Professional Documents
Culture Documents
CONCEPTUAL FRAMEWORK
l. Birth/Creation of Negotiable Instruments (sec. 10-29)
II. Life (sec. 30-69)
Negotiability
Holder in due course
Parties
III. Death (sec. 70-189)
Proceedings
Defenses
Discharge
ACT NO. 2031
February 03, 1911
THE NEGOTIABLE INSTRUMENTS LAW
Introduction
History and Development
The term commercial paper refers to written promises or
obligations to pay sums of money that arise from the use of such
instruments as drafts, promissory notes, checks and trade
acceptances. (The most common instruments are checks and
promissory notes.)
4
However, the term commercial paper in its
broadest sense may refer to either negotiable or non-negotiable
instruments.
During the early part of the Middle Ages, merchants and
traders had to carry gold and silver to pay for the goods they
purchased at the various international fairs. Obviously these
precious metals were continually subject to loss or theft through
the perils of travel.
5
To eliminate the dangers of this sort, merchants began to
deposit their gold and silver with bankers. When they needed
4
Business Law Text and Cases, Second Edition, Howell, Allison, Henley,
1981, page 400
5
Ibid.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 2
funds to pay for goods they had purchased, they drew on them
by giving the seller a written order addressed to the bank, telling
it to deliver part of the gold or silver to the seller. These orders,
called bills of exchange, were thus substitutes for money. Today,
checks and the drafts and promissory notes that are payable on
demand serve this same basic purpose.
6
The second major purpose of commercial paper is to serve
as credit device; this came about as a logical extension of the
initial use of commercial paper. Soon after bills of exchange
became established as substitutes for money, merchants who
wished to purchase goods on credit discovered that sellers were
sometimes willing to accept bills of exchange that were not payable
until a stated time in the futuresuch as ninety days after date.
If the seller was satisfied as to the commercial reputation of the
bills drawer (the purchaser), he would take such an instrument
(called a time bill or draft) and wait until the maturity date to collect
it. In this way the seller/payee extended credit to the buyer/drawer.
7
Soon thereafter ways were devised by which payees could
sell these instruments to third parties, usually banks, and receive
immediate cash in return. Since the banks would then have to
wait for the maturity dates before receiving payment, the payees
would have to sell them the paper at a discountthat is, perhaps
five or ten percent less than the face amount. This meant, in
effect, that the purchasing banks were charging the sellers interest
in advance as compensation for their role in the transaction.
8
Today, because of the widespread use of time notes and
drafts, the credit aspect of commercial paper is as important to
the business community as its substitute for money aspect.
9
The negotiability of bills of exchange and promissory notes
originated in the customs of merchants. The statute of Anne, which
is declaratory of the common law, established the negotiability of
promissory notes.
10
6
Ibid. (italics supplied)
7
Ibid, pages 401-402.
8
Ibid.
9
Ibid.
10
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1
3
Negotiable Instrument; definition
A negotiable instrument is a special contract which on its
face is signed by the maker or drawer, making an unqualified
promise or order to pay on demand or at a fixed or determinable
future time, a sum certain in money, to order or bearer, and when
it is addressed to a drawee, the latter must be named or otherwise
indicated therein with reasonable certainty.
Or simply stated: It is a special contract which complies
with the requirements laid down under Section 1 of the Negotiable
Instruments Law.
Purpose of the enactment of the Negotiable Instruments Law
The Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering transactions in
commercial paper. Thus, the said statute should not be tampered
with haphazardly or lightly. Nor should it be brushed aside in
order to meet the necessities in a single case.
11
Functions of a Negotiable Instrument
1. Substitute for moneymerchants often do not want to
carry cash for fear of loss or theft.
2. Credit devicesome forms of negotiable instruments
extend credit from one party to another.
3. Recordkeeping devicethese records are used for
financial statements, tax returns, and the like.
Negotiable Instrument as a substitute for money
The essence of negotiability which characterizes a
negotiable paper as a credit instrument lies in its freedom to
circulate freely as a substitute for money.
12
(Firestone Tire &
Rubber Company of the Philippines vs. Court of Appeals and
Luzon Development Bank, G.R. No. 113236, March 5, 2011,
[Quisumbing, J.])
11
State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993),
cited in Osmea vs. Citibank, March 23, 2004
12
Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 4
Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by
itself, operate as payment (See. 189, Act 2031 on Neg. Inst..; Art.
1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil.
255; Tan Suncor v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a managers check or ordinary cheek, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender
of payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under
a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3).
13
Words of Negotiability
The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom to circulate
as a substitute for money. Hence, freedom of negotiability is the
touchstone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course (11 Am. Jur.
2d, 32).
As held in Caltex (Philippines), Inc vs. Court of Appeals,
14
The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing,
that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to
control, if it can be legally ascertained. While the writing
may be read in the light of the surrounding circumstance in
order to more perfectly understand the intent and meaning
of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as
contradistinguished from what their words express, but what
is the meaning of the words they have used. What the
parties meant must be determined by what they said.
13
Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30,
1990, [Gutierrez, J.]
14
G.R. No. 97753, August 10, 1992, 212 SCRA 448, emphasis ours
5
Quasi-Negotiable Instruments
In one case, that of Capco vs. Macaset
15
, the Supreme Court
had an occasion to rule that: [c]ertificates of stocks are considered
as quasi-negotiable instruments. When the owner or shareholder
of these certificates signs the printed form of sale or assignment
at the back of every stock certificate without filling in the blanks
provided for the name of the transferee as well as for the name of
the attorney-in-fact, the said owner or shareholder, in effect,
confers on another all the indicia of ownership of the said stock
certificates. (Campos and Lopez-Campos, Notes and Cases on
Negotiable Instruments Law, 1971 ed., p 605)
The phrase quasi-negotiable has been termed as unhappy
one; and certainly it is far from satisfactory, as it conveys no
accurate, well-defined meaning. But still it described better than
any other short-hand expression the nature of those instruments
which, while not negotiable in the sense of the law merchant, are
so framed and so dealt with, as frequently to convey as good a
title to the transferee as it they were negotiable. (Daniel, The
Elements of Negotiable Instruments Law, page 27)
Very frequently by application of the principles of estoppels,
and to effectuate the ends of justice and the intention of the parties,
the courts decree a better title to the transferee than actually
existed in his transferrer; and the result reached in many cases is
the same as would be reached if the instrument were negotiable.
16
Types of Negotiable Instruments.
The Philippine Negotiable Instruments Law was basically
lifted from the provisions of the United States Uniform Currency
Act, in which Secs. 13-104 thereof specified four types of
instruments (e.g. drafts, checks, certificates of deposit, and notes).
In the Philippine setting, however, Act 2031 (Negotiable
Instruments Law) provides for three (e.g., promissory notes, bills
of exchange, checks), noteworthy is the inclusion of Drafts and
Certificates of Time Deposit through the decisions of the Supreme
Court interpreting our law on negotiable instruments.
15
G.R. No. 90888, September 13, 1990
16
Railroad Co. v. Howard, 7 Wall. 415
Basic Principles and Jurisprudence on the Negotiable Instruments Law 6
At present, in Philippine jurisdiction, we generally recognize
five types of negotiable instruments, to wit:
1. Promissory Notes
17
2. Bills of Exchange
18
3. Check
19
4. Draft
20
5. Certificates of Time Deposit
21
2002 Bar Question:
A. Define the following: (1) a negotiable promissory
note, (2) a bill of exchange and (3) a check. (3%)
B. You are Pedro Cruz. Draft the appropriate contract
language for (1) your negotiable promissory note and
(2) your check, each containing the essential
elements of a negotiable instrument. (2%)
ANSWER:
A. (1) Sec. 184, Act. 2031it is an unconditional promise
in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed
or determinable future time, a sum certain in money
to order or to bearer.
(2) Sec. 126, Act 2031is 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 or
determinable future time a sum certain in money to
order or to bearer.
(3) Sec. 185, Act 2031it is a bill of exchange drawn
on a bank payable on demand.
17
Sec. 184, Act 2031, Negotiable Instruments Law.
18
Sec. 126, ibid.
19
Sec. 185, ibid.
20
BPI vs. Commissioner of Internal Revenue,
21
Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10,
1992.
7
B. (1) September 1, 2002
I promise to pay Pancho Dela Torre, or order,
ONE HUNDRED THOUSAND PESOS (Php
100,000.00), on December 25, 2002.
(Sgd)
Pedro Cruz
(2) Bank of the Philippine Islands-Malate, Manila
September 1, 2002
Pay to the order of Pancho Dela Torre, the
amount of ONE HUNDRED THOUSAND PESOS
(Php 100,000.00).
(Sgd)
Pedro Cruz
1. What is a Promissory Note?
It is an unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on demand, or
at a fixed or determinable future time, a sum certain in money to
order or to bearer. (Sec. 184, Negotiable Instruments Law)
In the case of Pentacapital Investment Corporation vs.
Makilito B. Mahinay,
22
citing Sierra vs. Court of Appeals,
23
it was
held that:
A promissory note is a solemn acknowledgment of a debt
and a formal commitment to repay it on the date and under
the conditions agreed upon by the borrower and the lender.
A person who signs such an instrument is bound to honor it
as a legitimate obligation duly assumed by him through the
signature he affixes thereto as a token of his good faith. If
he reneges on his promise without cause, he forfeits the
sympathy and assistance of this Court and deserves instead
its sharp repudiation.
22
G.R. No. 171736, July 5, 2010, [Nachura, J.:]
23
G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795
Basic Principles and Jurisprudence on the Negotiable Instruments Law 8
Test to determine a promissory note
To constitute a good promissory note, no precise words of
contract are necessary, provided they amount, in legal effect, to a
promise to pay. In other words, if over and above the mere
acknowledgment of the debtor there may be collected from the
words used a promise to pay it, the instrument may be regarded
as a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221,
February 28, 1958, [Bengzon, J.])
Due A. B. $325, payable on demand, or I acknowledge
myself to be indebted to A in $ 109, to be paid on demand, for
value received, or I.O.U. $85 to be paid on May 5
th
, are held to
be promissory notes, significance being given to words of payment
as indicating a promise to pay. (1 Daniel Neg. Inst., see 39 and
cases cited [Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700,
703) (Supra)
An acknowledgment may become a promise by the addition
of words by which a promise of payment is naturally implied, such
as, payable, payable on a given day, payable on demand,
paidwhen called for,(10 Corpus Juris Secundump p. 523.)
(supra)
Who are the parties to a Promissory Note?
The maker, he is the person who drafted and issued the
promissory note, and made a promise that upon demand or at a
fixed or determinable future time, he will pay a sum certain in
money to order or to bearer to the holder of the instrument or to a
holder in due course.
The payee, is the person in whose favor the promissory
note was issued.
Intimidation, vitiation of consent in promissory notes
Carmela Brobio Mangahas vs. Eufrocina Brobio
G.R. No. 183852, October 20, 2010
NACHURA, J.:
9
FACTS: On January 10, 2002, Pacifico S. Brobio (Pacifico) died
intestate, leaving three parcels of land. He was survived
by his wife, respondent Eufrocina A. Brobio, and four
legitimate and three illegitimate children; petitioner
Carmela Brobio Mangahas is one of the illegitimate
children.
On May 12, 2002, the heirs of the deceased executed
a Deed of Extrajudicial Settlement of Estate of the Late
Pacifico Brobio with Waiver. In the Deed, petitioner and
Pacificos other children, in consideration of their love
and affecti on for respondent and the sum of
P150,000.00, waived and ceded their respective shares
over the three parcels of land in favor of respondent.
According to petitioner, respondent promised to give
her an additional amount for her share in her fathers
estate. Thus, after the signing of the Deed, petitioner
demanded from respondent the promised additional
amount, but respondent refused to pay, claiming that
she had no more money.
A year later, while processing her tax obligations with
the Bureau of Internal Revenue (BIR), respondent was
required to submit an original copy of the Deed. Left
with no more original copy of the Deed, respondent
summoned petitioner to her office on May 31, 2003
and asked her to countersign a copy of the Deed.
Petitioner refused to countersign the document,
demanding that respondent first give her the additional
amount that she promised. Considering the value of
the three parcels of land (which she claimed to be worth
P20M), petitioner asked for P1M, but respondent
begged her to lower the amount. Petitioner agreed to
lower it to P600, 000.00. Because respondent did not
have the money at that time and petitioner refused to
countersign the Deed without any assurance that the
amount would be paid, respondent executed a
promissory note. Petitioner agreed to sign the Deed
when respondent signed the promissory note which
read
Basic Principles and Jurisprudence on the Negotiable Instruments Law 10
31 May 2003
This is to promise that I will give [a] (sic) Financial
Assistance to CARMELA B. MANGAHAS the amount
of P600,000.00 Six Hundred Thousand only on June
15, 2003.
(SGD)
EUFROCINA A. BROBIO
When the promissory note fell due, respondent failed
and refused to pay despite demand. Petitioner made
several more demands upon respondent but the latter
kept on insisting that she had no money.
ISSUES: Was intimidation used to execute the promissory note
subject of the case?
RULING: Contracts are voidable where consent thereto is given
through mistake, violence, intimidation, undue
influence, or fraud. In determining whether consent is
vitiated by any of these circumstances, courts are given
a wide latitude in weighing the facts or circumstances
in a given case and in deciding in favor of what they
believe actually occurred, considering the age, physical
infirmity, intelligence, relationship, and conduct of the
parties at the time of the execution of the contract and
subsequent thereto, irrespective of whether the contract
is in a public or private writing.
Nowhere is it alleged that mistake, violence, fraud, or
intimidation attended the execution of the promissory
note. Still, respondent insists that she was forced into
signing the promissory note because petitioner would
not sign the document required by the BIR. In one case,
the Court in characterizing a similar argument by
respondents therein held that such allegation is
tantamount to saying that the other party exerted undue
influence upon them. However, the Court said that the
fact that respondents were forced to sign the
documents does not amount to vitiated consent.
11
There is undue influence when a person takes improper
advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
For undue influence to be present, the influence exerted
must have so overpowered or subjugated the mind of
a contracting party as to destroy his free agency,
making him express the will of another rather than his
own.
Respondent may have desperately needed petitioners
signature on the Deed, but there is no showing that
she was deprived of free agency when she signed the
promissory note. Being forced into a situation does not
amount to vitiated consent where it is not shown that
the party is deprived of free will and choice. Respondent
still had a choice: she could have refused to execute
the promissory note and resorted to judicial means to
obtain petitioners signature. Instead, respondent chose
to execute the promissory note to obtain petitioners
signature, thereby agreeing to pay the amount
demanded by petitioner.
Contrary to the CAs findings, the situation did not
amount to intimidation that vitiated consent. There is
intimidation when one of the contracting parties is
compelled to give his consent by a reasonable and
well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person
or property of his spouse, descendants, or
ascendants. Certainly, the payment of penalties for
delayed payment of taxes would not qualify as a
reasonable and well-grounded fear of an imminent
and grave evil. (emphasis supplied) We join the RTC
in holding that courts will not set aside contracts merely
because sol i ci tati on, i mportuni ty, argument,
persuasion, or appeal to affection was used to obtain
the consent of the other party. Influence obtained by
persuasion or argument or by appeal to affection is not
prohibited either in law or morals and is not obnoxious
even in courts of equity.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 12
Question:
Does the reference to the penalty charges in the
promissory note constitute substantial compliance with
the disclosure requirement of the Truth in Lending Act?
ANSWER:
Yes.
The Court has affirmed that financial charges are amply
disclosed if stated in the promissory note.
In the case of Development Bank of the Philippines vs.
Arcilla, Jr. The Court there said, Under Circular 158 of the Central
Bank, the lender is required to include the information required
by R.A. 3765 in the contract covering the credit transaction or any
other document to be acknowledged and signed by the borrower.
In addition, the contract or document shall specify additional
charges, if any, which will be collected in case certain stipulations
in the contract are not met by the debtor. In this case, the
promissory notes signed by the Yus contained data, including
penalty charges, required by the Truth in Lending Act. They cannot
avoid liability based on a rigid interpretation of the Truth in Lending
Act that contravenes its goal. (Bank of the Philippine Islands, Inc.
vs. Sps Yu, G.R. No. 184122 January 20, 2010, [Abad, J.])
2. Bill of Exchange defined.
A Bill of Exchange is 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 or determinable future time a sum certain in money
to order or to bearer. (Sec. 126, Negotiable Instruments Law)
In the once celebrated case of Manuel Bastida vs. The Acting
Commissioner of Customs and The Court of Tax Appeals,
24
it was
held that:
[A]s bills exchange they are, fundamentally, negotiable
instruments. And a negotiable instrument is more like
24
G.R. No. L-24011, October 24, 2970, [Castro, J:]
13
money than a contract right or chose in action.
25
As
such, it may be the subject of conversion (Knight vs. Seney
290 Ill. 11) or of replevin (Rothwell vs. Taylor 303 Ill. 263.)
26
it may also be the subject of sale, like any other goods or
wares.
27
As the Tax Court aptly observed, checks may be
bought and sold like a commodity. As a matter of fact in the
United States the deposit of a check with a bank is
considered a sale (Helvering vs. Stein [CA 4] 115 F 2d 468;
Burton vs. United States, 196 US 283, 49 L ed 482). Money
orders, also considered as bills of exchange of limited
negotiability, possess the same attributes as other
negotiable instruments. Thus, they may, be bought and sold
like checks. (emphasis supplied)
As long as a commercial paper conforms with the definition
of a bill of exchange, that paper is considered a bill of exchange.
The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper
is a bill of exchange or not. (Philippine Bank of Commerce vs.
Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.])
(emphasis supplied)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of
Commerce instituted an action against Jose M. Aruego
Civil Case No. 42066 for the recovery of the total sum
of about P35, 000.00 with daily interest thereon from
November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction
thereof plus attorneys fees equivalent to 10% of the
total amount due and costs. The complaint filed by the
Philippine Bank of Commerce contains Twenty-Two
25
Ludwig Teller, Bills and Notes, p. 6 (1948)
26
Ibid., pp. 6-7
27
Ibid., p. 7
Basic Principles and Jurisprudence on the Negotiable Instruments Law 14
(22) causes of action referring to Twenty-Two (22)
transactions entered into by the said Bank and Aruego
on different dates covering the period from August 28,
1950 to March 14, 1951. The sum sought to be
recovered represents the cost of the printing of World
Current Events, a periodical published by the
defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the
plaintiff. Thus, for every printing of the World Current
Events, the printer Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant
for acceptance. As an added security for the payment
of the amounts advanced to Encal Press and Photo
Engraving, the plaintiff bank also required the
defendant Aruego to execute a trust receipt in favor of
said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same
with the promise to turn over to the plaintiff the proceeds
of the sale of said publication to answer for the payment
of all obligations arising from the draft.
Defendant contends that the drafts signed by him were
not really bills of exchange but mere pieces of evidence
of indebtedness because payments were made before
acceptance.
ISSUE: Is his contention tenable?
RULING: The contention is without merit.Under the Negotiable
Instruments Law, a bill of exchange is 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 or
determinable future time a sum certain in money to
order or to bearer. As long as a commercial paper
conforms with the definition of a bill of exchange, that
paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of
the kind of liabilities of the parties involved, but not in
the determination of whether a commercial paper is a
bill of exchange or not.
15
From the definition, does the bill of exchange operate as an
assignment of funds in the hands of the drawee?
A bill in itself does not operate as an assignment of the
funds in the hands of the drawee available for the payment thereof.
(Sec. 127, Negotiable Instruments Law)
Doctrine of Equitable Assignment
The doctrine of equitable assignment is the creature of courts
of equity, and the phrase equitable assignment is used because,
by the technicalities of pleadings at law, no legal assignment can
be effectuated.
28
It is contended that the bill, whether for the whole
of the fund or debt, or only a part, may be evidence to show an
assignment; and that with other circumstances indicating that such
was the intention, will vest in the holder an exclusive claim to the
debt or fund, and bind it in the hands of the drawee after notice.
29
The bill for the entire amount of debt or fund should operate as an
equitable assignment thereof.
30
Moreover, it may be regarded as a settled doctrine that an
order founded upon a good consideration, given for a specific
debt or fund owing by or in the hands of a third person, operates
as, or rather is evidence of, an equitable assignment of the demand
to the holder.
31
Who are the parties to a bill of exchange?
The drawer, is the person drawing an instrument making
an unconditional order in writing to the drawee, requiring him to
pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.
The drawee, is the person being required by the drawer
to pay on demand or at a fixed or determinable future time a
sum certain in money to the payee, or his order, or to the bearer
of the instrument.
28
Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 201
29
Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet.
277; Buckner v. Sayre, 17 B. Monroe, 754, cited in the Elements of
Negotiable Instruments Law, Daniel, page 8
30
Supra
31
The Elements of Negotiable Instruments Law, Daniel, page 9
Basic Principles and Jurisprudence on the Negotiable Instruments Law 16
The payee, is the person in whose favor the bill of exchange
was issued.
What is the rule if the Bill of Exchange is addressed to more
than one drawee?
A bill may be addressed to two or more drawees jointly,
whether they are partners of not.
But not to two or more drawees in the alternative or in
succession.
Example:
To: Lancelot Borja and/or Margaux Borja
Bo. Obrero, Iloilo City
In the above instance, the drawee is addressed to two or
more persons jointly, whether they are partners or not. Thus,
payment of any one of them extinguishes the entire obligation.
To: Lancelot Borja, and in his incapacity or insolvency,
Margaux Borja;
Lancelot Borja, Margaux Borja, or Mizpah Borja in
succession.
In the second instance, the bill was addressed to two or
more drawees in the alternative or in succession, such is not
allowed under the law.
Bills of exchange are either foreign or inland
Foreign Bill of Exchangewhen drawn in one State or
country, and made payable in another State or country;
32
Inland Bill of Exchangewhen drawn, and made payable,
in the same State or country.
33
32
The Elements of Negotiable Instruments Law, Daniel, page 5
33
Ibid
17
Difference between bills and notes
In their original structure, a bill of exchange and a promissory
note do not strongly resemble each other. In a bill, there are
three original parties: drawer, drawee, and payee; in a note only
two: maker and payee. In a bill the acceptor is the primary debtor.
In a note the maker is the only debtor. But if the note be transferred
to a third party by the payee, it becomes strikingly similar to a bill.
The indorser becomes then, as it were, the drawer; the maker,
the acceptor; and the indorsee, the payee.
34
(The Elements of the
Law of Negotiable Instruments, by: John W. Daniel, 1908)
Bank notes or bank bills
Bank notes or bank bills (as they are equally as often called)
are the promissory notes of incorporated banks, designed to
circulate like money, and payable to bearer on demand.
35
The terms bank notes and bank bills are of the like
signification, and for the purposes of interpretation, both in criminal
and civil jurisprudence, are equivalent and interchangeable.
36
In form and substance they are promissory notes, and they
are governed by very many of the principles which apply to the
negotiable notes of individuals given in the course of trade. But
they are designed to constitute a circulating medium, and this
circumstance imparts to them peculiar characteristics, and
essentially varies the rules which govern promissory notes in
general. They have been held not securities for money, but money
itself.
37
Chief Characteristics of
Bank Bills
Always payable on demand;
38
34
Daniel on Negotiable Instruments, page 29
35
The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold
supplied)
36
Ibid
37
Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page
1664, ibid
38
Daniel on Negotiable Instruments, page 1666
Basic Principles and Jurisprudence on the Negotiable Instruments Law 18
Usually payable to bearer, though sometimes expressed
to be payable to a person named or bearer;
39
A lawful tender in payment of debts, unless objected to
because they are not money.
40
Bank Notes
Are not, legally speaking, money, but in a popular sense
are often spoken of as money, and are conventionally
used in its stead with the like effect.
41
3. Draft, defined.
A draft is a form of a bill of exchange used mainly in
transactions between persons physically remote from each other,
an order made by one person, say the buyer of goods, addressed
to a person having in his possession funds of such buyer ordering
the addressee to pay the purchase price to the seller of the goods,
and where the order is made by one bank to another, it is referred
to as a bank draft. (Bank of the Philippine Islands vs. Commission
of Internal Revenue, 496 SCRA 601)
In order for a draft to work, one of two general conditions
must exist. Either the drawee must owe the drawer a debt (in
which case the drawer is simply telling the drawee to pay the debt
or a portion of it to a third party) or some kind of agreement or
relationship must exist between the parties under which the
drawee has consented to the drawing of the draft upon him or
her. If neither of these conditions existed, obviously the drawee
would not obey the order to pay the amount of the draft to the
payee or to any subsequent holder of the instrument.
42
A trade acceptance is a draft or bill of exchange drawn by
the seller of the goods on the purchaser of those goods and
accepted (signed) by the purchaser. The purpose of the
transaction is to enable the seller to raise money on the paper
before the purchasers obligation matures under the sales
contract.
43
39
Ibid, page 1665
40
Ibid, page 1672a
41
Ibid, page 1672
42
Business Law Text and Cases, Second Edition, Howell, Allison, Henley,
1981, page 402
19
To illustrate, X corporation has sold goods to Y company.
Due to the fact that Y company still wishes to utilize the cash
instead of paying in cash, X corporation (drawer) draws a trade
acceptance on Y company for the purchase of the goods. The
instrument orders Y company to pay the amount due to the order
of X corporation on a particular future time. It is then presented to
an officer of Y company who accepts it by signing the same and
returns it to X corporation. The acceptance in effect, would be a
promise of Y company to pay X corporation when the same
becomes due. It can now be negotiated to a third person, say X
corporations bank and receives cash immediately.
Nature of Draft, as distinguished from Bill of Exchange
The case of Republic of the Philippines vs. Philippine
National Bank, et al
44
, laid down a detailed discussion of the
nature of Drafts, to wit:
To begin with, we may say that a demand draft is a bill of
exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa
185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of
Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered
as a bill of exchange, a draft is said to be, like the former, an open
letter of request from, and an order by, one person on another to
pay a sum of money therein mentioned to a third person, on
demand or at a future time therein specified (13 Words and
Phrases, 371). As a matter of fact, the term draft is often used,
and is the common term, for all bills of exchange. And the words
draft and bill of exchange are used indiscriminately (Ennis vs.
Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback,
39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of
our Negotiable Instruments Law (Act No. 2031) does not operate
as an assignment of funds in the hands of the drawee who is not
liable on the instrument until he accepts it. This is the clear import
of Section 127. It says: A bill of exchange of itself does not operate
as an assignment of the funds in the hands of the drawee available
for the payment thereon and the drawee is not liable on the bill
unless and until he accepts the same. In other words, in order
43
Ibid.
44
G.R. No. L-16106, December 30, 1961
Basic Principles and Jurisprudence on the Negotiable Instruments Law 20
that a drawee may be liable on the draft and then become
obligated to the payee it is necessary that he first accepts
the same. In fact, our law requires that with regard to drafts or
bills of exchange there is need that they be presented whether
for acceptance or for payment within a reasonable time after their
issuance or after their last negotiation thereon as the case may
be (Section 71, Act 2031). Failure to make such presentment will
discharge the drawer from liability or to the extent of the loss
caused by the delay (Section 186, Ibid.) (emphasis supplied)
Since it is admitted that the demand drafts herein involved
have not been presented either for acceptance or for payment,
the inevitable consequence is that the appellee bank never had
any chance of accepting or rejecting them. Verily, appellee bank
never became a debtor of the payee concerned and as such the
aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.
Demand Draft distinguished from a cashiers or managers
check
In the very same case of Republic of the Philippines vs.
Philippine National Bank, et al, it has been held that: a demand
draft is very different from a cashiers or managers check, contrary
to appellants pretense, for it has been held that the latter is a
primary obligation of the bank which issues it and constitutes its
written promise to pay on demand. Thus, a cashiers check has
been clearly characterized In Re Bank of the United States, 277
N.Y.S. 96, 100, as follows:
A cashiers check issued by a bank, however, is not an
ordinary draft. The latter is a bill of exchange payable on
demand. It is an order upon a third party purporting to drawn
upon a deposit of funds. (Drinkall vs. Movious State Bank,
11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep.
693; State vs. Tyler County State Bank (Tex. Com. App.)
277 S.W. 625, 42 A.L.R. 1347). A cashiers check is of a
very different character. It is the primary obligation of the
bank which issues it (Nissenbaum vs. State, 38 Ga. App.
253, S.E. 776) and constituted its written promise to pay
upon demand (Steinmetz vs. Schultz, 59 S.D. 603, 241
N.W. 734)
21
The following definitions cited by the appellant also confirm
this view:
A cashiers check is a check of the banks cashier on his or
another bank. It is in effect a bill of exchange drawn by a
bank on itself and accepted in advance by the act of issuance
(10 C.J.S. 409)
A cashiers check issued on request of a depositor is the
substantial equivalent of a certified check and the deposit
represented by the check passes to the credit of the
checkholder, who is thereafter a depositor to that amount.
(Lummus Cotton Gin Co. vs. Walker, 70 So. 754, 756, 195
Ala. 552)
A cashiers check, being merely bill of exchange drawn by
a bank on itself, and accepted in advance by the act of
issuance, is not subject to countermand by the payee after
indorsement, and has the same legal effects as a certificate
deposit or a certified check. (Walker vs. Sellers, 77 So. 715;
201 Ala. 189)
A demand draft is not therefore of the same category as a
cashiers check which should come within the purview of the law.
4. Certificates of Time Deposit; Negotiable Instrument.
A certificate of deposit is a receipt of a bank or banker for a
certain sum of money received upon deposit, and it is generally
framed in such a form as to constitute a promissory note, payable
to the depositor, or to the depositor or order, or to bearer. (The
Elements of Negotiable Instruments Law, Daniel, page 16)
In order, however, to be negotiable, a certificate of deposit
must possess the requisite features of certainty in respect to
parties, and time and mode of payment and the same causes
which deprive bills and notes of negotiability would affect it in like
manner. (ibid)
Illustrative case:
Caltex (Philippines), Inc. vs. Court of Appeals and Security
Bank and Trust Company
Basic Principles and Jurisprudence on the Negotiable Instruments Law 22
G.R. No. 97753, August 10, 1992
REGALADO, J.:
Facts: On various dates Security Bank and Trust Company
(SBTC) issued 280 certificates of time deposit (CTD)
in favor of one Angel dela Cruz who deposited with
SBTC the aggregate amount of Php 1,200,000.00. A
sample text of the certificates of time deposit is
reproduced below:
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22,
1982, 19____.
This is to Certify that BEARER has deposited
i n thi s Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days.
after date, upon presentation and surrender of
this certificate, with interest at the rate of 16%
per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
___________ ___________
AUTHORIZED SIGNATURES
Angel dela Cruz delivered the said CTDs to Caltex
(Philippines) Inc. (Caltex) in connection with his
purchased of fuel products from the latter. Sometime
in March 1982, Angel dela Cruz informed SBTC that
he lost all the certificates of time deposit in dispute.
On March 25, 1982, Angel dela Cruz negotiated and
obtained loan from defendant bank in the amount of
Php 875,000.00. On the same date, said depositor
23
executed a notarized Deed of Assignment of Time
Deposi t stated, among others, that del a Cruz
surrenders to SBTC full control of the indicated time
deposits from and after date of the assignment and
further authorizes said bank to pre-terminate, set-off
and apply the said time deposits to the payment of
whatever amount or amounts may be due on the loan
upon its maturity.
Sometime in 1982, plaintiffs agent went to the
defendant bank and presented for verification the CTD
declared lost by Angel dela Cruz alleging that the same
were delivered to herein plaintiff as security for
purchases made with Caltex. On November 26 1982,
defendant received a letter from herein plaintiff formally
informing it of its possession of the CTDs in question
and of its decision to pre-terminate the same.
Accordingly, defendant bank rejected the plaintiffs
demand and claim for payment of value of the CTDs.
In April 1983, the loan in the amount of Php 875,000.00
with defendant bank matured and fell due, and the latter
set-off and applied the time deposits in question to the
payment of the matured loan.
Plaintiff filed the instant complaint praying that the
defendant bank be ordered to pay it the aggregate value
of the certificates of time deposit of Php 1,120,000.00
plus interest and compounded interest therein at 16%
per annum, moral and exemplary damages as well as
attorneys fees.Trial court rendered its decision
dismissing the instant complaint.
Issue: Whether or not the Certificates of Time Deposit are
considered as negotiable instruments?
Ruling: The CTDs in question are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites
for an instrument to become negotiable.
The CTDs i n questi on undoubtedl y meet the
requirements of the law for negotiability. The parties
Basic Principles and Jurisprudence on the Negotiable Instruments Law 24
bone of contention is with regard to requisite (d) set
forth above. x x x
The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according
to the document, is the depositor? It is the bearer.
The documents do not say that the depositor is Angel
dela Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are
to be repayable to the bearer of the documents or, for
that matter, whosoever may be the bearer at the time
of presentment.
x x x
On this score, the accepted rule is that the negotiability
or non-negotiability of an instrument is determined from
the writing, that is, from the fact of the instrument itself
45
.
In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained.
46
While the writing may be read in the light of the
surrounding circumstances in order to prove perfectly
understanding the intent and meaning of the parties,
yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no
other words are to be added to it or substituted instead.
The duty of the court in such case is to ascertain, not
what the parties may have secretly intended as
contradistinguished from what their words express, but
what is the meaning of the words they have used. What
the parties meant must be determined by what they
said.
47
Certificates of Time Deposit; Issued without Valuable
Consideration; Not Covered by the Philippine Deposit
Insurance Corporation.
45
11 Am. Jur. 2d, Bills and Notes, 79.
46
Ibid, 86.
47
Ibid, 87-88.
25
Illustrative Case:
Philippine Deposit Insurance Corporation vs.
Court of Appeals and John Francis Cotaoco
G.R. No. 118917, December 22, 1997
KAPUNAN, J:
Petitioner Philippine Deposit Insurance Corporation (PDIC)
seeks the reversal of the decision of the Court of Appeals affirming
with modification the decision of the Regional Trial Court holding
petitioner liable for the value of thirteen (13) certificates of time
deposit (CTDs) in the possession of private respondents.
The facts, as found by the Court of Appeals, are as follows:
On September 22, 1983, plaintiffs-appellees invested in
money market placements with the Premiere Financing
Corporation (PFC) in the sum of P10,000.00 each for which
they were issued by the PFC corresponding promissory
notes and checks. On the same date (September 22, 1983),
John Francis Cotaoco, for and in behalf of plaintiffs-
appellees, went to the PFC to encash the promissory notes
and checks, but the PFC referred him to the Regent Saving
Bank (RSB). Instead of paying the promissory notes and
checks, the RSB, upon agreement of Cotaoco, issued the
subject 13 certificates of time deposit with Nos. 09648 to
09660, inclusive, each stating, among others, that the same
certifies that the bearer thereof has deposited with the RSB
the sum of P10,000.00; that the certificate shall bear 14%
interest per annum; that the certificate is insured up to
P15,000.00 with the PDIC; and that the maturity date thereof
is on November 3, 1983 (Exhs. B, B-1 to B-12).
On the aforesaid maturity dated (November 3, 1983),
Cotaoco went to the RSB to encash the said certificates.
Thereat, RSB Executive Vice President Jose M. Damian
requested Cotaoco for a deferment or an extension of a
few days to enable the RSB to raise the amount to pay for
the same (Exh. D). Cotaoco agreed. Despite said
extension, the RSB still failed to pay the value of the
certificates. Instead, RSB advised Cotaoco to file a claim
with the PDIC.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 26
Meanwhile, on June 15, 1984, the Monetary Board of the
Central Bank issued Resolution No. 788 (Exh. 2, Records,
p. 159) suspending the operations of the RSB. Eventually,
the records of RSB were secured and its deposit liabilities
were eventually determined. On December 7, 1984, the
Monetary Board issued Resolution No. 1496 (Exh. 1)
liquidating the RSB. Subsequently, a masterlist or inventory
of the RSB assets and liabilities was prepared. However,
the certificates of time deposit of plaintiffs-appellees were
not included in the list on the ground that the certificates
were not funded by the PFC or duly recorded as liabilities
of RSB.
On September 4, 1984, plaintiffs-appellees filed with the
PDIC their respective claims for the amount of the certificates
(Exhs. C, C-1 to C-12). Sabina Yu, James Ngkaion,
Elaine Ngkaion and Jeffrey Ngkaion, who have similar
claims on their certificates of time deposit with the RSB,
likewise filed their claims with the PDIC. To their dismay,
PDIC refused the aforesaid claims on the ground that the
Traders Royal Bank Check No. 299255 dated September
22, 1983 for the amount of P125,846.07 (Exh. B) issued
by PFC for the aforementioned certificates was returned by
the drawee bank for having been drawn against insufficient
funds; and said check was not replaced by the PFC, resulting
in the cancellation of the certificates as indebtedness or
liabilities of RSB.
48
Consequently, on March 31, 1987, private respondents filed
an action for collection against PDIC, RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central
Bank in default for failing to file an answer.
On May 29, 1989, the trial court rendered its decision
ordering the defendants therein to pay plaintiffs, jointly and
severally, the amount corresponding to the latters certificates of
time deposit.
Both PDIC and RSB appealed. The Central Bank, on the
other hand, filed a petition for certiorari, prohibition and mandamus
48
Rollo, pp. 30-31.
27
before the Court of Appeals praying that the writ of execution
issued by the trial court against it be set aside.
On February 8, 1995, the Court of Appeals rendered its
decision granting the Central Banks petition but dismissing the
appeals of PDIC and RSB. Hence, this petition by PDIC assigning
the following errors:
I
THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS
ARE NEGOTIABLE INSTRUMENTS
II
THE CA ERRED IN HOLDING THAT THE CTDS WERE
ACQUIRED FOR VALUE AND CONSIDERATION
III
THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS
STATE THAT THESE WERE INSURED PETITIONER
SHOULD BE HELD LIABLE FOR THE SAME.
We deal jointly with petitioners first and third assigned
errors.
Relying on this Courts ruling in Caltex (Philippines), Inc. v.
Court of Appeals and Security Bank and Trust Company,
49
the
Court of Appeals concluded that the subject CTDs are negotiable.
Petitioner, on the other hand, contends that the CTDs are non-
negotiable since they do not contain an unconditional promise or
order to pay a sum certain in money nor are they made payable
to order or bearer, as required by Section 1 of the Negotiable
Instruments Law.
Whether the CTDs in question are negotiable or not is,
however, immaterial in the present case. The Philippine Deposit
Insurance Corporation was created by law and, as such, is
governed primarily by the provisions of the special law creating
it.
50
The liability of the PDIC for insured deposits therefore is
49
212 SCRA 448 (1992).
50
Section 4, Corporation Code.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 28
statutory and, under Republic Act No. 3591,
51
as amended, such
liability rests upon the existence of deposits with the insured bank,
not on the negotiability or non-negotiability of the certificates
evidencing these deposits.
The authority for this conclusion finds support in decisions
by American state courts applying their respective bank guaranty
laws. Invariably, the plaintiffs in these cases argued that the
negotiability of the certificates of deposit in their possession
entitled them to be paid out of the bank guaranty fund, a contention
that the courts uniformly rejected.
Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson
52
argued that:
. . . the court should hold the certificates to be guaranteed
because they are negotiable instruments, and were acquired
by the present holders in due course; otherwise it is said
certificates of deposit will be deprived of the quality of
commercial paper. Certificates of deposit have been
regarded as the highest form of collateral. They are of wide
currency in the banking and business worlds, and are
particularly useful to persons of small means, because they
bear interest, and may be readily cashed; therefore to
deprive them of the benefit of the guaranty fund would be a
calamity. . . .
The Supreme Court of Kansas, however, found the plaintiffs
contention to be without merit, ruling thus:
. . . The argument confuses negotiability of commercial paper
with statutory guaranty of deposits. The guaranty is
something extrinsic to all forms of evidence of bank
obligation; and negotiability of instruments has no
dependence on existence or nonexistence of the guaranty.
. . . Whatever the status of the plaintiffs may be as holders
in due course under the Negotiable Instruments Law, they
cannot be assignees of a deposit which was not made, and
51
Entitled An Act Establishing The Philippine Deposit Insurance Corporation,
Defining Its Powers And Duties And For Other Purposes.
52
204 Pac. 715 (1992), 110 Kan. 380.
29
cannot be entitled to the benefit of a guaranty which did not
come into existence. . . .
In arriving at the above decision, the Kansas Supreme Court
relied on its earlier ruling in American State Bank v. Foster,
53
which
arose from the same facts as the Fourth National Bank case.
There, the Court held:
. . . Even if the plaintiff were to be regarded as an innocent
purchaser of the certificates as negotiable instruments, its
situation would be in no wise bettered so far as relate to a
claim against the guaranty fund. The fund protects deposits
only. And if no deposit is made, or no deposit within the
protection of the guaranty law, the transfer of a certificate
cannot impose a liability on the fund. . . . where a certificate
of deposit is given under such circumstances that it is not
protected by the guaranty fund, although that fact is not
indicated by anything on its face, its indorsement to an
innocent holder cannot confer that quality upon it.
In like fashion did the Supreme Court of Nebraska brush
aside a similar contention in State v. Farmers Stale Bank:
54
In this contention we think the appellants fail to distinguish
between the liability of the maker of a negotiable instrument,
which rests upon the law pertaining to negotiable paper,
and the liability of the guaranty fund, which is purely statutory.
The circumstances under which the guaranty fund may be
liable are entirely apart from the law pertaining to negotiable
paper. A holder of a certificate of deposit in a bank who
seeks to hold the guaranty fund liable for its payment must
show that the transaction leading up to the issuance of the
certificate was such that the law holds the guaranty fund
liable for its payment. . . .
The Farmers State Bank ruling was reiterated by the
Nebraska Supreme Court in State v. Home State Bank of Dunning
55
and in State v. Kilgore State Bank.
56
The same ruling was adopted
by the Supreme Court of South Dakota in Mildenstein v. Hirning.
57
53
204 Pac. 709, 110 Kan. 520 (1922).
54
196 N.W. 908, 111 Neb. 117 (1923).
55
201 N.W. 971, 113 Neb. 93 (1925).
56
205 N.W. 297 (1925).
Basic Principles and Jurisprudence on the Negotiable Instruments Law 30
In the case at bar, the Court of Appeals initially found the
subject CTDs to be negotiable. Subsequently, however,
respondent court deemed the issue immaterial, albeit for entirely
different reasons.
. . . Besides, whether the certificates are negotiable or not
is of no moment. The fact remains that the certificates
categorically state that their bearer [sic] have a deposit in
the RSB; that the same will mature on November 3, 1993;
and that the certificates are insured by PDIC.
58
We disagree with respondent courts rationale. The fact that
the certificates state that the certificates are insured by PDIC does
not ipso facto make the latter liable for the same should the
contingency insured against arise. As stated earlier, the deposit
liability of PDIC is determined by the provisions of R.A. No. 3519,
and statements in the certificates that the same are insured by
PDIC are not binding upon the latter.
. . . The mere fact that a certificate recites on its face that a
certain sum has been deposited, or that officers of the bank
may have stated that the deposit is protected by the guaranty
law, does not make the guaranty fund liable for payment, if
in fact a deposit has not been made . . . . The banks have
nothing to do with the guaranty fund as such. It is a fund
raised by assessments against all state banks, administered
by officers of the state to protect deposits in banks. . . .
59
We come now to petitioners second assigned error.
In order that a claim for deposit insurance with the PDIC
may prosper, the law requires that a corresponding deposit be
placed in the insured bank. This is implicit from a reading of the
following provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit
Insurance Corporation . . . which shall insure, as provided,
the deposits of all banks which are entitled to the benefits
of insurance under this Act . . . . (Emphasis supplied).
57
207 N.W. 979 (1926).
58
Rollo, p. 38.
59
State v. Farmers State Bank, supra, note 6.
31
xxx xxx xxx
Sec. 10(a) . . .
xxx xxx xxx
(c) Whenever an insured bank shall have been closed on
account of insolvency, payment of the insured deposits
in such bank shall be made by the Corporation as soon
as possible . . . .(Emphasis supplied.)
A deposit as defined in Section 3(f) of R.A. No. 3591, may
be constituted only if money or the equivalent of money is received
by a bank:
Sec. 3. As used in this Act
(f) The term deposit means the unpaid balance of money
or its equivalent received by a bank in the usual course
of business and for which it has given or is obliged to
give credit to a commercial, checking, savings, time or
thrift account or which is evidenced by passbook, check
and/or certificate of deposit printed or issued in
accordance with Central Bank rules and regulations and
other applicable laws, together with such other
obligations of a bank which, consistent with banking
usage and practices, the Board of Directors shall
determine and prescribe by regulations to be deposit
liabilities of the Bank . . . . (Emphasis ours.)
Did RSB receive money or its equivalent when it issued the
certificates of time deposit? The Court of Appeals, in resolving
who between RSB and PFC issued the certificates to private
respondents, answered this question in the negative. A perusal of
the impugned decision, however, reveals that such finding is
grounded entirely on speculation, and thus, cannot bind this
Court:
60
Equally unimpressive is the contention of PDIC and RSB
that the certificates were issued to PFC which did not acquire
60
Cuizon vs. Court of Appeals, G.R. No. 102096, August 22, 1996.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 32
the same for value because the check issued by the latter
for the certificates bounced for insufficiency of funds. First,
granting arguendo that the certificates were originally issued
in favor of PFC, such issuance could only give rise to the
presumption that the amount stated in the certificates have
been deposited to RSB. Had not PFC deposited the amount
stated therein, then RSB would have surely refused to issue
the certificates certifying to such fact. Second, why did not
RSB demand that PFC pay the certificates or file a claim
against PFC on the ground that the latter failed to pay for
the value of the certificates? It could very well be that the
reason why RSB did not run after PFC for payment of the
value of the certificates was because the instruments were
issued to the latter by RSB for value or were already paid to
RSB by plaintiffs-appellees. Third, if it is true that at the
time RSB issued the certificates to PFC, the instruments
were paid for with checks still to be encashed, then why did
not RSB specifically state in the certificates that the validity
thereof hinges on the encashment of said check? Fourth,
even if it is true that PFC did not deposit with or pay the
RSB the amount stated in the certificates, the latter is not
be such reason freed from civil liability to plaintiffs-appellees.
For, by issuing the certificates, RSB bound itself to pay the
amount stated therein to whoever is the bearer upon its
presentment for encashment. Truly, there is no reason to
depart from the established principle that where a bank
issues a certificate of deposit acknowledging a deposit made
with a third person or an officer of the bank, or with another
bank representing it to be the certificate of the bank, upon
which assurance the depositor accepts it, the bank is liable
for the amount of the deposit (Michis, Banks and Banking,
Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof).
61
Moreover, such finding totally ignores the evidence
presented by defendants. Cardola de Jesus, RSB Deputy
Liquidator, testified that RSB received three (3) checks in
consideration for the issuance of several CTDs, including the ones
in dispute. The first check amounted to P159,153.93, the second,
P121,665.95, and the third, P125,846.07 In consideration of the
third check, private respondents received thirteen (13) certificates
of deposit with Nos. 09648 to 09660, inclusive, with a value of
61
Id., at 39-40.
33
P10,000.00 each or a total of P130,000.00. To conform with the
value of the third check, CTD No. 09648 was chopped, and only
the sum of P5,846.07 was credited in favor of private respondents.
The first two checks made good in the clearing while the third
was returned for being drawn against insufficient funds.
The check in question appears on the records as Exhibit
3 (for Regent),
62
and is described in RSBs offer or evidence as
Traders Royal Bank Check No. 292555 dated September 22,
1983 covering the amount or P125,846.07 . . . issued by Premiere
Financing Corporation.
63
At the back of said check are the words
Refer to Drawer,
64
indicating that the drawee bank (Traders Royal
Bank) refused to pay the value represented by said check. By
reason of the checks dishonor, RSB cancelled the corresponding
as evidence by an RSB ticket dated November 4, 1983.
65
These pieces of evidence convincingly show that the subject
CTDs were indeed issued without RSB receiving any money
therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591,
therefore came into existence. Accordingly, petitioner PDIC cannot
be held liable for value of the certificates of time deposit held by
private respondents.
ACCORDINGLY, the instant petition is hereby GRANTED
and the decision of the Court of Appeals REVERSED. Petitioner
is absolved from any liability to private respondents.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
5. Check defined.
A check is a bill of exchange drawn on a bank payable on
demand. (Sec. 185, Negotiable Instruments Law)
A check is (1) a draft or order (2) upon a bank or banking
house, (3) purporting to be drawn upon a deposit of funds (4) for
the payment at all events of a certain sum of money, (5) to a
62
Records, p. 161.
63
Id., at 155.
64
Exhibit 3-1 (Regent).
65
Exhibits 5 and 5-A (Regent); records, p. 163.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 34
certain person therein named, or to him or his order, or to bearer,
and (6) payable instantly on demand.
66
Except as herein otherwise provided, the provisions of this
Act applicable to a bill of exchange payable on demand apply to
a check.
A check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the creditor of
cash in an amount equal to the amount credited to his account.
(Equitable PCI Bank vs. Ong, 502 SCRA 119)
Check and Inland Bills of Exchange, distinguished
The Supreme Court of the United States, in the leading case
of Merchants Bank v. State Bank, says of checks when contrasted
with bills of exchange: Bank checks are not inland bills of
exchange, but have many of the properties of such commercial
paper, and many of the rules of the law merchants are alike
applicable to both. Each is for a specified sum, payable in
moneyin both cases, there is a drawer, a drawee, and payee.
Without acceptance, no action can be maintained by the holder,
upon either, against drawee. The chief points of difference are
that (1) a check is always drawn on a bank or banker; (2) the
drawer is not discharged by the laches of the holder in
presentment, unless he can show that he has sustained some
injury by the default; (3) it is not due until payment is demanded,
and the statute of limitations runs only from that time; (4) it is, by
its fact, the appropriation of so much money of the drawer, in the
hands of the drawee, to the payment of an admitted liability of the
drawer; (5) it is not necessary that the drawer of a bill should
have funds in the hands of the draweea check in such case
would be a fraud.
67
A check is a draft or order
A bill is also a draft or order; and it is often said that a check
is, in legal effect, a bill of exchange drawn on a bank or banking
66
Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484,
cited in Daniel, page 17
67
Merchants Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18
(italics supplied)
35
house, with some peculiarities.
68
In some cases it is called a bill
payable on demand,
69
and in others an inland bill, or in the nature
of an inland bill, payable on demand;
70
and the expression that a
check is like a bill has been criticized on the ground that nihil
simile est idem, whereas checks are bills, or rather bill is the
genus, and check is a species,
71
In form a check is a bill on a
banking house, and it is perfectly correct to say that it is a bill with
some peculiarities, or in other words, a species of bill of exchange.
(Daniel, page 18)
Characteristics of a check
A check has the character of negotiability and at the same
time it constitutes an evidence of indebtedness. By mutual
agreement of the parties, the negotiable character of a check may
be waived and the instrument may be treated simply as proof of
an obligation. (Sps. Pacheco vs. Court of Appeals, G.R. No.
126670, December 2, 1999, [Ynares-Santiago, J.])
A check is a negotiable instrument that serves as a substitute
for money and as a convenient form of payment in financial
transactions and negotiations. The use of checks as payment
allows commercial and banking transactions to proceed without
the actual handling of money, thus, doing away with the need to
physically count bills and coins whenever payment is made. It
permits commercial and banking transactions to be carried out
quickly and efficiently. But the convenience afforded by checks
is damaged by unfunded checks that adversely affect confidence
in our commercial and banking activities, and ultimately injure
public interest. (Mitra vs. People of the Philippines, G.R. No.
191404, July 5, 2010)
As a general rule, checks and other papers deposited in a
bank for collection remain the property of the depositor, and the
bank performs the service of collection as his agent, even though
it is authorized to apply the proceeds on a debt of the owner. (7
68
Billgerry v. Branch, 19 Gratt. 418; Cruger v. Armstrong, 3 Johns. Cas. 5;
State v. Crawford, 13 La. Ann. 301, ibid
69
Harker v. Anderson, 21 Wend. 372; Edwards on Bills, 396, ibid
70
Merchants Bank v. Spicer, 6 Wend. 445; Purell v. Allemong, 22 Gratt. 742,
ibid
71
Matter of Brown, 2 Story, 502, ibid
Basic Principles and Jurisprudence on the Negotiable Instruments Law 36
C. J., sec. 245, pp. 597, 598; Richardson vs. New Orleans Coffee
Co., 102 Fed., 785; Philadelphia vs. Eckles, 98 Fed., 485;
Commercial Nat. Bank vs. Armstrong, 148 U. S., 50; St. Louis,
etc. R. Co. vs. Johnston, 133 U. S., 566; Ward vs. Smith, 19 Law
ed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.)
72
Is Check considered a legal tender?
A check, whether a managers check or ordinary check, is
not legal tender, and an offer of a check in payment of a debt is
not a valid tender of payment and may be refused receipt by the
obligee or creditor. (Tibajia vs. CA, G.R. No. 100290, June 4, 1993,
[Padilla, J.]) However, in the case of Fortunado vs. Court of
Appeals
73
the Supreme Court stressed that, We are not, by this
decision, sanctioning the use of a check for the payment of
obligations over the objections of the creditor.
In Cebu International Finance Corporation vs. Courts
of Appeals, Vicente Alegre
74
, the High Court ruled that: [i]n a
loan transaction, the obligation to pay a sum certain in money
may be paid in money, which is the legal tender or, by the use of
a check. A check is not a legal tender, and therefore cannot
constitute valid tender of payment. In Philippine Airlines, Inc. vs.
Court of Appeals
75
, this Court held that: [s]ince a negotiable
instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as
payment (citation omitted).
Moreover, the following provisions support the ruling of the
Tibajia case, to wit:
a. Article 1249 (NCC) The payment of debts in money shall
be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
72
Chinese Grocers Association vs. American Apothecaries Co., G.R. No. L-
43667, March 31, 1938, [Villa-Real, J.:]
73
G.R. No. 78556, 25 Paril 1991, 196 SCRA 269.
74
G.R. No. 123031, October 12, 1999
75
18 SCRA 557 (1990)
37
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they
may have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.
b. Section 1 (R.A. 529) Every provision contained in, or
made with respect to, any obligation which purports to
give the obligee the right to require payment in gold or
in any particular kind of coin or currency other than
Philippine currency or in an amount of money of the
Philippines measured thereby, shall be as it is hereby
declared against public policy null and void, and of no
effect, and no such provision shall be contained in, or
made with respect to, any obligation thereafter incurred.
Every obligation heretofore and hereafter incurred,
whether or not any such provision as to payment
contained therein or made with respect thereto, shall be
discharged upon payment in any coin or currency which
at the time of payment is legal tender for public and
private debts.
c. Section 63 (R.A. 265, Central Bank Act) Legal
CharacterChecks representing deposit money do not
have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option
of the creditor: Provided, however, that a check which
has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor
of cash in an amount equal to the amount credited to his
account.
However, noteworthy is the fact that the prohibition in
Section 1 of R.A. 529 does not apply when:
a. Transactions were the funds involved are the proceeds
of loans or investments made directly or indirectly,
through bona fide intermediaries or agents, by foreign
governments, their agencies and instrumentalities, and
international financial and banking institutions so long
as the funds are Identifiable, as having emanated from
the sources enumerated above;
Basic Principles and Jurisprudence on the Negotiable Instruments Law 38
b. Transactions affecting high priority economic projects
for agricultural industrial and power development as may
be determined by the National Economic Council which
are financed by or through foreign funds;
c. Forward exchange transactions entered into between
banks or between banks and individuals or juridical
persons;
d. Import-export and other international banking financial
investment and industrial transactions.
With the exception of the cases enumerated in items (a),
(b), (c) and (d) in the foregoing provision, in, which cases the
terms of the parties agreement shall apply, every other domestic
obligation heretofore or hereinafter incurred whether or not any
such provision as to payment is contained therein or made with
respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public
and private debts: Provided, that if the obligation was incurred
prior to the enactment of this Act and required payment in a
particular kind of coin or currency other than Philippine currency,
it shall be discharged in Philippine currency measured at the
prevailing rates of exchange at the time the obligation was
incurred, except in case of a loan made in foreign currency
stipulated to be payable in the currency in which case the rate of
exchange prevailing at the time of the stipulated date of payment
shall prevail. All coins and currency, including Central Bank notes,
heretofore and hereinafter issued and drawn by the Government
of the Philippines shall be legal tender for all debts, public and
private. (As amended by RA 4100, Section 1, approved June 19,
1964)
Under the above-quoted provision of Republic Act 529, if
the obligation was incurred prior to the enactment of the Act and
require payment in a particular kind of coin or currency other than
the Philippine currency the same shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time
the obligation was incurred. As we have adverted to, Republic
Act 529 was enacted on June 16, 1950. In the case now before
us the obligation of the appellant to pay the appellee the 20% of $
140,000.00, or the sum of $ 28,000.00, accrued on August 25,
39
1961, or after the enactment of Republic Act 529. It follows that
the provision of Republic Act 529 which requires payment at the
prevailing rate of exchange when the obligation was incurred
cannot be applied. Republic Act 529 does not provide for the rate
of exchange for the payment of the obligation incurred after the
enactment of said Act. The logical conclusion, therefore, is that
the rate of exchange should be that prevailing at the time of
payment. This view finds support in the ruling of this Court in the
case of Engel vs. Velasco & Co.
76
where this Court held that even
if the obligation assumed by the defendant was to pay the plaintiff
a sum of money expressed in American currency, the indemnity
to be followed should be expressed in Philippine currency at the
rate of exchange at the time of judgment rather than at the rate of
exchange prevailing on the date of defendants breach. This is
also the ruling of American court as follows:
The value of domestic money of a payment made in foreign
money is fixed with respect to the rate of exchange at the time of
payment. (70 CJS p. 228)
According to the weight of authority the amount of recovery
depends upon the current rate of exchange, and not the par value
of the particular money involved. (48 C.J. 605-606)
The value in domestic money of a payment made in foreign
money is fixed in reference to the rate of exchange at the time of
such payment. (48 C.J. 605)
77
It is to be noted that while an agreement to pay in dollars is
declared as null and void and of no effect, what the law specifically
prohibits is payment in currency other than legal tender. It does
not defeat a creditors claim for payment, as it specifically provides
that every other domestic obligationwhether or not any such
provision as to payment is contained therein or made with respect
thereto, shall be discharged upon payment in any coin or currency
which at the time of payment is legal tender for public and private
debts. A contrary rule would allow a person to profit or enrich
himself inequitable at anothers expense. (Ponce vs. Court of
Appeals, G.R. No. L-49494, May 31, 1979, [Melencio-Herrera,
J.])
76
47 Phil 115, 142.
77
Kalalao vs. Luz, G.R. No. L-27782, July 31, 1970.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 40
As held in Eastbound Navigation, Ltd. vs. Juan Ysmael &
Co., Inc., 102 Phil 1 (1957), and Arrieta vs. National Rice & Corn
Corp.
78
, if there is any agreement to pay an obligation in a currency
other than Philippine legal tender, the same is null and void as
contrary to public policy, pursuant to Republic Act No 529, and
the most that could be demanded is to pay said obligation in
Philippine currency. In other words, what is prohibited by RA No.
529 is the payment of an obligation in dollars, meaning that a
creditor cannot oblige the debtor to pay him in dollars, even if the
loan were given in said currency. In such a case, the indemnity to
be allowed should be expressed in Philippine currency on the
basis of the current rate of exchange at the time of payment.
79
(supra)
Exception to the Rule; check not a legal tender.
In the case of Salvacion F. Vda. De Eduque vs. Jose M.
Ocampo
80
, the Supreme Court already upheld that Japanese
military notes were legal tender during Japanese occupation. But
appellant argues, further, that the consignation of a cashiers
check, which is not legal tender, is not binding upon him. This
question, however, has never been raised in the lower court. Upon
the contrary, defendant accepted impliedly in the consignation of
the cashiers check when he himself asked the court that out of
the money thus consigned he be paid the amount of the second
loan of P15,000. It is a rule that a cashiers check may
constitute a sufficient tender where no objection is made on
this ground.
81
If effect, when there is implied acceptance, it thus operates
as a waiver on the part of the person receiving it to later question
the same. He is estopped by virtue his act of implied acceptance.
What is a crossed-check?
This is a check with two parallel lines in the upper left hand
corner. (Bank of America, NT & SA, vs. Associated Citizens Bank,
G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])
78
10 SCRA 79 (1964)
79
Kalalo vs. Luz, 34 SCRA 337 (1970)
80
G.R. No. L-222, 26 April 1950, penned by Chief Justice Moran
81
62 C.J., p. 670; see also 40 Amer. Jur. P. 764 (emphasis supplied)
41
Under usual practice, crossing a check is done by placing
two parallel lines diagonally on the left portion of the check. The
crossing may be special wherein between the two parallel lines is
written the name of a bank or a business institution, in which case
the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two
parallel diagonal lines are written the words and Co. or none at
all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit. (State
Investment House vs. Intermediate Appellate Court, G.R. No.
72764, July 13, 1989, [Fernan, C.J:])
Illustrative Case:
CHAN WAN vs. TAN KIM and CHEN SO
G.R. No. L-15380, Sept. 30, 1960
BENGZON, J:
This suit to collect eleven checks totaling P4,290.00 is here
for decision because it involves no issue of fact.
Such checks payable to cash or bearer and drawn by
defendant Tan Kim (the other defendant is her husband) upon
the Equitable Banking Corporation, were all presented for payment
by Chan Wan to the drawee bank, but they were all dishonored
and returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer.
At the hearing of the case, in the Manila court of first
instance, the plaintiff did not take the witness stand. His attorney,
however, testified only to identify the checks which are Exhibits
A to K plus the letters of demand upon defendants.
On the other hand, Tan Kim declared without contradiction
that the checks had been issued to two persons named Pinong
and Muy for some shoes the former had promised to make and
were intended as mere receipts.
In view of such circumstances, the court declined to order
payment for two principal reasons: (a) plaintiff failed to prove he
was a holder in due course, and (b) the checks being crossed
Basic Principles and Jurisprudence on the Negotiable Instruments Law 42
checks should not have been deposited instead with the bank
mentioned in the crossing.
It may be stated in this connection, that defendants asserted
a counterclaim, the court dismissed it for failure of proof, and from
such dismissal they did not appeal.
The only issue is, therefore, the plaintiffs right to collect on
the eleven commercial documents.
The Negotiable Instruments Law regulating the issuance of
negotiable checks, the rights and the liabilities arising therefrom,
does not mention crossed checks. Art. 541 of the Code of
Commerce refers to such instruments.
82
The bills of Exchange
Act of England of 1882, contains several provisions about them,
some of which are quoted in the margin.
83
In the case of Philippine National Bank vs. Zulueta, 101
Phil., 1071; 55 Off. Gaz., 222, we applied some provisions of said
Bills of Exchange Act because the Negotiable Law, originating
82
SEC. 541. The maker or any legal holder of a check shall be entitled to
indicate therein that it be paid to certain banker or institution, which he
shall do by writing across the face the name of said banker or institution,
or only the words and company.
The payment made to a person other than the banker or institution
shall not exempt the person on whom it is drawn, if the payment was not
correctly made.
83
76. [General and Special Crossing Defined.] (1) Where a check bears
across its face an addition of
(a) The words and company or any abbreviation thereof between two
parallel transverse lines, either with or without the words not negotiable;
or
(b) Two parallel transverse lines simply, either with or without the words
not negotiable; that addition constitutes a crossing, and the cheque is
crossed generally.
(2) Where a cheque bears across its face an addition of the name of a
banker, either with or without the words not negotiable, that addition
constitutes a crossing, and the cheque is crossed specially and to that
banker.
79. . . . (2) Where the banker on whom a cheque is drawn which is so
crossed nevertheless pays the same, or pays the same, or pays a cheque
crossed generally otherwise than to a banker, or if crossed specially
otherwise than to the banker to whom it is crossed, or his agent for
collection being a banker, he is liable to the true owner of the cheque for
any loss he may sustain owing to the cheque having been so paid. (Taken
from Brannans Negotiable Instruments Law, 60th Ed. 1250-1251.)
43
from England and codified in the United States, permits resort
thereto in matters not covered by it and local legislation.
84
Eight of the checks here in question bear across their face
two parallel transverse lines between which these words are
written: non-negotiable China Banking Corporation. These
checks have, therefore, been crossed specially to the China
Banking Corporation, and should have been presented for
payment by China Banking, and not by Chan Wan.
85
Inasmuch
as Chan Wan did present them for payment himself the Manila
court said there was no proper presentment, and the liability
did not attach to the drawer.
We agree to the legal premises and conclusion. It must be
remembered, at this point, that the drawer in drawing the check
engaged that on due presentment, the check would be paid, and
that if it be dishonored . . . he will pay the amount thereof to the
holder.
86
Wherefore, in the absence of due presentment, the
drawer did not become liable.
Nevertheless we find, on the backs of the checks,
endorsements which apparently show they had been deposited
with the China Banking Corporation and were, by the latter,
presented to the drawee bank for collection. For instance, on the
back of the check Exhibit A (same as in Exh. B), this endorsement
appears:
For deposit to the account of White House Shoe Supply
with the China Banking Corporation and then this:
Cleared through the clearing office of Central Bank of
the Philippines. All prior endorsements and/or lack of
endorsements guaranteed. Chi na Banki ng
Corporation.
And on the back of Exh. G:
84
Sec. 196, Negotiable Instruments Law.
85
If it is not presented by said Bank for payment, the drawee runs the risk, in
case of payment to persons not entitled thereto. So the practice is for the
drawee to refuse when presented by individuals. The check is generally
deposited with the bank mentioned in the crossing, so that the latter may
take charge of the collection.
86
Sec. 61. Negotiable Instruments Law.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 44
For deposit to the credit of our account. Viuda e Hijos
de Chua Chiong Pio. Peoples Shoe Company.
followed by the endorsement of China Banking Corporation
as in Exhibits A and B. All the crossed checks have the
clearance endorsement of China Banking Corporation.
These circumstances would seem to show deposit of the
checks with China Banking Corporation and subsequent
presentation by the latter through the clearing office; but as drawee
had no funds, they were unpaid and returned, some of them
stamped account closed. How they reached his hands, plaintiff
did not indicate. Most probably, as the trial court surmised, this
is not a finding of fact he got them after they had been thus
returned, because he presented them in court with such account
closed stamps, without bothering to explain. Naturally and rightly,
the lower court held him not to be a holder in due course under
the circumstances, since he knew, upon taking them up, that the
checks had already been dishonored.
87
Yet it does not follow as a legal proposition, that simply
because he was not a holder in due course Chan Wan could not
recover on the checks. The Negotiable Instruments Law does
not provide that a holder
88
who is not a holder in due course,
may not in any case, recover on the instrument. If B purchases
an overdue negotiable promissory note signed by A, he is not a
holder in due course; but he may recover from A,
89
if the latter has
no valid excuse for refusing payment. The only disadvantage of
holder who is not a holder in due course is that the negotiable
instrument is subject to defense as if it were non- negotiable.
90
(emphasis supplied)
Now what defense did the defendant Tan Kim prove? The
lower courts decision does not mention any; evidently His Honor
had in mind the defense pleaded in defendants answer, but though
it [is] unnecessary to specify, because the crossing and
presentation incidents sufficed to bar recovery, in his opinion.
87
Sec. 52 (b), Negotiable Instruments Law.
88
He was a holder all right, because he had possession of the checks that
were payable to bearer.
89
Sec. 51. Negotiable Instruments Law.
90
SEC. 58 Negotiable Instruments Law.
45
Tan Kim admitted on cross-examination either that the
checks had been issued as evidence of debts to Pinong and Muy,
and/or that they had been issued in payment of shoes which
Pinong had promised to make for her.
Seeming to imply that Pinong had to make the shoes, she
asserted Pinong had promised to pay the checks for me. Yet
she did not complete the idea, perhaps because she was just
answering cross- questions, her main testimony having referred
merely to their counter-claim.
Needless to say, if it were true that the checks had been
issued in payment for shoes that were never made and delivered,
Tan Kim would have a good defense as against a holder who is
not a holder in due course.
91
Considering the deficiency of important details on which a
fair adjudication of the parties right depends, we think the record
should be and is hereby returned, in the interest of justice, to the
court below for additional evidence, and such further proceedings
as are not inconsistent with this opinion. With the understanding
that, as defendants did not appeal, their counterclaim must be
and is hereby definitely dismissed. So ordered.
Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon,
JJ., concur.
What are the effects of crossing a check?
It means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates
to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee
named therein. (Bank of America, NT & SA, vs. Associated Citizens
Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])
In Bataan Cigar v. Court of Appeals, the Supreme Court
enumerated the effects of crossing a check as follows:
a.) The check may not be encashed but only deposited in
the bank;
91
Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 46
b.) The check may be negotiated only onceto one who
has an account with a bank; and
c.) The act of crossing the check serves as a warning to the
holder that the check has been issued for a definite
purpose so that he must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a
holder in due course.
The effect therefore of crossing a check relates to the mode
of its presentment for payment. Under Section 72 of the
Negotiable Instruments Law, presentment for payment to be
sufficient must be made (a) by the holder, or by some person
authorized to receive payment on his behalfAs to who the holder
or authorized person will depend on the instructions stated on the
face of the check. (State Investment House vs. Intermediate
Appellate Court, G.R. No. 72764, July 13, 1989, [Fernan, C.J:])
The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course. (Dino
vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])
Duty of the collecting bank when dealing with crossed checks
In Philippine Commercial International Bank vs. Court of
Appeals and Ford Phils., Inc.,
92
it was held that: the crossing of
the check with the phrase Payees Account Only, is a warning
that the checks should be deposited only in the account of the
CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain
that the check be deposited in payees account only. Therefore,
it is the collecting bank (PCIBank) which is bound to scrutinize
the check and to know its depositors before it could make the
clearing indorsement all prior indorsements and/or lack of
indorsement guaranteed.
In Banco de Oro and Mortgage Bank vs. Equitable Banking
Corporation,
93
we ruled:
92
G.R. Nos. 121413, 121479, 128604, January 29, 2011
93
157 SCRA 188 (1988)
94
Id. at 194
47
Anent petitioners liability on said instruments, this court is
in full accord with the ruling of the PCHCs Board of Directors
that:
In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of
all prior endorsements. Thus, stamped at the back of the
checks are the defendants clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.
No amount of legal jargon can reverse the clear meaning of
defendants warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation.
94
What may be the ways of crossing a check?
The crossing may be special wherein between the two
parallel lines is written the name of a bank or business institution,
in which case the drawee should pay only with the intervention of
that bank or company.
It may also be general wherein between two parallel
diagonal lines are written the words and Co. or none at all, in
which case the drawee should not encash the same but merely
accept the same for deposit. (Bank of America, NT & SA, vs.
Associated Citizens Bank, G.R. No. 141001, 141018, May 21,
2009, [Carpio, J.])
Liability of depository bank for allowing the deposit of
crossed checks which were issued in favor of and payable
to one person, and without being indorsed by the former, to
the account of another person
Vicente Go vs. Metropolitan Bank and Trust Co.
G.R. No. 168842, August 11, 2010
NACHURA, J.:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 48
FACTS: Petitioner (Vicente Go) alleged that he was doing
business under the name Hope Pharmacy which sells
medicine and other pharmaceutical products in the City
of Cebu. Petitioner had in his employ Chua as his
pharmacist and trustee or caretaker of the business;
Tabaag, on the other hand, took care of the receipts
and invoices and assisted Chua in making deposits
for petitioners accounts in the business operations of
Hope Pharmacy.
Petitioner claimed that there were unauthorized
deposits and encashments made by Chua and
Tabaag in the total amount of One Hundred Nine
Thousand Four Hundred Thirty-three Pesos and Thirty
Centavos (P109,433.30).
Petitioner also averred that there were thirty-two (32)
checks with Hope Pharmacy as payee, for varying
sums, amounting to One Million Four Hundred Ninety-
Two Thousand Five Hundred Ninety-Five Pesos and
Six Centavos (P1,492,595.06), that were not endorsed
by him but were deposited under the personal account
of Chua with respondent bank.
Petitioner claimed that the said checks were crossed
checks payable to Hope Pharmacy only; and that
without the participation and connivance of respondent
bank (which was the depository of said crossed-
checks), the checks could not have been accepted for
deposit to any other account, except petitioners
account.
ISSUE: May the depository bank (Metrobank) be liable for
allowing the deposit of crossed checks which were
issued in favor of and payable to herein petitioner
(Vicente Go) and without being indorsed by the latter,
to the account of Maria Teresa Chua (one of the
respondents)?
RULING: A check is a bill of exchange drawn on a bank payable
on demand.
There are different kinds of checks. In
this case, crossed checks are the subject of the
49
controversy. A crossed check is one where two parallel
lines are drawn across its face or across the corner
thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a
particular banker or a company is written between the
parallel lines drawn. It is crossed generally when only
the words and company are written or nothing is
written at all between the parallel lines, as in this case.
It may be issued so that presentment can be made
only by a bank.
In order to preserve the credit worthiness of checks,
jurisprudence has pronounced that crossing of a check
has the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check
may be negotiated only once to one who has an
account with a bank; and (c) the act of crossing the
check serves as warning to the holder that the check
has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.
The Court has taken judicial cognizance of the practice
that a check with two parallel lines in the upper left
hand corner means that it could only be deposited and
not converted into cash. The effect of crossing a check,
thus, relates to the mode of payment, meaning that
the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein.
The
crossing of a check is a warning that the check should
be deposited only in the account of the payee. Thus, it
is the duty of the collecting bank to ascertain that the
check be deposited to the payees account only.
In the instant case, there is no dispute that the subject
32 checks with the total amount of P1,492,595.06 were
crossed checks with petitioner as the named payee. It
is the submission of petitioner that respondent bank
should be held accountable for the entire amount of
the checks because it accepted the checks for deposit
under Chuas account despite the fact that the checks
Basic Principles and Jurisprudence on the Negotiable Instruments Law 50
were crossed and that the payee named therein was
not Chua.
In its defense, respondent bank countered that
petitioner is not entitled to reimbursement of the total
sum of P1,492,595.06 from either Maria Teresa Chua
or respondent bank because petitioner was not
damaged thereby.
Respondent banks contenti on i s meri tori ous.
Respondent bank should not be held liable for the entire
amount of the checks considering that, as found by
the RTC and affirmed by the CA, the checks were
actually given to Chua as payments by petitioner for
loans obtained from the parents of Chua. Furthermore,
petitioners non-inclusion of Chua and Tabaag in the
petition before this Court is, in effect, an admission by
the petitioner that Chua, in representation of her
parents, had rightful claim to the proceeds of the
checks, as payments by petitioner for money he
borrowed from the parents of Chua. Therefore,
petitioner suffered no pecuniary loss in the deposit of
the checks to the account of Chua.
However, we affirm the finding of the RTC that
respondent bank was negligent in permitting the deposit
and encashment of the crossed checks without the
proper indorsement. An indorsement is necessary for
the proper negotiation of checks specially if the payee
named therein or holder thereof is not the one
depositing or encashing it. Knowing fully well that the
subject checks were crossed, that the payee was not
the hol der and that the checks contai ned no
indorsement, respondent bank should have taken
reasonable steps in order to determine the validity of
the representations made by Chua. Respondent bank
was amiss in its duty as an agent of the payee.
Prudence dictates that respondent bank should not
have merely relied on the assurances given by Chua.
xxx xxx
51
Negligence was committed by respondent bank in
accepting for deposit the crossed checks without
indorsement and in not verifying the authenticity of the
negotiation of the checks. The law imposes a duty of
extraordinary diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity.
As a
business affected with public interest and because of
the nature of its functions, the banks are under
obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary
nature of the rel ati onshi p.
The fact that thi s
arrangement had been practiced for three years without
Mr. Go/Hope Pharmacy raising any objection does not
detract from the duty of the bank to exerci se
extraordinary diligence. Thus, the Decision of the RTC,
as affirmed by the CA, holding respondent bank liable
for moral damages is sufficient to remind it of its
responsibility to exercise extraordinary diligence in the
course of its business which is imbued with public
interest.
WHEREFORE, the Decision dated May 27, 2005 and
the Resolution dated August 31, 2005 of the Court of
Appeals in CA-G.R. CV No. 63469 are hereby
AFFIRMED.
Within what time should a check be presented for payment?
A check must be presented for payment within a reasonable
period after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay. (Sec. 186,
Negotiable Instruments Law)
The present banking practice requires that a check must
be issued within six (6) months from the date of issuance,
otherwise, the check becomes stale, and the drawer will be
discharged from liability thereon to the extent of the loss caused
by the delay.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 52
A stale check is valueless
A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is valueless
and, therefore should not be paid. Under the negotiable
instruments law, an instrument not payable on demand must be
presented for payment on the day it falls due. When the instrument
is payable on demand, presentment must be made within a
reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after
the last negotiation thereof.
95
(International Corporate Bank vs.
Sps. Gueco, G.R. No. 141968, February 12, 2001, [Kapunan, J.])
Moreover, in Crystal vs. Court of Appeals
96
, it has been
held that, if the check had become stale, it becomes imperative
that the circumstances that caused its non-presentment be
determined.
What constitutes reasonable time?
In determining what is a reasonable time, regard is to be
had to the nature of the instrument, the usage of trade or business
with respect to such instruments, and the facts of the particular
case. (Sec. 193, Negotiable Instruments Law)
The test is whether the payee employed such diligence as
a prudent man exercises in his own affairs.
97
This is because the
nature and theory behind the use of a check points to its
immediate use and payability. (International Corporate Bank vs.
Sps. Gueco, G.R. No. 141968, February 12, 2001) (emphasis
supplied)
Acceptance not required in checks; Acceptance
synonymous with Certification of Checks
A comprehensive discussion was laid down by the Supreme
Court in the case of Philippine National Bank vs. The National
City Bank of New York and Motor Service Company, Inc., G.R.
No. L-43596, October 31, 1936, wherein it was held that: [a] check
is a bill of exchange payable on demand and only the rules
95
Section 71, Negotiable Instruments Law
96
71 SCRA 443 (1976)
97
Jeff Bras, Stones vs. McCullough (1934) 188 Ark. 1108, 69 S.W. (2d) 863
53
governing bills of exchange payable on demand are applicable to
it, according to Section 185 of the Negotiable Instruments Law.
In view of the fact that acceptance is a step unnecessary, in so far
as bills of exchange payable on demand are concerned (Sec.
143), it follows that the provisions relative to acceptance are
without application to checks. Acceptance implies, in effect,
subsequent negotiation of the instrument, which is not true in case
of the payment of a check because from the moment the check is
paid it is withdrawn from circulation. The warranty established by
section 62, is in favor of holders of the instrument after its
acceptance. When the drawee bank cashes or pays a check, the
cycle of negotiation is terminated, and it is illogical thereafter to
speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according
to section 191, acceptance means an acceptance completed
by delivery or notification and this concept is entirely incompatible
with payment, because when payment is made the check is
retained by the bank, and there is no such thing as delivery or
notification to the party receiving the payment. Checks are not to
be accepted, but presented at once for payment. (1 Bouviers
Law Dictionary, 476) There can be no such thing as acceptance
in the ordinary sense of the term. A check being payable
immediately and on demand, the bank can fulfill its duty to the
depositor only by paying the amount demanded. The holder has
no right to demand from the bank anything but payment of the
check, and the bank has no right, against the drawer, to do
anything but to pay it. (5 R.C.L., p. 516, par. 38) A check is not an
instrument which in the ordinary course of business calls for
acceptance. The holder can never claim acceptance as his legal
right. He can present for payment, and only for payment. (1 Morse
on Banks and Banking, 6
th
ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice
against the presentation of checks for acceptance, before they
are paid, in which case we have a certification equivalent to
acceptance according to section 187, which provides that where
a check is certified by the bank on which it is drawn, the certification
is equivalent to an acceptance, and it is then that the warranty
under section 62 exists. This certification or acceptance consists
in the signification by the drawee of his assent to the order of the
drawer, which must not express that the drawee will perform his
promise by any other means than the payment of money. (Section
Basic Principles and Jurisprudence on the Negotiable Instruments Law 54
132) When the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
thereon (sec. 188), and then the check operates as an assignment
of a part of the funds to the credit of the drawer with bank. (sec.
189) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a
bill of exchange or draft may be accepted. The bank may accept
if it chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers,
voluntarily to incur the obligation. The act by which the bank places
itself under obligation to pay to the holder the sum called for by a
check must be the expressed promise or undertaking of the bank
signifying its intent to assume the obligation, or some act from
which the law will imperatively imply such valid promise or
undertaking. The most ordinary form which such an act assumes
is the acceptance by the bank of the check, or, as it is perhaps
more often called, the certifying of the check. (1 Morse on Banks
and Banking, pp. 898, 899; 5 R.C.L., p. 520)
No doubt a bank may by an unequivocal promise in writing
make itself liable in any event to pay the check upon demand, but
this is not an acceptance of the check in the true sense of that
term. Although a check does not call for acceptance, and the
holder can present it only for payment, the certification of checks
is a means in constant and extensive use in the business of
banking, and its effects and consequences are regulated by the
law merchant. Checks drawn upon banks or banker, thus marked
or certified, enter largely into the commercial and financial
transactions of the country; they pass from hand to hand, in the
payment of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. x x x The
check becomes a basis of creditany easy mode of passing
money from hand to hand, and answers the purposes of money.
(5 R.C.L., pp. 516, 517)
What is the effect of a check being certified by the drawee
bank?
Where a check is certified by the bank on which it is drawn
the certification is equivalent to an acceptance. (Sec. 187,
Negotiable Instruments Law)
55
The purpose of procuring a check to be certified is to
impart strength and credit to the paper by obtaining an
acknowledgment from the certifying bank that the drawer has
funds therein sufficient to cover the check and securing the
engagement of the bank that the check will be paid upon
presentation. A certified check has a distinctive character as a
species of commercial paper, and performs important functions
in banking and commercial business. When a check is certified,
it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on
deposit, payable to the holder on demand. (Philippine National
Bank vs. The National City Bank of New York, October 31, 1936)
(emphasis supplied)
In the case of New Pacific Timber & Supply Co., Inc. vs.
Seneris
98
, [s]ince the check had been certified by the drawee
bank, by the certification, the funds represented by the check are
transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the
depositor of the drawee bank, with rights and duties of one in
such situation. Where a check is certified by the bank on which it
is drawn, the certification is equivalent to acceptance. Said
certification implies that the check is drawn upon sufficient funds
in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check
is presented for payment. It is an understanding that the check is
good then, and shall continue good, and this agreement is as
binding on the bank as its notes on circulation, a certificate of
deposit payable to the order of depositor, or any other obligation
it can assume. The object of certifying a check, as regards
both parties, is to enable the holder to use it as money. When
the holder procures the check to be certified, the check operates
as an assignment of a part of the funds to the creditors. Hence,
the exception to the rule enunciated under Section 63 of the
Central Bank to the effect that a check which has been cleared
and credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount
credited to his account x x x (Equitable PCI Bank vs. Rowena
Ong, G.R. No. 156207 [September 15, 2006]) (emphasis supplied)
98
G.R. No. L-41764, 19 December 1980, 101 SCRA 686, 693
Basic Principles and Jurisprudence on the Negotiable Instruments Law 56
All the authorities, both English and American, hold that a
check may be accepted, though acceptance is not usual. By the
law merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been
set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an undertaking
that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes of circulation, a
certificate of deposit payable to the order of the depositor, or any
other obligation it can assume. The object of certifying a check
as regards both parties is to enable the holder to use it as money.
The transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is available
also to him for all purposes of money. Thus it continues to perform
its important functions until in the course of business it goes back
to the bank for redemption, and is extinguished by payment. It
cannot be doubted that the certifying bank intended these
consequences, and it is liable accordingly. To hold otherwise
would render these important securities only a snare and a
delusion. A bank incurs no greater risk in certifying a check than
in giving a certificate of deposit. In well- regulated banks the
practice is at once to charge the check to the account of the drawer,
to credit in a certified check account, and, when the check is paid,
to debit that account in the amount. Nothing can be simpler or
safer than this process. (Merchants Bank vs. States Bank, 10
Wall., 604, at p. 647; 19 Law. Ed., 1008, 1009, cited in PNB vs.
National City Bank of New York, id.)
Ordinarily the acceptance or certification of a check is
performed and evidenced by some word or mark, usually the
words good, certified or accepted written upon the check by
the banker or bank officer. (1 Morse, Banks and Banking, 915; 1
Bouviers Law Dictionary, 476.) The bank virtually says, that check
is good; we have the money of the drawer here ready to pay it.
We will pay it now if you 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 law will not permit a
check, when due, to be thus presented, and the money to be left
with the bank for the accommodation of the holder without
discharging the drawer. The money being due and the check
presented, it is his own fault if the holder declines to receive the
57
pay, and for his own convenience has the money appropriated to
that check to its future presentment at any time within the statute
of limitations. (1 Morse on Banks and Banking, p. 920.)
What happens if the holder of the check procures it to be
certified?
Where the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
therefrom. (Sec. 188, Negotiable Instruments Law)
Payment and Certification of Checks distinguished
In the PNB case, the Supreme Court laid down a detailed
discussion and held that: [w]ith few exceptions, the weight of
authority is to the effect that payment neither includes nor implies
acceptance.
In National Bank vs. First National Bank ([19101, 141 Mo.
App., 719; 125 S.W., 513), the court asks, if a mere promise to
pay a check is binding on a bank, why should not the absolute
payment of the check should have the same effect? In response,
it is submitted that the two things, that is acceptance and
payment, are entirely different. If the drawee accepts the paper
after seeing it, and then permits it to go into circulation as genuine,
on all the principles of estoppel, he ought to be prevented from
setting up forgery to defeat liability to one who has taken the paper
on the faith of the acceptance, or certification. On the other hand,
mere payment of the paper at the termination of its course does
not act as an estoppel. The attempt to state a general rule covering
both acceptance and payment is responsible for a large part of
the conflicting arguments which have been advanced by the courts
with respect to the rule. (Annotation at 12 A.L.R., 1090 1921.])
In First National Bank vs. Brule National Bank ([1917], 12
A.L.R., 1079, 1085), the Court said:
We are of the opinion that payment is not acceptance.
Acceptance, as defined by Section 131, cannot be
confounded with payment
Acceptance, certification, or payment of a check, by the
express language of the statute, discharges the liability only
Basic Principles and Jurisprudence on the Negotiable Instruments Law 58
of the persons named in the statute, to wit, the drawer and
all indorsers, and the contract of indorsement by the
negotiator if the check is discharged by acceptance,
certification, or payment. But clearly the statute does not
say that the contract or warranty of the negotiator, created
by Section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A.L.R.
764), that payment of a check on a forged or unauthorized
indorsement of the payees name, and charging the same to the
drawers account, do not amount to an acceptance so as to make
the bank liable to the payee, is supported by all of the recent
cases in which the question is considered. (cases cited, Annotation
at 69 A.L.R., 1076, 1077 [1930])
Merely stamping a check paid upon its payment on a forged
or unauthorized indorsement is not an acceptance thereof so as
to render the drawee bank liable to the true payee. (Anderson vs.
Tacoma National Bank [1928], 146 Wash., 520 520; Pac., 8;
Annotation at 69 A.L.R., 1077, [1930])
In State Bank of Chicago vs. Mid-City Trust & Savings Bank
(12 A.L.R., 989; 991, 992), the Court said:
The defendant in error contends that the payment of the
check shows acceptance by the bank, urging that there can be
no more definite act by the bank upon which a check has been
drawn, showing acceptance than the payment of the check.
Section 184 of the Negotiable Instruments Act (Sec. 202) provides
that the provisions of the act applicable to bills of exchange apply
to a check, and section 131 (sec. 149), that the acceptance of a
bill must be in writing signed by the drawee. Payment is the final
act which extinguishes a bill. Acceptance is a promise to pay in
the future and continues the life of the bill. It was held in the First
National Bank vs. Whitman (94 U.S., 343; 24 L. ed., 229), that
payment of a check upon a forged indorsement did not operate
as an acceptance in favor of the true owner. The contrary was
held in Pickle vs. Muse (Fickle vs. Peoples Nat. Bank, 88 Tenn.,
380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.W., 919), and Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751) at a time
when the Negotiable Instruments Act was not in force in those
states. The opinion of the Supreme Court of the United States
59
seems more logical, and the provision of the Negotiable
Instruments Act now require an acceptance to be in writing. Under
this statute the payment of a check on a forged indorsement,
stamping it paid, and charging it to the account of the drawer, do
not constitute an acceptance of the check or create a liability of
the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co.
vs. Walker Bin Co., 92 Ohio St., 406; L.R.A. 1916 D, 433; 111
N.E., 147; Ann. Cas. 1917 D, 1055; Baltimore & O.R. Co. vs. First
National Bank, 102 Va., 753; 47 S.E., 837; State Bank of Chicago
vs. Mid-City Trust & Savings Bank 12 A.L.R., pp. 989, 991, 992.)
Before drawees acceptance of check there is no privity of
contract between drawee and payee. Drawees payment of check
on unauthorized indorsement does not constitute acceptance
of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165
S.E., 860 [1932])
The great weight of authority is to the effect that the payment
of a check upon a forged or unauthorized indorsement and the
stamping of it paid does not constitute an acceptance. (Dakota
Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.W.,
351, 352 [1932].)
Paying of the check, cashing it on presentment is not
acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N.E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 III.
App. 625, 636, 637 [1908]), the language of the decision was as
follows:
The plaintiffs say that this acceptance was made by the
very unauthorized payments of which they complain. This
suggestion does not seem forceful to us. It is the contention
which was made before the Supreme Court of the United
States in First National Bank vs. Whitman (94 U.S., 343),
and repudiated by that court. The language of the opinion
in that case is so apt in the present case that we quote it:
It is further contended that such an acceptance of a check
as creates a privity between the payee and the bank is
Basic Principles and Jurisprudence on the Negotiable Instruments Law 60
established by the payment of the amount of this check in
the manner described. This argument is based upon the
erroneous assumption that the bank has paid this check. If
this were true, it would have discharged all of its duty, and
there would be an end to the claim against it. The bank
supposed that it had paid the check, but this was an error.
The money it paid was upon a pretended and not a real
indorsement of the name of the payeeWe cannot
recognize the argument that payment of the amount of the
check or sight draft under such circumstances amounts to
an acceptance creating a privity of contract with the real
owner.
It is difficult to construe a payment as an acceptance under
any circumstancesA banker or individual may be ready
to make actual payment of a check or draft when presented,
while unwilling to make a promise to pay than to meet the
promise when required. The difference between the
transactions is essential and inherent.
And in Wharf vs. Seattle National Bank (24 Pac. [2d], 120,
123 [1933]):
It is the rule that payment of a check on unauthorized or
forged indorsement does not operate as an acceptance of
the check so as to authorize an action by the real owner to
recover its amount from the drawee bank. (Michie on Banks
and Banking, vol. 5, sec. 278, p. 521.) (See also, Federal
Land Bank vs. Collings, 156 Miss., 893; 127 So., 570; 69
A.L.R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69
A.L.R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for appellant
is forced to stand upon the narrow ledge that the payment of the
check by the two banks will constitute an acceptance. The drawee
bank simply marked it paid and did not write anything else except
the date. The bank first paying the check, the Commercial National
Bank and Trust Company, simply wrote its name as indorser and
passed the check on to the drawee bank; does this constitute
61
acceptance? The precise question has not been presented to
this court for decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never written
its name across the paper and therefore, under the strict terms of
the statute, could not be bound as the acceptor, in the second
place, it does not appear to us to be illogical and unsound to say
that the payment of a check by the drawee, and the stamping of it
paid, is equivalent to the same thing as acceptance of a check;
however, there is a variety of opinions in the various jurisdictions
on this question. Counsel correctly states that the theory upon
which numerous courts hold that the payment of a check creates
privity between the holder of the check and the drawee bank is
tantamount to a pro tanto assignment of that part of the funds. It
is most easily understood how the payment of the check, when
not authorized to be done by the drawee bank, might under such
circumstances create liability on the part of the drawee to the
drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380;
12 S.W., 919; 7 L.R.A., 93; 17 Am. St. Rep., 900), wherein Judge
Lurton held that the acceptance of a check was necessary order
to give the holder thereof a right of action thereon against the
bank, and further held in a case similar to this, so far as the
question is concerned, that the acceptance of a check by the bank
and its subsequent charge of the amount to the drawer, although
it was presented by, and payment made, an unauthorized person.
Judge Lurton cited the case of National Bank of the Republic vs.
Millard (10 Wall., 152; 19 L.ed., 897), wherein the Supreme Court
of the United States, not having such a case before it, threw out
the suggestion that, if it was shown that a bank had charged the
check on its books against the drawer and made settlement with
the drawee that the holder could recover on account of money
had and received, invoking the rule of justice and fairness, it might
be said there was an implied promise to the holder to pay it on
demand. (See National Bank of the Republic vs. Millard, 10 Wall.
[77 U.S.], 152; 19 L.ed., 899.) The Tennessee court then argued
that it would be inequitable and unconscionable for the owner
and payee of the check to be limited to an action against an
insolvent drawer and might thereby lose the debt. They recognized
the legal principle that there is no privity between the drawer bank
and the holder, or payee, of the check, and proceeded to hold
that no particular kind of writing was necessary to constitute an
acceptance and that it became a question of fact, and the bank
became liable when it stamped it paid and charged it to the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 62
account of the drawer, and cites, in support of its opinion, Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751); Saylor
vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs.
Bank (20 Ohio St., 234; 5 Am. Rep., 648.)
This decision was in 1890, prior to the enactment of the
Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the
Millard Case, supra, was dicta. The Dodge case, from the
Ohio court, held exactly as the Tennessee court, but
subsequently in the case of Elyria Bank vs. Walker Bin Co.
(92 Ohio St., 406; 111 N.E., 147; L.R.A. 1916 D, 433; Ann.
Cas. 1917 D, 1055), the court held to the contrary, called
attention to the fact that the Dodge case was no longer the
law, and proceeded to announce that, whatever might have
been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law; and
the rule announced in the Dodge case had been discarded.
The court, in the latter case, expressed its doubts that the
courts of Tennessee and Pennsylvania would adhere to the
rule announced in the Pickle case, quoted supra, in the fact
of the Negotiable Instrument Law. Subsequent to the Millard
case, the Supreme Court of the United States, in the case
of First National Bank of Washington vs. Whitman (94 U.S.,
343, 347; 24 L.ed., 229), where the bank, without any
knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended that by
the payment the privity of contract existing between the
drawer and drawee was imparted to the payee, said:
It is further contended that such an acceptance of the check
as creates a privity between the payee and the bank is
established by the payment of the amount of this check in
the manner described. This argument is based upon the
erroneous assumption that the bank has paid this check. If
this were true, it would have discharged all of its duty, and
there would be an end of the claim against it. The bank
supposed that it had paid the check; but this was an error.
The money it paid was upon a pretended and not a real
indorsement of the name of the payee. The real indorsement
of the payee was as necessary to a valid payment as the
real signature of the drawer; and in law the check remains
unpaid. Its pretended payment did not diminish the funds
63
of the drawer in the bank, or put money in the pocket of the
person entitled to the payment. The state of the account
was the same after the pretended payment as it was before.
We cannot recognize the argument that a payment of the
amount of a check or sight draft under such circumstances
amounts to an acceptance, creating a privity of contract with
the real owner. It is difficult to construe a payment as an
acceptance under any circumstances. The two things are
essentially different. One is a promise to perform at, the
other an actual performance. A banker or an individual may
be ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay than to
meet the promise when required. The difference between
the transactions is essential and inherent.
Nature of a managers check.
A managers check is one drawn by a banks manager upon
the bank itself. It stands on the same footing as a certified check,
which is deemed to have been accepted by the bank that certified
it. As the banks own check, a managers check becomes the
primary obligation of the bank and is accepted in advance by the
act of its issuance. (Security Bank and Trust Company vs. Rizal
Commercial Banking Corporation, G.R. No. 170984, 170987,
January 30, 2009, [Quisumbing, J.])
A managers check is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity and
honor behind its issuance, and by its peculiar character and
general use in commerce, a managers check is regarded
substantially to be as good as the money it represents. (Citibank
N.A. (Formerly First National City Bank) vs. Sabeniano, 504 SCRA
378)
[It] stands on the same footing as a certified check.
99
The
effect of certification is found in Section 187, Negotiable
Instruments Law.
100
The effect of issuing a managers check was
99
Supra note 21 at 411 [Soler v. Court of Appeals, G.R. No. 123892, 21 May
2011, 358 SCRA 57, 64]
100
Sec. 187. Certification of check; effect of.Where a check is certified by
the bank on which it is drawn, the certification is equivalent to an
acceptance
Basic Principles and Jurisprudence on the Negotiable Instruments Law 64
incontrovertibly elucidated when [we] it was declared that [a]
managers check is one drawn by the banks manager upon the
bank itself. It is similar to a cashiers check both as to the effect
and use. A cashiers check is a check of the banks cashier on
his own or another check. In effect, it is a bill of exchange drawn
by the cashier of a bank upon the bank itself, and accepted in
advance by the act of its issuance. It is really the banks own
check and may be treated as a promissory note with the bank as
a maker. The check becomes the primary obligation of the bank
which issued it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance
thereof. x x x.
101
(Equitable PCI Bank vs. Rowena Ong, G.R. No.
156207, September 15, 2006, [Chico-Nazario, J.])
Given that a check is more than just an instrument of credit
used in commercial transactions for it also serves as a receipt or
evidence for the drawee bank of the cancellation of the said check
due to payment, then, the possession by the drawee bank of the
said Managers Checks (MCs), duly stamped Paid gives rise to
the presumption that the said Managers Checks (MCs) were
already paid out to the intended payee. (supra)
Cashiers Check deemed as cash
In the case of New Pacific Timber & Supply Company, Inc.
vs. Hon. Alberto Seneris,
102
it was held that:
It is to be emphasized in this connection that the check
deposited by the petitioner in the amount of P50, 000.00 is not an
ordinary check but a Cashiers Check of the Equitable Banking
Corporation, a bank of good standing and reputation. As testified
to by the Ex-Officio Sheriff with whom it has been deposited, it is
a certified crossed check.
103
It is a well-known and accepted
practice in the business sector that a Cashiers Check is deemed
as cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the
check are transferred from the credit of the maker to that of the
payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties
101
International Corporate Bank vs. Gueco, G.R. No. 141968, 12 February
2001
102
G.R. No. L-41764, December 19, 1980, [Concepcion, Jr., J.:]
103
p. 35, t.s.n., May 24, 1975
65
of one in such situation.
104
Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance.
105
Said certification implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have been set apart
for its satisfaction, and that they shall be so applied whenever the
check is presented for payment. It is an understanding that the
check is good then, and shall continue good, and this agreement
is as binding on the bank as its notes in circulation, a certificate of
deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as
regards both parties, is to enable the holder to use it as money.
106
When the holder procures the check to be certified, the check
operates as an assignment of a part of the funds to the creditors.
107
Hence, the exception to the rule enunciated under Section 63 of
the Central Bank Act to the effect that a check which has been
cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account shall apply in this case.
Problem:
X delivered stocks of vegetable oil to Y sometime on
March 1993. As payment therefor, Y issued a personal
check in the amount of Php 348, 805.50. However, when
the check was encashed, it was dishonored by the
drawee bank. Y then assured X that he would replace
the bounced check with a cashiers check from the Bank
of the Philippine Islands (BPI). Thereafter, BPI cashiers
check no. 14428 in the amount of Php 348, 805.50 was
issued, drawn against the account of Y. The following
day, X returned to drawee bank to encash the check
but it was dishonored, the bank then informed X that
Ys account was closed on that date.
104
Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-
2886, August 22, 1952, 49 O.G. No. 1, p. 59
105
Section 187. Certification of check; effect of. Where a check is certified
by the bank on which it is drawn, the certification is equivalent to
acceptance. (Negotiable Instruments Law)
106
PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719
107
PNB vs., Nat. City Bank of New York, supra, 711-717; Sec. 189. When
check operates as an assignment. A cheek of itself does not operate
as an assignment of any part of the funds to the credit of the drawer with
the bank. and the bank, is not liable to the holder unless and until it accepts
or certifies it. (Negotiable Instruments Law) [Emphasis supplied]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 66
X then filed a complaint for collection of sum of money
against BPI. In its answer, BPI claimed that it issued
the check by mistake in good faith; that its dishonor
was due to lack of consideration; and that Xs remedy
was to sue Y who purchased the check.
a. Is X a holder in due course despite BPIs contention
that there was lack of consideration?
b. Is BPI liable to X for the amount of the cashiers
check?
c. What is the nature of a cashiers check?
ANSWER:
a. YES. X is a holder in due course.
Sec. 52. (NIL)a holder in due course is a holder who
has taken the instrument under the following conditions:
a. That it is complete and regular upon its face;
b. That he became the holder of it before it was
overdue and without notice that it had been
previously dishonored;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him, he
had no notice of any infirmity in the instrument
or defect in the title of the person negotiating
it.
Value in general terms may be some right, interest, profit
or benefit to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc., on the
other side. Here, there is no dispute that X received Ys
cashiers check as payment for the formers vegetable
oil. The fact that it was Y who purchased the cashiers
check from BPI will not affect Xs status as a holder for
value since the check was delivered to him as payment
for the vegetable oil he sold to Y. (Bank of the Philippine
Islands vs. Gregorio C. Roxas, G.R. No. 157833, October
15, 2007 [Sandoval-Gutierrez, J.]).
67
b. YES. BPI is liable for the amount of the cashiers check.
A cashiers check is really the banks own check and
may be treated as a promissory note with the bank as a
maker. The check becomes the primary obligation of
the bank which issues it and constitutes a written promise
to pay upon demand. (BPI vs. Roxas)
c. It is a well known and accepted practice in the business
sector that a cashiers check is deemed as cash. This
is because the mere issuance of a cashiers check is
considered acceptance thereof. (BPI vs. Roxas).
What is a Memorandum check?
A memorandum check is in the form of an ordinary check,
with the word memorandum, or memo or mem written across
its face, signifying that the maker or drawer engages to pay the
bona fide holder absolutely, without any condition concerning its
presentment.
108
(People of the Philippines vs. Hon. David Nitafan,
et al, G.R. No. 75954, October 22, 1992)
Such a check is an evidence of debt against the drawer
and although may not be intended to be presented,
109
has the
same effect as an ordinary check,
110
and if passed to the third
person, will be valid in his hands like any other check.
111
(Ibid.)
Feature of a Memorandum Check
A memorandum check may carry with it the understanding
that it is not [to] be presented at the bank but will be redeemed by
the maker himself when the loan falls due. This understanding
may be manifested by writing across the check Memorandum,
Memo, or Mem. (People vs. Nitafan, supra)
It presents all the features of other negotiable instruments
when transferred or indorsed to a bona fide holder for value. It is
a contract by which the maker engages to pay the bona fide holder
absolutely, and not upon a condition to pay if the bank upon which
108
Franklin Bank v. Freeman, 16 Pick 535
109
Cushing v. Gore, 15 Mass. 69.z
110
Dykes v. Leather Manufactures Bank, 11 Page 612
111
Franklin Bank v. Freeman, supra
Basic Principles and Jurisprudence on the Negotiable Instruments Law 68
it be drawn should not pay upon presentation at maturity, and if
due notice of the presentation and nonpayment should be given.
112
Liabilities of a drawee bank
The bank of which a check is drawn, known as the drawee
bank, is under strict liability, based on the contract between the
bank and its customer (drawer), to pay the check only to the payee
or the payees order. The drawers instructions are reflected on
the face and by the terms of the check.
When the drawee bank pays a person other than the payee
named on the check, it does not comply with the terms of the
check and violates its duty to charge the drawers account only
for properly payable items.
Thus, the Supreme Court ruled in Philippine National Bank
vs. Rodriguez, that a drawee should charge to the drawers
account only the payables authorized by the latter; otherwise, the
drawee will be violating the instructions of the drawer and shall
be liable for the amount charged to the drawers account.
(Bank of America, NT & SA, vs. Associated Citizens Bank, G.R.
No. 141001, 141018, May 21, 2009, [Carpio, J.])
Liability of an endorser bank under Section 66 of the
Negotiable Instruments Law
In check transactions, the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. (Bank of America,
NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018,
May 21, 2009, [Carpio, J.])
If a bank refuses to pay a check, can the payee-holder thereof
sue the bank?
No. If a bank refuses to pay a check (notwithstanding
sufficiency of funds), the payee-holder cannot sue the bankthe
112
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 407, citations omitted
69
payee-holder should instead sue the drawer who might in turn
sue the bank. (Villanueva vs. Nite, 496 SCRA 459 [2006]). Section
189
113
is sound law based on logic and established legal principles:
no privity of contract between the drawee-bank and the payee.
(supra)
Is there any difference between a Check and a Promissory
Note?
A check is a form of a bill of exchange wherein it is an
unconditional order in writing addressed by one person to another
(usually a bank), signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer, whereas, a promissory note is an unconditional promise
to pay made by one person addressed to another, on demand or
also at a fixed or determinable future time, a sum certain in money
to order or to bearer.
A check necessarily involves three individuals, the drawer,
the payee, and the drawee (bank), whereas, a promissory note
only involves two persons, the maker and the payee.
In checks, liability of the drawee bank arises from the
moment the latter accepts the check being presented either for
acceptance or payment, whereas in promissory notes, liability of
the maker attaches from the moment the instrument was delivered
to the payee for the purpose of giving effect thereto.
Questions:
Does a collecting bank, over the objections of the
depositor, have the authority to withdraw unilaterally
from such depositors account the amount it had
previously paid upon certain unindorsed order
instruments deposited by the depositor to another
account that she later closed?
113
SEC. 189. When check operates as an assignment. A check of itself
does not operate as an assignment of any part of the funds to the credit
of the drawer with the bank, and the bank is not liable to the holder, unless
and until it accepts or certifies the check. (emphasis ours)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 70
ANSWER:
This was the query poised by Justice Azcuna in the case of
Bank of the Philippine Islands vs. Court of Appeals, et
al, where it was held that:
The collecting bank, had the right to debit the depositors
account for the value of the checks it previously credited in her
favor. It is of no moment that the account debited by the collecting
bank was different from the original account to which the proceeds
of the check were credited because both admittedly belonged to
depositor.
114
The right to set-off was explained in Associated Bank vs.
Tan.
115
A bank generally has a right of set-off over the deposits
therein for the payment of any withdrawals on the part of a
depositor. The right of a collecting bank to debit a clients account
for the value of a dishonored check that has previously been
credited has fairly been established by jurisprudence. To begin
with, Article 1980 of the Civil Code provides that [f]ixed, savings,
and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan.
Hence, the relationship between banks and depositors has
been held to be that of creditor and debtor. Thus, legal
compensation under Article 1278 of the Civil Code may take place
when all the requisites mentioned in Article 1279 are present.
x x x
While, however, it is conceded that petitioner had the right
to set-off the amount it paid to Templonuevo against the deposit
of Salazar, the issue of whether it acted judiciously is an entirely
different matter.
116
As businesses affected with public interest,
and because of the nature of their functions, banks are under
obligation to treat the accounts of their depositors with meticulous
114
Bank of the Philippine Islands vs. Court of Appeals, et al, January 25,
2007, G.R. No. 136202
115
G.R. No. 156940, December 14, 2004, 446 SCRA 282
116
Id
71
care, always having in mind the fiduciary nature of their
relationship.
117
In this regard, petitioner was clearly remiss in its
duty to private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face
of the checks. Despite the obvious lack of indorsement thereon,
petitioner permitted the encashment of these checks three times
on three separate occasions. This negates petitioners claim that
it merely made a mistake in crediting the value of the checks to
Salazars account and instead bolsters the conclusion of the CA
that petitioner recognized Salazars claim of ownership of the
checks and acted deliberately in paying the same, contrary to
ordinary banking policy and practice. It must be emphasized that
the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining
their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the
expert on this field, and the law thus holds it to a high standard of
conduct.
118
The taking and collection of a bank without the proper
indorsement amount to a conversion of the check by the bank.
119
In depositing the check under his name, the depositor does
not automatically become the owner of the amount deposited
In Bank of the Philippine Islands vs. Court of Appeals
and Benjamin Napiza
120
: as correctly held by the Court of
Appeals, in depositing the check in his name, private respondent
did not become the outright owner of the amount stated therein.
Under the above rule, by depositing the check with petitioner,
private respondent was, in a way, merely designating petitioner
as the collecting bank. This is in consonance with the rule that a
negotiable instrument, such as a check, whether a managers
check or ordinary check, is not legal tender.
121
As such, after
receiving the deposit, under its own rules, petitioner shall credit
117
Prudential Bank v. CA, G.R. No. 125536, March 16, 2000, 328 SCRA 264;
Simex International [Manila], Inc. v. CA, G.R. No.88013, March 19, 1990,
183 SCRA 360; BPI v. IAC, G.R. No. 69162, February 21, 1992, 206 SCRA
408
118
Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp.,
G.R. No. L-74917, January 20,1988, 157 SCRA 188
119
Associated Bank v. CA, G.R. No. 89802, May 7, 1992, 208 SCRA 465;
City Trust Banking Corp. v. IAC, G.R. No. 84281, May 27, 1994, 232 SCRA
559
120
February 29, 2000
Basic Principles and Jurisprudence on the Negotiable Instruments Law 72
the amount in private respondents account or infuse value thereon
only after the drawee bank shall have paid the amount of the
check or the check has been cleared for deposit. Again, this is in
accordance with ordinary banking practices and with this Courts
pronouncement that the collecting bank or last endorser generally
suffers the loss because [it] has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements.
122
The rule finds
more meaning in this case where the check involved is drawn on
a foreign bank and therefore collection is more difficult than when
the drawee bank is a local one even though the check in question
is a managers check.
123
"
Distinguish between Drawn Against Insufficient Funds
(DAIF) and Drawn Against Uncollected Deposit (DAUD).
ANSWER:
121
Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568
(1990) citing Sec. 189 of the Negotiable Instruments Law; Art. 1249, Civil
Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v.
Santos, 9 Phil. 44 and 21 R.C.L. 60, 61
122
Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bank
of the Philippines Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA
51, 63 (1992), Banco de Oro v. Equitable Banking Corporation, G.R. 74917,
157 SCRA 188 (1988) and Great Eastern Life Insurance Co. v. Hongkong
and Shanghai Banking Corporation, 43 Phil. 678
123
A managers check is like a cashiers check which, in the commercial
world, is regarded substantially to be as good as the money it represents
(Tan v. Court of Appeals, G.R. No. 108555, 239 SCRA 310, 322 (1944)
DAIF DAUD
Is a condition in which
a depositors balance
is inadequate for the
bank to pay a check.
It means that the account
has, on its face, sufficient
funds but not yet available to
the drawer because the
deposit, usually a check, had
not yet been cleared.
It subjects the
depositor to possible
prosecution for estafa
and Bouncing Checks
Law (BP 22)
It does not expose the
depositor the estafa and
BP 22
73
(Bank of the Philippine Islands vs. Suarez, G.R. No.
167750, March 15, 2010, [Carpio. J.])
Prescriptive Period to bring action
The statute of limitations begins to run when the bank gives
the depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a
statement of his account,
124
and an action upon a check is
ordinarily governed by the statutory period applicable to the
instruments in writing.
125
(Philippine Commercial International Bank
vs. Court of Appeals and Ford Philippines, Inc., January 29, 2001)
Our laws on the matter provide that the action upon a written
contract must be brought within ten years from the time the right
of action accrues.
126
Hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause
of action for the recovery of the proceeds of Citibank Check No.
SN 04867 would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action
was filed on January 20, 1984, barely six years had lapsed. Thus,
we conclude that Fords cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the
period provided by law. (supra)
PHILIPPINE CLEARING HOUSE ACT
What is the purpose of the creation of the Philippine Clearing
House Corporation?
ANSWER:
The Philippine Clearing House Corporation was created to
facilitate the clearing of checks among member banks. (Insular
Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No.
141818, June 22, 2006, [Ynares-Santiago, J.])
124
Supra note 20 at Section 605, Vda De Bataclan, et al vs. Medina, 102
Phil. 181, 186 (1957)
125
Ibid
126
Civil Code, Art. 1144
Basic Principles and Jurisprudence on the Negotiable Instruments Law 74
Under its Articles of Incorporation, the PCHC provides an
effective, convenient, efficient, economical and relevant exchange
and facilitate services limited to check processing and sorting by
way of assisting member banks, entities in clearing checks and
other clearing items as defined and existing in future Central Bank
of the Philippines Circulars, memoranda, circular letters rules and
regulations and policies in pursuance of Section 107 of RA 265.
Pursuant to its function involving the clearing of checks and other
clearing items, the PCHC has adopted rules and regulations
designed to provide member banks with a procedure whereby
disputes involving the clearance of checks and other negotiable
instruments undergo a process of arbitration prior to submission
to the courts below. This procedure not only ensures a uniformity
of rulings relating to factual disputes involving checks and other
negotiable instruments but also provides a mechanism for settling
minor disputes among participating and member banks who would
otherwise go directly to the trial courts. While the PCHC Rules
and Regulations allow appeal to the Regional Trial Courts only
on questions of fact already decided by the PCHC arbitration when
warranted and appropriate.
127
In Banco de Oro Savings and Mortgage Banks vs. Equitable
Banking Corporation
128
, this Court had the occasion to rule on the
validity of these rules as well as the jurisdiction of the PCHC as a
forum for resolving disputes and controversies involving checks
and other clearing items when it held that the participation of two
banksin the Clearing Operations of the PCHC (was) a
manifestation of its submission to its jurisdiction.
129
What is the extent of the jurisdiction of the Philippine Clearing
House Corporation (PCHC)?
Among the member banks of the PCHC exi sts a
compromissoire or an arbitration agreement embedded in their
contract wherein they consent that any future dispute or
controversy between its PCHC participants involving any check
would be submitted to the Arbitration Committee for arbitration.
127
Associated Bank vs. Court of Appeals, et al., G.R. No. 107918, June 14,
1994
128
157 SCRA 188 (1988)
129
Ibid., page 196, cited in Associated Bank vs. Court of Appeals, June 14,
1994
75
The PCHC has its own Rules and Procedure for Arbitration
(PCHC Rules). However, this is governed by Republic Act No.
876, also known as the Arbitration Law and supplemented by the
Rules of Court. (Insular Savings Bank vs. Far Eastern Bank and
Trust Company, G.R. No. 141818, June 22, 2006, [Ynares-
Santiago, J.])
Moreover, take note that, since the PCHC Rules came about
only as a result of an agreement between and among member
banks of PCHC and not by law, it cannot confer jurisdiction to the
RTC. Thus, the portion of the PCHC Rules granting jurisdiction
to the RTC review arbitral awards, only on questions of law, cannot
be given effect. (ibid.)
In the case of Associated Bank vs. Court of Appeals, et al.,
130
it was held that: [u]nder the rules and regulations of the Philippine
Clearing House Corporation (PCHC), the mere act of participation
of agreement by the parties to abide by its rules and regulations.
131
And as a consequence of such participation, a party cannot invoke
the jurisdiction of the courts over disputes and controversies which
fall under the PCHC Rules and Regulations without first going
through the arbitration processes laid out by the body. Since
claims relating to the regularity of checks cleared by banking
institutions are among those claims which should first be submitted
for resolution by the PCHCs Arbitration Committee, petitioner
Associated Bank, having voluntarily bound itself to abide by such
rules and regulations, is estopped from seeking relief from the
Regional Trial Court on the coattails of a private claim and in the
guise of a third party complaint without first having obtained a
decision adverse to its claim from the said body. It cannot bypass
the arbitration process on the basis of its averment that its third
party complaint is inextricably linked to the original complaint in
the Regional Trial Court.
The applicable PCHC provisions on the question of
jurisdiction provide:
Sec. 3AGREEMENT TO THESE RULES
It is the general agreement and understanding, that
any participant in the PCHC MICR clearing operations,
by the mere act of participation, thereby manifests its
Basic Principles and Jurisprudence on the Negotiable Instruments Law 76
agreement to these Rules and Regulations, and its
subsequent amendments.
xxx xxx xxx
Sec. 36ARBITRATIONS
36.1 Any dispute or controversy between two or more
clearing participants involving any check/item thru
PCHC shall be submitted to the Arbitration Committee,
upon written complaint of any involved participant by
filing the same with the PCHC serving the same upon
the other party or parties, who shall within fifteen (15)
days after receipt thereof, file with the Arbitration
Committee its written answer to such written complaint
and also within the same period serve the same upon
the complaining participant. This period of fifteen (15)
days may be extended by the Committee not more
than once for another period of fifteen (15) days, but
upon agreement in writing of the complaining party,
said extension may before such period as the latter
may agree to.
Section 36.6 is even more emphatic:
26.6 The fact that a bank participates in the clearing
operations of PCHC shall be deemed its written and
subscribed consent to the binding effect of this
arbi trati on agreement as i f i t had done so i n
accordance with Section 4 of the Republic Act No.
876 otherwise known as the Arbitration Law.
Thus, not only do the parties manifest by mere participation
their consent to these rules, but such participation is deemed (their)
written and subscribed consent to the binding effect of arbitration
agreements under the PCHC rules. Moreover, a participant
subject to the Clearing House Rules and Regulations of the PCHC
may go on appeal to any Regional Trial Courtswhere the head
office of any of the parties is located only after a decision or award
130
G.R. No. 107918, June 14, 1994, [Kapunan, J.]
131
PCHC Rules and Regulations, Sec. 3 9hereinafter cited as Rules)
77
has been rendered by the arbitration committee or arbitrator on
questions of law.
132
Clearly therefore, petitioner Associated Bank, by its voluntary
participation and its consent to the arbitration rules cannot go
directly to the Regional Trial Court when it finds it convenient to
do so. The jurisdiction of the PCHC under the rules and
regulations is clear, undeniable and is particularly applicable to
all the parties in the third party complaint under their obligation to
first seek redress of their disputes and grievances with the PCHC
before going to the trial court.
Third-Party Complaints
As a general rule, a trial court that has established
jurisdiction over the main action also acquires jurisdiction over a
third-party complaint, even if it could not have done so had the
latter been filed as an independent action. This rule, however,
does not apply to banks that have agreed to submit their disputes
over check clearings to arbitration under the rules of the Philippine
Clearing House Corporation. In that event, primary recourse
should be to the PCHC Arbitration Committee, without prejudice
to an appeal to the trial courts. In other words, without first resorting
to the PCHC, the third-party complaint would be premature. (Allied
Banking Corporation vs. Court of Appeals and Bank of the
Philippine Islands, Inc., G.R. No. 123871, August 31, 1998,
[Panganiban, J.:])
Illustrative Case:
Allied Banking Corporation vs. Court of Appeals
and Bank of the Philippine Islands, Inc.
G.R. No. 123871, August 31, 1998
PANGANIBAN, J.:
Hyatt Terraces Baguio issued two crossed checks drawn
against Allied Banking Corp. (hereinafter, ALLIED) in favor of
appellee Meszellen Commodities Services, Inc. (hereinafter,
MESZELLEN). Said checks were deposited on August 5, 1980
and August 18, 1980, respectively, with the now defunct
132
Rules, Sec. 13
Basic Principles and Jurisprudence on the Negotiable Instruments Law 78
Commercial Bank and Trust Company (hereinafter, COMTRUST).
Upon receipt of the above checks, COMTRUST stamped at the
back thereof the warranty All prior endorsements and/or lack of
endorsements guaranteed. After the checks were cleared through
the Philippine Clearing House Corporation (hereinafter, PCHC),
ALLIED BANK paid the proceeds of said checks to COMTRUST
as the collecting bank.
On March 17, 1981, the payee, MESZELLEN, sued the
drawee, ALLIED BANK, for damages which it allegedly suffered
when the value[s] of the checks were paid not to it but to some
other person.
Almost ten years later, or on January 10, 1991, before
defendant ALLIED BANK could finish presenting its evidence, it
filed a third party complaint against Bank of the Philippine Islands
(hereinafter, BPI, appellee herein) as successor-in-interest of
COMTRUST, for reimbursement in the event that it would be
adjudged liable in the main case to pay plaintiff, MESZELLEN.
The third party complaint was admitted [in] an Order dated May
16, 1991 issued by the Regional Trial Court of Pasig, Branch 162.
On July 16, 1991, BPI filed a motion to dismiss said third party
complaint grounded on the following: 1) that the court ha[d] no
jurisdiction over the nature of the action; and 2) that the cause of
action of the third party plaintiff ha[d] already prescribed.
On September 16, 1991, the trial court issued an order
dismissing the third party complaint. Defendant-third party
plaintiffs motion for reconsideration of this order was subsequently
denied.
133
Petitioner raises the following issues:
134
I. The Respondent Honorable Court of Appeals erred in
holding that the cause of action of the third-party
complaint ha[d] already prescribed.
II. The Respondent Honorable Court of Appeals erred in
holding that the filing of the third party complaint should
be disallowed as it would only delay the resolution of
the case.
133
CA Decision, pp. 1-2; rollo, pp. 24-25
134
Petition, p. 6; rollo, p. 16
79
The Courts Ruling
The petition is bereft of merit.
Critical Issue: Mandatory Recourse to PCHC
To buttress its claim, private respondent contends that
petitioners remedy rests with the PCHC, of which both Allied and
BPI are members, in consonance with the Clearing House Rules
and Regulations which, in part, states:
Sec. 38 Arbitration
Any dispute or controversy between two or more clearing
participants involving any check/item cleared thru PCHC
shall be submitted to the Arbitration Committee, upon written
complaint of any involved participant by filing the same with
the PCHC serving the same upon the other party or parties,
who shall within fifteen (15) days after receipt thereof file
with the Arbitration Committee its written answer to such
written complaint and also within the same period serve the
same upon the complaining participant, . . . .
Private respondent cites Banco de Oro Savings and
Mortgage Bank v. Equitable Banking Corporation
135
and
Associated Bank v. Court of Appeals,
136
which upheld the right of
the PCHC to settle and adjudicate disputes between member
banks. In Banco de Oro, the Court ruled:
The participation of the two banks, petitioner and private
respondent, in the clearing operations of PCHC is a
manifestation of their submission to its jurisdiction. Secs. 3
and 36.6 of the PCHC-CHRR clearing rules and regulations
provide:
Sec. 3. AGREEMENT TO THESE RULES. It is the
general agreement and understanding that any
parti ci pant i n the Phi l i ppi ne Cl eari ng House
Corporation, MICR clearing operations[,] by the mere
135
157 SCRA 188, January 20, 1988, per Gancayco, J
136
233 SCRA 137, June 14, 1994, per Kapunan, J
Basic Principles and Jurisprudence on the Negotiable Instruments Law 80
fact of their participation, thereby manifests its
agreement to these Rules and Regulations and its
subsequent amendments.
Sec. 36.6. (ARBITRATION) The fact that a bank
participates in the clearing operations of the PCHC
shall be deemed its written and subscribed consent
to the binding effect of this arbitration agreement as if
it had done so in accordance with section 4 of (the)
Republic Act. No. 876, otherwise known as the
Arbitration Law.
Further[,] Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the
arbitration of one or more arbitrators any controversy
existing between them at the time of the submission
and which may be the subject of any action, or the
parties of any contract may in such contract agree to
settle by arbitration a controversy thereafter arising
between them. Such submission or contract shall be
valid and irrevocable, save upon grounds as exist at
law for the revocation of any contract.
Such submission or contract may include question
ari si ng out of val uati ons, apprai sal s or other
controversies which may be collateral, incidental,
precedent or subsequent to any issue between the
parties. (Emphasis supplied.)
Associated Bank also disallowed a similar third-party
complaint, ruling thus:
Under the rules and regulations of the Philippine Clearing
House Corporation (PCHC), the mere act of participation of
the parties concerned in its operations in effect amounts to
a manifestation of agreement by the parties to abide by its
rul es and regul ati ons. As a consequence of such
participation, a party cannot invoke the jurisdiction of the
courts over disputes and controversies which fall under the
PCHC Rules and Regulations without first going through
the arbitration processes laid out by the body. Since claims
81
relating to the regularity of checks cleared by banking
institutions are among those claims which should first be
submitted for resolution by the PCHCs Arbitration
Committee, petitioner Associated Bank, having voluntarily
bound itself to abide by such rules and regulations, is
estopped from seeking relief from the Regional Trial Court
on the coattails of a private claim and in the guise of a third
party complaint without first having obtained a decision
adverse to its claim from the said body. It cannot bypass the
arbitration process on the basis of its averment that its third
party complaint is inextricably linked to the original complaint
in the Regional Trial Court.
xxx xxx xxx
Clearly therefore, petitioner Associated Bank, by its voluntary
participation and its consent to the arbitration rules cannot
go directly to the Regional Trial Court when it finds it
convenient to do so. The jurisdiction of the PCHC under the
rules and regulations is clear, undeniable and is particularly
applicable to all the parties in the third party complaint under
their obligation to first seek redress of their disputes and
grievances [from] the PCHC before going to the trial court.
Finally, the contention that the third party complaint should
not have been dismissed for being a necessary and
inseparable offshoot of the main case over which the court
a quo had already exercised jurisdiction misses the
fundamental point about such pleading. A third party
complaint is a mere procedural device which under the Rules
of Court is allowed only with the courts permission. It is an
action actually independent of, separate and distinct from
the plaintiffs complaint (s)uch that, were it not for the Rules
of Court, it would be necessary to file the action separately
from the original complaint by the defendant against the
third party. (Emphasis supplied.)
Banco de Oro and Associated Bank are clear and
unequivocal: a third-party complaint of one bank against another
involving a check cleared through the PCHC is unavailing, unless
the third-party claimant has first exhausted the arbitral authority
of the PCHC Arbitration Committee and obtained a decision from
said body adverse to its claim.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 82
Recognizing the role of the PCHC in the arbitration of
disputes between participating banks, the Court in Associated
Bank further held: Pursuant to its function involving the clearing
of checks and other clearing items, the PCHC has adopted rules
and regulations designed to provide member banks with a
procedure whereby disputes involving the clearance of checks
and other negotiable instruments undergo a process of arbitration
prior to submission to the courts below. This procedure not only
ensures a uniformity of rulings relating to factual disputes involving
checks and other negotiable instruments but also provides a
mechanism for settling minor disputes among participating and
member banks which would otherwise go directly to the trial
courts.
We defer to the primary authority of PCHC over the present
dispute, because its technical expertise in this field enables it to
better resolve questions of this nature. This is not prejudicial to
the interest of any party, since primary recourse to the PCHC
does not preclude an appeal to the regional trial courts on
questions of law. Section 13 of the PCHC Rules reads:
Sec. 13. The findings of facts of the decision or award
rendered by the Arbitration Committee or by the sole
Arbitrator as the case may be shall be final and conclusive
upon all the parties in said arbitration dispute. The decision
or award of the Arbitration Committee or of the Sole Arbitrator
shall be appealable only on questions of law to any of the
Regional Trial Courts in the National Capital Judicial Region
where the Head Office of any of the parties is located. The
appellant shall perfect his appeal by filing a notice of appeal
to the Arbitration Secretariat and filing a Petition with the
Regional Trial Court of the National Capital Region . . . .
Furthermore, when the error is so patent, gross and
prejudicial as to constitute grave abuse of discretion, courts may
address questions of fact already decided by the arbitrator.
137
137
Asia Construction and Development Corporation v. Construction Industry
Arbitration Commission, 218 SCRA 529, February 8, 1993; Sime Darby v.
Deputy Administrator, 180 SCRA 177, December 15, 1989
138
Regalado, Remedial Law Compendium, Vol. 1, 5th revised ed., p. 95;
Republic v. Central Surety and Insurance Co., 25 SCRA 641, October 26,
1968; Eastern Assurance & Surety Corporation v. Cui, 105 SCRA 622,
July 20, 1981; Talisay-Silay Milling Co. Inc. and J. Amado Araneta v. CIR
and Central Azucarera del Danao, 18 SCRA 894, November 29, 1966
83
We are not unaware of the rule that a trial court, which has
jurisdiction over the main action, also has jurisdiction over the
third-party complaint, even if the said court would have had no
jurisdiction over it had it been filed as an independent action.
138
However, this doctrine does not apply in the case of banks, which
have given written and subscribed consent to arbitration under
the auspices of the PCHC.
By participating in the clearing operations of the PCHC,
petitioner agreed to submit disputes of this nature to arbitration.
Accordingly, it cannot invoke the jurisdiction of the trial courts
without a prior recourse to the PCHC Arbitration Committee.
Having given its free and voluntary consent to the arbitration
clause, petitioner cannot unilaterally take it back according to its
whim. In the world of commerce, especially in the field of banking,
the promised word is crucial. Once given, it may no longer be
broken.
Upon the other hand, arbitration as an alternative method
of dispute resolution is encouraged by this Court. Aside from
unclogging judicial dockets, it also hastens solutions especially
of commercial disputes.
In view of the foregoing, a discussion of the issues raised
by the petitioners is unnecessary.
WHEREFORE, the petition is DENIED for lack of merit.
Costs against petitioner.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
Does PCHCs jurisdiction extend to non-negotiable checks?
As provided in the articles of incorporation of PCHC its
operation extend to clearing checks and other clearing items.
No doubt transactions on non-negotiable checks are within the
ambit of its jurisdiction. x x x The term check as used in the said
Articles of Incorporation of PCHC can only connote checks in
general use in commercial and business activities. It cannot be
conceived to be limited to negotiable checks only. Checks are
used between banks and bankers and their customers, and are
Basic Principles and Jurisprudence on the Negotiable Instruments Law 84
designed to facilitate banking operations. It is of the essence to
be payable on demand, because the contract between the banker
and the customer is that the money is needed on demand.
139
(Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation, G.R. No. 74917, January 20, 1988, [Gancayco, J.])
Viewing these provisions (Sec. 3 and 36.6 PCHC-CHRR
clearing rules and regulations; Sec. 2 Arbitration Law; Sec. 21 of
the same rules), the conclusion is clear that the PCHC Rules and
Regulations should not be interpreted to be applicable only to
checks which are negotiable instruments but also to non-
negotiable instruments and that the PCHC has jurisdiction over
this case even as the checks subject of this litigations are
admittedly non-negotiable. (supra)
What may be some of the judicial remedies available to the
losing party in case the Philippine Clearing House
Commission Arbitration Committee denies its motion for
reconsideration?
ANSWER:
a. It may petition the proper Regional Trial Court to issue
an order vacating the award on the grounds provided
for under Section 24 of the Arbitration Law;
b. File a petition for review under Rule 43 of the Rules of
Court with the Court of Appeals on questions of fact, of
law, or mixed questions of fact and law; or
c. File a petition for certiorari under Rule 45 of the Rules of
Court on the ground that the Arbitrator Committee acted
without or in excess of jurisdiction or with grave abuse
of discretion amounting to lack or excess of jurisdiction.
(Insular Savings Bank vs. Far Eastern Bank and Trust Company,
G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.])
What are the grounds under Section 24 of the Arbitration Law
for the issuance of the Regional Trial Court of an order to
vacate the award granted by the Philippine Clearing House
Corporation Arbitration Committee?
85
ANSWER:
SEC. 24. Grounds for vacating award. In any one of the
following cases, the court must make an order vacating the
award upon the petition of any party to the controversy when
such party proves affirmatively that in the arbitration
proceedings:
(a) The award was procured by corruption, fraud or
other undue means; or
(b) That there was evident partiality or corruption in the
arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in
refusing to postpone the hearing upon sufficient
cause shown, or in refusing to hear evidence
pertinent and material to the controversy; that one
or more of the arbitrators was disqualified to act as
such under section nine hereof, and willfully
refrained from disclosing such disqualification or of
any other misbehavior by which the rights of any
party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so
imperfectly executed them, that a mutual, final and
definite award upon the subject matter submitted
to them was not made.
x x x x
(Insular Savings Bank vs. Far Eastern Bank and
Trust Company, G.R. No. 141818, June 22, 2006,
[Ynares-Santiago, J.])
BATAS PAMBANSA BILANG 22
(BOUNCING CHECKS LAW)
Reason for the law
BP 22 or the Bouncing Checks Law was enacted for the
specific purpose of addressing the problem of the continued
issuance and circulation of unfunded checks by irresponsible
persons. To stem the harm caused by these bouncing checks to
the community, BP 22 considers the mere act of issuing an
unfunded check as an offense not only against property but also
Basic Principles and Jurisprudence on the Negotiable Instruments Law 86
against public order.
140
The purpose of BP 22 in declaring the
mere issuance of a bouncing check as malum prohibitum is to
punish the offender in order to deter him and others from
committing the offense, to isolate him from society, to reform and
rehabilitate him, and to maintain social order.
141
The penalty is
stiff. BP 22 imposes the penalty of imprisonment for at least 30
days or a fine of up to double the amount of the check or both
imprisonment and fine. (Mitra vs. People, G.R. No. 191404, July
5, 2010, [Mendoza, J.:])
Elements of violation of Section 1 of Batas Pambansa
Bilang 22
a) The making, drawing, and issuance of any check to apply
for account or for value;
b) The knowledge of the maker, drawer, or issuer that at
the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of the check
in full upon its presentment; and
c) The subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for
the same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
(Ting vs. CA, 398 Phil. 481 (2000); Sycip, Jr. vs. CA,
G.R. No. 125059, March 17, 2000, 328 SCRA 447. See
Batas Pambansa Bilang 22 (1979), Section 1, cited in
Lunaria vs. People of the Philippines, G.R. No. 160127,
November 11, 2008)
Illustrative Case:
Eumelia Mitra vs. People of the Philippines and Felicisimo
Tarcelo
G.R. No. 191404, July 5, 2010
MENDOZA, J.:
FACTS: Petitioner Eumelia R. Mitra (Mitra) was the Treasurer,
and Florencio L. Cabrera, Jr. (now deceased) was the
President, of Lucky Nine Credit Corporation (LNCC),
a corporation engaged in money lending activities.
87
Between 1996 and 1999, private respondent Felicisimo
S. Tarcelo (Tarcelo) invested money in LNCC. As the
usual practice in money placement transactions,
Tarcelo was issued checks equivalent to the amounts
he invested plus the interest on his investments.
When Tarcelo presented these checks for payment,
they were dishonored for the reason account closed.
Tarcelo made several oral demands on LNCC for the
payment of these checks but he was frustrated.
Constrained, in 2002, he caused the filing of seven
informations for violation of Batas Pambansa Blg. 22
(BP 22) in the total amount of P925, 000.00 with the
MTCC in Batangas City.
ISSUES: Whether or not the elements of violation of Batas
Pambansa Bi l ang 22 must be proved beyond
reasonable doubt as against the corporation who owns
the current account where the subject checks were
drawn before liability attaches to the signatories?
RULING: A check is a negotiable instrument that serves as a
substitute for money and as a convenient form of
payment in financial transactions and obligations. The
use of checks as payment allows commercial and
banking transactions to proceed without the actual
handling of money, thus, doing away with the need to
physically count bills and coins whenever payment is
made. It permits commercial and banking transactions
to be carried out quickly and efficiently. But the
convenience afforded by checks is damaged by
unfunded checks that adversely affect confidence in
our commercial and banking activities, and ultimately
injure public interest.
BP 22 or the Bouncing Checks Law was enacted for
the specific purpose of addressing the problem of the
continued issuance and circulation of unfunded checks
by irresponsible persons. To stem the harm caused by
these bouncing checks to the community, BP 22
considers the mere act of issuing an unfunded check
as an offense not only against property but also against
Basic Principles and Jurisprudence on the Negotiable Instruments Law 88
public order. The purpose of BP 22 in declaring the
mere issuance of a bouncing check as malum
prohibitum is to punish the offender in order to deter
him and others from committing the offense, to isolate
him from society, to reform and rehabilitate him, and to
maintain social order. The penalty is stiff. BP 22
imposes the penalty of imprisonment for at least 30
days or a fine of up to double the amount of the check
or both imprisonment and fine.
Mitra posits in this petition that before the signatory to
a bouncing corporate check can be held liable, all the
elements of the crime of violation of BP 22 must first
be proven against the corporation. The corporation
must first be declared to have committed the violation
before the liability attaches to the signatories of the
checks.
The Court finds itself unable to agree with Mitras
posture. The third paragraph of Section 1 of BP 22
reads: Where the check is drawn by a corporation,
company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable
under this Act. This provision recognizes the reality
that a corporation can only act through its officers.
Hence, its wording is unequivocal and mandatory - that
the person who actually signed the corporate check
shall be held liable for a violation of BP 22. This
provision does not contain any condition, qualification
or limitation.
In the case of Llamado v. Court of Appeals,
142
the Court
ruled that the accused was liable on the unfunded
corporate check which he signed as treasurer of the
corporation. He could not invoke his lack of involvement
in the negotiation for the transaction as a defense
because BP 22 punishes the mere issuance of a
bouncing check, not the purpose for which the check
was issued or in consideration of the terms and
conditions relating to its issuance. In this case, Mitra
142
337 Phil. 153, 160 (1997)
89
signed the LNCC checks as treasurer. Following
Llamado, she must then be held liable for violating BP
22.
Another essential element of a violation of BP 22 is
the drawers knowledge that he has insufficient funds
or credit with the drawee bank to cover his check.
Because this involves a state of mind that is difficult to
establish, BP 22 creates the prima facie presumption
that once the check is dishonored, the drawer of the
check gains knowledge of the insufficiency, unless
within five banking days from receipt of the notice of
dishonor, the drawer pays the holder of the check or
makes arrangements with the drawee bank for the
payment of the check. The service of the notice of
dishonor gives the drawer the opportunity to make good
the check within those five days to avert his prosecution
for violating BP 22.
Mitra alleges that there was no proper service on her
of the notice of dishonor and, so, an essential element
of the offense is missing. This contention raises a
factual issue that is not proper for review. It is not the
function of the Court to re-examine the finding of facts
of the Court of Appeals. Our review is limited to errors
of law and cannot touch errors of facts unless the
petitioner shows that the trial court overlooked facts or
circumstances that warrant a different disposition of
the case or that the findings of fact have no basis on
record. Hence, with respect to the issue of the propriety
of service on Mitra of the notice of dishonor, the Court
gives full faith and credit to the consistent findings of
the MTCC, the RTC and the CA.
The defense postulated that there was no demand
served upon the accused, said denial deserves scant
consideration. Positive allegation of the prosecution
that a demand letter was served upon the accused
prevails over the denial made by the accused.
Though, having denied that there was no demand letter
served on April 10, 2000, however, the prosecution
positively alleged and proved that the questioned
Basic Principles and Jurisprudence on the Negotiable Instruments Law 90
demand letter was served upon the accused on April
10, 2000, that was at the time they were attending Court
hearing before Branch I of this Court. In fact, the
prosecution had submitted a Certification issued by the
other Branch of this Court certifying the fact that the
accused were present during the April 10, 2010 hearing.
With such straightforward and categorical testimony
of the witness, the Court believes that the prosecution
has achieved what was dismally lacking in the three
(3) cases of Betty King, Victor Ting and Caras -
evidence of the receipt by the accused of the demand
letter sent to her. The Court accepts the prosecutions
narrative that the accused refused to sign the same to
evidence their receipt thereof. To require the
prosecution to produce the signature of the
accused on said demand letter would be imposing
an undue hardship on it. As well, actual receipt
acknowledgment is not and has never been required
of the prosecution either by law or jurisprudence.
[emphasis supplied]
Wi th the noti ce of di shonor dul y served and
disregarded, there arose the presumption that Mitra
and Cabrera knew that there were insufficient funds to
cover the checks upon their presentment for payment.
In fact, the account was already closed.
To reiterate the elements of a violation of BP 22 as
contained in the above-quoted provision, a violation
exists where:
1. a person makes or draws and issues a check to apply
on account or for value;
2. the person who makes or draws and issues the check
knows at the time of issue that he does not have
sufficient funds in or credit with the drawee bank
for the ful l payment of the check upon i ts
presentment; and
3. the check is subsequently dishonored by the drawee
bank for insufficiency of funds or credit, or would
have been dishonored for the same reason had not
91
the drawer, without any valid reason, ordered the
bank to stop payment.
There is no dispute that Mitra signed the checks
and that the bank dishonored the checks because
the account had been closed. Notice of dishonor
was properly given, but Mitra failed to pay the
checks or make arrangements for their payment
within five days from notice. With all the above
elements duly proven, Mitra cannot escape the civil
and criminal liabilities that BP 22 imposes for its
breach.
Ways of violating B.P. Blg. 22
There are two (2) ways of violating B.P. Blg. 22: (1) by making
or drawing and issuing a check to apply on account or for value
knowing at the time of issue that the check is not sufficiently
funded; and (2) by having sufficient funds in or credit with the
drawee bank at the time of issue but failing to keep sufficient
funds therein or credit with said bank to cover the full amount of
the check when presented to the drawee bank within a period of
ninety (90) days.
143
(Wong vs. Court of Appeals, G.R. No. 117857,
February 2, 2001)
Failure of the drawer to maintain funds in his bank to cover
the check for 90 days
Nowhere in the said provision does the law require a maker
to maintain funds in his bank account for only 90 days. Rather,
the clear import of the law is to establish a prima facie presumption
of knowledge of such insufficiency of funds under the following
conditions (1) presentment within 90 days from date of the check,
and (2) the dishonor of the check and failure of the maker to make
arrangements for payment in full within 5 banking days after notice
thereof. That the check must be deposited within ninety (90) days
is simply one of the conditions for the prima facie presumption of
knowledge of lack of funds to arise. It is not an element of the
offense. Neither does it discharge petitioner from his duty to
maintain sufficient funds in the account within a reasonable time
thereof. (Wong vs. Court of Appeals, G.R. No. 117857, February
2, 2001)
143
Section 1, B.P. Blg. 22
Basic Principles and Jurisprudence on the Negotiable Instruments Law 92
Lack of criminal intent irrelevant; gravamen of the offense
It bears repeating that the lack of criminal intent of the part
of the accused is irrelevant.
144
The law has made the mere act of
issuing a worthless check a malum prohibitum, an act proscribed
by legislature for being deemed pernicious and inimical to public
welfare.
145
In fact, even in cases where there had been payment,
through compensation or some other means, there could still be
prosecution for violation of B.P. 22. The gravamen of the offense
under this law is the act of issuing a worthless check that is
dishonored upon its presentment for payment, not the
nonpayment of the obligation.
146
(Lunaria vs. People of the
Philippines, G.R. No. 160127, November 11, 2008) (emphasis
supplied)
Congress, in the exercise of police power, enacted BP 22
i n order to mai ntai n publ i c confi dence i n commerci al
transactions.
147
(Spouses Yap vs. First e-Bank Corporation, G.R.
No. 169889, September 29, 2009, [Corona, J.], citing Lozano vs.
Martinez)
Intention of the parties in the issuance of the check
immaterial; criminal intent of the issuer of the check
immaterial
In Abarquez vs. Court of Appeals
148
, it was held that: [t]he
fact that petitioner issued the subject checks knowing the
144
People v. Lo Ho Wing, G.R. No. 88017, 21 January 1991, 193 SCRA 122,
130. See Macalalag v. People, G.R. No. 164358, December 20, 2006,
511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui,
G.R. Nos. 76262-63, March 16, 1989, 171 SCRA 305, 311; People v.
Manzanilla, G.R. Nos. L-66003-04, 11 December 1987, 156 SCRA 279,
283
145
Macalalag v. People, G.R. No. 164358, December 20, 2006, 511 SCRA
400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui, G.R. Nos.
76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla,
G.R. Nos. L-66003-04, December 11, 1987, 156 SCRA 279, 283
146
Macalalag v. People, G.R. No. 164358; December 20, 2006, 511 SCRA
400; Tan v. Mendez, 432 Phil. 760 (2002); Lozano v. Martinez, G.R. No. L-
63419, December 18, 1986, 146 SCRA 323, 338
147
The gravamen of the offense punishable by BP 22 is the act of making
and issuing a worthless check or a check that is dishonored upon its
presentation for payment. It is not the nonpayment of an obligation which
the law punishes. The law
148
G.R. No. 148557, August 7, 2003
93
inadequacy of his funds in the bank to cover said checks makes
him liable under B.P. 22. As elaborated in Meriz vs. People
149
The Court has consistently declared that the cause or
reason for the issuance of the check is inconsequential in
determining criminal culpability under B.P. 22. The Court
has since said that a check issued as an evidence of a debt,
although not intended for encashment, has the same effect
like any other check and must thus be held to be within the
contemplation of B.P. 22. Once a check is presented for
payment, the drawee bank gives it the usual course whether
issued in payment of an obligation or just as a guaranty of
an obligation. B.P. 22 does not concern itself with what
might actually be envisioned by the parties, its primordial
intention being instead to ensure the stability and
commercial value of checks as being virtual substitutes for
currency. It is a policy that can easily be eroded if one has
yet to determine the reason for which checks are issued, or
the terms and conditions for their issuance, before an
appropriate application of legislative enactment can be
made. The gravamen of the offense under B.P. 22 is the
act of making or issuing a worthless check or a check that
is dishonored upon presentment for payment. The act
effectively declares the offense to be one of malum
prohibitum. The only valid query then is whether the law
has been breached, i.e., by the mere act of issuing a bad
check, without so much regard as to the criminal intent of
the issuer.
More so, in the case of Cruz vs. Court of Appeals,
150
where
it was held that:
When a check is presented for payment, the drawee bank
will generally accept the same regardless of whether it was
issued in payment of an obligation or merely to guarantee
the said obligation. What the law punishes is the issuance
of a bouncing check
151
not the purpose for which it was
issued nor the term and conditions relating to its issuance.
149
Pp. 531-532
150
G.R. No. 108738, June 17, 1994, [Kapunan, J.:]
151
Lozano vs. Martinez, 146 SCRA 523; People vs. Veridiano II, 132 SCRA
523
Basic Principles and Jurisprudence on the Negotiable Instruments Law 94
The mere act of issuing a worthless check is malum
prohibitum.
152
This point has been made clear by this Court,
thus:
It is now settled that Batas Pambansa Bilang 22
applies even in cases where dishonored checks are
issued merely in the form of a deposit or a guarantee.
The enactment in question does not make any
distinction as to whether the checks within its
contemplation are issued in payment of an obligation
or merely to guarantee the said obligation. In
accordance with the pertinent rule of statutory
construction, inasmuch as the law has not made any
distinction in this regard, no such distinction can be
made by means of interpretation or application.
Furthermore, the history of the enactment of subject
statute evinces the definite legislative intent to make
the prohibition all-embracing, without making any
exception from the operation thereof in favor of a
guarantee. This intent may be gathered from the
statement of the sponsor of the bill (Cabinet Bill No.
9) which was enacted later into Batas Pambansa
Bilang 22, when it was introduced before the Batasan
Pambansa, that the bill was introduced to discourage
the issuance of bouncing checks, to prevent checks
from becoming useless scraps of paper and to
restore respectability to checks, all without distinction
as to the purpose of the issuance of the checks. The
legislative intent as above said is made all the more
clear when it is considered that while the original text
of Cabinet Bill No. 9, supra, had contained a proviso
excluding from the coverage of the law a check issued
as a mere guarantee, the final version of the bill as
approved and enacted by the Committee on the
Revi si on of Laws i n the Batasan del eted the
abovementioned qualifying proviso deliberately for the
purpose of making the enforcement of the act more
effective (Batasan Record, First Regular Session,
December 4, 1978, Volume II, pp.1035-1036).
152
Que vs. People, 154 SCRA 160
95
Consequently, what are important are the facts that
the accused had deliberately issued the checks in
question to cover accounts and that the checks in
question to cover accounts and that the checks were
dishonored upon presentment regardless of whether
or not the accused merely issued the checks as a
guarantee. (pp. 4-5, Dec. IAC) [pp. 37-38, Rollo].
153
The importance of arresting the proliferation of worthless
checks need not be underscored. The mischief created by
unfunded checks in circulation is injurious not only to the
payee or holder, but to the public as well. This harmful
practice can very well pollute the channels of trade and
commerce, injure the banking system and eventually hurt
the welfare of society and the public interest.
154"
Knowledge of the payee of the insufficiency or lack of funds
of the drawer immaterial
The knowledge of the payee of the insufficiency or lack of
material funds of the drawer with the drawee bank is immaterial
as deceit is not an essential element of an offense penalized
by B.P. 22. The gravamen of the offense is the issuance of a bad
check, hence, malice and intent in the issuance thereof is
inconsequential.
155
(Ty vs. People of the Philippines, G.R. No.
149275, September 27, 2004) (emphasis supplied)
An essential element of the offense is knowledge on the
part of the maker or drawer of the check of the insufficiency of his
funds in or credit with the bank to cover the check upon its
presentment. Since this involves a state of mind difficult to
establish, the statute itself creates a prima facie presumption of
such knowledge where payment of the check is refused by the
drawee because of insufficient funds in or credit with such bank
when presented within ninety (90) days from the date of the check.
To mitigate the harshness of the law in its application, the statute
provides that such presumption shall not arise if within five (5)
banking days from receipt of the notice of dishonor, the maker or
drawer makes arrangements for payment of the check by the bank
153
Id., pp. 164-165
154
Lozano vs. Martinez, supra, p. 340
155
Cruz v. Court of Appeals, G.R. No. 108738, 17 June 1994, 233 SCRA 301
Basic Principles and Jurisprudence on the Negotiable Instruments Law 96
or pays the holder the amount of the check.
156
(Wong vs. Court of
Appeals, G.R. No. 117857, February 2, 2001)
No independent civil action
There is no independent civil action to recover civil liability
arising from the issuance of an unfunded check prohibited and
punished under Batas Pambansa Bilang 22 (BP 22). (Heirs of
Eduardo Simon vs. Chan and Court of Appeals, G.R. No. 157547,
February 23, 2011, [Bersamin, J.])
The Supreme Court has settled the issue of whether or not
a violation of BP 22 can give rise to civil liability in Banal v. Judge
Tadeo, Jr.,
157
holding:
x x x
Article 20 of the New Civil Code provides:
Every person, who contrary to law, willfully or negligently
causes damage to another, shall indemnify the latter for the
same.
Regardless, therefore, of whether or not a special law so
provides, indemnification of the offended party may be had
on account of the damage, loss or injury directly suffered
as a consequence of the wrongful act of another. The
indemnity which a person is sentenced to pay forms an
integral part of the penalty imposed by law for the
commission of a crime (Quemel v. Court of Appeals, 22
SCRA 44, citing Bagtas v. Director of Prisons, 84 Phil. 692).
Every crime gives rise to a penal or criminal action for the
punishment of the guilty party, and also to civil action for the
restitution of the thing, repair of the damage, and
indemnification for the losses (United States v. Bernardo,
19 Phil. 625)
x x x
Civil liability to the offended party cannot thus be denied.
The payee of the check is entitled to receive the payment of money
156
Lozano vs. Martinez, 146 SCRA 323, 330-331 (1986)
157
G.R. No. L-78911, December 11, 1987, 156 SCRA 325
97
for which the worthless check was issued. Having been caused
the damage, she is entitled to recompense.
Surely, it could not have been the intendment of the framer
of Batas Pambansa Blg. 22 to leave the offended party defrauded
and empty-handed by excluding the civil liability of the offender,
giving her only the remedy, which in many cases results in a Pyrrhic
Victory, of having to file a separate civil suit. To do so may leave
the offended party unable to recover even the face value of the
check due her, thereby unjustly enriching the errant drawer at the
expense of the payee. The protection which the law seeks to
provide would, therefore, be brought to naught. (supra)
Notice of dishonor essential
Both the spirit and letter of the Bouncing Checks Law require,
for the act to be punished under said law, not only that the
accused issued a check that was dishonored, but that
likewise the accused was actually notified in writing of the
fact of dishonor. The consistent rule is that penal statutes have
to be construed strictly against the State and liberally in favor of
the accused.
158
(Abarquez vs. Court of Appeals, G.R. No. 148557,
August 7, 2003, published in The New Philippine Law Report,
Vol. XXXI, No. 8, August 2003, page 21) (emphasis supplied)
Proof of receipt of the notice of dishonor of drawer must be
clearly established
In James Svendsen vs. People of the Philippines,
159
citing
Rico v. People of the Philippines,
160
this Court held:
x x x [I]f x x x notice of non-payment by the drawee bank is
not sent to the maker or drawer of the bum check, or if there
is no proof as to when such notice was received by the
drawer, then the presumption of knowledge as provided in
Section 2 of B.P. 22 cannot arise, since there would simply
be no way of reckoning the crucial five-day period.
158
Domagasang vs. CA, G.R. No. 139292, 5 December 2000, 347 SCRA 75,
83
159
G.R. No. 175381, February 26, 2008
160
440 Phil. 540 (2002)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 98
x x x In recent cases, we had the occasion to emphasize
that not only must there be a written notice of dishonor or
demand actually received by the drawer of a dishonored
check, but there must also be proof of receipt thereof that is
properly authenticated, and not mere registered receipt and/
or return receipt.
Thus, as held in Domagsang vs. Court of Appeals, while
Section 2 of B.P. 22 indeed does not state that the notice of
dishonor be in writing, this must be taken in conjunction
with Section 3 of the law, i.e., that where there is no sufficient
funds in or credit with such drawee bank, such fact shall
always be explicitly stated in the notice of dishonor or
refusal. A mere oral notice or demand to pay would appear
to be insufficient for conviction under the law. In our view,
both the spirit and letter of the Bouncing Checks Law require
for the act to be punished thereunder not only that the
accused issued a check that is dishonored, but also that
the accused has actually been notified in writing of the fact
of dishonor. This is consistent with the rule that penal
statutes must be construed strictly against the state and
liberally in favor of the accused. x x x
In fine, the failure of the prosecution to prove the existence
and receipt by petitioner of the requisite written notice of
dishonor and that he was given at least five banking days
within which to settle his account constitutes sufficient
ground for his acquittal.
161
(Italics in the original; underscoring
and emphasis omitted)
The evidence for the prosecution failed to prove the second
element. While the registry receipt,
162
which is said to cover the
letter-notice of dishonor and of demand sent to petitioner, was
presented, there is no proof that he or a duly authorized agent
received the same. Receipts for registered letters including return
receipts do not themselves prove receipt; they must be properly
authenticated to serve as proof of receipt of the letters.
163
Thus in
Ting v. Court of Appeals,
164
this Court observed:
161
Id. At 554-555
162
MeTC records, p. 49
163
Supra note 440 Phil. 540 (2002) at 540-555
164
398 Phil. 481 (2000)
99
x x x All that we have on record is an illegible signature on
the registry receipt as evidence that someone received the
letter. As to whether this signature is that of one of the
petitioners or of their authorized agent remains a mystery.
From the registry receipt alone, it is possible that petitioners
or their authorized agent did not receive the demand letter.
Possibilities, however, cannot replace proof beyond
reasonable doubt.
165
However, apparently, a contrary ruling was laid down in the
subsequent case of Eumelia Mitra vs. People of the Philippines
(G.R. No. 191404, July 5, 2010), wherein it was held that: positive
allegation of the prosecution that a demand letter was served upon
the accused prevails over the denial made by the accused. x x x
The court accepts the prosecutions narrative that the accused
refused to sign to evidence their receipt thereof. To require the
prosecution to produce the signature of the accused on said
demand letter would be imposing an undue hardship on it. x x x
As well, actual receipt acknowledgment is not and has never been
required of the prosecution either by law or jurisprudence.
As the rule now stands, the Mitra case is controlling.
Payment as a matter of defense in B.P. 22 cases
In the Abarquez case, the Supreme Court laid down the
following doctrines:
The prima facie presumption that the drawer has knowledge
of the insufficiency of funds or credit at the time of the issuance,
or on the payment for presentment, of the check may be rebutted
by payment of the value of the check either by the drawer or by
the drawee bank within five banking days from notice of the
dishonor given by the drawer. The payment thus becomes a
complete defense regardless of the strength of the evidence
offered by the prosecution. It must be presupposed, then, that
the issuer received a notice of dishonor and that, within five days
from receipt thereof, he failed to pay the amount of the check or
to make arrangement for its payment.
166
165
Id. At 494
166
Meriz vs. People, p. 533
Basic Principles and Jurisprudence on the Negotiable Instruments Law 100
In Caras vs. Court of Appeals
167
, we note that the law
provides for a prima facie rule of evidence. Knowledge of
insufficiency of funds in or credit with the bank is presumed from
the act of making, drawing, and issuing a check payment of which
is refused by the drawee bank for insufficiency of funds when
presented within 90 days from the date of issue. However, this
presumption is rebutted when it is shown that the maker or drawer
pays or makes arrangements for the payment of the check within
five banking days after receiving notice that such check had been
dishonored. Thus, it is essential for the maker or drawer to be
notified of the dishonor of her check, so he could pay the value
thereof or make arrangements for its payment within the period
prescribed by law.
In Griffith vs. Court of Appeals
168
, we held that:
While we agree with the private respondent that the
gravamen of violation of B.P. 22 is the issuance of worthless
checks that are dishonored upon their presentment for payment,
we should not apply penal laws mechanically. We must find if the
application of the law is consistent with the purpose and the reason
for the law. Ratione cessat lex, et cessat lex (When the reason
for the law ceases, the law ceases.) It is not the letter alone but
the spirit of the law also that give it life. This is especially so in
this case where a debtors criminalization would not serve the
ends of justice but in fact subvert it. The creditor having collected
already more than a sufficient amount to cover the value of the
checks for payment of rentals, via auction sale, we find that holding
the debtors president to answer for a criminal offense under B.P.
22 two years after said collection, is no longer tenable nor justified
by law or equitable consideration.
Matters to be proved by the prosecution in BP 22 cases
Under Batas Pambansa Bilang 22 (BP 22), the prosecution
must prove not only that the accused issued a check that was
subsequently dishonored. It must also [be] established that the
accused was actually notified that the check was dishonored, and
that he or she failed, within five banking days from receipt of notice,
167
G.R. No. 129900, 2 October 2001, 366 SCRA 371, 380
168
G.R. No. 129764, 12 March 2002
101
to pay the holder of the check the amount due therein or to make
arrangement for its payment. Absent proof that the accused
received such notice, a prosecution for violation of the Bouncing
Check Law cannot prosper. (Betty King vs. People of the
Philippines, G.R. No. 131540, December 2, 1999, [Panganiban,
J.])
I. FORM AND INTERPRETATION
Section 1. Form of negotiable instruments. - 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 or
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 or otherwise indicated therein with
reasonable certainty.
Notes:
Parties to Negotiable Instruments:
In sum, parties to negotiable instruments may be primary,
or secondary or incidental.
Primary parties are those which are the primary participants
to the creation of a negotiable instrument (e.g., maker, drawer,
payee, drawee/acceptor).
Secondary or incidental parties are those which came in or
become involved only after the instrument is negotiated or
transferred to a third person (e.g., indorsers, indorsees).
They may also be classified as parties primarily liable and
parties secondarily liable.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 102
The person primarily liable on an instrument is the person
who, by the terms of the instrument, is absolutely required to pay
the same. All other parties are secondarily liable. (Sec. 192)
Parties to a Promissory Note, include:
a) Maker;
b) Payee
Parties to a Bill of Exchange, include:
a) Drawer;
b) Drawee;
c) Payee
At the onset, it ought to be proper for us to define the terms
that the reader would encounter throughout the entire study of
this subject matter, as specified in Section 191that unless the
contract otherwise requires:
Acceptance means an acceptance completed by delivery
or notification;
Action includes counterclaim and set-off;
Bank includes any person or association of persons
carrying on the business of banking, whether incorporated
or not;
Bearer means the person in possession of a bill or note
which is payable to bearer;
Bill means bill of exchange, and note means negotiable
promissory note;
Delivery means transfer of possession, actual or
constructive, from one person to another;
Holder means the payee or indorsee of a bill or note who
is in possession of it, or the bearer thereof;
Indorsement means an indorsement completed by delivery;
103
Instrument means negotiable instrument;
Issue means the first delivery of the instrument, complete
in form, to a person who takes it as a holder;
Person includes a body of persons, whether incorporated
or not;
Value means valuable consideration;
Written includes printed, and writing includes print.
The law does not require any particular form, either as to a
bill of exchange or promissory note, or other negotiable instrument,
and while it would be unwise to depart from the approved forms
in vogue amongst merchants, yet the law respects substance more
than form; and where the intention appears to assume the
obligations which devolve upon drawers and makers of negotiable
instruments, it will be enforced, although not evidenced in the
usual commercial form. Thus, an order written under a note,
Please pay the above note, and hold it against me in our
settlement, signed by the drawer and accepted by the drawee,
has been held a good bill;
169
and so, also, it has been held that a
like order written under an account is a bill of exchange.
170
And
where an indorsement was made on a bond, ordering the contents
to be paid to order for value received, it was held a good bill.
171
(Daniel, Elements of the Law of Negotiable Instruments Law,
page 35)
Must be in Writing
As a substitute for money, a negotiable instrument, similar
to money, must be written or contained in a medium, in such a
way that it could by physically transferrable from hand to hand.
Strictly speaking, there are no verbal negotiable instruments.
It may be written on any paper, cloth, board, parchment,
wood, plastic, so long as it has a semi-permanent character, so
as to manifest the intent of the maker or drawer to create a
169
Leonard v. Mason, 1 Wend. 252
170
Hoyt v. Lynch, 2 Sandf. 328
171
Bay v. Frazer, 1 Bay, 66
Basic Principles and Jurisprudence on the Negotiable Instruments Law 104
negotiable instrument, capable of being negotiated or transferred
from one person to another. Otherwise, if such is incapable of
being physically transferred its negotiable character would be
defeated.
[T]his writing can be handwritten, printed, or typewritten,
or it can consists of any other intentional [method of] reduction to
tangible form. (Business Law, Howell, p. 412)
For a negotiable instrument to operate practically as either
a substitute for cash or a credit device, or both, it is essential that
the instrument can be easily transferable without danger of being
uncollectible.
172
The whole of the bill or note must be expressed in writing.
Whether the instrument be a bill of exchange or a promissory
note, or otherwise, and whether or not it be negotiable, must be
determined by its face, without reference to any other source.
173
Signed by the Maker or Drawer
Section 1 requires that the instrument be signed either by
the maker or drawer. This is in line with the provision that No
person is liable on the instrument whose signature does not appear
thereon.
174
Moreover, a negotiable instrument being essentially
a contract requires that there be consent of the maker or drawer,
since they are the ones who start with the creation and initial
delivery of an instrument. Consent is thus, manifested by their
affixing their signature on the instrument.
The term signed means any symbol executed or adopted
by a party with [the] present intention to authenticate a writing.
Thus a signing can occur through the use of ones initials, a rubber
stamp, or some other type of signature, such as the mark X, so
long as it is made with the intention of giving assent to the writings
terms. (ibid, p. 413)
It does not matter upon what portion of the instrument, the
maker or drawer affixes his name, so long that he signs as drawer
172
Miller & Jentz, Business Law Today, 9th Edition, 2011, page 391
173
Daniel on Negotiable Instrument, 77; Gibbon v. Scott, 2 Stark, 268
174
Sec. 18, NIL
105
or maker.
175
It is not material whether the writing is in pencil or
ink,
176
although as matter of permanence and security, ink is, of
course, preferable. And the name may be printed a well as written,
though, in such cases, it cannot prove itself, and must be shown
to have been adopted and used by the party as his signature.
177
If another sign the name of the party in his presence and at his
request, it is the same as if he did it himself;
178
and if another sign
the partys name by verbal or other authority, it is sufficient.
179
The full name may be written; and at least the surname should
appear, and generally does. But this is not indispensablethe
initials are sufficient,
180
and any mark which the party uses to
indicate his intention to bind himself will be as effectual as his
signature,
181
whether there be a certificate of witnesses on the
instrument or not.
182
But, of course, a mark does not prove itself
like a signature, although it is an adminicle of proof.
183
Any
peculiarity in it may be shown as evidence of proof;
184
but, unless
there be an attesting witness, or one who saw it written, or is
familiar with its characteristics, the plaintiff cannot recover.
185
Nor
it is necessary that the substance upon which the instrument is
written should be paperparchment, cloth, leather, or any other
substitute for paper will suffice.
186
(Daniel, Elements of the Law of
Negotiable Instruments, page 35-36)
Must Contain Unconditional Promise or Order
In perspective, a negotiable instrument operates as an
undertaking of a person, be it a maker, who promises to pay, or a
drawer, which in turn, orders another person to pay on his behalf,
that is made without any condition to another person, identified
as the payee, and receiving anything of value in exchange thereof.
175
Clason v. Bailey, 14 Johns, 484; Schmidt v. Schmaeller, 45 Mo. 502
176
Reed v. Roark, 14 Tex. 329; Closson v. Stearns, 4 Vt. 11
177
Brown v. Butchers Bank, 6 Hill, 443; Schneider v. Norris, 2 Maule & S.
286
178
Sager v. Tupper, 42 Mich. 605
179
Daniel on Negotiable Instruments, page 274, 299
180
Merchants Bank v. Spicer, 6 Wend. 443; 1 Parsons on Notes and Bills,
36
181
Lyons v. Holmes, 11 S.C. 429
182
Willoughby v. Moulton, 47 N.H. 205; Shank v. Butach, 28 Ind. 19
183
Hilborn v. Alford, 22 Cal. 482; Flowers v. Billing, 45 Ala. 488
184
George v. Surrey, 1 Moody & M. 516; 2 Parsons on Notes and Bills, 480
185
Thompson on Bills, 30, 31, 33
186
Daniel on Negotiable Instruments, 77
Basic Principles and Jurisprudence on the Negotiable Instruments Law 106
Vital is the requirement that the promise or order to pay must be
unconditional. Since, a negotiable instrument is intended as a
substitute for money, the payee and the subsequent holder thereof
must be assured that they would be able to receive the amount
indicated on the face of the instrument without any other condition
or additional burden.
If a bill, it must contain a certain direction to payif a note,
a certain promise to pay. A bill is, in its nature, the demanding of
a right, not the mere asking of a favor, and therefore a supplication
made or authority given to pay an amount is not a bill. (Daniel,
Elements of the Law of Negotiable Instruments, page 45)
A promissory note must contain a certain promise to pay. I
promise to pay, or cause to be paid, would suffice, because the
undertaking that the payment be made is definite and certain.
187
It is said by Story, that it seems that to constitute a good
promissory note, there must be an express promise upon the fact
of the instrument to pay the money; for a mere promise implied
by law, founded upon an acknowledged indebtedness, will not be
sufficient.
188
But we think the better language is used by Byles,
who says: No precise words of contract are necessary, provided
they amount, in legal effect, to a promise to pay,
189
In other words,
if over and above the mere acknowledgment of debt, there may
be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note.
190
The instrument must be payable unconditionally and at all
events in order to be negotiable.
191
To be unconditional, the
payment of the instrument must not be made to depend upon a
future uncertain event, which may, or may not happen.
A promise is unconditional, although it is coupled with (a)
an indication of a particular fund out of which reimbursement is to
be made or a particular account to be debited with the amount; or
(b) a statement of the transaction which gives rise to the
instrument. (Sec. 2, NIL)
187
Lovell v. Hill, 6 Car. & P. 238; Caviness v. Rushton, 101 Ind. 500
188
Story on Promissory Notes, 14
189
Byles on Bills, 8
190
Daniel on Negotiable Instruments, 36; Cowan v. Hallack, 9 Colo. 578
191
Daniel, Elements of the Law of Negotiable Instruments, 46
107
And an instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure the
defect.
192
The contingency implied deprives the instrument of its
negotiable character, as the events named may never happen.
193
If the time must certainly come, although the particular day
is not mentioned, the instrument is regarded as negotiable, as
the fact of payment is certain.
194
If the instrument is payable at, or
within a certain time after, a mans death, it is sufficient, because
the event must occur;
195
and a promise to pay on demand, after
my decease, $850, signed by the promissory, is a good note,
negotiable as any other, and binding on the promissors estate at
his death.
196
So a note payable one day after date or at my
death,
197
and if the day of payment must come at some time, it
has been said that the distance is immaterial.
198
(Daniel, Elements
of the Law of Negotiable Instruments, page 48)
However, an order or promise to pay out of a particular fund
is not unconditional. (Sec. 2, N.I.L.) In accordance with these
principles the negotiable character of the instrument is destroyed
if it be made payable expressly or impliedly out of a particular
fund.
199
Illustrations: The insertion in an order to pay a certain
sum on account of brick work done on a certain building
200
or
out of rents,
201
or out of my growing substance,
202
or out of a
certain claim,
203
or out of my part of the estate of A,
204
or out of
the amount due on contract.
205
On the same principle, receivers
certificates are not regarded as negotiable, although framed with
the negotiable words usual in promissory notes.
206
(Daniel,
Elements of the Law of Negotiable Instruments, page 50)
192
Sec. 4, NIL
193
Daniel, Elements of the Law of Negotiable Instruments, 47
194
Daniel on Negotiable Instruments, 43
195
Cooke v. Colehan, 2 Stra. 1217; Conn v. Thornton, 46 Ala. 587; Price v.
Jones, 105 Ind. 544.
196
Bristol v. Warner, 19 Conn. 7
197
Conn v. Thornton, 46 Ala. 588
198
Worth v. Case, 42 N.Y. 362
199
Daniel, Elements of the Law of Negotiable Instruments, 50
200
Pitman v. Crawford, 3 Gratt. 127
201
J Parsons on Notes and Bills, 43
202
Josselyn v. Lacier, 10 Mod. 294
203
Richardson v. Carpenter, 46 N.Y.661
204
Mills v. Kuykendale, 2 Black., 47
205
Hoagland v. Erck, 11 Neb. 580
206
Staunton v. Railroad Co., 31 Fed. 587; McCurdy v. Bowes, 88 Ind.583
Basic Principles and Jurisprudence on the Negotiable Instruments Law 108
An order to pay A, or order, $300.00 or what may be due
on my deposit book, is conditional.
207
Therefore, the same in
non-negotiable.
2011 Bar Question:
A writes a promissory note in favor of his creditor, B. It
says: Subject to my option, I promise to pay B Php1
Million or his order or give Php1 Million worth of cement
or to authorize him to sell my house worth Php1 Million.
Signed, A. Is the note negotiable?
A. No, because the exercise of the option to pay lies with
A, the maker and debtor.
B. No, because it authorizes the sale of collateral securities
in case the note is not paid at maturity.
C. Yes, because the note is really payable to B or his order,
the other provisions being merely optional.
D. Yes, because an election to require something to be done
in lieu of payment of money does not affect negotiability.
To Pay a sum certain in Money
The sum or amount which is promised or ordered to be paid
by the maker or drawer as the case may be must be certain. This
would enable to payee or any subsequent holder to be able to
know how much they are going to claim from the person primarily
liable thereon.
Thus, if an instrument is to be a substitute for money and
have an equivalent degree of acceptability, the necessity that the
amount be a sum certain is obvious. This requirement of certainty
is met if the holder can determine from the terms of the instrument
itself the amount he or she is entitled to receive at maturity. (Ibid,
Howell, p. 417)
The amount which the debtor promises or engages to pay
must either be stated in the instrument itself, in figures or words,
or must be ascertainable from data somewhere on the paper.
207
The Negotiable Instruments Law Annotated, by Joseph Doddridge
Brannan, Second Edition 1911, page 3, citing National Sav. Bank v. Cable,
73 Conn. 568 Atl. 428.
109
Illustrations: A note to pay a certain sum, and all other sums
which may be due is not negotiable, as the aggregate amount is
not capable of definite ascertainment.
208
So, if it be for a certain
sum and whatever sum you may collect of me for C,;
209
or if it be
for the proceeds of a shipment of goods, value about 2,000,
consigned by me to you;
210
or the demands of the sick club in
part of interest;
211
or a certain sum, the same to go as set-off;
212
or if it be expressed, deducting all advances and expenses;
213
or if it be due for $800 and such additional premium as may be
due on policy No. 218,171.
214
But a promise to pay bearer a
certain sum per acre for so many acres as a certain tract contained
was held to be negotiable as soon as the number of acres was
indorsed upon it.
215
(Daniel, Elements of the Law of Negotiable
Instruments, page 51)
It is essential to the negotiability of the bill or note that it
purports to be only for the payment of money. Such at least may
be stated to be the general rule, for if any other agreement of a
different character be engrafted upon it, it becomes a special
contract clogged and involved with other matters, and has been
deemed to l ose thereby i ts character as a commerci al
instrument.
216
(ibid, page 55)
Payable on Demand or at a Fixed or Determinable Future Time
This requirement recognizes that the holder of an instrument
wants to know with certainty when he or she will be entitled to
payment. Any appreciable uncertainty as to time of payment
makes the instrument commercially unacceptable and defeats
the concept that a negotiable instrument is a substitute for money.
(Howell, p. 418)
An instrument is payable on demand: (a) when it is so
expressed to be payable on demand, or at sight, or on
208
Smith v. Nightinglare, 2 Stark, 375
209
Legro v. Staples, 16 Me. 252; Lime Rock F. & M. Ins. Co. v. Hewitt, 60 Me.
407
210
Jones v. Simpson, 2 B & C, 318
211
Bolton v. Dugdale, 4 B & Ad. 619
212
Clarke v. Percival, 2 B & Ad. 660
213
Cashman v. Haynes, 20 Pick, 132
214
Marret v. Equitable Ins. Co., 54 Me. 537
215
Smith v. Clopton, 4 Tex. 109
216
Fletcher v. Thompson, 55 N.H. 308; Ingham v. Dudley, 60 Iowa 16
Basic Principles and Jurisprudence on the Negotiable Instruments Law 110
presentation; or (b) in which no time for payment is fixed. (Sec. 7,
NIL)
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand. (ibid)
An instrument may also be payable on a fixed future time,
as on its face, the holder can clearly discern the date and time
when the instrument shall become due. Example: April 8, 2012;
or April 3, 2007.
When an instrument is payable at a determinable future time,
the holder thereof would be able to know the date and time when
instrument would become due by referring to a fixed or known
future event. Example: 10-days after Christmas this year; or 15-
days after New Year of next year.
Payable to Order or Bearer
The requirement that an instrument be made payable to
Order or Bearer are what we call words of negotiability, this
implies that an instrument, provided it complies with all other
requisites of Section 1 of the Negotiable Instruments Law, can be
negotiated or transferred to other persons, in the manner provided
for under the law.
Without these so-called words of negotiability, an instrument
would not be negotiable, as on its face it would be intended only
to be payable to the person named therein, thus, preventing it to
be further negotiated.
An instrument is payable to Order where it is drawn payable
to the order of a specified person or to him or his order. (Sec. 8,
NIL)
It may be drawn payable to the order of
217
:
a) A payee who is not maker, drawer, or drawee; or
b) The drawer or maker; or
c) The drawee; or
d) Two or more payees jointly; or
111
e) One or some of several payees; or
f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty.
218
On the other hand, an instrument is payable to Bearer
219
:
a) When it is expressed to be so payable; or
b) When it is payable to a person named therein or
bearer; or
c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the
person making it so payable; or
d) When the name of the payee does not purport to
be the name of any person; or
e) When the onl y or l ast i ndorsement i s an
indorsement in blank.
2000 Bar Question:
MP bought a used cellphone from JR. JR preferred cash
but MP is a friend so JR accepted MPs promissory note
for P10,000.00. JR thought of converting the note into
cash by endorsing it to his brother KR. The promissory
note is a piece of paper with the following hand-printed
notation: MP WILL PAY JR TEN THOUSAND PESOS IN
PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
TODAY. Below this notation MPs signature with 8/1/
00 next to it, indicating the date of the promissory note.
When JR presented MPs note to KR, the latter said it
was not a negotiable instrument under the law and so
could not be a valid substitute for cash. JR took the
opposite view, insisting on the notes negotiability. You
are asked to referee. Which of the opposing views is
correct? Explain. (3%)
ANSWER:
KRs view is correct. The promissory note does not meet
the requirements of Sec. 1, Act 2031, which requires that
Basic Principles and Jurisprudence on the Negotiable Instruments Law 112
the instrument be payable to bearer or order, therefore it is
non-negotiable.
Drawee must be named or otherwise Indicated therein with
reasonable certainty
It should be noted that the requirement on Sec. 1 (e) applies
only if the instrument is a Bill of Exchange, wherein, the Drawer
orders a Drawee to pay the payee or his Order, or Bearer thereof,
in which case, the drawee, who becomes subsequently the
acceptor thereof is the person primarily liable to pay the instrument.
As for the requirements of a Promissory Note, Sec. 1 (a) to
(d) would suffice.
Whether the Bill is payable on demand or at a fixed or
determinable future time, so long as the holder would be able to
know or identify the person to whom he would be demanding or
enforcing payment of the instrument.
The requisite is that the drawee must be Named.
Example:
Pepito Aguilar
1002, Santos Avenue, Sta. Cruz, Manila
Or
Luis Lustriano of Luzurriaga & Associates
Ortigas Center, Pasig City
Drawee may also be Indicated with Reasonable Certainty.
Example:
Brgy. Captain
Brgy. Sto Domingo, Laguna
Or
Hon. Municipal Mayor
Municipality of Oton, Iloilo
113
The instrument can only be negotiable if it complies with
Section 1
A document will only become a Negotiable Instrument if it
complies with the requisites of Section 1 of the Negotiable
Instruments law, unconditionally and in a single document.
It should be noted that the existence of a negotiable
instrument is different on who is liable on the instrument. The
existence of a negotiable instrument is answered if the paper
strictly complies with Section 1 of the Negotiable Instruments Law,
liability, on the other hand may be addressed taking into
consideration certain factors, like, proper negotiation, existence
of a consideration, holder in due course, and the like.
Thus, if what we have is a mere innominate contract, without
complying with Section 1 of the said law, then, it may be governed
by the Civil Code, or other pertinent provisions of the Code of
Commerce, but it cannot avail of the provisions of Act 2031.
Distinction between a negotiable and non-negotiable
instrument
In the case of Consolidated Plywood Industries, Inc. vs. IFC
Leasing and Acceptance Corp.,
220
this Court had the occasion to
clearly distinguish between a negotiable and non-negotiable
instrument.
Among others, the instrument in order to be considered
negotiable must contain the so-called words of negotiability
i.e. must be payable to order or bearer. Under Section 8 of the
Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always
be a specified person named in the instrument and the bill or
note is to be paid to the person designated in the instrument or to
any person to whom he has indorsed and delivered the same.
Without the words or order or to the order of, the instrument is
payable only to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but
will merely step into the shoes of the person designated in the
instrument and will thus be open to all defenses available against
220
149 SCRA 459 (1987).
Basic Principles and Jurisprudence on the Negotiable Instruments Law 114
the latter. (Juanita Salas vs. Court of Appeals, G.R. No. 76788,
January 22, 1990, [Fernan, C.J.:])
In the above-mentioned case of Juanita Salas vs. Court of
Appeals, the pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay
Violago Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20)
Philippine currency, which amount includes interest at 14% per
annum based on the diminishing balance, the said principal sum,
to be payable, without need of notice or demand, in installments of
the amounts following and at the dates hereinafter set forth, to wit:
P1,614.95 monthly for 36 months due and payable on the 21st
day of each month starting March 21, 1980 thru and inclusive of
February 21, 1983. P_________ monthly for ______ months due
and payable on the ______ day of each month starting
_____198__ thru and inclusive of _____, 198________ provided
that interest at 14% per annum shall be added on each unpaid
installment from maturity hereof until fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address: ____________________ ________________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager
115
A careful study of the questioned promissory note shows
that it is a negotiable instrument, having complied with the
requisites under the law as follows: [a] it is in writing signed by
the maker Juanita Salas; [b] it contains an unconditional promise
to pay the amount of P58,138.20; [c] it is payable at a fixed or
determinable future time which is p1,614.95 monthly for 36
months due and payable on the 21
st
day of each month starting
March 21, 1980 thru and inclusive of Feb. 21, 1983; [d] it is
payable to Violago Motor Sales Corporation, or order and as such,
[e] the drawee is named or indicated with certainty. (supra)
The case of Narcisa Buencamino, et. al., vs. Hernandez, et
al.
1
talks about the negotiability of Government negotiable land
certificates, which provide as follows, to wit:
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER
in the sum of TEN THOUSAND PESOS. This certificate is issued in
accordance with the provisions of Section 9, Republic Act No. 1400,
entitled AN ACT DEFINING A LAND TENURE POLICY, PROVIDING
FOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND
APPROPRIATING FUNDS FOR ITS IMPLEMENTATION, approved
September 9, 1955, and is due and payable to BEARER on demand
and upon presentation at the Central Bank of the Philippines without
interest, if presented for payment within five years from the date of
issue; with interest at the rate of 4 per centum per annum, if presented
for payment after five years from the date of issue; with interest at
the rate of 4- per centum per annum, if presented for payment
after ten years from the date of issue; and, with interest at the rate of
5 per centum per annum, if presented for payment after fifteen years
from the date of issue. Both principal and interest are payable by the
Treasurer of the Philippines, through the Central Bank of the
Philippines, in legal tender currency of the Philippines.
This land certificate is part of the total negotiable land certificates
issued and limited to the aggregate principal sum of SIXTY MILLION
PESOS a year, to be issued during the first two years from September
9, 1955 when Republic Act No. 1400 was approved, and P30 million
each year during the succeeding years, for the purchase of private
221
G.R. No. L-14883, July 31, 1963, [Regals, J.:]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 116
agricultural lands for resale at cost to bona-fide tenants or occupants,
or, in the case of estates abandoned by the owners for the last five
years, to private individuals who will work the lands themselves and
who are qualified to acquire or own lands, but who do not own more
than six hectares of lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made until after five (5)
years from the date of execution of the Deed of Sale of Hacienda de
Leon, pursuant to the conditions under Paragraph b of the
Memorandum Agreement executed between the Land Tenure
Administration and the owners of Hacienda de Leon on May 11, 1957,
acknowledged before Marcelo Lagramada, Notary Public for Manila,
as Doc. No. 324, Page 66, Book No. 6, Series of 1957.
(Sgd.) JUAN CAIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA
President of the Phil.
(Sgd.) VICENTE GELLA
Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible
Under Republic Act No. 1400, the land certificates, as in
this case, shall be payable to bearer upon demand. The one
issued, however, were, payable to bearer only after the lapse of
five years from a given period. Obviously then, the requirement
that they should be payable on demand was not met since an
instrument payable on demand is one which is (a) expressed to
be payable on demand, or at sight, or on presentation; or (b)
expresses no time for payment (Sec. 7, Negotiable Instruments
Law), the five-year period within which the certificates could not
be encashed was an expression of the time for the payment
contrary to the paragraph (b) of the last law cited.
In another significant case, that of Consolidated Plywood
Industri es, Inc., et al vs. IFC Leasi ng and Acceptance
Corporation
222
, [t]he pertinent portion of the note is as follows:
117
FOR VALUE RECEIVED, I/we jointly and severally
promi se to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS
& 71/100 only (P 1,093,789.71), Philippine Currency, the
sai d pri nci pal sum, to be payabl e i n 24 monthl y
installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note must be payable
to order or bearer, it cannot be denied that the promissory note
in question is not a negotiable instrument.
The instrument in order to be considered negotiable-i.e.
must contain the so-called word of negotiability, must be
payable to order or bearer. These words serve as an
expression of consent that the instrument may be
transferred. This consent is indispensable since a maker
assumes greater risk under a negotiable instrument than
under a non-negotiable one
xxx xxx xxx
When instrument is payable to order.
SEC. 8 WHEN PAYABLE TO ORDER.the instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order
xxx xxx xxx
These are the only two ways by which an instrument may
be made payable to order. There must always be a specified
person named in the instrument. It means that the bill or
note is to be paid to the person designated in the instrument
or to any person to whom he has indorsed and delivered
the same. Without the words or order or to the order of,
222
G.R. No. 72593, April 30, 1987.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 118
the instrument is payable only to the person designated
therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a
holder of a negotiable instrument but will merely step into
the shoes of the person designated in the instrument and
will thus be open to all defenses available against the latter.
(Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Editions, page 38).
(Emphasis supplied)
Therefore, considering that the subject promissory note is
not a negotiable instrument, it follows that the respondent can
never be a holder in due course but remains a mere assignee of
the note in question. Thus, the petitioner may raise against the
respondent all defenses available to it as against the seller-
assignor Industrial Products Marketing.
Treasury warrant; not a Negotiable Instrument.
Treasury warrants do not fall within the purview of the
Negotiable Instruments Law. Treasury warrants are payable from
a particular appropriation of an order payable out of a particular
fund, and is not unconditional.
Postal Money Orders; not a Negotiable Instrument.
It is not disputed that our postal statues were patterned after
statutes in force in the United States. For this reason, ours are
generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of
any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal
money orders are not negotiable instruments (Bolognesi vs. U.S.
189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed.
912), the reason behind this rule being that, in establishing and
operating a postal money order system, the government is not
engaging in commercial transactions but merely exercises a
governmental power for the public benefit. (Philippine Education
Co., Inc., vs. Soriano, G.R. No. L-22405, June 30, 1971, [Dizon,
J.])
It is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws and
119
regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually
provide for not more than one endorsement; payment of money
orders may be withheld under a variety of circumstances. (49 C.J.
1153, supra)
Central Bank Certificate of Indebtedness; not a Negotiable
Instrument
In the case of Traders Royal Bank vs. Court of Appeals,
Filriters Guaranty Assurance Corporation and Central Bank
of the Philippines
223
, it was held that: the subject CBCI is not a
negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received,
hereby promises to pay bearer, of if this Certificate of indebtedness
be registered, to FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the principal sum
of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains
to certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a bond (82 Minn. 202).
Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money, it
is usually used for the purpose of long term loans.
Problem:
What is the nature and characteristic of a NOW account?
Is it Negotiable within the ambit of the Negotiable
Instruments Law?
223
G.R. No. 93397, March 3, 1997, [Torres, J.]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 120
ANSWER:
Negotiable Orders of Withdrawals (NOW Accounts) is
defined as savings accounts from which funds may be
withdrawn by means of negotiable orders of withdrawal.
They shall be kept and maintained separately from the
regular savings deposits subject to withdrawal through the
presentation of withdrawal slips and passbooks. Only
natural persons shall be eligible to maintain NOW Accounts.
The authority to offer NOW Accounts shall be granted only
to thrift banks that meet the requirements laid down by the
Central Bank Regulations.
They are not negotiable within the provisions of the
Negotiable Instruments Law because of certain limits and
restrictions, to wit:
(a.) The order of withdrawal shall be payable only to a
specific person, natural or juridical, and not to bearer
nor to the order of a specified person;
Only the payee can encash this order of withdrawal with
drawee bank, or deposit it in his account with the drawee bank or
with any other bank.
When is an instrument considered to be complete? When is
it incomplete?
An i nstrument i s compl ete i f i t compl i es wi th the
requirements of Section 1 of the Negotiable Instruments Law,
embodied in a single document or medium, and that there must
be no other conditions imposed for its validity or compliance.
An instrument is incomplete if it lacks any material particular
essential for its completion.
Essentials of a Bill or Note
224
To be a negotiable bill of exchange or promissory note, the
instrument must have the following essential characteristics:
a) The bill must contain an order
224
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 26
121
b) The note must contain a promise
c) The order or promise must be unconditional
d) It must be an absolute order or promise for the
payment of money alone
e) The amount of money must be certain
f) The time of payment must be a time certain to arrive
g) The instrument must be specific as to all its parties
h) The instrument must be delivered
What are the effects if the instrument is incomplete?
Strictly speaking, we do not have any negotiable instrument.
An instrument only comes within the purview of the Negotiable
Instruments Law if it complies with the requisites of Section 1 of
the Negotiable Instruments Law, in the absence thereof, we only
have a private document or contract, in which the Negotiable
Instruments Law has no application.
Sec. 2. What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of this Act,
although it is to be paid:
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that, upon
default in payment of any installment or of interest,
the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the
current rate; or
(e) With costs of collection or an attorneys fee, in case
payment shall not be made at maturity.
Notes:
When sum is considered certain.
The sum becomes certain if the maker, drawee, or holder
of the instrument would be able to discern with exact certainty
how much would he pay or collect, as the case may be, on the
value of the negotiable instrument.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 122
With Interest
The sum is considered certain although coupled with the
payment of interest. It should be borne in mind that the payment
of the interest is only in addition to the principal sum to be paid,
thus, the sum payable is still certain.
Example:
P30,000.00 plus 2% monthly interest; or
Pay 10% of P100,000.00
By stated installments
Though coupled with payment in stated installments, the
sum is still considered certain. The main reason is that said
installment, is only a mode of payment of the main obligation,
certainly entire sum due or payable could still be identified.
Example:
Promise to pay bearer P10,000.00 in 2 equal
installments; or
Promise to pay bearer five installments of P2,000.00
each.
By stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall
become due
This is similar to payment by stated installments as
previously mentioned, but this one contains an acceleration clause,
where, default in the payment of any installment or of interest, the
whole sum or amount becomes due.
In Acceleration Clauses: Instruments due at a fixed future
date sometimes have clauses providing that the date of maturity
shall be moved ahead if a specified event occurs prior to the stated
due date. An instrument issued this year with a maturity date [of]
two years hence might contain, for example, either of these
acceleration clauses: (1) This instrument shall become
immediately due and payable upon the makers (or acceptors)
bankruptcy; or (2) for a note payable in monthly installments: If
123
any instrument is not paid when due, the entire instrument is due
and demandable. (Howell, p. 421)
With exchange, whether at a fixed rate or at the current rate
The sum is still certain, though it is made coupled with
exchange whether fixed rate or at current rate. In this instance, a
reasonable prudent person would still be able to determine the
sum payable.
Example:
Pay to bearer an amount equivalent to $100.00; or
Pay to bearer an amount equivalent to the prevailing
rate of $100.00; or
Pay to bearer an amount equivalent to $100.00 at an
exchange rate of Php 43.50 per dollar.
With costs of collection or an attorneys fee, in case payment
shall not be made at maturity
This would be self-explanatory. Again the most important
fact to determine is whether or not the holder would be able to
determine the amount due, despite the additional cost of collection
or attorneys fee.
The attorneys fee is due if the unpaid note is placed in the
hands of an attorney for collection, although no suit is brought. A
stipulation in a mortgage securing the note for fees in case of suit
on the mortgage securing the note for fees in case of suit on the
mortgage is cumulative and not restrictive of the provision of the
note. (Brannan, page 5, citing, Morrison v. Ornbaun, 30 Mont.
111, 75 Pac. 953.)
A provision in a promissory note for attorneys fees if
collected by attorney, or if suit is brought on this note, is a promise
to pay attorneys fees for collection only after dishonor, and does
not impair the negotiability of the note. (Ibid, citing First Natl. Bank
of Shawano v. Miller, 139 Wis. 126, 120 N.W. 820, S.C. sec. 104.)
Likewise, [a] provision in a note for an attorneys fee, but
leaving blank the amount thereof, amounts to a promise to pay a
reasonable sum as an attorneys fee, and does not render the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 124
note non-negotiable. Where the plaintiff employed an attorney, it
is sufficient to show what is a reasonable fee, and it is not
necessary to prove an express agreement as to fees, or that
plaintiff paid the attorney before the suit. (Brannan, page 6, citing
McCormick v. Swem (Utah) 102 Pac. 626)
Example:
For value received, I promise to pay David Lancelot, or
order, the amount of Php 100,000.00, ten days after sight. It
is understood that an amount equivalent to the cost of
collection would be made payable in addition to the principal
amount, and an amount equivalent to Twenty-Five Per Cent
(25%) of the amount due as Attorneys Fees, should there be
default in the payment after demand.
(sgd)
Abigail Margaux
In the case of H.R. Andreas vs. B.A. Green
225
, the promissory
note was worded as follows:
P15,000.00 MANILA, P. I
Aug. 19th, 1921
On or before the 19th day of November, 1921, or on
thirty (30) days written demand notice, for value received, I
promise to pay to Harry Bridge, at Manila, P.I., the sum of
fifteen thousand pesos (P15, 000) with interest thereon at
the rate of twelve per cent (12%) per annum. If not paid
when due after thirty days written demand notice, this note
shall bear interest at the rate of 12 per cent per annum until
paid; and a further sum equal to 10 per cent of the total
amount due as and for expenses of collection for attorneys
fees whether actually incurred or not and in addition to all
costs as provided for in the Code of Civil Procedure.
This note is secured by real-estate mortgage of even date.
(Sgd.) B. A. GREEN
225
G.R. No. L-24322, December 16, 1925
125
The Supreme Court in the above-mentioned case held that:
[s]tipulations in negotiable instruments for the payment of
collection and attorneys fees are not forbidden by lay in this
jurisdiction. x x x The purpose of a stipulation in a note for a
reasonable attorneys fees is not to give the lender a larger
compensation for the loan than the law allows, but is to safeguard
the lender against future loss or damage by being compelled to
retain counsel to institute judicial proceedings to collect his debt.
Sec. 3. When promise is unconditional. - An unqualified order
or promise to pay is unconditional within the meaning of this
Act though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account
to be debited with the amount; or
(b) A statement of the transaction which gives rise to
the instr ument.
But an order or promise to pay out of a particular fund is not
unconditional
Notes:
When is promise to pay unconditional?
A promise to pay is unconditional if no other requirement or
qualification or condition is needed for its payment.
Moreover, an unqualified order or promise to pay is
unconditional, though coupled with:
a. An i ndi cati on of a parti cul ar fund out of whi ch
reimbursement is to be made or a particular account to
be debited with the amount; or
b. A statement of the transaction which gives rise to the
instrument.
An indication of a particular fund out of which reimbursement
is to be made or a particular account to be debited with the
amount
Basic Principles and Jurisprudence on the Negotiable Instruments Law 126
In this instance, the promise or order to pay is still
unconditional because payment is not premised upon any
condition, or subject to the availability of funds of a particular
account. The holder of the instrument is assured that he be paid
upon presentment of the instrument. It should be taken into
consideration that the law uses the word reimbursement, which
implies that payment is to be advanced by the person primarily
liable and merely reimburse the same from a particular account.
Thus, regardless of the availability of funds in that account, the
holder receives payment.
Example:
To: Maria Santos
1020 Licauco Drive, Ortigas Center, Pasig
This 26
th
day of October 2011
Please pay, Mario Delos Santos, or order, P10,000.00
five (5) days after sight, and reimburse said amount from
my savings account with PSBank account number 01-
092837-99.
(sgd)
Jose Santos
An order drawn by the X company directing payment of a
certain sum, on account of contract between you (the drawee)
and the X Company held negotiable, the words on account of
not having the same effect as out of the proceeds of. (Brannan,
page 6, citing First Nat. Bank v. Lightner, 74 Kans. 736, 88 Pac.
59, 8 L.R.A. (N.S.) 231, 118 Am. St. Rep. 353.)
An order to pay on or before a fixed day and charge the
same to the $1,800 payment, is not conditional. (Ibid, citing
Shepard v. Abbott, 179 Mass. 300, 60 N.E. 782)
A bill of exchange is not made non-negotiable because it
contains the words charge to my account and credit according to
a registered letter I have addressed to you. These words do not
mean according to the conditions mentioned in the letter, but
merely charge my account and credit according to the letter. (Ibid,
citing In re Boyse, 33 Ch. Div. 612)
127
A statement of the transaction which gives rise to the
instrument
Though an instrument may contain the reason for the
issuance thereof, it does not in any way impose a condition upon
the payment of the instrument. What is important is that the
statement of transactions must not be made as the condition for
payment of the instrument.
Examples:
As payment for the 10 crates of apple, I promise to pay
Mario Santos, or his order, Php 100,000.00 five (5) days
after sight.
(sgd)
Maria Delos Santos
Note that in the example above, the statement of the
transaction which gave rise to the instrument did not render the
instrument conditional, thus, the same is negotiable.
However, what if, say for instance that in the same example,
the 10 crates of apple were not delivered to Maria, but she had
already parted with her promissory note, will that make the
instrument non-negotiable?
The answer is no, it should be remembered that an
instrument is negotiable the moment it complies with Section 1 of
the negotiable instruments law. However, if the question pertains
to Marias liability on the promissory note, then we have a different
answer, which will be later on discussed in the succeeding pages
of this work.
It should be remembered that the existence of a negotiable
instrument differs from the question of who? is liable on the
negotiable instrument. The former merely requires compliance
with Section 1 of the law, while the latter takes into consideration
other aspects of liability, e.g., holder in due course, not a holder in
due course, transfer or negotiation, etc.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 128
What about if the order or promise is to pay out of a particular
fund, is it still unconditional?
No. An order or promise to pay out of a particular fund is not
unconditional. (Sec. 3, Negotiable Instruments Law) It is
conditional because from the phrase itself, pay out of a particular
fund, makes the payment of the instrument dependent upon the
available funds on the account, thus, the same is conditional,
therefore, non-negotiable. It is of no moment if there are indeed
actual available funds on the account, what matters is what is the
implication of the written words on the face of the paper.
Treasury warrants, which, by their nature are payable out of
particular funds which are the subject of appropriations for which
these treasury warrants were issued are non-negotiable, simply
because the repayment of which is dependent upon the availability
of a particular fund.
Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time, within
the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
specified therein; or
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect.
Notes:
What constitutes a determinable future time?
An instrument to be negotiable must be made either payable
on a fixed date or at a determinable future time, the latter phrase
means a period of time which could be determined with reference
to another particular time, or event which is certain to happen
though the time of happening is uncertain.
129
Fixed period after date or sight
This refers to a fixed or definite time after seeing, or
accepting the instrument, or on the date specified on the
instrument.
Example:
Ten days after sight; or
Ten days after date of the instrument
On or before a fixed or determinable future time specified
therein
This provision is self-explanatory.
Example:
Pay bearer P1, 000.00 on or before January 9, 2012
Pay bearer P1, 000.00 on or before Christmas day of 2012
If the instrument is made payable upon a contingency, is it
negotiable? What if the contingency occurred?
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect. (Sec. 4,
Negotiable Instruments Law)
What is a contingency?
Contingency refers to future uncertain events, or past events
unknown to parties, or circumstances which may or may not
happen.
Example:
I promise to pay bearer, or order, P1, 000.00 after passing
the bar exams
Pay bearer, P500.00 to buy umbrella when it rains on
December 25, 2011
Notes, payable at a certain time, but secured by a mortgage
executed as part of the same transaction, and reciting that the
whole debt shall be due in case of sale or removal of the property
Basic Principles and Jurisprudence on the Negotiable Instruments Law 130
by the mortgagor without the consent of the mortgagee, or in case
the mortgagee deems himself insecure, are uncertain as to time
and amount of payment and are therefore not negotiable.
(Brannan, page 8, citing Iowa Nat. Bank v. Carter (Iowa), 123
N.W. 237, S.C. secs. 25, 26)
Reason for the rule
As a substitute for money, payment of the negotiable
instrument must never be subject to any uncertainties, or
contingency, to do so would create a situation where the holder of
the instrument could not enforce payment on the person primarily
liable by reason of the event or contingency upon which an
obligation to pay would arise never occurred. This, entirely defeats
the purpose for the creation of the negotiable instrument.
2011 Bar Question:
A promissory note states, on its face: I, X, promise to
pay Y the amount of Php 5,000.00 five days after
completion of the on-going construction of my house.
Signed, X. Is the note negotiable?
A. Yes, since it is payable at a fixed period after the
occurrence of a specified event.
B. No, since it is payable at a fixed period after the
occurrence of an event which may not happen.
C. Yes, since it is payable at a fixed period or determinable
future time.
D. No, since it should be payable at a fixed period before
the occurrence of a specified event.
Sec. 5. Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any act
in addition to the payment of money is not negotiable. But
the negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
(a) Authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
(b) Authorizes a confession of judgment if the
instrument be not paid at maturity; or
131
(c) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) Gives the holder an election to require something to
be done in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
Notes:
If an act is imposed in addition to the order or promise to pay
a sum certain in money, is the instrument still negotiable?
No. An instrument which contains an order or promise to
do any act in addition to the payment of money is not negotiable.
(Sec. 5, Negotiable Instruments Law)
This would impose additional burden to the person primarily
liable on the instrument.
2011 Bar Question:
B borrowed Php1 million from L and offered to him his
BMW car worth Php1 Million as collateral. B then
executed a promissory note that reads: I, B, promise
to pay L or bearer the amount of Php1 Million and to
keep my BMW car (loan collateral) free from any other
encumbrance. Signed, B. Is this note negotiable?
A. Yes, since it is payable to bearer.
B. Yes, since it contains an unconditional promise to pay a
sum certain in money.
C. No, since the promise to just pay a sum of money is
unclear.
D. No, since it contains a promise to do an act in addition
to the payment of money.
2002 Bar Question:
Which of the following stipulations or features of a
promissory note (PN) affect or do not affect its
Basic Principles and Jurisprudence on the Negotiable Instruments Law 132
negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the
paragraph number of the stipulation or feature of the
PN as shown below and your corresponding answer,
either Affected or Not affected. Explain. (5%)
(1) The date of the PN is February 30, 2002.
(2) The PN bears interest payable on the last day of
each calendar quarter at a rate equal to five percent
(5%) above the then prevailing 91-day Treasury Bill
rate as published at the beginning of such calendar
quarter.
(3) The PN gives the maker the option to make payment
either in money or in quantity of palay of equivalent
value.
(4) The PN gives the holder the option either to require
payment in money or to require the maker to serve
as the bodyguard or escort of the holder for 30 days.
ANSWER:
(1) Not affected; Sec. 12, Negotiable Instruments Law, the
instrument is not invalid for the reason only that it is ante-
dated or post-dated, provided this is not done for an
illegal or fraudulent purpose. Thus, date is not essential
for its negotiability.
(2) Not affected; Sec. 2, Act 2031, the sum payable is a
sum certain within the meaning of this Act, although it is
to be paid with installments, or with exchange, whether
at a fixed rate or at the current rate.
(3) Affected; it makes the payment of the instrument
conditional by giving the maker an option to pay in money
or other palay.
(4) Not Affected; Sec. 5 (d), Act 2031, the negotiable
character of an instrument otherwise negotiable is not
affected by a provision which gives the holder an election
to require something to be done in lieu of payment of
money.
133
What may be some provisions added to the instrument which
would not affect its negotiability?
The negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
a. Authorizes the sale of collateral securities in case the
instrument is not paid at maturity; or
b. Authorizes a confession of judgment if the instrument
be not paid at maturity; or
c. Waives the benefit of any law intended for the advantage
or protection of the obligor; or
d. Gives the holder an election to require something to be
done in lieu of payment of money.
Authorization of sale of collateral securities in case the
instrument be not paid at maturity
A note, reciting that the title to property for which it is given
shall remain in the payee, and that he shall have the right to declare
the money due and take possession of the property whenever he
may deem himself insecure, even before the maturity of the note,
is not negotiable. (Brannan, page 9, citing Kimpton v. Studebaker
Bros. Co., 14 Idaho, 552, 94 Pac. 1039, 125 Am. St. Rep. 185)
Warrants of Attorney to Confess Judgment
In the case of Philippine National Bank vs. Manila Oil
Refining & By-Products Company, Inc.
226
the written instrument
read as follows:
RENEWAL
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of
the Philippine National Bank sixty-one thousand only pesos
at Philippine National Bank, Manila, P.I.
226
G.R. No. L-18103, June 8, 1922, [Malcom, J.:].
Basic Principles and Jurisprudence on the Negotiable Instruments Law 134
Without defalcation, value received; and to hereby
authorize any attorney in the Philippine Islands, in case
this note be not paid at maturity, to appear in my name
and confess judgment for the above sum with interest, cost
of suit and attorneys fees of ten (10) per cent for collection,
a release of all errors and waiver of all rights to inquisition
and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received.
No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The question raised in reference to the aforementioned
Promissory Note concerns the validity of one of its provisions
whereby in case the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon
for the principal amount, with interest, costs, and attorneys fees,
and waives all errors, rights to inquisition, and appeal, and all
property exceptions.
The attorney for the appellee contends that the Negotiable
Instruments Law (Act No 2031) expressly recognizes judgment
notes, and that they are enforceable under the regular procedure.
The Negotiable Instruments Law, in Section 5, provides that The
negotiable character of an instrument otherwise negotiable is not
affected by a provision which. . . (b) Authorizes a confession of
judgment if the instrument be not paid at maturity. We do not
believe, however, that his provision of law can be taken to sanction
judgments by confession, because it is a portion of a uniform law
which merely provides that, in jurisdiction where judgment notes
are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the
135
Negotiable Instruments Law concludes with these words. But
nothing in this section shall validate any provision or otherwise
illegal.
Judgments by confession as appeared at common law were
considered an amicable, easy, and cheap way to settle and secure
debts. They are a quick remedy and serve to save the courts
time. They also save the time and money of the litigants and the
government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding
the parties to the result as they themselves viewed it.
On the other hand, there are disadvantages to the
commercial world which outweigh the considerations just
mentioned. Such warrants of attorney are void as against public
policy, because they enlarge the field of fraud, because under
these instruments the promissory bargains away his right to a
day in court, and because the effect of the instrument is to strike
down the right of appeal accorded by statute. The recognition of
such a form of obligation would bring about a complete
reorganization of commercial customs and practices, with
reference to short-term obligations. It can readily be seen that
judgment notes, instead of resulting to the advantage of
commercial life in the Philippines might be the source of abuse
and oppression, and make the court involuntary parties thereto.
We are of the opinion that warrants of attorney to confess
judgment are not authorized nor contemplated by our law. We
are further of the opinion that provisions in notes authorizing
attorneys to appear and confess judgments against makers should
not be recognized in this jurisdiction by implication and should
only be considered as valid when given express legislative
sanction. (supra)
In the Memoranda of Amici Curiae in the case of PNB,
Professor Jose A. Espiritu, of the University of the Philippines,
states:
1. Confession of judgment has been defined as a voluntary
submission to the jurisdiction of the court, giving consent
and without the service of process, what could otherwise
Basic Principles and Jurisprudence on the Negotiable Instruments Law 136
be obtained by summons and complaint, and other
formal proceedi ngs, an acknowl edgment of
indebtedness, upon which it is contemplated that a
judgment may and will be rendered. (8 Cyc., pp. 563,
564)
2. As to the general effects of confession of judgment, the
following statements may be mentioned: A warrant to
confess judgment does not destroy the negotiability of
the note. Such a note is commonly called a judgment
note. Decisions to the contrary in the States where the
Negotiable Instruments Law is now in force are
abrogated thereby, since it expressly provides that the
negotiable character of an instrument otherwise
negotiable is not affected by a provision which authorizes
a confession of judgment, if the instrument is not paid at
maturity. However, this statutory provision does not apply
to stipulations for the confession of judgment prior to
maturity. (8 C.J., p. 128, sec. 222)
3. Nature of Requisites. A judgment may be rendered
upon the confession of defendant, either in an action
regularly commenced against him by the issuance and
service of process, in which case the confession may
be made by his attorney of record, or, without the
institution of a suit, upon a confession by defendant in
person or by his attorney in fact. It implies something
more than a mere admission of a debt to plaintiff, in
addition, it is defendants consent that a judgment shall
be entered against him.. (23 cyc., 699)
4. Statutory Provisions, Statutes regulating the confession
of judgments without action, or otherwise than according
to the course of the common law, are strictly construed,
and a strict compliance with their provisions must be
shown in order to sustain the validity of the judgment.
(Chapin vs. Tompson, 20 Cla., 681) And this applies
also to statutory restriction upon the right to confess
judgment, as that authority to confess judgment shall
not be given in the same instrument which contains the
promise or obligation to pay the debt, or that such
confession shall not be authorized by any instrument
executed prior to suit brought. (23 Cyc., 699, 700)
137
5. Warrant or Power of AttorneyValidity and Necessity.
A judgment by confession may be entered upon a written
authority, called a warrant or letter of attorney, by which
the debtor empowers an attorney to enter an appearance
for him, waive process, and confess judgment against
him for a designated sum, except where this method of
proceeding is prohibited by statute. The warrant as the
basis of judgment is generally required to be placed on
file in the clerks office, and no judgment can be so
entered until it is so filed. (23 Cyc., 703)
6. Requisites and Sufficiency. A warrant or power of
attorney to confess judgment should be in writing and
should conform to the requirements of the statute in force
at the time of its execution, although in the absence of
specific authority directions it is sufficient, without much
regard to its form, if it contains the essential of a good
power and clearly states its purpose. It must be signed
by the person against whom the judgment is to be
entered.. (23 Cyc., 704)
How about illegal provisions or stipulations?
Nothing in this section (Sec. 5) shall validate any provision
or stipulation otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and
negotiable character of an instrument are not affected by the
fact that:
(a) It is not dated; or
(b) Does not specify the value given, or that any value
had been given therefor; or
(c) Does not specify the place where it is drawn or the
place where it is payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in
which payment is to be made.
But nothing in this section shall alter or repeal any statute
requiring in certain cases the nature of the consideration to
be stated in the instrument.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 138
Notes:
This provision thus rejects the possible view that such
omissions cause an instrument to be incomplete and therefore
nonnegotiable.
227
These Omissions does not in any way affect
the validity and negotiable character of an instrument so long as
the same adheres with the requirements of Sec. 1.
Undated instrument
Negotiability of an instrument is not affected by an omission
of the date. Sec. 7 (b) of the N.I.L. provides that where no time
for payment is expressed on the face of the instrument, the same
shall be presumed to be payable on demand.
Also, Sec. 11, makes a presumption on instrument dates,
where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true
date of the making, drawing, acceptance or indorsement, as the
case may be.
Moreover, Sec. 12, N.I.L. also recognizes that an instrument
is not invalid by reason only that it is post-dated or ante-dated, so
long as it is not done for an illegal or fraudulent purpose.
Subsequently, Sec. 13 thereof also declares that a proper date
may be inserted on an undated instrument.
Thus, date is not an essential requirement for the validity or
negotiability of a Bill or Note.
No mention of the value given in exchange of the Bill of Note
The validity and negotiability of a Bill or Note is not affected
by the mere fact that the instrument does not specify the value
given, or that any value had been given therefor.
228
This is because
the law presumes that every negotiable instrument is deemed
prima facie to have been issued for a valuable consideration; and
every person whose signature appears thereon to have become
a party thereto for value.
229
227
Business Law, Second Edition, Rate A. Howell, 1981, p. 425
228
Sec. 6 (b), N.I.L.
229
Sec. 24, N.I.L.
139
Designation of a particular kind of current money in which
payment is made
Note that the law makes mention of a current money,
referring to a particular currency. Thus, [a] check payable in
current funds is not payable in money and is not negotiable.
(Brannan, page 9, citing Dille v. White, 132 Iowa, 327, 109 N.W.
909, 10 L.R.A. (N.S.) 510, following former Iowa cases, but not
citing the N.I.L. S.C. sec. 65, emphasis supplied)
Payment in current money is different from current funds, in
as much as the latter implies that payment of the instrument is
premised upon the availability of the current fund, eventually
making it conditional.
Sec. 7. When payable on demand. - An instrument is payable
on demand:
(a) When it is so expressed to be payable on demand,
or at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.
Notes:
When note is expressed to be payable on demand
A note payable on demand after date is a demand note,
and presentment need not be made the day after date, but only
within a reasonable time to hold an indorser. (Brannan, page 11,
citing Hardon v. Dixon, 77 App. Div. 241, 78 N.Y.S. 106), holding
that the Statute of Limitations did not begin to run on such a note
until the day after its date, said to have no application. (Ibid, citing
Schlesinger v. Schultz, 110 App. Div. 356, 96 N.Y.S. 383, S.C.
secs. 71, 73)
What would be the effect if the instrument is dated and was
issued, accepted, or indorsed when already overdue?
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
Basic Principles and Jurisprudence on the Negotiable Instruments Law 140
indorsing it, payable on demand. (Sec. 7, Negotiable Instruments
Law)
Sec. 8. When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be
named or otherwise indicated with reasonable certainty.
Notes:
Pay to order means pay to my order, and a bill so
reading and indorsed by the drawer is a valid bill of exchange.
(Brannan, page 12, citing Chamberlain v. Young [1893], 2 Q.B.
206)
An order means any form of words implying a right on the
part of the drawer to command, and a corresponding duty on the
part of the drawee to make, the payment specified.
230
The order to pay must be distinguished from a mere request
to pay
Prof. Norton said: [o]ur purpose here is to illustrate the
difference between a mandatory form of words directing payment
and a mere request. The theory of a bill of exchange is that
the drawer has funds in the hands of the drawee, which he
orders or directs to be delivered or paid over to the payee or
indorsee of the bill. Hence, where the instrument is so written
230
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 27
141
as to show that the drawee has or attempts to exercise no right to
order the money paid, it is not a bill of exchange. To determine
whether or not the instrument is so written is, of course, a question
purely of the construction of the instrument. Parol evidence cannot
be admitted, since, if the bill is to operate as money, the instrument
must be pronounced to be a bill or note according to its face. The
point to be determined is whether the terms of the instrument, on
the one hand, leave compliance or refusal optional, or, on the
other hand, amount to an imperative direction. In the former case
it is a mere request; in the latter it is a demand, with which the
drawee must in common honesty comply, and amount to the order
which is a necessary constituent of a bill of exchange.
231
(emphasis supplied)
The payee must be named or otherwise indicated therein with
reasonable certainty
In the case of Equi tabl e Banki ng Corporati on vs.
Intermediate Appellate Court
232
, the subject check reads:
Pay to the EQUITABLE BANKING CORPORATION Order
of A/C OF CASVILLE ENTERPRISES, INC.
The said check was declared by the Supreme Court to be
equivocal and patently ambiguous. x x x the payee ceased to be
indicated with reasonable certainty in contravention of Section 8
of the Negotiable Instruments Law.
233
As worded, it could be
accepted as deposit to the account of the party named after the
symbols A/C or payable to the Bank as trustee, or as an agent,
for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary.
Sec. 9. When payable to bearer. - The instrument is payable
to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
231
Id., footnotes omitted.
232
G.R. No. 74451, May 25, 1988
233
Section 8, Negotiable Instruments Law
Basic Principles and Jurisprudence on the Negotiable Instruments Law 142
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the
person making it so payable; or
(d) When the name of the payee does not purport to be
the name of any person; or
(e) When the only or last indorsement is an indorsement
in blank.
Notes:
When the payee of the check is not intended to be the true
recipient of its proceeds, is it payable to order or bearer?
As a rule, when the payee is fictitious or not intended to
be the true recipient of the proceeds, the check is considered as
a BEARER instrument.
The distinction between bearer and order instruments lies
in their manner of negotiation. Under Section 30 of the NIL, an
order instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly
negotiated. It is negotiable by delivery. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No. 170325,
September 26, 2008, Reyes, R.T., J.])
When instrument is payable to the order of a fictitious or non-
existing person
A check that is payable to a specified payee is an order
instrument. However, under Section 9 (c) of the NIL, a check
payable to a specified payee may nevertheless be considered as
a bearer instrument if it is payable to the order of a fictitious or
non-existing person, and such fact is known to the person making
it so payable. Thus, checks issued to Prinsipe Abante or Si
Malakas at si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments because the named
payees are fictitious and non-existent. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
143
Term Fictitious as used under Section 9 (c)
We have yet to discuss a broader meaning of the item
fictitious as used in the NIL. It is for this reason that we look
somewhere for guidance. Court rulings in the United States are a
logical starting point since our law on negotiable instruments was
directly lifted from the Uniform Negotiable Instruments Law of the
United States.
234
A review of the US jurisprudence yields that an actual
existing and living payee may also be fictitious if the maker of
the check did not intent for the payee to receive the proceeds of
the check. This usually occurs when the maker places a name of
an existing payee on the check for convenience or to cover up an
illegal activity.
235
Thus, a check made expressly payable to a non-
fictitious and existing person is not necessarily an order instrument.
If the payee is not the intended recipient of the proceeds of the
check, the payee is considered a fictitious payee and the check
is a bearer instrument. (Philippine National Bank vs. Erlando T.
Rodriguez and Norma Rodriguez, supra)
FICTITIOUS-PAYEE RULE; Who is liable under it; exceptions.
When a person making the check so payable did not intend
for the specified payee to have any part in the transaction, the
payee is considered as fictitious payee. (Mueller & Martin vs.
Liberty Insurance Bank). Fictitious-payee rule extends protection
even to non-bank transferee of the checks. (Getty Petroleum Corp.
vs. American Express Travel Related Services Company, Inc, 90
NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-
405)
In a fictitious-payee situation, the drawee bank is absolved
from liability and the drawer bears the loss. When faced with a
check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate
the check by placing his indorsement thereon. And since the
234
Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases
on Negotiable Instruments Law (1994), 5th ed, pp.8-9
235
Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank &
Trust Co., 294 F.839 (1923); United States v. Chase Nat. Bank, 250 F.
105 (1918)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 144
maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule
is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the
validity of the indorsement. This despite the fact that the fictitious
payee was purposely named without any intention that the payee
should receive the proceeds of the check.
236
(Philippine National
Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
The rule protects the depositary bank and assigns the loss
to the drawer of the check who was in a better position to prevent
the loss in the first place. (Getty Petroleum Corp. vs. American
Express Travel Related Services Company, Inc.)
However, there is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial bad faith on the
part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of its defense. The exception will cause
it to bear the loss. Commercial bad faith is present if the transferee
of the checks acts dishonestly, and is a party to the fraudulent
scheme. (Philippine National Bank vs. Erlando T. Rodriguez, et
al, G.R. No. 170325, September 26, 2008 [Reyes, R.T., J.])
The payee in an order instrument was not properly identified
with reasonable certainty, what would be the effect thereof
to the instrument?
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable certainty,
otherwise, it would be considered as a bearer instrument.
Knowledge of the drawer of the fictitious and non-existing
character of the payee controls
A requested a bank to draw a draft to the order of C Bros.,
an existing firm who were ignorant of the transaction. A indorsed
the draft in the name of C Bros., and the indorsee collected it
from the drawee. Held, that the knowledge of the drawer of the
fictitious or non-existing character of the payee controls, not the
knowledge of the person at whose request the draft is drawn.
236
Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465
(1920)
145
That the draft was not payable to bearer and that the drawee
could recover the money from the indorsee. (Brannan, pages 13-
14, citing, Seaboard Nat. Bank v. Bank of America, 193 N.Y. 26,
85 N.E. 829; Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass.
397, 87 N.E. 740 accord, italics supplied)
Illustrative cases:
A clerk had a power of attorney to draw checks on his
employers bank account. The clerk fraudulently drew checks to
X, an existing person, but who had no interest in the checks and
was not intended by the clerk to receive them. The clerk indorsed
the name of X and negotiated the checks for his own purposes,
and the drawee bank paid them in good faith. Held, that the payee
was a fictitious person within the section, that the checks were
payable to bearer and that the payment by the bank was rightful.
(Brannan, page 14, citing Snyder v. Corn Exch. Nat. Bank, 221
Pa. 599, 70 Atl. 876, S.C. sec. 124)
The name of the drawer was forged to checks made payable
to real persons. It did not appear who the forger was, but he
knew that the payees would never have any interest in the checks.
The drawee bank paid the checks to defendant, a holder in due
course, on the forged indorsement of the payee. Held, that the
payees were fictitious, that the checks were payable to bearer,
and that the drawer could not recover the money from defendant.
(Ibid, citing Trust Company of America v. Hamilton Bank, 127 App.
Div. 515, 112 N.Y. Supp. 84)
An instrument knowingly made payable to the order of a
fictitious or non-existing person is negotiable without indorsement,
but to recover upon the instrument as payable to bearer, it must
be shown that the maker had knowledge of the fiction, and if the
plaintiff declares only upon the instrument as payable to order, it
is not necessary to decide whether there is evidence of such
knowledge, as the issue is not open. (Ibid, citing Boles v. Harding,
201 Mass. 103, 87 N.E. 481)
A bill payable to a real person not intended by the drawer to
have any interest in it is payable to a fictitious person, and is to be
treated as payable to bearer, and the acceptors ignorance of the
fiction is immaterial. (Ibid, citing Bank of England v. Vagliano
[1891], A.C. 107)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 146
The drawers ignorance that the payee is non-existing is
also immaterial. (Ibid, citing Clutton v. Attenborough [1897], A.C.
9). But if the payee is a real person intended by the drawer to be
the payee, he is not a fictitious person, and the drawer is not
liable to one claiming under a forged indorsement of the payees
name, although the payee really had no interest in the instrument.
(Brannan, page 15, citing Bank of England v. Vagliano and Clutton
v. Attenborough, distinguished. Vinden v. Huges [1905], 1 K.B.
795; North & South Wales Bank v. Macbeth [1908], App. Cas.
137)
When the only or last indorsement is an indorsement in blank
A promissory note indorsed in blank by the payee is payable
to bearer. (Brannan, page 16, citing Mass. Nat. Bank v. Snow,
187 Mass. 159, 72 N.E. 959, S.C. secs. 16, 56, 124, 191; Unaka
Nat. Bank v. Butler, 113 Tenn. 574, 83 S.W. 655 (a check), S.C.
sec. 56)
The indorsement in blank of a non-negotiable promissory
note does not make it negotiable, and the indorser is liable only
as an assignor. (Ibid, citing Wettlaufer v. Baxter (Ky.), 125 S.W.
741)
Sec. 10. Terms, when sufficient. - The instrument need not
follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the
requirements hereof.
Notes:
Substantial compliance with the requirements of negotiability
The law does not require that the Bill or Note have to literally
follow the language of the Negotiable Instruments Law, it is enough
that looking at the face of the instrument, substantial compliance
from Sec. 1 of the said law can be inferred.
Illustrative case:
A certificate of deposit reciting that X has deposited in the
Y bank three thousand dollars to the credit of himself, payable in
current funds on return to this certificate properly indorsed on July
1, 1909 is a negotiable instrument under the N.I.L. (Brannan,
147
page 16, citing, Forest v. Safety Banking & Trust Co. (E.D. Pa.),
174 Fed. 345)
Sec. 11. Date, presumption as to. - Where the instrument or
an acceptance or any indorsement thereon is dated, such
date is deemed prima facie to be the true date of the making,
drawing, acceptance, or indorsement, as the case may be.
Notes:
A Date in a bill or note is not essential to its validity
The date of an instrument is not necessary to it in law, that
its absence avoids the instrument. It is not an essential
characteristic of the instrument, as other qualities are characteristic
of the instrument or of its negotiability. For this reason the date
may be supplied by parol, the date of delivery being the day of
date; or it may be antedated or postdated, or, if the date be left
blank, all parties are deemed to consent that the holder may fill
up the blank with a date. Legally speaking, the chief importance
of a date is that it is presumptive evidence of the time of its actual
execution, a presumption, however, which may be contradicted
by parol evidence.
5
Sec. 12. Ante-dated and post-dated. - The instrument is not
invalid for the reason only that it is ante-dated or post-dated,
provided this is not done for an illegal or fraudulent purpose.
The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery.
Notes:
An indorsee of a post-dated check is not put upon inquiry
merely because of its negotiation prior to its date. (Brannan, page
17, citing Albert v. Hoffman, 64 Misc. Rep. 87; 117 N.Y. Supp.
1043, S.C. sec. 25.)
A post-dated check is not invalid, and may be properly
stamped as a bill payable on demand. (Ibid, citing, Royal Bank v.
Tottenham, [1894] 2 Q.B. 715; Hitchcock v. Edwards, 60 L.T. Rep.
636.)
A post-dated check is not irregular x x x so as to charge the
holder with equities. (Ibid)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 148
Sec. 13. When date may be inserted. - Where an instrument
expressed to be payable at a fixed period after date is issued
undated, or where the acceptance of an instrument payable
at a fixed period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the
instrument shall be payable accordingly. The insertion of a
wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so
inserted is to be regarded as the true date.
Notes:
If the instrument is issued undated, is it a negotiable
instrument?
ANSWER:
Yes.
Where
a. an instrument expressed to be payable at a fixed
date is issued undated or
b. where the acceptance of an instrument payable at
a fixed period after sight is undated
Then any holder may insert therein the true date of
issue or acceptance, and the instrument shall be
paid accordingly. (Sec. 13, Negotiable Instruments
Law)
The validity and negotiable character of an
instrument is not affected by the fact that it is not
dated. (Sec. 5, Negotiable Instruments Law)
What if a wrong date was inserted by the holder?
The insertion of a wrong date does not avoid the instrument
in the hands of a subsequent holder in due course but it is as to
him, the date so inserted is to be regarded as the true date. (Sec.
13, Negotiable Instruments Law)
149
Illustrative case:
An undated note, payable four months after date, was
delivered to the payee by an accommodation indorser on
December 1
st
. The payee, without authority, filled in the date
December 30
th
. Held, that in the absence of other authority the
payee could only fill in the blank with the date of issue and that
the indorser was discharged. (Brannan, page 17, citing Bank of
Houston v. Day, (Mo. App.), 122 S.W. 756.)
Sec. 14. Blanks; when may be filled. - Where the instrument
is wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filling up
the blanks therein. And a signature on a blank paper delivered
by the person making the signature in order that the paper
may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed
may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable
time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual
for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority
given and within a reasonable time.
Notes:
What happens when there are blanks on the instrument?
When there are blanks on the instrument, so long as they
are material to the completion of the instrument, it may be filled
up by the person in possession thereof.
Illustrative case:
Defendant signed a note in blank on the statement that it
was to be used to borrow money for a co-defendant who was
jointly liable with the plaintiff to a bank. The note was filled up in
the presence of plaintiffs, who were made payees, and delivered
them, and they paid the co-defendants share of the debt to the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 150
bank. Held, that the note was filled up in accordance with the
authority given, that the payees were holders for value and could
recover on the note. (Brannan, page 19, citing Hermanns Exr. v.
Gregory (Ky.), 115 S.W. 809, S.C.sec. 25.)
General Rule: When there are blanks on the instrument,
consisting of material particulars, the person in possession thereof
has a prima facie authority to fill it up. Provided, that he fills it up
strictly in accordance with the authority given and within a
reasonable time.
We have here an instance, where a paper, which has yet to
comply with Sec. 1, there being wanting of any material particular,
may be filled up by the person in possession thereof. But in order
to bind any person who became a party to the instrument prior to
its completion, such blanks must be filled up strictly in accordance
with the authority given to the person in possession thereof.
However, if the instrument, after completion, regardless of whether
or not he complied with the authority given him, is negotiated to a
holder in due course, it is valid and effectual for all purposes in
his hands, irrespective of how the blank was filled up, as the law
gives a presumption that it had been filled up strictly in accordance
with the authority given and within a reasonable time.
What if the instrument which was irregularly filled up was
negotiated to a person not a holder in due course? Will the answer
be the same?
No. The answer will not be the same. If it was negotiated
to a person not a holder in due course, he cannot enforce the
instrument, as it was not filled up strictly in accordance with the
authority given and within a reasonable time.
How must the blanks to the instrument be filled up?
They must be filled up:
a) Strictly in accordance with the authority give; AND
Ex. If the authority was for the payment of bills due and
it was filled up strictly for that purpose.
b) Within a reasonable time.
151
Ex. In the above example, it was filled up almost
immediately thereafter the knowledge of the bills
due.
Materiality of the blanks to the completion of the instrument
The word material in this section is not synonymous with
necessary so as to restrict the right of filling a blank to something
essential to a complete negotiable instrument. Therefore the name
of a place may be written after delivery in a blank space after the
word at and the instrument will not be thereby avoided in the
hands of a holder in due course. (Brannan, page 18, citing
Johnston v. Hoover, 139 Iowa, 143; 117 N.W. 277)
Where the maker of a note signed and delivered it, leaving
a blank after the amount between the words at and value
received, the payee or any subsequent holder was authorized to
fill the blank with a place of payment either without or without the
State, and such act was not an alteration avoiding the note. (Ibid,
citing Diamond Distilleries Co. v. Gott (Ky.), 126 S.W. 131.)
Presumption of authority to sign
Hence, the law merely requires that the instrument be in
the possession of a person other than the drawer or maker. From
such possession, together with the fact that the instrument is
wanting in a material particular, the law presumes agency to fill
up the blanks.
238
Because of this, the burden of proving want of
authority or that the authority granted was exceeded, is placed on
the person questioning such authority.
239
(John Dy vs. People of
the Philippines, et al, G.R. No. 158312, November 14, 2008,
[Quisumbing, Acting C.J.])
Suppose a person signed a blank instrument and delivered
it to the payee, would the holder still have the authority to
convert it into a negotiable instrument?
Yes. A signature on a blank paper delivered by the person
making the signature in order that the paper may be converted
238
I.A.F. Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, 168 (1987 ed)
239
J.C. Campos, Jr. and M.C. Lopez-Campos, Notes and Selected Cases
on Negotiable Instruments Law, 351 (3rd ed., 1971)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 152
into a negotiable instrument operates as a prima facie authority
to fill it up as such for any amount. (Sec. 14, Negotiable
Instruments Law)
Burden to prove authority
The burden is on the plaintiff, a party prior to the completion
of an instrument signed in blank, to prove that the blanks were
filled up within a reasonable time. From October to the following
June 9 is, if unexplained, more than a reasonable time. (Brannan,
page 19, citing Madden v. Gaston, 121 N.Y. Supp. 951, semble,
S.C. sec. 16)
Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person
whose signature was placed thereon before delivery.
Notes:
Incomplete and undelivered instruments
A class of cases, illustrative of want of consent, arises when
in an incomplete instrument has been signed and stolen, without
any delivery to an agent in trust, or otherwise, intervening. In
such cases no trust for any purpose has been created. No
instrument has been perfected. No appearance of validity has
been given it. No negligence can be imputed. Therefore if the
blank be filled, it is sheer forgery, in which the maker is in no wise
involved, and he is not therefore bound, even to a bona fide holder
without notice.
240
(Daniel, Elements of the Law of Negotiable
Instruments, page 140)
What is required in order that the completed blank instrument
may be enforceable against any person?
In order that any such instrument when completed may be
enforced against any person who became a party thereto prior to
its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time.
240
1 Parsons on Notes and Bills, 114; Daniel on Negotiable Instruments, 839
153
What if the above-indicated instrument was negotiated to a
holder in due course?
If such instrument, after completion, is negotiated to a holder
in due course, it is valid and effectual for all purposes in his hands,
and he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time.
What is the rule in incomplete and undelivered instruments?
Where an incomplete instrument has not been delivered, it
will not, if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person whose
signature was placed thereon before delivery. (Sec. 15, Negotiable
Instruments Law)
Does Section 15 include a holder in due course?
Yes. There was no intention of the part of the person whose
signature was placed before delivery to make or draw a negotiable
instrument, thus, it will not be binding upon him.
What if the instrument is later on completed, but not delivered
While it cannot be said that the authorities are uniform, it
may be stated to be safely settled that if a negotiable instrument
has been fully completed in form and signed by the drawer or
maker, and, before delivery, is stolen from the possession of the
party who has signed it, and passed by the thief to a bona fide
holder for value in the usual course of business, it would afford
him no defense against such bona fide holder. Whether the
instrument be payable to bearer, or to the order of the thief, if it be
indorsed by him, we can see no reason why the bona fide holder
should not be entitled to recover. The want of delivery is a defect
not apparent on the face of the bill or note. That party has given
the appearance of validity to his paper. His signature is itself an
assurance that his obligation has been perfected by delivery; and
it being necessary that the loss should fall upon one of two innocent
parties, it should fall upon the one whose act had opened the
door for it to enter.
241
(Daniel, Elements of the Law of Negotiable
Instruments, page 129)
241
Daniel on Negotiable Instruments, 837; Kinyon v. Wohlford, 17 Minn. 239
Basic Principles and Jurisprudence on the Negotiable Instruments Law 154
Where the maker has perfected the instrument, and left it
undelivered in a safe, desk, or other receptacle, it should then be
at his hazard. Such papers are made for use, and not for
preservation. The maker creates the risk of their being eloigned
by keeping them on hand, and places them on the same basis as
negotiable papers which have been put upon the market. When
once issued the purchaser is protected and the owner loses, even
though he had guarded his property with bolt and bar; and if
bankers and others who must necessarily be in possession of
negotiable securities in the course of trade are not protected, we
can discover no principle which can be invoked to protect one
who holds his own paper contrary to the ordinary wants and usages
of trade.
242
(Ibid)
Illustrative Case:
Bank of America NT & SA vs. Philippine Racing Club
G.R. No. 150228, July 30, 2009
LEONARDO-DE CASTRO, J.:
FACTS: Philippine Racing Club Inc. (PRCI) maintained a
Current Account with Bank of America. The authorized
joint signatories with respect to said account were the
President (Antonia Reyes) and Vice-President for
Finance (Gregorio Reyes).On or about the 2
nd
week of
December 1988, the President and Vice President were
scheduled to go out of the country in connection with
the corporations business. In order not to disrupt
operations in their absence, they pre-signed several
checks relating to said account. The intention was to
insure continuity of the corporations operations by
making available cash/money especially to settle
obligations that might become due. These checks were
entrusted to the accountant with instruction to make
use of the same as the need arose. The internal
arrangement was, in the event there was need to make
use of the checks, the accountant would prepare the
corresponding voucher and thereafter complete the
entries on the pre-signed checks.
242
Thompson on Bills (Wilsons ed.), 92; 1 Parsons on Notes and Bills, 114
155
On December 16, 1988, a John Doe presented two (2)
checks to the bank for encashment a couple of the
pre-signed checks worth Php 110,000.00 each.
The two (2) checks had similar entries with similar
infirmities and irregularities. Despite the highly irregular
entries on the face of the checks, the bank, without as
much as verifying and/or confirming the legitimacy of
the checks considering the substantial amount involved
and the obvious infirmity/defect of the check on their
faces, encashed said checks. A verification process,
even by way of a telephone call to PRCI office, would
have taken less than ten (10) minutes. But this was
not done by the bank. Investigation conducted by PRCI
yielded the fact that there was no transaction involving
PRCI that call for the payment of Php 220,000.00 to
anyone. The checks appeared to have come into the
hands of any employee of PRCI who eventually
completed without authority the entries on the pre-
signed checks. PRCIs demand for the bank to pay
fell on deaf ears. Hence, complaint was filed.
ISSUE: Whether the proxi mate cause of the wrongful
encashment of the checks in question was due to (a)
petitioners failure to make a verification regarding the
said checks with the respondent in view of the
misplacement of entries on the face of the checks.
RULING: It is well-settled that banks are engaged in a business
impressed with public interest, and it is their duty to
protect in return their many clients and depositors who
transact business with them. They have the obligation
to treat their clients account meticulously and with the
highest degree of care, considering the fiduciary nature
of their relationship. The diligence required of banks,
therefore, is more than of a good father of a family.
243
In the case at bar, extraordinary diligence demands
that petitioner should have ascertained from the
243
Samsung Construction Company Philippines, Inc. v. Far East Bank and
Trust Company, Inc., G.R. No. 129015, August 13, 2004, 436 SCRA 402,
421
Basic Principles and Jurisprudence on the Negotiable Instruments Law 156
respondent the authenticity of the subject checks or
the accuracy of the entries therein not only because of
the presence of highly irregular entries on the face of
the checks but al so of the deci dedl y unusual
circumstances surrounding their encashment. x x x the
confluence of the irregularities on the face of the checks
and circumstances that depart from the usual banking
practice of respondent should have put petitioners
employees on guard that the checks were possibly not
issued by the respondent in due course of its business.
Petitioners subtle sophistry cannot exculpate it from
behavior that fell extremely short of the highest degree
of care and diligence required of it as a banking
institution.
In defense of its cashier/tellers questionable action,
petitioner insists that pursuant to Sections 14
244
and
16
245
of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled up
the blanks had authority and that a valid and intentional
delivery to the party presenting the checks had taken
244
Sec. 14. Blanks, when may be filled. Where the instrument is wanting in
any material particular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks therein. And a signature on
a blank paper delivered by the person making the signature in order that
the paper may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given and within a
reasonable time. But if any such instrument, after completion, is negotiated
to a holder in due course, it is valid and effectual for all purposes in his
hands, and he may enforce it as if it had been filled up strictly in accordance
with the authority given and within a reasonable time.
245
Sec. 16, Delivery; when effectual; when presumed. Every contract on a
negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between immediate
parties, and as regards a remote party other than a holder in due course,
the delivery in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing as the case
may be; and in such case the delivery may be shown to have been
conditional, or for a special purpose only, and not for the purpose of
transferring the property in the instrument. But where the instrument is in
the hands of a holder of a due course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved
157
place. Thus, in petitioners view, the sole blame for
this debacle should be shifted to respondent for having
its signatories pre-sign and deliver the subject
checks.
246
Petitioner argues that there was indeed
delivery in this case because, following American
jurisprudence, the gross negligence of respondents
accountant in safekeeping the subject checks which
resulted in their theft should be treated as a voluntary
delivery by the maker who is estopped from claiming
non-delivery of the instrument.
247
Petitioners contention would have been correct if the
subject checks were correctly and properly filled out
by the thief and presented to the bank in good order.
In that instance, there would be nothing to give notice
to the bank of any infirmity in the title of the holder of
the checks and it could validly presume that there was
proper delivery to the holder. The bank could not be
faul ted i f i t encashed the checks under those
circumstances. However, the undisputed facts plainly
show that there were circumstances that should have
alerted the bank to the likelihood that the checks were
not properly delivered to the person who encashed the
same. In all, we see no reason to depart from the
finding in the assailed CA Decision that the subject
checks are properly characterized as incomplete and
undelivered instruments this making Section 15
248
of
the NIL applicable in this case.
2000 Bar Question:
PN makes a promissory note for P5, 000.00, but leaves
the name of the payee in blank because he wanted to
verify its correct spelling first. He mindlessly left the
note on top of his desk at the end of the workday. When
he returned the following morning, the note was
missing. It turned up later when X presented it to PN
246
Rollo, p. 304
247
Id. at 306
248
Sec. 15. Incomplete instrument not delivered. Where an incomplete
instrument has not been delivered it will not, if completed and negotiated,
without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery
Basic Principles and Jurisprudence on the Negotiable Instruments Law 158
for payment. Before X, T, who turned out to have filched
the note from PNs office, had endorsed the note after
inserting his own name in the blank space as the payee.
PN dishonored the note, contending that he did not
authorize its completion and delivery. But X said he
had no participation in, or knowledge about, the
pilferage and alteration of the note and therefore he
enjoys the rights of a holder in due course under the
Negotiable Instruments Law. Who is correct and why?
(3%)
ANSWER:
A. PN is correct. Sec. 15, Act 2031, provides that where
an incomplete instrument has not been delivered, it will
not, if completed and negotiated without authority be a
valid contract in the hands of any holder, as against any
person whose signature was placed thereon before
delivery. Therefore PN is correct when he dishonored
the note.
Sec. 16. Delivery; when effectual; when presumed. - Every
contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as
regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or
under the authority of the party making, drawing, accepting,
or indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring
the property in the instrument. But where the instrument is
in the hands of a holder in due course, a valid delivery thereof
by all parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no
longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed
until the contrary is proved.
Notes:
Delivery is the final step necessary to perfect the existence
of any written contract; and, therefore, as long as a bill or note
159
remains in the hands of the drawer or maker, it is a nullity.
249
(Daniel, Elements of the Law of Negotiable Instruments,
page 42)
The inception of a note is defined by Judge Platt to mean
when it was first given, or when it first became the evidence of
an existing contract. It has no legal inception until it is delivered
as evidence of a subsisting debt. The mere writing and signing of
a bill or note, which the drawer or maker retains in his hands,
forms no contract. No person has then a right of action upon it
any more than if it were blank paper. The inception of the paper
is when there came into existence a right of action upon it. This is
because while the note or bill is in the makers hands, it can be
erased, canceled, or revoked. It cannot, therefore, be an evidence
of indebtedness until it is beyond such possibility. The decisive
step for this is the delivery.
250
So essential is delivery that it has been held that where a
promissory note, the existence of which was unknown to the
grantee, lay in the grantors possession, and was found amongst
his papers after death, the payee could not claim or sue upon
it;
251
and though such a note should be found, accompanied with
written directions to deliver it to the payee, the payee will still have
no right of action, unless the directions be valid as a testament.
252
(Ibid)
When can there be Delivery?
Two things must concur in a delivery. The first is the transfer,
actual or constructive, of the possession of the instrument; the
second an intent to transfer the title on the part of the transferrer.
The minds of both parties, to this extent, must concur.
253
On the other hand, such acts as handing completed notes
to the payee, who, though objecting to the form, retained them; or
depositing completed notes, properly addressed, in the post office;
249
Devries v. Shumate, 53 Md. 216; Purviance v. Jones, 120 Ind. 164
250
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 68, citations omitted
251
Disher v. Disher, 1 P. Wms. 204
252
Gough v. Findon, 7 Exch. 48
253
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 69, citations omitted
Basic Principles and Jurisprudence on the Negotiable Instruments Law 160
or giving a duplicate bill in place of one lost, which the payee
treated as an original,have been held to constitute sufficient
deliveries. It is to be noted, however, that the delivery needs to
be to the payee, nor need the intent of the transferrer to transfer
title be communicated to him. For, as will be seen, a bill or note
may be delivered in escrow, and take effect on performance of
the condition, without knowledge or actual assent of the payee,
and a note delivered in a sealed envelope, to be opened after the
makers death, is operative, although the payee does not become
aware of the existence of the note until after the death occurs.
The outward and visible indication of delivery is possession.
254
Types of Delivery
Delivery may be constructive a well as actual. (Ibid)
There is actual delivery, when it is effected by the manual
passing of the instrument itself to the payee or his agent.
255
There is constructive delivery, when it is effected by direction
to a third person in actual possession of the instrument to deliver
it to, or to hold it for, the payee.
256
Delivery may also be upon conditions. Deliveries upon
conditions are of two classes: delivery as an escrow, and delivery
to the other party to the instrument upon a condition. Delivery as
an escrow is defined as a delivery to a third person, made to
await the happening of an event, or performance of a condition,
or some affirmative action on the part of the other party, before he
is entitled to the absolute delivery of the instrument, as
distinguished from the affirmative action of the party who delivers
the instrument in escrow. The authorities agree that a delivery in
escrow has two elements: It must be to some person not ultimately
entitled to receive it; and the delivery must take effect and the title
to the instrument pass the instant condition of the escrow is fulfilled,
even though the depositary has not formally delivered it to the
person entitled to the possession. In these respects it is like the
escrow of a deed, from the analogy of which it is in fact drawn.
There are, however, these distinctions: A deed once delivered to
254
Id., pp. 69-70
255
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 67
256
Id.
161
be held in escrow by a third party, and wrongly passed on by him,
is subject to defenses, even in the hands of a purchaser for value
without notice, but a negotiable instrument is not. A deed being
delivered conditionally to the obligee, parol evidence that it was
conditional is admissible.
257
A delivery upon a condition is where the instrument is
delivered to the payee, to be held by him pending some future
event.
258
A direction to a third person, who is in actual custody of the
instrument, to hold it subject to the payees or transferees order,
or an order to the depositary to deliver it, or a delivery to a third
person for the payee without condition is sufficient in legal
contemplation. In either of the cases suggested the delivery would
be constructive.
259
(Elements of the Law of Negotiable Instruments,
page 42)
Without delivery there can be no valid and binding contract
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the
purposes of giving effect thereto.
260
The first delivery of the
instrument, complete in form, to the payee who takes it as a holder,
is called issuance of the instrument.
261
Without the initial delivery
of the instrument from the drawer of the check to the payee, there
can be no valid and binding contract and no liability on the
instrument. (Gempesaw vs. Court of Appeals, G.R. No. 92244,
February 9, 1993)
This is further explained in People vs. Yabut
262
, the place
where the bills were written, signed, or dated does not necessarily
fix or determine the place where they were executed. What is of
decisive importance is the delivery thereof. The delivery of the
254
Id., pp. 69-70
255
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 67
256
Id.
257
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 70-71, citations, omitted
258
Id., p. 71
259
Gordon v. Adams, 127 Ill. 225; Howe v. Ould, 28 Gratt. 7
260
NIL, Sec. 16
261
Ibid., Sec. 191, par. 10
262
No. L-42902, 29 April 1977, 76 SCRA 624
Basic Principles and Jurisprudence on the Negotiable Instruments Law 162
instrument is the final act essential to its consummation as an
obligation. An undelivered bill or note is inoperative. Until delivery,
the contract is revocable. And the issuance as well as the delivery
of the check must be to a person who takes it as a holder, which
means (t)he payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. Delivery of the check
signifies transfer of possession, whether actual or constructive,
from one person to another with intent to transfer title thereto.
Delivery denotes physical transfer
Significantly, delivery is the final act essential to the
negotiability of an instrument. Delivery denotes physical transfer
of the instrument by the maker or drawer coupled with an intention
to convey title to the payee and recognize him as a holder.
263
It
means more than handing over to another; it imports such transfer
of the instrument to another as to enable the latter to hold it for
himself.
264
(John Dy vs. People of the Philippines, et al, G.R. No.
158312, November 14, 2008, [Quisumbing, Acting C.J.])
In the case of Development Bank of Rizal vs. Sima Wei,
et al,
265
it was ruled by the High Court that it had had long been
recognized the business custom of using printed checks where
blanks are provided for the date of issuance, the name of the
payee, the amount payable and the drawers signature. All the
drawer has to do when he wishes to issue a check is to properly
fill up the blanks and sign it. However, the mere fact that he has
done these does not give rise to any liability on his part, until and
unless the check is delivered to the payee or his representative.
A negotiable instrument, of which a check is, is not only a written
evidence of a contract right but also a species of property. Just
as a deed to a piece of land must be delivered in order to convey
title to the grantee, so must a negotiable instrument be delivered
to the payee in order to evidence its existence as a binding
contract. (emphasis supplied)
263
De la Victoria vs. Burgos, G.R. No. 111190, June 27, 1995, 245 SCRA
374, 379
264
Lewis County et al. v. State Bank of Peck, 170 Pacific Reporter 98, 100
(1918), citing Bigelow, Bills, Notes and Checks, 2nd Ed., p. 13
265
G.R. No. 85419, March 9, 1993, [Campos, Jr., J.:]
266
In re Martens Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs.
Danby, 113 A. 612 (1921).
267
Negotiable Instruments Law, Sec. 191, par. 6.
163
Thus, the payee of a negotiable instrument acquires no
interest with respect thereto until its delivery to him.
266
Delivery of
an instrument means transfer of possession, actual or constructive,
from one person to another.
267
Without the initial delivery of the
instrument from the drawer to the payee, there can be no liability
on the instrument. Moreover, such delivery must be intended to
give effect to the instrument. (supra)
When does the instrument become effectual between the
parties?
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto.
And where the instrument is no longer in the possession of
a party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved.
As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or drawer with intent
to transfer title to the payee and recognize him as the holder
thereof. (Dela Victoria vs. Burgos, G.R. No. 111190, June 27, 1995,
[Bellosillo, J.])
A bill of exchange payable to the order of the drawer does
not come into existence until it is delivered as well as indorsed by
the payee. (Brannan, page 19, citing Stouffer v. Curtis, 198 Mass.
560, 85 N.E. 180)
Intention essential
It is essential to delivery that the minds of both parties should
assent, in order to bind them; and if, through inattention, infirmity,
or otherwise, one does not assent, the act of the other is
nugatory.
268
Therefore, leaving a check on the desk of a clerk of
a bank, and without knowledge of such clerk of an officer of the
bank, does not constitute delivery.
269
268
Daniel on Negotiable Instruments, 67
269
Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Kinney v. Ford, 52 Barb.
194
Basic Principles and Jurisprudence on the Negotiable Instruments Law 164
Delivery must be for purposes of giving effect thereto
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so
for the purpose of giving effect thereto.
270
Otherwise, it cannot be
said that there has been delivery of the negotiable instrument.
Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably.
(San Miguel Corporation vs. Puzon, G.R. No. 167567, September
22, 2010, [Del Castillo, J.:])
San Miguel Corporation vs. Bartolome Puzon, Jr.
G.R. No. 167567, September 22, 2010
DEL CASTILLO, J.:
Puzon was a dealer of beer products of San Miguel
Corporation (SMC). He purchased products on credit. To ensure
payment and as a business practice, SMC required him to issue
post-dated checks equivalent to the value of the products
purchased on credit before the same were released to him. Said
checks were returned to Puzon when the transactions covered
by these checks were paid or settled in full. On December 31,
2000, Puzon purchased products on credit amounting to
P11,820,327.00 for which he issued, and gave to SMC, BPI Check
Nos. 27904 (for P309,500.00) and 27903 (for P11,510,827.00) to
cover the said transaction. On January 23, 2001, Puzon, together
with his accountant, visited the SMC Sales Office to reconcile his
account with SMC. During that visit Puzon allegedly requested
to see BPI Check No. 17657. However, when he got hold of BPI
Check No. 27903 which was attached to a bond paper together
with BPI Check No. 17657 he allegedly immediately left the office
with his accountant, bringing the checks with them. SMC sent a
letter to Puzon demanding the return of the said checks. Puzon
ignored the demand hence SMC filed a complaint against him for
theft with the City Prosecutors Office.
The High Court held that: [t]he essential elements of the
crime of theft are the following: (1) that there be a taking of personal
property; (2) that said property belongs to another; (3) that the
taking be done with intent to gain; (4) that the taking be done
without the consent of the owner; and (5) that the taking be
165
accomplished without the use of violence or intimidation against
persons or force upon things.
271
Considering that the second element is that the thing taken
belongs to another, it is relevant to determine whether ownership
of the subject check was transferred to petitioner. On this point
the Negotiable Instruments Law provides:
Sec. 12. Antedated and Postdatedthe instrument is not
invalid for the reason only that it is antedated or postdated,
provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the
title thereto as of the dated of delivery. (underscoring supplied)
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so
for the purpose of giving effect thereto.
272
Otherwise, it cannot be
said that there has been delivery of the negotiable instrument.
Once there it delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in payment
of the obligation, the purpose of giving effect to the instrument is
evident thus title to or ownership of the check was transferred
upon delivery. However, if the check was not given as payment,
there being no intent to give effect to the instrument, then
ownership of the check was not transferred to SMC.
The evidence of SMC failed to establish that the check was
given in payment of the obligation of Puzon. There was no
provisional receipt or official receipt issued for the amount of the
check. What was issued was a receipt for the document, a
POSTDATED CHECK SLIP.
273
Furthermore, the petitioners demand letter sent to
respondent states As per company policies on receivables, all
270
Sec. 16 of the Negotiable Instruments Law
271
Aoas v. People, G.R. No. 155339, March 3, 2008; 547 SCRA 311, 317-
318; People v. Puig, G.R. Nos. 173654-765, August 28, 2008, 563 SCRA
564, 570; Cruz v. People, G.R. No. 176504, September 3, 2008, 564 SCRA
99, 110.
272
Sec. 16 of the Negotiable Instruments Law
273
Rollo, p. 76
Basic Principles and Jurisprudence on the Negotiable Instruments Law 166
issuances are to be covered by post-dated checks. However,
you have deviated from this policy by forcibly taking away the
check you have issued to us to cover the December issuance.
274
Notably, the term payment was not issued instead the terms
covered and cover were used.
When taken in conjunction with the counter-affidavit of
Puzonwhere he stated that As the [liquid beer] contents are
paid for, the SMC return[s] to me the corresponding PDCs or
request[s] me to replace them with whatever was the unpaid
balance.
275
it becomes clear that both parties did not intend for
the check to pay for the beer products. The evidence proves that
the check was accepted, not as payment, but in accordance with
the long-standing policy of SMC to require its dealers to issue
postdated checks to cover its receivables. The check was only
meant to cover the transaction and in the meantime Puzon was
to pay for the transaction by some other means other than the
check. This being so, title to the check did not transfer to SMC; it
remained with Puzon. The second element of the felony of theft
was therefore not established. Petitioner was not able to show
that Puzon took a check that belonged to another. Hence, the
prosecutor and the DOJ were correct in finding no probable cause
for theft.
How must the delivery of the instrument be made for it to be
effectual?
The delivery, in order to be effectual as between immediate
parties and as regards a remote party other than a holder in due
course, must be made either by or under the authority of the party
making, drawing, accepting, or indorsing, as the case may be.
Illustrative Case:
Loreto Dela Victoria vs. Hon. Jose P. Burgos and Raul H.
Sesbreo
G.R. No. 111190, June 27, 1995
BELLOSILLO, J:
274
Demand letter. Id. At 79.
275
Id. At 113.
167
FACTS: Raul H. Sesbreo filed a complaint for damages against
Assistant City Fiscals Bienvenido N. Mabanto, Jr., and
Dario D. Rama, Jr., before the Regional Trial Court of
Cebu City. After trial judgment was rendered ordering
the defendants to pay P11, 000.00 to the plaintiff, private
respondent herein. The decision having become final
and executory, on motion of the latter, the trial court
ordered its execution. A notice of garnishment was
served on petitioner Loreto dela Victoria as City Fiscal
of Mandaue City where defendant Mabanto, Jr. was
then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or
belonging to Mabanto, Jr., under penalty of law.
Petitioner moved to quash the notice of garnishment
claiming that he was not in possession of any money,
funds, credit, property or anything of value belonging
to Mabanto, Jr., except his salary and RATA checks,
but that said checks were not yet properties of Mabanto,
Jr., until delivered to him. He further claimed that, as
such, they were still public funds which could not be
subject of garnishment.
ISSUE: Whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee
before physical delivery to the latter?
RULING: Garnishment is considered as a species of attachment
for reaching credits belonging to the judgment debtor
owing to him from a stranger to the litigation. Emphasis
is laid on the phrase belonging to the judgment debtor
since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of
Mabanto, Jr., is public funds. He received his
compensati on i n the form of checks from the
Department of Justice through petitioner a City Fiscal
of Mandaue City and head of office. Under Sec. 16 of
the Negotiable Instruments Law, every contract on a
negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect
thereto. As ordinarily understood, delivery means the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 168
transfer of the possession of the instrument by the
maker or drawer with intent to transfer title to the payee
and recognize him as the holder thereof.
According to the trial court, the checks of Mabanto, Jr.,
were already released by the Department of Justice
duly signed by the officer concerned through petitioner
and upon service of the writ of garnishment by the
sheriff petitioner was under obligation to hold them for
the judgment creditor. It recognized the role of the
petitioner as custodian of the checks. At the same time
however it considered the checks as no longer
government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the
Negotiable Instruments Law which states: And where
the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and
intentional delivery by him is presumed. Yet, the
presumption is not conclusive because the last portion
of the provision says until the contrary is proved.
However this phrase was deleted by the trial court for
no apparent reason. Proof of the contrary is its own
finding that the checks were in the custody of the
petitioner. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to him
and still had the character of public funds. In Tiro v.
Hontanosas
276
we ruled that-
The salary check of a government officer of employee
such as a teacher does not belong to him before it is
physically delivered to him. Until that time the check
belongs to the government. Accordingly, before there
is actual delivery of the check, the payee has no power
over it; he cannot assign it without the consent of the
Government.
What if the instrument is in the hands of a holder in due
course, is delivery conclusively presumed?
Where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all the parties prior to him so as
to make them liable to him is conclusively presumed.
276
No. L-32312, 25 November 1983, 125 SCRA 697.
169
But the presumption both as to the fact and the time of
delivery may be rebutted.
277
As a bill or note takes effect only by
delivery, so it takes effect only on delivery; and if this be subsequent
to its date, it will be binding only from the day of actual delivery.
278
If the bill or note bears no date, the time must be computed
from its delivery; and if the day of actual delivery cannot be proved,
it will be computed from the earliest day on which it appears to
have been in the hands of the payee or any holder.
279
Burden of proving delivery
Under the last clause of section 16 and section 14, the
burden is on the defendant to show the agreement under which a
negotiable instrument signed in blank was delivered and that the
terms have been violated. (Brannan, page 22, citing Madden v.
Gaston (Misc. Rep.) 121 N.Y. Supp. 951 S.C. sec. 14)
Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction
apply:
(a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum
payable; but if the words are ambiguous or uncertain,
reference may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which
interest is to run, the interest runs from the date of
the instrument, and if the instrument is undated, from
the issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
277
Woodford v. Dorwin, 3 Vt. 82; Scaife v. Byrd, 39 Ark. 568
278
Lovejoy v. Whipple, 18 Vt. 379
279
Clark v. Sigourney, 17 Conn. 511; Richardson v. Lincoln, 5 Metc. (Mass.)
201
Basic Principles and Jurisprudence on the Negotiable Instruments Law 170
(e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat
it as either at his election;
(f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making
the same intended to sign, he is to be deemed an
indorser;
(g) Where an instrument containing the word I promise
to pay is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
Notes:
Where sum payable is written in words or figures
The law mandates that where the sum payable is expressed
in words and also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum payable.
Example:
Sum payable is Eleven Million Seven Hundred Six
Thousand Pesos (Php 11,706.00); in this instance we
follow the sum expressed in words.
But if the words are ambiguous or uncertain, reference may
be had to the figures to fix the amount.
Example:
Sum payable is Six Million Seven Fifty Pesos (Php
6,000,750.00); in this instance there is ambiguity in the
sum payable in words, thus, reference may be had to the
figures to fix the amount.
In another illustration, the instrument provides that the sum
payable is Eleven Million Six Hundred Fifty Seven Thousad Nine
Hundred Fifty Pesos (Php 6,750,980.00). What should be the
construction of the instrument?
171
The instrument is not negotiable, the sum payable is
uncertain. The sum payable in words and figures must be
reconciled in order for Sec. 17 (a) to apply, otherwise, we have a
non-negotiable instrument for being uncertain as to the amount
payable.
2011 Bar Question:
X issued a check in favor of his creditor, Y. It reads:
Pay to Y the amount of Seven Thousand Hundred
Pesos (Php700, 000.00). Signed, X. What amount
should be construed as true in such a case?
A. Php700, 000.00.
B. Php700.00.
C. Php7, 000.00.
D. Php700, 100.00.
Where the instrument provides for the payment of interest
Where the instrument provides for the payment of interest,
without specifying the date from which the interest is to run, the
interest runs from the date of the instrument.
Example:
For value received I promise to pay David Lancelot,
or his order, Php 1,000.00 with 10% interest per annum.
(Sgd)
Abigail Margaux
(January 1, 2011)
In the above-cited example, there was no date specified as
to when the interest will start to run, applying Sec. 17 (b), the rate
of interest will start to run on January 1, 2011, which is the date of
the instrument.
However, where the said instrument is undated, interest runs
from the time of issuance thereof.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 172
In the above example, assuming the instrument is undated,
the 10% interest shall commence from the time of the actual
issuance or delivery thereof, as the holder of an undated
instrument has a prima facie authority to insert the proper date as
may be necessary.
Undated Instrument
This provision is self-explanatory. The same rule as above-
mentioned shall be followed. This manifests that date is not
essential to the validity of the instrument, but only as with regards
to liability.
Conflict between the Written and Printed provisions
Printed provisions here would mean those printed by the
use of a typewriter, risograph, or any other mark which came about
as a result of a mechanical process. Whereas, written provisions
are those writings made by hand. And in case of conflict, written
provisions prevail over the printed ones.
Ambiguity of whether a Bill or a Note
An instrument in the following form:
$1000 New York 190
Pay to the order of Rosario Didato
Value received and charge on account to 38 Stanton Street
Lansa Rosalia
May be declared upon as a promissory note. (Brannan, page
24, citing Didato v. Coniglio, 50 Misc. R. 280, 100 N.Y. Supp. 466)
Where there is ambiguity whether the instrument is a bill or a
note, the holder may treat it as either at his election. (Sec. 17 (e),
N.I.L.)
Where signature is placed in such a way that the capacity of
the signatory is uncertain; signature may be treated as an
indorser
173
This provision applies only to cases of doubt arising out of
the location of the signature. Therefore one who signed in the
place of the makers name is not an indorser. (Ibid, citing Germania
Natl. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 63,
64.)
Joint and Several Liability
A promissory note reads:
I/We hereby consent to any extension which may be
requested by anyone of us
for the payment of the note.
It was held that said promissory note expressly provides
that the signatories engaged to pay, jointly and severally, the
amount specified therein. And that this did not guarantee the
payment of one signatory by the other signatories, but in fact bound
themselves solidarily to pay the said amount. (China Banking
Corporation vs. Court of Appeals, G.R. No. L-59887, August 31,
1982, [Relova, J.:])
In another case, that of Republic Planters Bank vs. Court
of Appeals and Fermin Canlas
280
, defendant Shozo Yamaguchi
and private respondent Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc., by virtue of Board Resolution No. 1
dated August 1, 1979, defendant Shozo Yamaguchi and private
respondent Fermin Canlas were authorized to apply for credit
facilities with the petitioner Republic Planters Bank in the forms
of export advances and l etters of credi t/trust recei pts
accommodations, worded in the following manner:
___________, after date, for value received, I/we, jointly
and severally promise to pay to the ORDER of the
REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....)
Philippine Currency...
280
G.R. No. 93073, December 21, 1992, [Campos, J.]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 174
Please credit proceeds of this note to:
________ Savings Account ______XX Current
Account No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
The only issue material to the resolution of the Honorable
Court is whether private respondent Fermin Canlas is solidarily
liable with the other defendants, on the promissory notes?
It was held by the Supreme Court that: private respondent
Fermin Canlas is solidarily liable on each of the promissory notes
bearing his signature for the following reasons:
The promissory notes are negotiable instruments and must
be governed by the Negotiable Instruments Law.
281
Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers and are
liable as such.
282
By signing the notes, the maker promises to
pay to the order of the payee or any holder
283
according to the
tenor thereof.
284
Based on the above provisions of law, there is
no denying that private respondent Fermin Canlas is one of the
co-makers of the promissory notes. As such, he cannot escape
liability arising therefrom.
Where an instrument containing the words I promise to pay
is signed by two or more persons, they are deemed to be jointly
and severally liable thereon.
285
An instrument which begins I,
We, or Either of us promise to pay, when signed by two or
more persons, makes them solidarily liable.
286
The fact that the
singular pronoun is used indicates that the promise is individual
as to each other; meaning that each of the co-signers is deemed
to have made an independent singular promise to pay the notes
in full.
281
Act 2031, enacted on February 3, 1911
282
Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs.
Mercantile Co., 275 P. 807 (1929)
283
Ibid, Section 1
284
Ibid, Section 60
285
Ibid, Section 17 (g).
286
Powell vs- Mobley, 142 S.E. 678 (1928); Keenig vs. Currans Restaurant,
159 Atl. 553 (1932)
175
In the case at bar, the solidary liability of private respondent
Fermin Canlas is made clearer and certain, without reason for
ambiguity, by the presence of the phrase joint and several as
describing the unconditional promise to pay to the order of
Republic Planters Bank. A joint and several note is one in which
the makers bind themselves both jointly and individually to the
payee so that all may be sued together for its enforcement, or the
creditor may select one or more as the object of the suit.
287
A joint
and several obligation in common law corresponds to a civil law
solidary obligation; that is, one of several debtors bound in such
wise that each is liable for the entire amount, and not merely for
his proportionate share.
288
By making a joint and several promise
to pay to the order of Republic Planters Bank, private respondent
Fermin Canlas assumed the solidary liability of a debtor and the
payee may choose to enforce the notes against him alone or jointly
with Yamaguchi and Pinch Manufacturing Corporation as solidary
debtors.
As to whether the interpolation of the phrase and (in) his
personal capacity below the signatures of the makers in the notes
will affect the liability of the makers, we do not find it necessary to
resolve and decide, because it is immaterial and will not affect to
the liability of private respondent Fermin Canlas as a joint and
several debtor of the notes. With or without the presence of said
phrase, private respondent Fermin Canlas is primarily liable as a
co-maker of each of the notes and his liability is that of solidary
debtor.
289
Philippine National Bank vs. Concepcion Mining
Company, Inc., et al
G.R. No. L-16968, July 31, 1962
LABRADOR, J:
Appeal from a judgment or decision of the Court of First
Instance of Manila, Hon. Gustavo Victoriano, presiding, sentencing
defendants Concepcion Mining Company and Jose Sarte to pay
jointly and severally to the plaintiff the amount of P7, 197.26 with
287
Rice vs.Gove, 22 pick Mass 158; 33 AM Dec. 724
288
Blacks Law Dictionary, p. 1249 (5th ed., 1979
289
Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December
21, 1992, [Campos, Jr., J]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 176
interest up to September 29, 1959, plus a daily interest of P1.3698
thereafter up to the time the amount is fully paid, plus 10% of the
amount as attorneys fees, and costs of this suit.
The present action was instituted by the plaintiff to recover
from the defendants the face of a promissory note the pertinent
part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise
to pay to the order of the Philippine National Bank . . .
In case it is necessary to collect this note by or through an
attorney-at-law, the makers and indorsers shall pay ten percent
(10%) of the amount due on the note as attorneys fees, which in
no case shall be less than P100.00 exclusive of all costs and fees
allowed by law as stipulated in the contract of real estate mortgage.
Demand and Dishonor Waived. Holder may accept partial payment
reserving his right of recourse again each and all indorsers.
(Purpose mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE
Please issue check to
Mr. Jose S. Sarte
Upon the filing of the complaint the defendants presented
their answer in which they allege that the co-maker the promissory
note Don Vicente L. Legarda died on February 24, 1946 and his
estate is in the process of judicial determination in Special
Proceedings No. 29060 of the Court of First Instance of Manila.
On the basis of this allegation it is prayed, as a special defense,
177
that the estate of said deceased Vicente L. Legarda be included
as party-defendant. The court in its decision ruled that the inclusion
of said defendant is unnecessary and immaterial, in accordance
with the provisions of Article 1216 of the Civil Code and section
17 (g) of the Negotiable Instruments Law.
A motion to reconsider this decision was denied and
thereupon defendants presented a petition for relief, asking that
the effects of the judgment be suspended for the reason that the
deceased Vicente L. Legarda should have been included as a
party-defendant and his liability should be determined in
pursuance of the provisions of the promissory note. This motion
for relief was also denied, hence defendant appealed to this Court.
Section 17 (g) of the Negotiable Instruments Law provides
as follows:
SEC. 17. Construction where instrument is ambiguous.
Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction
apply:
x x x x x x x x x
(g) Where an instrument containing the word I promise
to pay is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
And Article 1216 of the Civil Code of the Philippines also
provides as follows:
ART. 1216. The creditor may proceed against any one of
the solidary debtors or some of them simultaneously. The
demand made against one of them shall not be an obstacle
to those which may subsequently be directed against the
others so long as the debt has not been fully collected.
In view of the above quoted provisions, and as the
promissory note was executed jointly and severally by the same
parties, namely, Concepcion Mining Company, Inc. and Vicente
L. Legarda and Jose S. Sarte, the payee of the promissory note
had the right to hold any one or any two of the signers of the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 178
promissory note responsible for the payment of the amount of the
note. This judgment of the lower court should be affirmed.
Our attention has been attracted to the discrepancies in the
printed record on appeal. We note, first, that the names of the
defendants, who are evidently the Concepcion Mining Co., Inc.
and Jose S. Sarte, do not appear in the printed record on appeal.
The title of the complaint set forth in the record on appeal does
not contain the name of Jose Sarte, when it should, as two
defendants are named in the complaint and the only defense of
the defendants is the non-inclusion of the deceased Vicente L.
Legarda as a defendant in the action. We also note that the copy
of the promissory note which is set forth in the record on appeal
does not contain the name of the third maker Jose S. Sarte.
Fortunately, the brief of appellee on page 4 sets forth said name
of Jose S. Sarte as one of the co-maker of the promissory note.
Evidently, there is an attempt to mislead the court into believing
that Jose S. Sarte is not one of the co-makers. The attorney for
the defendants Atty. Jose S. Sarte himself and he should be held
primarily responsible for the correctness of the record on appeal.
We, therefore, order the said Atty. Jose S. Sarte to explain why in
his record on appeal his own name as one of the defendants
does not appear and neither does his name appear as one of the
co-signers of the promissory note in question. So ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion,
Barrera, Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Reyes, J.B.L., J., took no part.
2001 Bar Question:
X, Y, and Z signed a promissory note in favor of A stating:
We promise to pay A on December 31, 2001 the sum of
P5, 000.00. When the note fell due, A sued X and Y
who put up the defense that A should have impleaded
Z. Is the defense valid?
ANSWER:
No. Sec. 17 (g), Act 2031, where an instrument containing
the word I promise to pay is signed by two or more persons,
they are deemed to be jointly and severally liable thereon.
179
Sec. 18. Liability of person signing in trade or assumed name.
- No person is liable on the instrument whose signature does
not appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his
own name.
Notes:
Who may be liable on the negotiable instrument?
Only persons signing under their name are liable on the
instrument. No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly
provided.
Since a negotiable instrument is a special form of contract,
the signature of the parties is needed as a manifestation of their
consent to be bound the said instrument.
What may be the liability of a person signing under a trade or
assumed name?
A person who signs in under a trade or assumed name will
be liable to the same extent as if he had signed in his own name.
(Sec. 18, Negotiable Instrument Law)
Example:
Alex Cruz issued a promissory note to the order of Nico
Santos, but instead of using the name Alex Cruz, he signed under
his trade-name Curzifix Radio Works, thus, under the law he will
be treated as if he signed as Alex Cruz.
Indication of a maker
Under the Negotiable Instruments Law, persons who write
their names on the face of the promissory notes are makers and
are liable as such.
290
By signing the notes, the maker promises to
pay to the order of the payee or to any holder
291
according to the
290
Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs.
Mercantile Co., 276 P. 807 (1929).
291
Ibid, Section 1.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 180
tenor thereof
292
. (Republic Planters Bank vs. Court of Appeals,
G.R. No. 93073, December 21, 1992, [Campos, Jr., J])
No application to an oral guaranty by the payee
This section has no application to an oral guaranty by the
payee upon transferring a note for value without indorsement,
the guaranty being an original and absolute obligation to which
the note is collateral. (Brannan, page 25, citing Swenson v. Stoltz,
Wash. 318, 78 Pac. 999, S.C. sec. 49.)
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be
established as in other cases of agency.
Notes:
May the signature be made through an agent? How should
the authority be shown?
Yes, the signature of any party may be made by a duly
authorized agent. For this purpose, no particular form of
appointment is necessary.
A person may become a party to, or transfer, a bill or note
by the hand of an agent. Whether one whose name purports to
have been signed by another as drawer, acceptor, maker, or
indorser is liable as such depends upon the authority express or
implied, of the person who wrote the signature. If such authority
existed, the principal, and he alone, is bound. No particular form
of appointment is necessary, and the authority of the agent may
be established as in other cases of agency.
293
The best mode for an agent to sign or indorse a negotiable
instruments for his principal, so that it may clearly appear that he
is the mere scribe who applies the executive hand as the
instrument of another, is as follows: A.B. by his attorney or agent,
C.D.; or A.B. by C.D., agent; or, C.D., for A.B.; or, C.D., agent
292
Ibid, Section 60.
293
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 65
181
for A.B.
294
(Daniel, Elements of the Law of Negotiable Instruments,
page 79)
When an instrument payable to X, was indorsed X by Y
with power of attorney plaintiff, in order to prove his title, must
show the authority of the agent to indorse. (Ibid, citing Scotland
County Nat. Bank v. Hohn (Mo. App.), 125 S.W. 539, S.C.
sec. 30.)
What are particular cases or instances which establishes
agency?
In a contract of agency, one binds oneself to render some
service or to do something in representation or on behalf of
another, with the latters consent or authority. The following are
the elements of agency: (1) the parties consent, express or
implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the
representation, by which the one who acts as agent does so, not
for oneself, but as a representative; (4) the limitation that the agent
acts within the scope of his or her authority. As the basis of agency
is representation, there must be, on the part of the principal, an
actual intention to appoint, an intention naturally inferable from
the principals words or actions. In the same manner, there must
be an intention on the part of the agent to accept the appointment
and act upon it. Absent such mutual intent, there is generally no
agency. (Dominion Insurance Corp. vs. CA, 426 Phil. 620 [2002];
Tuazon, et al. vs. Heirs of Bartolome Ramos, G.R. No. 156262,
July 14, 2005, cited in Civil Law Reviewer, Albano, Albano, Jr.,
Albano-Pua, Albano III, 2008 Edition, page 836)
Agency may be express or implied from the acts of the
principal, from his silence or lack of action, or his failure to
repudiate the agency knowing that another person is acting on
his behalf without authority. (Ibid, p. 837)
Agency may be oral, unless the law requires a specific form.
(Ibid, Art. 1869, NCC)
294
Bradlee v. Boston Glass Co., 46 Pick. 347; Weaver v. Carnall, 35 Ark.
198; 1 Parsons on Notes and Bills, 91; Tannant v. Rocky Mountain Nat.
Bank, 1 Colo. 278
Basic Principles and Jurisprudence on the Negotiable Instruments Law 182
General Rule:
The power of persons to incur liability as parties to, and to
transfer, negotiable instruments by the hands of others is governed
by the general rules applicable to principals and agents.
295
EXCEPTION
An undisclosed principal cannot sue or be sued as a party
to a negotiable instrument.
296
Sec. 20. Liability of person signing as agent, and so forth. -
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on
the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal,
does not exempt him from personal liability.
Notes:
All persons who are themselves competent to become
parties to a negotiable contract, in their own individual right, can
do so through the instrumentality of an agent. (Daniel, Elements
of the Law of Negotiable Instruments, page 75)
If the agent signs a note with his own name, and discloses
no principal, he is personally bound. The party so signing must
have intended to bind somebody upon the instrument, and no
promissor but himself thereon appearing, it must be construed as
his note or as a nullity.
297
And although he term himself agent,
such suffix to his name will be regarded as a mere description
personae, or as an earmark of the transaction, and may be rejected
as surplusage.
298
(ibid, page 80)
Three things are essential to the creation of an obligation
on the part of one individual by and through the act of another,
295
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 65
296
Ibid.
297
Arnold v. Stackpole, 11 Mass. 27; Sharpe v. Bellis, 61 Pa. St. 71; Finan v.
Babcock, 58 Mich. 305
298
Toledo Iron & Agr. Works v. Heisser, 51 Mo. 128; Arnold v. Sprague, 34
Vt. 409
183
viz: (1) The principal himself must be competent; (2) The agent
must be competent to act as such; (3) Authority, express or implied,
verbal or in writing, must be conferred by the principal upon the
agent. (ibid, page 75)
If the agent exceeded his authority in signing his principals
name, or sign his own professedly as binding his principal, who is
named, he is not bound as a party to the paper itself, but only in
an action of tort for falsely assuming authority to bind another.
(ibid, page 80)
What is the liability of a person signing as an agent?
He is not liable on the instrument, where he adds to his
signature words indicating that he signs for or on behalf of a
principal or in a representative capacity if he was duly authorized.
However, the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing
his principal, does not exempt him from personal liability. (Sec.
20, Negotiable Instruments Law)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of
Commerce instituted an action against Jose M. Aruego
Civil Case No. 42066 for the recovery of the total sum
of about P35,000.00 with daily interest thereon from
November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction
thereof plus attorneys fees equivalent to 10% of the
total amount due and costs. The complaint filed by the
Philippine Bank of Commerce contains Twenty-Two
(22) causes of action referring to Twenty-Two (22)
transactions entered into by the said Bank and Aruego
on different dates covering the period from August 28,
1950 to March 14, 1951. The sum sought to be
recovered represents the cost of the printing of World
Basic Principles and Jurisprudence on the Negotiable Instruments Law 184
Current Events, a periodical published by the
defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the
plaintiff. Thus, for every printing of the World Current
Events, the printer Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant
for acceptance. As an added security for the payment
of the amounts advanced to Encal Press and Photo
Engraving, the plaintiff bank also required the
defendant Aruego to execute a trust receipt in favor of
said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same
with the promise to turn over to the plaintiff the proceeds
of the sale of said publication to answer for the payment
of all obligations arising from the draft.
Aruego contends that he signed the bills of exchange
referred to in the plaintiffs complaint in a representative
capacity, as the then President of the Philippine
Education Foundation Company, publisher of World
Current Events and Decision Law Journal, printed by
Encal Press and Photo-Engraving, drawer of the said
bills of exchange in favor of the plaintiff bank;
ISSUE: Is his contention tenable?
RULING: Section 20 of the Negotiable Instruments Law provides
that Where the instrument contains or a person add
to his signature words indicating that he signs for or on
behalf of a principal or in a representative capacity, he
is not liable on the instrument if he was duly authorized;
but the mere addition of words describing him as an
agent or as filing a representative character, without
disclosing his principal, does not exempt him from
personal liability.
An inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was
signing as a representative of the Philippine Education
Foundation Company. He merely signed as follows:
JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO.
185
For failure to disclose his principal, Aruego is personally
liable for the draft he has accepted.
Principal must be disclosed
It is a general principle of commercial law that a negotiable
instrument must wear no mask, but must reveal its character upon
its face. And it extends to the liability of parties thereto, who must
appear as distinctly as the terms of the instrument itself, in order
to be bound thereby. It follows, therefore, that no party can be
charged as principal upon a negotiable instrument unless his name
is disclosed therein. The reason for this rule is that each party
who takes a negotiable instrument makes his contracts with the
parties who appear on its face to be bound for its payment; it is a
courier without luggage, whose countenance is its passport; and
in suits upon negotiable instruments, no evidence is admissible
to charge any person as a principal party thereto, unless his name
in some way is disclosed upon the instrument itself;
299
although
upon other written contracts, not negotiable, it is often competent
to show that, although signed in the name of the agent only, they
were executed in the business of the principal, and with the intent
that he should be bound. (Daniel, Elements of the Law of
Negotiable Instruments, page 79-80)
A note was written on a lithographed receipt form, with the
name of a corporation at the head, and the impressed seal of the
company upon the paper, but not referred to in the note, and the
defendants added the word president and secretary
respectively to their signatures. Held, not such disclosure of a
principal as will exempt the signers from personal liability.
(Brannan, page 27, citing Daniel v. Glidden, 38 Wash. 556, 80
Pac. 811, sub nom. Daniel v. Buttner.)
Where defendant signed a note as a trustee, held, that as
to holders in due course the principal must be disclosed on the
face of the note in order to relieve defendant of personal liability
(semble), but as between defendant and the payee the disclosure
might be made aliunde, and is a question of fact x x x. (Ibid, citing
Megowan v. Peterson, 173 N.Y. 1, 65 N.E. 738.)
299
Cragin v. Lovell, 109 U.S. 194; Texas Land Co. v. Carroll, 63 Tex. 51;
Brown v. Baker, 7 Allen, 339
Basic Principles and Jurisprudence on the Negotiable Instruments Law 186
If the payee knows the nature and object of the trust, and
that the maker of the note was acting in his capacity as trustee,
the maker is not individually liable to the payee, although none of
such information appears on the note. (Ibid, citing Kerby v.
Ruegamer, 107 App. Div. 491, 95 N.Y. Supp. 408.)
Effect of non-disclosure
Where the agent signs his name but nowhere in the
instrument has he disclosed the fact that he is acting in a
representative capacity or the name of the third party for whom
he might have acted as agent, the agent is personally liable to
take holder of the instrument and cannot be permitted to prove
that he was merely acting as agent of another and parol or extrinsic
evidence is not admissible to avoid the agents personal liability.
(Republic Planters Bank vs. Court of Appeals, G.R. No. 93073,
December 21, 1992, [Campos, Jr., J:], citing, Crocker National
Bank vs. Say, 209 Cal 436; 288 P 69 (1930); Dayries vs. Lindsly,
54 So. 791 (1911); Granada vs. PNB, 18 SCRA 1 (1966)
As a general rule, officers or directors under the old
corporate name bear no personal liability for acts done or contracts
entered into by officers of the corporation, if duly authorized.
Inasmuch as such officers acted in their capacity as agent of the
old corporation and the change of name meant only the
continuation of the old juridical entity, the corporation bearing the
same name is still bound by the acts of its agents if authorized by
the Board.
300
Certainly an agent who actually makes a contract, and who
has notice of all equities emanating therefrom, can stand on no
better footing that his principal with respect to commercial paper
growing out of the transaction. To place him on any higher plane
would be incompatible with the fundamental conception underlying
the relation of the principal and agent. (Fossum vs. Hermanos,
G.R. No. L-19461, March 28, 1923, [Street, J:])
It is a well-known rule of law that if the original payee of a
note unenforceable for lack of consideration repurchase the
instrument after transferring it to a holder in due course, the paper
again becomes subject in the payees hands to the same defenses
300
Ibid.
187
to which it would have been subject if the paper had never passed
through the hands of a holder in due course. (Fossum vs.
Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing
Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915
D], 271; 8 C.J., 470.) The same is true where the instrument is
retransferred to an agent of the payee. (supra, citing Battersbee
vs. Calkins, 128 Mich., 569)
In Dollarhide vs. Hopkins (72 III. App., 509), the plaintiff, as
agent of a corporation engaged in manufacturing agricultural
implements, sold to the defendant a separator for threshing small
grain, with a general warranty that the machine, properly handled,
would thresh and clean grain as well as any other separator of
like size. The notes in suit were executed by the defendant in
payment of the separator, and were assigned to the plaintiff before
maturity. They were then indorsed by the plaintiff bank which
became holder in due course; but afterwards, and before the
commencement of the action, the notes were retransferred by
the bank to the plaintiff. In an action upon the notes the defendant
alleged and proved breach of warranty and showed that the plaintiff
knew of the defect in the separator at the time he purchased the
notes. It was hel d that the pl ai nti ff coul d not recover,
notwithstanding the fact that the notes had passed through a bank,
in whose hands they would not have been subject to the defense
which had been interposed (54 L.R.A., 678)
Ratification
A corporation, as well as an individual, may ratify the acts
of another, when such acts are done and performed in the name
of the alleged principal; and the ratification may be by express
consent, or by conduct of the alleged principal inconsistent with
any other hypothesis than that he approved and intended to adopt
what had been done in his name. Intelligent acquiescence
amounts to a binding ratification.
301
Three things are essential to a ratification: (1) The party
must have the capacity to have made the contract in the particular
mode adopted; (2) The principal must have known all of the facts
attending the transaction; (3) The contract must have been
301
Knox County v. Aspinwall, 32 How. 544; Supervisors v. Schenck, 5 Wall.
782; Bissell v. Jeffersonville, 24 How. 299; Daniel on Negotiable
Instruments, 317
Basic Principles and Jurisprudence on the Negotiable Instruments Law 188
originally lawful.
302
(Daniel, Elements of the Law of Negotiable
Instruments, page 81)
Revocation of agency
A general authority to an agent is presumed to continue
until its revocation is generally known. And if A is the agent of B
to draw bills in his name, B will be liable as drawer to ignorant
indorsees, who had no knowledge of the change in the relationship
of the parties, or of the revocation of the agency.
303
(Ibid)
Other Illustrative cases:
A note reading six months after demand I promise to pay
and signed J.H.S. Laundry and Dye Works, J.H.S. Managing
Director is the note of the company and J.H.S. is not personally
liable. (Brannan, page 26, citing, Chapman v. Smethurst [1909],
1 K.B. 927)
However, in a different case, A check was drawn in favor of
plaintiff was stamped near the top with the words B. Marcus &
Co. (Limited) and signed by the two defendants as follows: B.
Marcus, Director, S.H. Davids, DirectorSecretary, the space
for the signature of the secretary left blank. The name of the
company appeared only at the top of the check. Held, that the
defendants were personally liable on the check. (Ibid, citing
Landes v. Marcus and Davids (K.B. Div. Mar. 31, 1909), 25 T.L.
Rep. 478)
Sec. 21. Signature by procuration; effect of. - A signature by
procuration operates as notice that the agent has but a
limited authority to sign, and the principal is bound only in
case the agent in so signing acted within the actual limits of
his authority.
Notes:
Whenever an authority purports to be derived from a written
instrument, or the agent signs the paper with the words by
procuration, in such a case the party dealing with him is bound to
302
Daniel on Negotiable Instruments, 318-320
303
Chitty on Bill [32]. 42; Story on Agency, 470, 473; Smith v. Stranger, Peake
Add. 116
189
take notice that there is a written instrument of procuration, and
he ought to call for and examine the instrument itself to see
whether it justifies the act of the agent. Under such circumstances,
he is chargeable with inquiry as to the extent of the agents
authority; and if, without examining into it when he knows of its
existenceand especially if he has it in his possessionhe
ventures to deal with the agent, he acts at his peril, and must
bear the loss if the agent transcended his authority.
304
But no
duty exists to make inquiry respecting private instructions to the
agent from his principal, whether written or oral, for they may well
be presumed to be of a secret and confidential nature.
305
(Daniel,
Elements of the Law of Negotiable Instruments, page 77)
What is a signature by procuration? What is the effect
thereof?
Signature by procuration operates as notice that the agent
has but a limited authority to sign, and the principal is bound only
in case the agent in so signing acted within the actual limits of his
authority. (Sec. 21, Negotiable Instruments Law)
Illustrative Cases:
The manager of a company in order to obtain a guarantee
for the companys business, without authority, gave a note signed
for myself and in representation of the company. This was not
necessary or in the ordinary course of the companys business.
Held. That the company was not liable on the note. (Brannan,
page 27, citing Re Cunningham & Co., 36 Ch. D. 532.)
An agent of a company drew a check per proc., in excess
of his authority. The company is not liable on the check to one
who cashed it in good faith, but must account for any money which
came into its possession and was employed for its benefit. (Ibid,
citing Reid v. Rigby & Co. [1984] 2 Q.B. 40. See also Bissel v.
Fox, 53 L.T.R. 193, S.C. infra, p. 309.)
Directors of a company which had no power to accept bills,
accepted a bill per proc. The company. Held, that they were
304
Stainback v. Bank of Virginia, 11 Gratt. 259; North River Bank v. Aymar, 3
Hill, 262
305
North River Bank v. Aymar, 3 Hill, 262; Story on Agency, 73
Basic Principles and Jurisprudence on the Negotiable Instruments Law 190
personally liable in an action for false representations. (Ibid, citing
West London Commercial Bank v. Kitson, 13 Q.B.D. 360.)
Where an agent accepts or indorses per proc., the taker
of a bill or note so accepted or indorsed is bound to inquire as to
the extent of the agents authority. But when the agent has the
authority to do the act in question, his abuse of such authority will
not affect bona fide holder for value. (Ibid, citing Bryant, Powis &
Bryant v. Quebec Bank, [1893] A.C. 170, 179.)
2011 Bar Question:
Under the Negotiable Instruments Law, a signature by
procuration operates as a notice that the agent has but
a limited authority to sign. Thus, a person who takes a
bill that is drawn, accepted, or indorsed by procuration
is duty-bound to inquire into the extent of the agents
authority by:
A. examining the agents special power of attorney.
B. examining the bill to determine the extent of such
authority.
C. asking the agent about the extent of such authority.
D. asking the principal about the extent of such
authority.
In a signature by procuration, the principal is bound
only in case the agent acted within the actual limits of
his authority. The signature of the agent in such a case
operates as notice that he has
A. a qualified authority to sign.
B. a limited authority to sign.
C. a special authority to sign.
D. full authority to sign.
Sec. 22. Effect of indorsement by infant or corporation.- The
indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
191
notwithstanding that from want of capacity, the corporation
or infant may incur no liability thereon.
Notes:
What is the effect of an indorsement by an infant or a
corporation?
ANSWER:
The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation
or infant may incur no liability. (Sec. 22, Negotiable
Instruments Law)
Indorsements made by infant or corporations
Infant, as bei ng referred to by Sec. 22 means
unemancipated minors, who lack the capacity to act with legal
effect. Under Sec. 22, their indorsement, notwithstanding the fact
of their want of legal capacity to act transfers title of the instrument
to another, without incurring any liability thereafter.
Same rule is applied to a corporation, who, in this instance,
may have acted ultra vires.
This provision deals with the lack of legal capacity of the
infant or corporation, which, despite their incapacity may validly
transfer title over the instrument without incurring any liability.
The capacity of parties is in general governed by the same
rules as their power to make a contract. It is of two kinds:
306
(31)
a) Capacity to incur liability.
b) Capacity to transfer the instrument.
The following classes of persons incur no liability, though
they may make a valid transfer of the instrument:
307
(32)
a) A person non compos mentis.
306
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 63
307
Id.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 192
b) An infant.
c) In some jurisdictions, a married woman.
d) A corporation, when the act is ultra vires.
Sec. 23. Forged signature; effect of. - When a signature is
forged or made without the authority of the person whose
signature it purports to be, it 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 enforce such right is precluded
from setting up the forgery or want of authority.
Notes:
Forgery
The counterfeiting of any writing, consisting in the signing
of anothers name with intent to defraud, is forgery.
308
(Bank of
the Philippine Islands vs. CASA Montessori Internationale, G.R.
Nos. 149454, 149507, May 28, 2004, [Panganiban, J.]) The most
usual species of forgery is fraudulently writing the name of an
existing person; but where one is in possession of a paper
containing a genuine signature, and fraudulently fills it up so as
to make it appear to be signed as maker, or indorser, or other
party to a bill or note, it is as much a forgery as if the signature
itself had been forged.
309
Intent to defraud, and uttering, essential
An intent to defraud is essential to constitute forgery, and
although a bill or note will not be binding upon those whom it
purports to bind if their names have been signed to it, or it has
been altered without authority, the party who has ignorantly or
innocently executed or altered it under a supposed authority, will
not be deemed guilty of forgery.
310
(Elements of the Law of
Negotiable Instruments, Daniel, 285)
308
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of
the Philippines, Vol I (1989 ed.), page 191
309
Rex V. Hales, 17 St. Trials; Powell v. Commonwealth, 1T Gratt. 822
310
Roscoes Cr. Ev. 505
193
The delivery of a bill or note, or other written contract, is
necessary to its validity; and so the uttering, which is the term
used to describe the delivery by a forger or counterfeiter to some
person of the forged instrument, is necessary in order to complete
the crime of forgery. Giving the bill or note to a confederate to
utter is an uttering thereof.
311
(Ibid)
What is the effect of forgery to the instrument?
When a signature is forged or made without the authority of
the person whose signature it purports to be, -
It 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.
The case of Natividad Gempesaw vs. The Honorable
Court of Appeals and Philippine Bank of Communications
312
,
the Supreme Court, speaking through Justice Campos laid down
a detailed discussion on the nature and effect of forgery, to wit:
Under the aforecited provision, forgery is a real or absolute
defense by the party whose signature was forged. A party
whose signature to an instrument was forged was never a
party and never gave his consent to the contract which gave
rise to the instrument. Since his signature does not appear
in the instrument, he cannot be held liable thereon by
anyone, not even by a holder in due course. Thus, if a
persons signature is forged as a maker of a promissory
note, he cannot be made to pay because he never made
the promise to pay. Or where a persons signature as a
drawer of a check is forged, he cannot charge the amount
thereof against the drawers account because he never gave
the bank the order to pay. And said section does not refer
only to the forged signature of the maker of a promissory
note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or
indorsee of a note or a check. Since under said provision a
311
Chitty on Bills [785]
312
G.R. No. 92244, February 9, 1993
Basic Principles and Jurisprudence on the Negotiable Instruments Law 194
forged signature is wholly inoperative, no one can gain
title to the instrument through such forged indorsement.
Such an indorsement prevents any subsequent party from
acquiring any right as against any party whose name
appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged
indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts
off the rights of all subsequent parties as against parties
prior to the forgery. However, the law makes an exception
to these rules where a party is precluded from setting up
forgery as a defense.
Types of forgeries:
1. Where forgery was accomplished by a person not
associated with the drawerfor example a mail
robbery; and
2. Where the indorsement was forged by an agent of
the drawer.
This difference in situations would determine the effect of
the drawers negligence with respect to forged indorsements.
While there is no duty resting on the depositor to look for forged
indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a
depositor is under a duty to set up an accounting system and a
business procedure as are reasonably calculated to prevent or
render difficult the forgery of indorsements, particularly by the
depositors own employees. And if the drawer (depositor) learns
that a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report such
fact to the drawee bank.
313
For his negligence or failure either to
discover or to report promptly the fact of such forgery to the
drawee, the drawer losses his right against the drawee who has
debited his account under a forged indorsement.
314
In other words,
he is precluded from using forgery as a basis for his claim for re-
crediting of his account. (Gempesaw vs. Court of Appeals, [1993])
313
Britton, Bills and Notes, Sec. 143, pp. 663-664
314
City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495
(1933); Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank,
252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat.
Bank 211 Iowa 495, 230 N.W. 342 (1930)
195
Illustrative case:
The Great Eastern Life Assurance Co., vs. Hong
Kong & Shanghai Banking Corporation and Philippine
National Bank
G.R. No. L-18657, August 23, 1922
JOHNS, J.:
FACTS: May 3, 1920, the plaintiff drew its check for P2,000 on
the Hongkong and Shanghai Banking Corporation with
whom it had an account, payable to the order of Lazaro
Melicor.
E. M. Maasim fraudulently obtained possession of the
check, forged Melicors signature, as an endorser, and
then personally endorsed and presented it to the
Philippine National Bank where the amount of the
check was placed to his credit.
After having paid the check, and on the next day, the
Philippine national Bank endorsed the check to the
Hongkong and Shanghai Banking Corporation which
paid it and charged the amount of the check to the
account of the plaintiff. In the ordinary course of
busi ness, the Hongkong Shanghai Banki ng
Corporation rendered a bank statement to the plaintiff
showing that the amount of the check was charged to
its account, and no objection was then made to the
statement.
About four months after the check was charged to the
account of the plaintiff, it developed that Lazaro Melicor,
to whom the check was made payable, had never
received it, and that his signature, as an endorser, was
forged by Maasim, who presented and deposited it to
his private account in the Philippine National Bank. With
this knowledge, the plaintiff promptly made a demand
upon the Hongkong and Shanghai Banking Corporation
that it should be given credit for the amount of the forged
check, which the bank refused to do, and the plaintiff
commenced this action to recover the P2,000 which
Basic Principles and Jurisprudence on the Negotiable Instruments Law 196
was paid on the forged check. On the petition of the
Shanghai Bank, the Philippine National Bank was
made defendant. The Shanghai Bank denies any
liability, but prays that, if a judgment should be rendered
against it, in turn, it should have like judgment against
the Philippine National Bank which denies all liability
to either party.
ISSUES: Who is responsible for the refund to the drawer of the
amount of the check drawn and payable to order, when
its value was collected by a third person by means of
forgery of the signature of the payee?Is it the drawee
or the last indorser, who ignored the forgery at the time
of making the payment, or the forger?
RULING: Plaintiffs check was drawn on Shanghai Bank payable
to the order of Melicor. In other words, the plaintiff
authorized and directed the Shanghai Bank to pay
Melicor, or his order, P2,000. It did not authorize or
direct the bank to pay the check to any other person
than Melicor, or his order, and the testimony is
undisputed that Melicor never did part with his title or
endorse the check, and never received any of its
proceeds. Neither is the plaintiff estopped or bound
by the banks statement, which was made to it by the
Shanghai Bank. This is not a case where the plaintiffs
own signature was forged to one of its checks. In such
a case, the plaintiff would have known the forgery, and
it would have been its duty to have promptly notified
the bank of any forged signature, and any failure on its
part would have released the bank from any liability.
That is not this case. Here, the forgery was that of
Melicor, who was the payee of the check, and the legal
presumption is that the bank would not honor the check
without the genuine endorsement of Melicor. In other
words, when the plaintiff received its bank statement,
it had a right to assume that Melicor had personally
endorsed the check, and that, otherwise, the bank
would not have paid it.
x x x
The money was on deposit in the Shanghai Bank, and
it had no legal right to pay it out to anyone except the
197
plaintiff or its order. Here, the plaintiff ordered the
Shanghai Bank to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never
paid to Melicor, and he never paid to Melicor, and he
never personally endorsed the check, or authorized any
one to endorse it for him, and the alleged endorsement
was a forgery. Hence, upon the undisputed facts, it
must follow that the Shanghai Bank has no defense to
this action.
It is admitted that the Philippine National Bank cashed
the check upon a forged signature, and placed the
money to the credit of Maasim, who was a forger. That
the Philippine National Bank then endorsed the check
and forwarded it to the Shanghai Bank by whom it was
paid. The Philippine National Bank had no license or
authority to pay the money to Maasim or anyone else
upon a forge[d] signature. It was its legal duty to know
that Melicors endorsement was genuine before
cashing the check. Its remedy is against Maasim to
whom it paid the money.
Adopting of forged signature
If ones signature is forged, it is, as a general rule, a mere
nullity as to him. It is legally accurate to say that he did not make
the instrument. But if the person whose signature has been forged
pronounces it genuine, or the instrument valid, the question arises
whether or not such declaration renders him liable as if he were a
party to a genuine instrument; and a variety of circumstances affect
its just solution. (Elements of the Law of Negotiable Instruments,
Daniel, 285)
In the first place, when third parties buy the paper on his
assurances or representations of the genuineness of his signature,
or of the validity of the instrument, or are induced to act upon
such assurances or representations, and would suffer loss if he
were permitted to set up forgery as a defense, it is quite clear
upon principles of estoppel that such defense cannot be made.
315
(Ibid)
315
Workman v. Wright, 33 Ohio St. 405; Woodruff v. Monroe, 33 Md. 158;
Beeman v. Duck, 11 M & W 251
Basic Principles and Jurisprudence on the Negotiable Instruments Law 198
In the second place, if no principle of estoppel applies, and
if through mistake a party stated that a signature is genuine, and
afterward he discovers his error, and speedily corrects it, and
before the holder has changed his relation to the paper, or anyone
has dealt with it upon the faith of his admission, forgery can be
successfully pleaded.
316
(Ibid, pp. 285-286)
In the third place, it may be stated that where the party,
knowing his signature to be a forgery, deliberately and
understandingly adopts it as his own, he would be bound, because
ratification thus made is equivalent to a previous authority,
provided, however, that an innocent third party has been induced
to act upon the faith of the adoption in such a way as to suffer
loss by its repudiation. This is based upon the familiar principles
of estoppel. But whether such deliberate adoption of a forgery,
without the consequent loss to a third party, acting on the faith
thereof, would be binding is a mooted question, both in England
and America.
317
(Ibid, p. 286)
2011 Bar Question:
Due to his debt to C, D wrote a promissory note which
is payable to the order of C. Cs brother, M,
misrepresenting himself as agent of C, obtained the note
from D. M then negotiated the note to N after forging
the signature of C. May N enforce the note against D?
A. Yes, since D is the principal debtor.
B. No, since the signature of C was forged.
C. No, since it is C who can enforce it, the note being
payable to the order of C.
D. Yes, since D, as maker, is primarily liable on the
note.
Forgery committed by an agent having authority to indorse
An agent having authority to indorse checks payable to his
principal and to deposit them in a certain bank for collection,
indorsed his principals name and transferred the checks to a third
316
Daniel on Negotiable Instruments, 1352; Woodruff v. Monroes, 33 Md.
158
317
on Negotiable Instruments, 1352a, 1352b, and cases cited
199
person who deposited them in defendants bank, which collected
and paid the amount to such third person in good faith. Held, that
the indorsement by the agent was not a forgery and the defendant
was not liable to the principal for a conversion of the checks.
(Brannan, page 29, citing Salen v. Bank, 110 App. Div. 636, 97
N.Y. Supp. 361.)
Is there any exception to the forgery rule?
Yes. Section 23 of the Negotiable Instruments Law further
provides that, unless the party against whom the instrument is
sought to enforce such right is precluded from setting up the
forgery or want of authority.
Who are these persons that are precluded from setting up
the defense of forgery?
Those persons who warrant or admit the genuineness of
the signature in question (e.g., indorsers, persons negotiating by
delivery, acceptors of bills of exchange)
Those who, by their acts, silence or negligence, are
estopped from setting up the defense of forgery. (estoppel)
When the forged signature is unnecessary to the title of the
holder as when the indorsement is forged on an instrument
payable to bearer.
When one party is estopped to deny the genuineness of
anothers signature
The relation of one party to a negotiable instrument is often
such that he cannot deny the genuineness of anothers signature,
for, having treated it himself as genuine, it would be fraud to permit
him to assert the contrary. Having issued or transferred the
instrument as genuine in all respects, he would not only be bound
by his guaranty that it is genuine, but it would be unjust to and
fraudulent upon other to permit him to deny it; and proof of his
having so issued or used it would be sufficient to entitle the holder
to recover against him.
318
(Elements of the Law of Negotiable
Instruments, Daniel, p. 286)
318
Hortsman v. Henshaw, 11 How. 177; Meacher v. Fort, 3 Hill (S.C.) 227;
Alleman v. Wheeler, 101 Ind. 144
Basic Principles and Jurisprudence on the Negotiable Instruments Law 200
If a bank pays out on a forged check, is it liable to reimburse
the drawer from whose account the funds were paid out?
General rule remains that the drawee who has paid upon
the forged signature bears the loss. The exception to this rule
arises only when negligence can be traced on the part of the
drawer whose signature was forged, and the need arises to weigh
the comparative negligence between the drawer and the drawee
to determine who should bear the burden of loss. x x x
The general rule is to the effect that a forged signature is
wholly inoperative, and payment made through or under such
signature is ineffectual or does not discharge the instrument. If
payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he has the
makers signature and is expected to know and compare it. The
rule has a healthy cautionary effect on banks by encouraging care
in the comparison of the signatures against those on the signature
cards they have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to spread the
risk to insurance. (Samsung Construction Company Philippines,
Inc. vs. Far East Bank and Trust Company, G.R. No. 129015,
August 13, 2004 [Tinga, J.])
Moreover, the same case held that:
Under Section 23 of the Negotiable Instruments Law,
forgery is a real or absolute defense by the party whose signature
is forged.
x x x
Still, even if the bank performed with utmost diligence, the
drawer whose signature was forged may still recover from the
bank as long as he or she is not precluded from setting up the
defense of forgery. After all, Section 23 of the Negotiable
Instruments Law plainly states that no right to enforce the payment
of check can arise out of a forged signature. x x x Consequently,
if a bank pays a forged check, it must be considered as paying
out its funds and cannot charge the amount so paid to the account
of the depositor. A bank is liable, irrespective of its good faith, in
paying a forged check.
201
x x x
Judicial notice can be taken that it is highly unusual in
practice for a business establishment to draw a check for close to
a million pesos and make it payable to cash or bearer, and not to
order.
x x x
The Court recently emphasized that the highest degree of
care and diligence is required of banks.
Banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many
clients and depositor who transact business with them. They
have the obligation to treat their clients account meticulously
and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.
Given the circumstances, extraordinary diligence dictates
that FEBTC should have ascertained from Jong personally that
the signature in the questionable check is his.
A bank is bound to know the signatures of its customers;
and if it pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged. (7 C.J., 683, cited in San Carlos Milling Co., Ltd. vs. Bank
of the Philippine Islands and China Banking Corporation, G.R.
No. L-37467, December 11, 1933, [Hull, J.])
Forgery committed by drawer-payors confidential employee;
liability
In Philippine Commercial International Bank vs. Court
of Appeals and Form Philippines, Inc., [t]he mere fact that the
forgery was committed by a drawer-payors confidential employee
or agent, who by virtue of his position had unusual facilities for
perpetrating fraud and imposing the forged paper upon the bank,
does not entitle the bank the shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the
drawer.
39
This rule likewise applies to the checks fraudulently
319
Am Jur 2d, Volume 10, Banks Section 604 (1963 Edition)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 202
negotiated or diverted by the confidential employees who hold
them in their possession.
x x x
On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servants wrongful
act, the law imputes to the master the act of the servant, and if
the act is negligent or wrongful and proximately results in an injury
to a third person, the negligence or wrongful conduct is the
negligence or wrongful conduct of the master, for which he is
liable.
320
The general rule is that if the master is injured by the
negligence of a third person and the concurring contributory
negligence of his own servant or agent, the latters negligence is
imputed to his superior and will defeat the superiors action against
the third person, assuming, of course that the contributory
negligence was the proximate cause of the injury of which
complaint is made.
321
Duty of the encashing bank
In the same case of Philippine Commercial International
Bank vs. Court of Appeals and Form Philippines, Inc., it was
ruled that: [l]astly, banking business requires that the one who
first cashes and negotiates the check must take some precautions
to learn whether or not it is genuine. And if the one cashing the
check through indifference or other circumstance assists the forger
in committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that
it did not discover the forgery or the defect in the title of the person
negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank,
without requiring proof as to the identity of the persons presenting
it, or making inquiries with regard to them, cannot hold the
proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such
cases the drawee bank has a right to believe that the cashing
bank (or the collecting bank) had, by the usual proper investigation,
satisfied itself of the authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been forged or
320
Am Jur 2d, Volume 58, Negligence, Section 458
321
Am Jur 2d, Volume 58, Negligence Section 464
203
diverted in turn received payment thereon from the drawee, is
guilty of negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter may recover
from the holder the money paid on the check.
322