceases to be payable to order and becomes payable to bearer. After this, it REMAINS a bearer instrument, even if a subsequent endorser endorses it specially) **important: an instrument that STARTED OUT as a BEARER instrument may be converted to an order instrument and reconverted again to a bearer instrument; but once this is done i.e.: once an order instrument becomes a bearer instrument , it stays a bearer instrument. The only way to simplify it is that a bearer instrument may only become an order instrument ONCE – that is, when it was originally made as a bearer instrument and subsequently endorsed specially. If it became a bearer instrument because of an endorsement in blank, it can’t be converted to an order instrument. Point of no return, reached.

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

4. CONDITIONAL -payment is conditioned by either the happening or non-happening of an event -legal effect: the party required to pay may disregard the condition and go ahead and pay, however, the person who is paid must hold the payment or its proceeds IN TRUST, and wait for the event to happen or not. It does, or doesn’t, the endorsee/trustee must return the money or its proceeds. 5. QUALIFIED -the endorser negatives personal liability by writing the words ‘without recourse’ or ‘sans recourse’ or others of like import on the instrument -legal effect: the endorser becomes a mere assignor of the title to the instrument, but negotiability of the same is not impaired

Q: Under sec.40, what is meant by a ‘fictitious person’? Is this to be interpreted literally? No, there is still a person involved, except that this person does not have any right to the instrument. This is what is meant ‘fictitious’ Q: what is material in determining whether a person is ‘fictitious’? The intention of the maker

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

(b) That he became the holder of it before it was overdue and without notice that it has previously been dishonored, if such was the fact; (c) That he took it in good faith and for value; and (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (sec.52, NIL

Q: Under sec.40, why should the special endorsers be held liable, despite the fact that the instrument remains a bearer instrument anyhow? Because of the accumulation of secondary contracts. The endorsements made by these people are, in and of themselves, contracts for which they may be held liable. Q: Under Sec.38 (ie. qualified endorsement), to whom does the phrase ‘without recourse’ refer to? ‘Without recourse’ against whom? Against the qualified endorser Q: Under Sec.39 (i.e.: conditional endorsement), what is the reason that the person paying may disregard the condition? The relativity of contracts. The payor is not a party to the principal contract, which is why he may disregard the condition and pay before it happens. Q: What is conditional here? (sec.39) The endorsement Q: Do all types of restrictive endorsements destroy negotiability? No, only the one which prohibits further endorsement

III. DUE COURSE HOLDING Q: Who is a holder in due course? A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face;

*The prima facie presumption is that every holder of negotiable paper is a HDC (sec.59), however, the same presumption may be refuted and in such an event, it becomes incumbent upon the holder to prove that he or some person under whom he claims acquired the title as HDC. Q: May a payee be considered a holder in due course, considering that the instrument was simply issued to him and not endorsed? Yes *cross refer sec.52 with sec.191 – sec 191 defines a ‘holder’ as the payee or endorsee of a bill or note who is in possession of the same, or one who is a bearer of the same. ‘Holder’ under sec.52 must be read in the light of sec.191’s definition, thus a payee may be a holder, and since a holder of a negotiable instrument may become a holder in due course, a payee may logically become a HDC as well. This was the ruling of the SC in Eulalio Prudencio et.al. c. CA, 143 SCRA 7, 16. Q: what are the rights of a HDC? 1. To take the instrument free from personal defenses between prior parties 2. To enforce payment for the full amount against all parties liable thereon (sec.57) Q: What is the Shelter Rule? It is the doctrine which allows a holder who derives his title through a holder in due course, and who is not himself a party to any

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact fraud or illegality affecting the instrument to have all the rights of the HDC in respect of all parties prior to the latter. (Sec.58) *NB: the shelter rule allows an innocent holder to derive his title from a holder in due course. The scenario contemplated by the law is one where the negotiation of an instrument was tainted by fraud or illegality before it came into the hands of the present holder. The present holder, therefore, who had nothing to do with the infirmity in the instrument, may derive his title from the HDC before him, and will himself be deemed a HDC. Q: What is the exception to the shelter rule? A prior party who was NOT a holder in due course may NOT purchase the instrument from the sheltered holder (who is of course, a HDC) and gain a clean title thereto. *NB: suppose a prior party had something to do with the fraud tainting the negotiation of the instrument. He allows an innocent person to purchase it. The innocent person, by operation of law, becomes a sheltered holder, a holder in due course. May the prior party again purchase the instrument from the sheltered holder and claim to be free of all personal defenses? Obviously not. The shelter rule cannot be used to circumvent the law. The rule under sec.58 is not available to the person repurchasing the instrument, if he was party to the fraud before the sheltered holder acquired the instrument. Such a person is not allowed to improve his position by reacquiring the instrument from a HDC. In the event of repurchase, the instrument, as regards him, would still be subject to both personal and real defenses. This was the ruling in the case of Fossum v. Hermanos, et. al., 44 Phil 713, 717-718.

Q: Suppose the instrument was defective, but the defect was not apparent. Does this destroy due course holding? No, sec.52 requires that the instrument is complete and regular on its face. If the defect was not apparent, the holder may still be deemed a HDC. Q: What are circumstances that destroy due course holding? 1. Irregular and defective instruments 2. Taking the instrument when it was overdue 3. The holder has notice of the infirmity or defect in the instrument 4. The holder did not take the instrument in good faith 5. The holder did not take the instrument for value 6. The holder ignored circumstances which should have put him on inquiry (i.e.: the check was crossed) 7. The holder was not a HDC, and was a party to an illegality during negotiation, and he tried to reacquire the instrument from a subsequent HDC.

IV. LIABILITIES AND ENFORCEMENT THEREOF Q: Who are the parties primarily and secondarily liable for a negotiable instrument? TYPE OF INSTRUMENT

*NB: the exception also applies to agents.

PARTIES LIABLE Acceptor (see: sec.127) Accommodation Acceptor (sec.29)

NATURE OF LIABILITY

PRIMARY

BILL OF EXCHANGE General Endorsers (see: sec.62)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact General Endorsers (sec.66)

Endorsers of Bearer Instruments (sec.67) Accommodation Endorsers (sec.29)

Acceptor for Honor (sec.165) SECONDARY

Acceptor for Honor (sec.165)

Maker (see: sec.60)

PROMISSORY NOTE

PRIMARY

General Endorsers (see: sec.62) Endorsers of Bearer Instruments (see: sec.67)

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

Acceptor (sec.127)

CHECK

Drawer (sec.61)

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

SECONDARY

Accommodation Endorser (sec.29)

Accommodation Acceptor (sec.29)

Accommodation Drawer (sec.29) IMPORTANT: -An accommodating party’s liability is not strictly primary and secondary, per se. It depends on what capacity the accommodating party signed – either as maker, drawer, endorser or acceptor. This is because the accommodating party, by lending his name, becomes a surety for the accommodated party. Ergo, the capacity in which he signs determines his liabilities – liabilities that may either be primary or secondary. The same principle goes for persons signing as agents if they fail to sign in accordance with sec.20.

Drawer (sec.61)

Accommodation Maker (sec.29)

SECONDARY

PRIMARY

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

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact

PARTY 1.

ACCEPTOR 2.

1. GENERAL ENDORSER 2. 3. ENDORSER OF A BEARER INSTRUMENT

4.

1. QUALIFIED ENDORSER

PERSON NEGOTIATING BY MERE DELIVERY

2. 3. 4.

WARRANTIES The existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; The existence of the payee and his then capacity to endorse *sec.62 That the instrument is genuine and in all respects what it purports to be; That he has good title to it; That all prior parties had capacity to contract; That the instrument is, at the time of his endorsement, valid and subsisting *secs.66, 67 That the instrument is genuine and all respects what it purports to be; That he has good title to it; That all prior parties had capacity to contract; That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless *sec.65

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

Q: What is the liability of an agent who signs a negotiable instrument on behalf of another person? The agent is NOT personally liable if he signs in the manner prescribed under sec.20, that is if he – 1. Adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity; and 2. Discloses his principal Failure of an agent to sign in this manner would operate to make him personally liable, as if he had signed the instrument on his own. Q: What is the legal effect of a signature per procuration? It operates as notice that the agent has but a limited authority to sign and the principal is bound only in case the agent so signing acted within the actual limits of his authority *see: sec.21 Q: When is a party deemed an accommodation party? When the person meets the following requisites – 1. He must be a party to the instrument, signing as maker, drawer, acceptor or endorser; 2. He must not receive value therefor; 3. He must sign for the purpose of lending his name or credit to some other person Q: May a person who does not sign the instrument be held liable? GENERALLY, No. But there are exceptions where a person who did not actually sign the instrument may be held liable – 1. One who signs in a trade or assumed name (sec.18) 2. One who signs through an agent or authorized person (sec.19) 3. Incapacitated persons who sign through their legal guardians 4. Forgers of signatures (sec.23)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact 5.

Persons whose signatures were forged but who are precluded from setting up the defense of forgery (sec.23) 6. In case of constructive acceptance (sec.137) 7. Endorsers who sign on an allonge 8. Persons who negotiate by mere delivery (sec.65) Q: What are the steps in holding the secondary parties liable? PROMISSORY NOTE

1.

2.

presentment for payment within the required period to the maker

BILL OF EXCHANGE

1.

Presentment for Acceptance

2.

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

If the note is dishonored, notice of dishonor should be given to the endorsers

3.

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

ACCEPTOR FOR HONOR or REFEREE IN CASE OF NEED 1. Protest for nonpayment

Q: When is presentment for payment unnecessary? 1. As far as the DRAWER goes, when he has no right to expect or require that the drawee or acceptor will pay the instrument (sec.79) 2. As regards the ENDORSER, where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented (sec.80) 3. Where, after the exercise of reasonable diligence, presentment cannot be made (sec.82) 4. Where the drawee is a fictitious person (sec.82) 5. When presentment has been waived, either expressly or impliedly (sec.82) Q: Does non-presentment of a bill relieve the drawer of all liability? No, the drawer is only discharged from the liability to the extent caused by the delay or non-presentment. Failure to present on time does not totally wipe out all liability. Q: What is acceptance? The signification by the drawee of his assent to the order of the drawer to pay a sum certain in money embodied in a bill of exchange Q: What are the requisites of acceptance? 1. It must be in writing; 2. Must be signed by the drawee; 3. Drawee must assent to paying a sum certain in money and not by any other means Q: When is presentment for acceptance required? 1. Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument;

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact 2.

Where the bill expressly stipulates that it shall be presented for acceptance; 3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee (sec..145) Q: How is presentment for acceptance made? 1. By or on behalf of the holder; 2. At a reasonable hour; 3. On a business day or before the bill is overdue; 4. At the proper place; 5. To the drawee or the person authorized to accepted or refuse acceptance on his behalf 6. If the bill is addressed to 2 or more drawees who are not partners, presentment must be made to all of them unless one has the authority to accept or refuse acceptance on their behalf in which case presentment must be made to that person only; 7. Where the drawee is dead, presentment may be made to his personal representative; 8. Where the drawee has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee (secs.144, 145, 146, 72, 85, 73) Q: when is presentment for acceptance unnecessary or excused? 1. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill; 2. Where, after the exercise of reasonable diligence, presentment cannot be made;

3.

Where, although presentment has been irregular, acceptance has been refused on some other ground (sec.149) Q: What is constructive acceptance? Acceptance by provision of law, whereby the drawee is deemed to have accepted the instrument should either of the following circumstances arise: 1. The bill was delivered to the drawee and he destroys the same; 2. The bill was delivered to the drawee but he refuses to pay within 24 hours or within such other period as the holder may allow to return the bill either as accepted or nonaccepted (i.e.: drawee unduly retains the bill) (sec.137) Q: What is a notice of dishonor? A notice which informs the secondary parties that the instrument was either dishonored by non-acceptance or non-payment, and that the holder of the instrument so dishonored intends to enforce the liabilities of the persons so notified Q: Does the payee have a legal obligation to inform the drawer that the instrument was dishonored? No, the payee is under no obligation to do so. The notice is only required to preserve the payee’s right to recover on the dishonored instrument, since failure to give notice to the drawer or endorsers operates to discharge them of their respective liabilities on the instrument Q: If no notice was given, is the drawer completely absolved of liability to the payee? No, the contractual liability still subsists

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact instrument;

Q: When is an instrument considered dishonored by non-payment? 1. When it is duly presented for payment and payment is refused or cannot be obtained; or 2. Presentment is excused and the instrument is overdue and unpaid (sec.83) Q: When is a bill dishonored by non-acceptance? 1. When it is duly presented for acceptance and such acceptance is refused or cannot be obtained; 2. When presentment for acceptance is excused and the bill is not accepted (sec.149) Q: May a person give notice of dishonor to prior parties, even if he was not authorized to do so? Yes, sec.91 states that notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not; effectively then, a person may give notice for another even if he was not authorized to do so Q: To whom should notice be given to the endorsers, in a case where the endorsers are partners? To either of them, pursuant to the principle of mutual agency between and among partners (Art.1818, NCC) Q: When is notice of dishonor excused or unnecessary?

1.

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

1.

ENDORSER (sec.115) when the drawee is a fictitious person or person not having capacity to contract, and the endorser was aware of that fact at the time he endorsed the

2.

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

2.

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

3.

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

3.

where the instrument was made or accepted for his accommodation

4.

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

5.

where the drawer has countermanded payment

*NB: Notice to these persons under these circumstances is no longer necessary because they either (a) knew of the dishonor beforehand; or (b) were themselves responsible for the dishonor

Q: May notice of dishonor be waived? Yes, it may be waived either before the tine of giving notice has arrived or after the omission to give due notice, and the waiver may be either express or implied ( sec.109) Q: Who are bound by the waiver of notice of dishonor? If the instrument itself contains the waiver, all parties to it are bound. If on the other hand, the waiver is written above the signature of a particular endorser only, then only that endorser is bound.(sec.110) Q: Does the failure to give notice of dishonor affect the rights of a subsequent HDC?

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact No, an omission to give notice of dishonor by non-acceptance does not prejudice the rights of a HDC subsequent to the omission (sec.117) Q: What is protest? A formal statement in writing made by a notary public at the instance of the holder declaring that the instrument has been presented for payment or for acceptance but the same was dishonored. It is generally indispensable only for foreign bills of exchange, however, the need for it may also be waived. Q: May protest be made for inland bills? Yes, although the NIL only requires protest for foreign bills, there is no prohibition against making a protest for the dishonor of inland bills. (sec.152, sec.118) Q: In what instances is protest necessary? 1. Where a foreign bill was dishonored by non-acceptance (sec.152) 2. Where a foreign bill, previously accepted, was subsequently dishonored by non-payment (sec.152) 3. Where a bill is sought to be accepted for honor (sec.161) 4. Where a bill is to be presented for payment to an acceptor for honor (sec.167) 5. where a bill is dishonored by an acceptor for honor (sec.170) Q: What are the legal effects of a waiver of protest? 1. Protest itself is waived; 2. Presentment for payment or acceptance is also deemed waived; 3. Notice of dishonor is also deemed waived

Q: when is there an acceptance for honor? When the original drawee refuses to accept a bill of exchange and there is a need to save the credit of certain parties. A third person or stranger to the instrument accepts the instrument for honor thereby making himself liable to all parties to the bill subsequent to the party for whose honor he accepted Q: What is the nature of the liability of the acceptor for honor? Secondary, because his engagement is to pay only if the bill is not paid by the drawer and provided that it has been duly presented for payment and protested for non-payment and that notice of dishonor is given to him. *NB: The nature of an acceptor for honor’s liability is different from that of an ordinary acceptor in this regard, since an ordinary acceptor is primarily liable the moment he accepts the instrument Q: What are the requisites of acceptance for honor? 1. The bill of exchange has been protested for dishonor by non-acceptance (and for better security); 2. The acceptor must be a stranger to the bill 3. The holder must consent to the acceptance for honor 4. The acceptance for honor must be made before the instrument is overdue 5. The acceptance for honor must be in writing, must indicate that it is an acceptance for honor, and must be signed by the acceptor for honor ( secs.161, 162, 165) Q: who may make a payment for honor? Any person, for the honor of any person liable on the instrument or for the honor of the drawer (sec.171)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact

V. THE SHORT-CUT RULE, TRUNCATION OF RIGHT OF RECOURSE IN FORGED CHECKS Q: What is the right of recourse of the parties to a forged check where the signature forged belonged to the payee? The short-cut rule holds that the payee whose signature was forged can go directly to the collecting bank, regardless of whether or not the checks were actually delivered to the payee. (Associated Bank, et. al. v. CA and Reyes, GR. No 89802, May 7, 1992; Westmont Bank v. Ong, GR No.132250, January 30, 2002) Q: Mario issued a check drawn against his checking account with BOC, the drawee-bank, to Pablo. Tisco stole the check and forged Pablo’s signature as endorser, thereby making it appear that the check was duly endorsed to him by the latter. Tisco then deposited the check with RCB, his bank whom he designated as collecting bank. Determine the respective rights of recourse of the parties. (NEGO MIDTERMS – AY 2012-2013) Pablo, as payee whose endorsement was forged by Tisco and who lost the note to the latter through theft, may proceed against RCB, the collecting bank, for recovery of the amount. RCB became liable as a general endorser when it endorsed the check to the drawee-bank, BOC, thereby warranting that the check was genuine and in all respects what it purports to be. RCB, the collecting bank, may only recover against Tisco, the forger-depositor, because no privity of contract exists between the maker and the collecting bank, nor between the payee, Pablo, and the collecting bank. The collecting bank may hold the depositor liable because the depositor is its client. Mario, as maker, may proceed against the drawee-bank and not the collecting bank because there is no privity between the him as maker and the collecting bank.

The collecting bank is ultimately liable. The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payee’s endorsement was genuine before cashing the check. As a general rule, a bank or corporation who has obtained possession of a check upon an unauthorized or forged endorsement of the payee’s signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained (Westmont Bank v. Ong, cited above) *The theory behind the rule is that the possession of the check is wrongful and when the money had been collected, the collecting bank can be held liable because it is deemed to have held the money for the rightful owner in order for the latter to recover them. The position of the bank taking the check on the forged or unauthorized endorsement is the same as if it had taken it and collected the money without endorsement at all and the act of the bank amounts to conversion of the checks. *The rationale is to expedite the right of recourse of the payee, to reach by a desirable short-cut, the person who ought to be allowed to recover directly from the collecting bank, regardless of whether the check was delivered to the payee or not *IMPORTANT: -This rule is NOT readily applicable to a case where the signature that was forged belonged to the DRAWER, or to OTHER SUBSEQUENT ENDORSERS. -If the drawer’s signature was forged, the drawer may not be held liable for the amount on the instrument (although he may certainly be held liable for the underlying contract).

Q: what is the rationale behind the short-cut rule?

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

instrument 4. Material Alteration 5. Ultra Vires act of a corporation 6. Fraud in Fact 7. Illegality 8. Vicious force or violence 9. Lack of authority 10. Prescription 11. Discharge in insolvency

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

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

VI. DEFENSES Q: What is a personal defense? One which involves the relationships of the parties between and amongst themselves, wherein there is a true and valid underlying contract but where, for various reasons (i.e.: fraud, duress, mistake, prior breach of contract by the holder, etc.), the defendant is excused from his obligation to perform. Q: What is a real defense? One which involves the instrument or the underlying contract itself, wherein there is an absence of one or more of the essential elements of a contract or where the admitted contract is vitiated Q: What defenses may be raised against a HDC? Only real defenses – those which call into question the instrument or the underlying contract. REAL DEFENSES 1. Minority (available only to the minor) 2. Forgery 3. Non-delivery of an incomplete

4. Conditional delivery of a complete instrument 5. Fraud in inducement 6. Filling up blanks without authority to do so 7. Duress of intimidation 8. Filling up blanks beyond a reasonable time 9. Transfer in breach of faith 10. Mistake 11. Ante-dating or post-dating for illegal or fraudulent purposes

PERSONAL DEFENSES 1. Failure or Absence of consideration 2. Illegal consideration 3. Non-delivery of a complete instrument

*NB: although the defense is a real one, the negotiation still passes title to the holder, the same rule also applies to corporations with regards to an ultra vires act – the corporation may raise it as a defense but the negotiation still transfers title Q: What is delivery? The transfer of possession of the negotiable instrument by one person to another with the intention to transfer title to the instrument Q: What is the effect if an instrument which is not complete was delivered? The delivery will not effect a valid contract in the hands of any holder as against any person whose signature was placed thereon prior to delivery (sec.15) Q: When may delivery be deemed valid? When it is made either by or under authority of the person making, drawing, accepting or endorsing the instrument (sec.16) Q: What are the rules involving delivery?

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact 1. 2.

A negotiable instrument must be delivered Delivery must either be by or under authority of the person making, drawing, accepting or endorsing the instrument 3. Delivery is presumed to have been made if the instrument is no longer in the hands of the maker or drawer for the purpose of issuing it, or the endorser for the purpose of transferring title 4. As between immediate parties and remote parties who are not holders in due course, the delivery of a complete instrument may be established to be conditional or for a special purpose, and not for transferring title 5. As between immediate parties and remote parties who are not holders in due course, it may be established that there was no delivery at all of the complete instrument 6. As to holders in due course, it cannot be established that there was no delivery because delivery as to the HDC is conclusive upon his possession of the instrument 7. As to a HDC, it cannot be established that the delivery was only conditional or for a special purpose (sec.16) Q: What are the rules with regard to filling up blanks in a negotiable instrument? 1. A person in possession of such an instrument has prima facie authority to complete the instrument by filling it up strictly in accordance with the authority given and within a reasonable time 2. If a person delivers a blank paper which contains his signature and which he intends to convert into a negotiable instrument, the person to whom it is delivered has prima facie authority to fill it up for any amount in accordance with the authority given and within a reasonable time;

3.

If the holder of the instrument, after it was filled up, is a HDC, the holder may enforce the instrument as if it were filled up with the proper authority and within a reasonable time (sec.14)

Q: when is fraud a real defense? When is it merely a personal one? FRAUD IN EXECUTION/ FRAUD IN FACTUM -person is induced to sign an instrument without knowing its character as a note or bill

-a REAL defense

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

Q: When may an alteration become a defense? When it is material (sec.1, 125) Q: Is material alteration a complete defense? No, only a partial one. A HDC who is in possession of a materially altered instrument and who is not a party to the alteration may enforce payment thereof according to its original tenor (sec.124) Q: What is the effect of ante-dating or post-dating a negotiable instrument? Ante- or post-dating does not per se affect the instrument. A personal defense only arises when the ante-dating or post-dating was done for a fraudulent or illegal purpose Q: what is the effect of forgery?

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

PARTY WHOSE SIGNATURE WAS FORGED

Maker

PROMISSORY NOTE

Subsequent holder cannot enforce payment against the drawer, drawee or payee Endorsers prior to the forgery may set up the real defense of forgery

EFFECTS

Endorsers subsequent to the forgery are still liable BILL OF EXCHANGE

Endorsers

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

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

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

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

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

Drawer

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

Q: How does the ‘Cut-ff Rule’ operate? Parties prior to the forged signature are cut-off from the parties after the forgery and cannot be held liable for the forgery. These parties may validly set up the defense of forgery against any holder, including a HDC. Q: Are there any exceptions to the cut-off rule? Yes, prior parties may still be held liable if they are precluded from setting up the defense of forgery either because of their warranties, representations of their negligence (i.e.: endorsers who had anything to do with the forgery prior to its commission may still be held liable)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact

Q: What is the effect of an insertion of a wrong date on an instrument? The act becomes a personal defense between immediate and prior parties, and the HDC has the right to regard the wrongfully inserted date as the true date (sec.13) Q: Senator Corupto executed a negotiable promissory note payable to Simpo or the latter’s order, as a reward for the political support and friendship given by Simpo to the Senator. Later on, the note was negotiated to Hovo, a holder in due course. May Hovo enforce the note against Corupto? Would your answer remain the same, if it were Simpo who would seek to enforce payment against Corupto? (NEGO MIDTERMS – AY 2012-2013) 1. YES, Hovo may enforce the note against Corupto. Hovo, being a holder in due course, possesses the right to enforce the instrument for the full amount stated thereon against the maker, Corupto; and has taken the instrument free of all personal defenses between prior parties. Corupto may not set up the defense of want or absence of consideration against Hovo because the same is merely a personal defense, and personal defenses may not be raised against a holder in due course. 2. NO, The same answer above would not apply in the event that it would be Simpo seeking to enforce the note against Corupto. The note was issued for ‘support and friendship’ – and as such, Corupto may set up as a personal defense the want or absence of consideration for the issuance of the note. ‘Friendship and support’ (in the same manner as love and affection) do not constitute ‘value’ or consideration under the ambit of the negotiable instruments law. Absence or lack of consideration is a defense pro tanto between immediate parties, and against a holder who is not a holder in due course. Q: May lack of consent be ratified?

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

VII. DISCHARGE OF AN INSTRUMENT Q: What is discharge? Release from further liability – 1. AS TO THE PAPER ITSELF: the end of a contractual obligation 2. AS TO THE PARTIES: the release of some or all of them from further obligation and liability under the instrument Q: Is there such a thing as partial discharge? Yes, as when the instrument (i.e.: the contractual obligation it represents) is not yet discharged, and only part or some of the obligors are released. Q: Suppose all the obligors are released, what happens to the instrument? The instrument is deemed released as well Q: How is an instrument discharged? 1. By payment in due course by or on behalf of the principal debtor 2. By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; 3. By the intentional cancellation thereof by the holder; 4. By any other act which will discharge a simple contract for the payment of money;

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact 5.

When the principal debtor becomes the holder of the instrument at or after maturity in his own right (sec.119) Q: What is meant by payment in due course? Payment is said to have been made in due course when it is made at or after maturity date of the instrument to the holder thereof in good faith and without notice that his title is defective (sec.88) Q: May payment be made by the delivery of another negotiable instrument? No (Art.1249, NCC) Q: What is the effect of payment by a secondary party? The instrument is NOT discharged, but such a party is remitted to his former rights with regards to prior parties (i.e.: he becomes a holder again and not just an endorser), and he may strike out his own and all subsequent endorsements (those made by the people he owed) and re-negotiate the instrument, EXCEPT when (a) the instrument is payable to the order of third person and the payment was made by the drawer; and (b) where it was made or accepted for accommodation and has been paid by the party accommodated. (sec.121) Q: Why is a prior party who reacquires the instrument permitted to strike out endorsements? Because the endorsements he strikes out are those which are not necessary for his title Q: why does payment by the party accommodated where the instrument is made or accepted for his accommodation discharge the instrument? Because the payment is in effect one made by the principal party (since the accommodating party acts as surety for the

accommodated party, payment by the latter is actually payment by the principal debtor which discharges the instrument) Q: Why does payment by the drawer discharge the instrument under sec.121(a)? Because the drawer is the party ultimately liable in case the instrument is drawn payable to the order of third person. Q: Suppose the third person who paid actually did so with the intention of acquiring title over the instrument, is the instrument discharged? No, in this case, the payor is not considered a ‘third person’ within the contemplation of 119. The payor is either a holder or an assignee as the case may be. Q: to whom should payment be made? To the HOLDER of the instrument (see notes on ‘who is a holder?’ – pages 4,5 as discussed above) Q: Is there a possibility that a payor who had already previously made payment may be made to pay again? Yes, the rightful holder who may have been unlawfully deprived of the instrument may still enforce payment against a payor who previously paid with knowledge of the defect in the previous holder’s title. Q: how does cancellation discharge the instrument? Depends on WHAT KIND of cancellation was effected – intentional cancellation discharges the instrument, conversely, if the cancellation was NOT intentional, the instrument is not discharged. *Intentional cancellation takes place when the holder writes the word ‘cancelled’ on the instrument or does… something childish to it (think: tearing it up, burning it, etc) (sec119)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact Q: What are the acts which discharge simple contracts? 1. payment or performance 2. loss of the thing due 3. condonation or remission of the debt 4. confusion or merger of the rights of creditor and debtor 5. compensation 6. novation 7. annulment or rescission 8. fulfillment of a resolutory condition 9. prescription (see: art.1231, NCC; check notes for oblicon)

6.

By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument unless made with the consent of the party secondarily liable or unless the right to recourse against such party is expressly reserved

expressly reserved Because the assurance of the drawer and the endorsers is to pay according to the tenor of the instrument. An agreement to extend the time of payment varies the original undertaking of the secondary parties (compare art.2079, NCC re: guaranty; same principle applies) EXCEPTIONS: (a) the extension was made with the consent of the secondary parties; (b) right of recourse against secondary parties was expressly reserved

Q: how are secondarily liable parties discharged? (sec.120) 1. 2. 3.

By any act which discharges the instrument By the intentional cancellation of his signature by the holder By the discharge of a prior party

4.

By a valid tender of payment

5.

By a release of the principal debtor unless the holder’s right of recourse against the party secondarily liable is expressly reserved

(art.1231 + other pertinent provisions of the NCC) An endorser whose endorsement is struck out and all endorsers subsequent to him are relieved from liability on the instrument (sec.48) Discharge here means discharge by some act of the creditor, it does not include discharge by operation of law (i.e. by bankruptcy, insolvency, prescription, failure to give notice of dishonor) It is the fault of the holder under this circumstance that he was not paid, thereby discharging the secondary parties. The release of the principal debtor discharges the instrument and persons secondarily liable lose their right of recourse against the principal debtor EXCEPTION: when right of recourse against secondary parties was

VIII. CHECKS AND THE RELATIONSHIPS BETWEEN PAYEE, DRAWEE AND DRAWER Q: What is a check? A bill of exchange drawn on a bank, payable on demand (sec.185) Q: When should a check be presented for payment? Within a reasonable time after its issue (sec.186) Q: Is a drawee liable upon the issuance of a check? No, the drawee is not liable just because he happens to be the drawee. A check does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, the bank is not liable to the holder unless and until he accepts the same, in which case, the drawee becomes an acceptor (sec.189) Q: what is a certified check?

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact One drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment Q: Is certification completely similar to acceptance? No, certification is equivalent to acceptance (sec.187) but they differ in the sense that (a) certification done at the instance of the HOLDER results in a discharge while ordinary acceptance does NOT discharge; and (b) in certification, the bank debits the drawer’s account at the time of certification, not after, as in ordinary acceptance Q: How does certification operate? Upon certification, the bank debits the drawer’s account, in effect setting aside the funds to meet the check if and when it is presented for payment. The funds that were set apart are no longer within the control of the drawer but have been precisely segregated for the purpose of paying the check. This is why certification procured by the holder discharges the secondary parties – because the certified check would now operate as an assignment of part of the funds to the credit of the drawer (sec.189). The theory is that the holder, by requesting such certification instead of payment, enters into a new contract with the bank, and not one within the contemplation of the drawer or a prior endorser. The drawer and the endorsers are expecting that the check will be presented for payment only and not for certification, hence they are discharged. *‘The bank virtually says that the check is good; we have the money of the drawer here ready to pay it. We will pay it now if you will receive it. The holder says, No, I will not take the money; you may certify the check and retain the money for me until this check is presented.’ The money being due and the check presented, it is his own fault if the holder declines to receive the pay xxx (1 Morse on Banks and Banking, p.920; cited in PNB V. National City Bank of New York, 63 Phil 711, 717-720)

Q: What is a crossed check? A check which bears 2 parallel lines diagonally on the left top portion. If the crossing of a check is SPECIAL, the name of a bank or business institution is written between the 2 parallel lines (meaning that the drawee should pay only with the intervention of that company), if the crossing is GENERAL, the words written between the 2 parallel lines are ‘and Co.’ or ‘for payee’s account only’ Q: Does the NIL govern crossed checks? No, the Code of Commerce under sec.541 does. Sec.541 of the Code of Commerce was patterned after the Bills of Exchange Act of 1882 (secs.76,77 of the Bills of Exchange Act of 1882) Q: What is the effect of crossing a check? Generally, the crossing of a check puts the holder on inquiry and requires him to ascertain the endorser’s title to the check. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith (think: holder can no longer become a HDC) Specifically, the effects are – 1. The check may not be encashed but only deposited in a bank 2. The check may only be negotiated once (to the person with the account in the bank) 3. The act of crossing serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose Q: Differentiate a bill of exchange from a check (see page 2 of these notes for tabular presentation)

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact Q: What is the relationship between and among the drawer, drawee and payee of a check?

PRESENCE OF PRIVITY OF CONTRACT DRAWER DRAWEE PAYEE AVAILABILITY OF RIGHT OF RECOURSE

DRAWER X

X

DRAWEE X

*

PAYEE X

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

The bank with which a payee-holder of a check deposits the same. The payee in this case usually has an account with the bank, known as the depositary bank or collecting bank Q: What is the relationship between the payee and the collecting bank? One of agent and principal. The collecting bank acts as the agent of the depositor when it sends the check for clearing. *check clearing is done through a ‘clearinghouse’, an association of banks or other payors for the purpose of settling accounts with each other on a daily basis. Each member of the clearinghouse forwards all deposited checks drawn on other members and receives from the clearinghouse all checks drawn on it. Balances are adjusted and settled on a daily basis. Q: Does the collecting bank become the owner of the check deposited with it? No, the check is only being collected from the drawee bank for the principal, the depositor. Q: If a check was forged prior to the deposit with the collecting bank, and the check is subsequently paid, is the collecting bank liable? Yes, because the collecting bank was the last endorser of the check. It endorsed the check for clearing with the drawee bank, and the drawee bank relied on the collecting bank’s warranty, given upon endorsement, that the instrument is genuine and in all respects what it purports to be. The liabilities and warranties of a collecting bank are the same as those of a general endorser (see: sec.66). Q: What is the right of recourse of a collecting bank who was forced to reimburse the drawee for a forged check? The collecting bank may proceed against its client, the depositor – because it is only with the depositor that privity of contract

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact exists, and also because the payee-depositor is liable under the same warranties of a general endorser (sec.66, NIL)

collecting bank; failure to do so makes the drawee liable for negligence and absolves the collecting bank of liability (sec.20, PCHC Rules)

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

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

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

IX. NEGOTIABLE DOCUMENTS OF TITLE

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

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

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

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

THE 24-HOUR RULE: the drawee bank must return checks or items cleared through the PCHC within 24 hours (think: especially applicable to forged checks where the forged signature belongs to the drawer) to the

Q: How are NDTs different from negotiable instruments?

CHECK CLEARING, CLEARING REGULATIONS

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NEGOTIABLE INSTRUMENTS

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact Re: GOVERNING LAWS

NIL Code of Commerce

Re: PURPOSE AND FUNCTION Re: POSSIBILITY OF DUE COURSE HOLDING

Transfer of Credit or Money Holder may be a HDC

Re: MODE OF TRANSFER

By Negotiation By Assignment An ORDER instrument may be converted to a bearer instrument

Re: CONVERTIBILITY THROUGH NEGOTIATION

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

Re: WARRANTIES

Once a bearer instrument, always a bearer instrument All parties (i.e.: drawers, makers, endorsers) to a negotiable instrument are bound by their respective warranties

NCC (Arts.1507-1520) Warehouse Receipts Law (WRL); Trust Receipts Law (TRL) Transfer of Goods

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

Holder is not a holder in due course, but a holder for value By Negotiation By Assignment Universal Convertibility – An ORDER document may be converted into a BEARER document, and back again

BEARER DOCUMENT By delivery (Art.1508, NCC) *POSSESSION is controlling - the warehouseman’s obligation follows the possessor

ORDER DOCUMENT By endorsement – (a) in blank; or (b) to bearer; or (c) to a specified person If the document is endorsed to a specified person, he may again negotiate the document in blank, to bearer or to another specified person (Art.1509, NCC) *ENDORSEMENT is controlling – the warehouseman’s obligation follows the endorsement (if endorsed in blank or to bearer, warehouseman’s obligation follows accordingly)

only the TRANSFEROR of a NDT makes warranties in favor of the transferee Endorsers are not liable for failure on the part of the bailee to deliver the goods

Q: What determines the negotiability? Words of negotiability (art.1507, NCC; Sec.5, WRL) Q: What is the effect of stamping the words ‘non-negotiable’ on a NDT?

Q: Does the transfer of a NDT result in the transfer of title to the goods? Yes, because transfer of the document controls the transfer of goods. Negotiation of a document has the effect of manual delivery so as to constitute the transferee the owner of the goods. The direct obligation of the bailee issuing the document to hold possession of the goods is owed to the transferee from the moment of negotiation (Art.1513, NCC) Q: Suppose the document was not negotiated but merely transferred to the holder, what are the effects? The person to whom it has been transferred and not negotiated acquires as against the transferee the title to the goods, subject to the terms of any agreement with the transferor (i.e.: person in possession

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact becomes an assignee of the goods), and the transferee may convert the plain transfer to negotiation by compelling the transferor to complete the negotiation process (Art.1515; secs.42,43, WRL) Q: what is the effect if there was in fact an intent to negotiate the document but possession of the same is retained by the transferor? The interest of the prior transferee may be defeated if the document is subsequently transferred to a purchaser in good faith without notice. The subsequent negotiation of the document under any sale or other disposition to any person receiving the same in good faith and for value and without notice of the previous sale, mortgage or pledge, shall have the SAME EFFECT as if the first purchaser had EXPRESSLY AUTHORIZED the subsequent negotiation (sec.48, WRL) *No, Art.1544 of the NCC on double sales does NOT apply to the second sale of a negotiable document like a warehouse receipt. The law (WRL) practically negates the will of the first purchaser and assumes that buyer 1 willingly permitted sale number 2. *Read this together with the right of the purchaser to compel the transferor to complete the negotiation – this is why. Q: What are the rights of a person to whom a NDT was duly negotiated? 1. He acquires such title to the goods as the person negotiating the document to him had or had ability to convey 2. The direct obligation of the bailee issuing the document to hold possession of the goods for him as if such bailee had contracted directly with him (Art.1513, NCC; Art.41, WRL) *Think: the goods follow the document of title, BUT notice that NO ADDITIONAL RIGHTS are conferred over the goods to the transferee.

*Here lies the crucial distinction between NDTs and NIs. Under the NIL, a holder in due course may acquire a better right than his transferor (i.e.: he gets a clean title to the instrument); whereas the transferee of a NDT acquires merely what the transferor had or could give (owing to the fact that NDTs are found under the law on Sales, the maxim applies: nemo dat quod non habet. One cannot sell what he does not have – if the person who deposited the goods with the bailee who issued the document is not legally entitled to the goods, no such title to them will be acquired by the transferee of the document of title EVEN IF he is a holder for value) Q: Suppose the goods were sought to be repossessed by an unpaid seller. May he run after the purchaser of the warehouse receipt? No, no seller’s lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom the receipt has been negotiated, nor shall the warehouseman be obliged to deliver or be justified in delivering the goods to an unpaid seller UNLESS the receipt is first surrendered for cancellation (sec.49, WRL) Q: What is the significance of the unpaid seller presenting to the warehouseman the receipt for cancellation? Why can’t the warehouseman deliver the goods prior to the surrender of such a receipt by the unpaid seller? The surrender for cancellation of the receipt by the unpaid seller means that the unpaid seller has validly reacquired the receipt from the holder for value Q: May the warehouseman validly refuse to deliver the goods to a person claiming them? Yes (secs.31, 49, WRL; art.1519, NCC) *Flag this as another key distinction with negotiable instruments – under the NIL, the parties liable may NOT validly refuse to

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact pay a holder in due course (except, of course, when they can raise real defenses against the HDC) Q: Who may negotiate a NDT? 1. The owner 2. A person to whom the possession or custody of the document has been duly entrusted by the owner (art.1512, NCC; sec.40, WRL) *There’s a massive conflict in THIS particular area of the Civil Code – negotiation of NDTs, owing to these 2 provisions: ART.1512 A negotiable document of title may be negotiated: (1) By the owner thereof; or (2) By any person to whom the possession or custody of the document has been entrusted by the owner, if, by the terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document is in such form that it may be negotiated by delivery

ART.1518 The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith, without notice of the breach of duty or loss, theft, fraud, accident, mistake, duress or conversion.

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

*scenario: a thief negotiated the document of title to a purchaser for value. Did the purchaser for value acquire nothing because the thief had no title to the goods that he could validly have conveyed? THEORY: the purchaser for value ACQUIRED a title to the goods, notwithstanding the thief’s title. Art.559, par.1 of the NCC states that ‘The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, the one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same’. The innocent purchaser for value’s title is NOT derived from the thief – he has an original title granted by art.559 on the law on property. His possession is deemed equivalent to a title in and of itself. With regards to the right of recovery, the lawful owner would not be able to recover from the innocent purchaser for value despite the wording of art.559, because art.1518 specifically exempts the circumstances of breach of duty, loss, theft, fraud, accident, mistake, duress or conversion. In this sense, art.559 and art.1518 constitute reciprocal exceptions to each other. But what about the earlier discussion regarding the rights of a holder for value? (see page 29) There’s really no real contradiction since it still holds true that a purchaser for value obtains merely a derivative title from the transferor. In the case of an innocent purchaser for value and good fait h who was unaware of the defect in the transferor’s title, he may invoke art.559 and claim the title granted to him by that provision. All the same, the innocent purchaser for value and good faith acquired nothing from the thief. His title isn’t based on the thief’s. *A final and interesting point: the above discussion is applicable to a BEARER document, one which may be negotiated by delivery without need of the endorsements of the owner or his representative. If, of course, the document is an ORDER document, then the ENDORSEMENT of the specified person (i.e.: the owner or his duly authorized agent) is necessary. The thief, in order to negotiate it, would need the signature of one of these 2 persons. Since he’s a thief, he can’t lawfully obtain it. He would then have to forge the signatures. And forgery renders the endorsement inoperative.

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact This is Dean Sundiang’s analysis. (I ask you, though: Do the provisions of the NIL [sec.23] apply suppletorily to the negotiation of NDTs? Would it not be more in line with civil law to apply the Statute Frauds and deem the contract entered into by the thief as unenforceable for violating Art.1403(1) because he entered into it by forging the signatures of the owner or the duly authorized representative and thus entered into the contract in the name of another person without having been given proper authority or legal representation? Just thinking aloud –Kimiko) Q: Do the endorsers of a NDT make any warranties? No, endorsers are not liable for the failure of the bailee to deliver the goods. Only the transferor of the document makes any warranties in favor of the transferee Q: What are the warranties of a transferor of a NDT? 1. That the document is genuine 2. That he has a legal right to negotiate or transfer it 3. That he has knowledge of no fact which would impair the validity or worth of the document; and 4. That he has a right to transfer the title to the goods and 5. That the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby (Art.1516, NCC; Sec.44, WRL) Q: when is a document of title (particularly a warehouse receipt) deemed non-negotiable? When it states that the goods received will be delivered to the depositor or to any other specified person (Sec.4, WRL)

By assignment. A transferee of a non-negotiable receipt merely steps into the shoes of the transferor, his right may be defeated by other persons who by law are given superior rights. The transferee gains no additional rights over the goods by virtue of the transfer (sec.4, WRL; art.1515, NCC) The transferee, however, has a right to compel the transferor to complete the negotiation by endorsement (art.1514, NCC; sec.42, WRL) Q: What are the obligations of the bailee? 1. To possess the goods for the persons entitled to them; 2. To deliver the goods upon presentment of the document; 3. To cancel the document upon presentment Q: What is the legal effect if the bailee failed to cancel the document after presentment? He shall be liable for failure to deliver the goods to anyone who purchases the same for value and in good faith Q: What is the primary liability of the bailee? Failure to deliver the goods without a valid reason makes the bailee liable for conversion Q: Is a warehouseman justified in delivering the goods because the claimant alleged that the document was lost or destroyed? No, loss or destruction does not authorize the warehouseman to deliver the goods. He cannot determine for himself the fact of loss, only a court of competent jurisdiction may do so (Aquino, Banking Law and Negotiable Instruments Law, vol. I, 2009) Q: If goods were released because of a court order, is the warehouseman free from all liability?

Q: How may a non-negotiable document of title be transferred?

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact No, the warehouseman is still liable to a person to whom the negotiable receipt has been or shall be negotiated for value without notice of the proceedings or of the delivery of the goods (sec.14, WRL) The warehouseman’s remedy is to enforce the bond required by the court or to run after the person who obtained the release of the goods Q: May the warehouseman refuse to deliver the goods on account of an adverse claim over them? Generally, no. No title to or right to the possession of the goods on the part of the warehouseman shall excuse him from liability for refusing to deliver the goods according to the terms of the receipt (sec.16, WRL) EXCEPTIONS: (1) The warehouseman’s title or right is derived directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit for storage; (2) The right is based on the warehouseman’s lien. Q: Under the WRL, what defenses may the warehouseman raise for nondelivery of the goods? 1. Loss of destruction of the goods without his fault 2. Failure to satisfy bailee’s lien (sec.8) 3. Failure to surrender the NDT(sec.8) 4. Lack of willingness by the person claiming the goods to sign acknowledgement of receipt (sec.8) 5. Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make delivery (sec.10) 6. The bailee has information that the delivery about to be made was to one not lawfully entitled to the possession of the goods 7. Delivery to a claimant with a better right

8. Attachment or levy of the goods by a creditor where the document is surrendered or its negotiation is enjoined and the document is impounded (sec.25) 9. The document of title is attached by a creditor (sec.26) Q: What are the charges included in a warehouseman’s lien? 1. All lawful charges for storage and preservation of the goods 2. All lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to the goods; 3. All reasonable charges and expenses for notice and advertisements of the sale, and for the sale of the goods where default had been made in satisfying the warehouseman’s lien Q: When is a warehouseman’s lien deemed lost? 1. When he surrenders the possession of the goods 2. When he refuses to deliver the goods when demand is made with which he is bound to comply under the WRL

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

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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west where you can clean up the streets with a gun… even though that’s exactly what’s needed.’ ~Point of Impact Q: How does a letter of credit operate?

1 2 3 4 5 6

7 8

•Buyer and Seller agree on what documents must be presented

o

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

o

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

o

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

•Buyer secures a letter of credit in favor or seller from his bank, which is termed the issuing or opening bank •Once the credit is established, seller ships goods to buyer and in the process, obtains the tender documents •To obtain payment for goods, seller executes a draft and presents it to bank, along with tender documents

•Bank pays seller and obtains possession of the documents of title

•Buyer reimburses bank for the payment it made to seller

•Bank gives buyer the documents of title upon reimbursement

•Buyer obtains title over the goods he purchased from seller

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

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

seller of the credit (this bank is called the advising bank or notifying bank)

The issuing or opening bank may contract the facilities of one of its correspondent banks for the purpose of advising the

Q: What are the transactions involved in a letter of credit? There are at least 3 transactions – 1. The contract of sale of goods between the buyer and seller 2. The contract of the buyer with the issuing bank, whereby the issuing bank promises to pay drafts drawn by the seller-

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3.

beneficiary, and the buyer reciprocally promises to reimburse the issuing bank The letter of credit proper

*Other contracts include the contract of carriage between the seller and the carrier for the goods, the contract of surety between the seller and the warehouseman or bailee for the keeping of the goods, and the various credit agreements between intermediary banks regarding the negotiation of the drafts drawn against the letter of credit Q: What is the ‘Independence Principle’? The independence principle is a doctrine embodied in the Uniform Customs and Practice for Documentary Credits (UCP) adopted by the International Chamber of Commerce, which essentially holds that the contracts involved in a letter of credit arrangement are to be maintained in a state of perpetual separation. *The parties to these different transactions may not co-opt the rights of recourse or remedies found in each transaction, nor are they obligated to go beyond the respective responsibilities of each of the transactions in order to determine the propriety or validity of the others.

Q: Is the issuing bank the only party who may invoke the independence principle? No, other parties (i.e.: even the beneficiary, in proper cases) may invoke the principle Q: What is the Fraud Exception? An exception to the independence principle, which holds that when the beneficiary, for the purpose of drawing on the credit, fraudulently presents documents to the confirming or paying bank which contain material representations of fact that are untrue, and which the beneficiary was aware of, the buyer may seek an injunction against payment. (Transfield Phils., Inc. v. Luzon Hydro Corp., GR No. 146717, November 22, 2004) *Requisites: 1. There is clear proof of fraud 2. It is an abuse of the independent purpose of the LOC and not merely fraud under the main agreement 3. Irreparable injury might follow if injunction is not granted or the recovery of damages would be severely impaired

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

XI. TRUST RECEIPTS

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

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

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AY 2012-2013

hiryu kimiko

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

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

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Q: What are the rights of the entruster? 1. To receive the proceeds from the sale of the goods, etc. released under a trust receipt to the extent of the amount owing to him as appears in the receipt 2. To receive the goods, etc. upon the return of the same by the entrustee in case of non-sale 3. To enforce all other rights conferred upon him in the trust receipt (sec.7, TRL) Q: What is the right of a purchaser for value and in good faith upon buying the goods sold by the entrustee? The purchaser for value and in good faith acquires the goods, documents or instruments free from the entrustee’s security interest (sec.11, TRL)

32 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S

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AY 2012-2013

hiryu kimiko