Letters of Credit

DEFINITION AND NATURE OF LETTER OF CREDIT

A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer
will honor drafts or other demands for payment upon compliance with the conditions specified in the credit.

Primary purpose of letter of credit - To substitute for and support, the agreement of the buyer-importer to pay
money under a contract or other arrangement, but it does not necessarily constitute as a condition of the
perfection of such arrangement.

In a letter of credit arrangement, there are three distinct and independent contracts, to wit:
1. contract of sale between buyer and seller;
2. contract of buyer with the issuing bank; and
3. letter of credit p
4. roper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein.

An action arising from a letter of credit prescribes in ten (10) years since the cause of action arises from a
contract.

Irrevocable letter of Credit vs. Confirmed letter of credit

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank
may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the
letter. The issuing bank does not reserve the right to revoke the credit.

On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent
bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake
the issuing bank's obligation as its own according to the terms and conditions of the credit.

Contract of Guaranty vs. Letter of Credit

The concept of guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each other.

The guarantee theory destroys the independence of the banks responsibility from the contract upon which it was
opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the
guarantors obligation is merely collateral and it arises only upon the default of the person primarily liable.

On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also
defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the
issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit

Commercial Letter of Credit vs. Standby Letter of Credits.

Commercial Letter of Credits Standby Letter of Credits

Involve the payment of money under a contract of sale. The credit is payable upon certification of a party's
nonperformance of the agreement.

Such credits become payable upon the presentation The documents that accompany the beneficiary's draft
by the seller-beneficiary of documents that show he tend to show that the applicant has not performed.
has taken affirmative steps to comply with the sales
agreement.
The beneficiary of a commercial credit must The beneficiary of the standby credit must certify that
demonstrate by documents that he has performed his his obligor has not performed the contract.
contract.
PARTIES TO A LETTER OF CREDIT

There would at least be three parties:

1. the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipts
of the documents of title;

2. the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper
document of titles and to surrender the documents to the buyer upon reimbursement; and

3. the seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the
documents of title and draft to the issuing bank to recover payment.

The number of the parties, not infrequently and almost invariably in international trade practice, may be
increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank which will lend credence to the letter of credit issued by a
lesser known issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating bank, to have the draft discounted.

When the notifying bank entered into a discounting arrangement with the beneficiary, it acts independently
as a negotiating bank. As such, the negotiating bank has a right to recourse against the issuer bank and
until reimbursement is obtained, he beneficiary as the drawer of the draft, continues to assume a contingent
liability thereon.

BASIC PRINCIPLES OF LETTER OF CREDIT

Doctrine of Independence Principle.

It assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is actually accomplished or not. Banks
assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effects of
any documents, for the general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods presented by any documents, or for the good faith or acts
and/or documents, or for the good faith or acts and/or commissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

Independence doctrine works to the benefit of both the issuing bank and the beneficiary.

Limitations of bank duties

1. Banks, in financing international business transactions, do not deal with the property to be exported or
shipped to the importer, but deal only with documents.
2. Banks have no duty to verify whether what has been described in the letters of credit or drafts or shipping
documents actually tallies with what was loaded.

Applicant cannot enjoin the payment of the obligation of the issuing bank under the Letter of Credit based
on any irregularity or non-performance of an obligation. The exception is when there is fraud or forgery in
the underlying transaction or the tender documents.
Fraud Exception Rule - Fraud is an exception to the doctrine of independence. The untruthfulness of a
certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support
an injunction against payment. The remedy for fraudulent abuse is an injunction.

Doctrine of Strict Compliance It is settled rule in commercial transactions involving letter of credit that the
documents tendered must strictly conforms to the terms of the letter of credit. The tender of documents by the
beneficiary (seller) must include all documents required by the letter.

Issuing bank or the confirming bank must examine the tender documents (including shipping documents) and
must make sure that the terms and conditions of the letters of credit are strictly complied with. The bank has no
discretion to waive the requirement. Tender documents must not only be complete but they must on their faces
be in compliance with the terms of the credit. Documents that are not stipulated as tender documents will not be
examined.

A correspondent bank which departs from what has been stipulated under the letter of credit acts on its own risks
and may not thereafter be able to recover from the buyer or the issuing bank, as the case maybe, the money
paid to the beneficiary.

Trust Receipts Law

DEFINITION/CONCEPT OF A TRUST RECEIPT TRANSACTION

A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who
do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may
not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased

In general, a trust receipt transaction imposes upon the entrustee the obligation to deliver to the entruster
the price of the sale. If the merchandise is not sold, to return the same to the entruster.

Two obligations in a trust receipt transaction:

1. The first is covered by the provision which refers to money received under the obligation involving the duty
to deliver it (entregrla) to the owner of the merchandise sold; and
2. The second is covered by the provision which refers to merchandise received under the obligation to
return it (devolvera) to the owner.

When both parties enter into an agreement knowing fully well that the return of the goods subject to the
trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt
transaction as the only obligation actually agreed upon by the parties would be return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods.

Loan Feature - A trust receipt is considered as a security transaction intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization, as collateral of the
merchandise imported or purchased.

Security Feature - A trust receipt is a security agreement pursuant to which a bank acquires a security interest
in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no
obligation.

Security Interest - A property interest in goods, documents, or instruments to secure performance of some
obligation of the entrustee or of some third persons to the entruster and includes title, whether or not expressed
to be absolute, whenever such title is in substance taken or retained for security only.
RIGHTS OF THE ENTRUSTER
1. He is entitled to the proceeds from the sale of the goods, documents or instruments released under a trust
receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt;
or
2. He is entitled to the return of the goods, documents of instruments in case of non-sale;
3. He may enforce all other rights conferred on him in the trust receipts, provided such are not contrary to the
provisions of the document; and
4. He may purchase the goods at the intended public sale (S7)

Validity of the security interest as against the creditors of the entrustee / innocent purchaser for value

Validity of entruster's security interest as against creditors.

The entruster's security interest in goods, documents, or instruments pursuant to the written terms of a trust
receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. (S12)
The only exception to the rule is when the properties are in the hands of an innocent purchaser for value and in
good faith. (S11)

Rights of purchaser for value and in good faith.

Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their
customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the
entrustee, acquires said goods, documents or instruments free from the entruster's security interest. (S11)

OBLIGATION AND LIABILITY OF THE ENTRUSTEE

Payment /Delivery of Proceeds of Sale or Disposition of Goods, Documents or Instrument

Obligations of the Entrustee when there has been a sale or disposition of goods, documents or instruments:
1. Hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt;
2. Receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the
amount owing to the entruster or as appears on the trust receipt;
3. Insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
4. Keep said goods or proceeds thereof whether in money or whatever form, separate and capable of
identification as property of the entruster;
5. Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
6. Observe all other terms and conditions of the trust receipt not contrary to the provisions of the TRL. (S9)

If the entruster were to cancel the trust receipt and take possession of the goods, the repossession of the
goods does not amount to dacion en pago. Dation in payment takes place when property is alienated to the
creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the
delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of
the performance of the obligation. The repossession of the goods by the entrustee was merely to secure
the payment of its obligation to the entrustor and not for the purpose of transferring ownership thereof in
satisfaction of the obligation.
Return of Goods, Documents or Instruments in case of Non-Sale

The following are the obligations of the entrustee;

1. Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
2. Observe all other terms and conditions of the trust receipt not contrary to the provisions of the TRL

Failure of entrustee to turn over the proceeds of the sale of the goods, covered by trust receipt to entruster
or to return said goods if they were not disposed of in accordance with the terms of the trust receipt, shall
be punishable as estafa.

Liability for Loss of Goods, Documents or Instruments

The risk of loss shall be borne by the entrustee. Loss of goods, documents, and instruments which are the
subject of the Trust Receipts Law, pending their disposition, irrespective of whether or not it was due to the fault
or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. (S10)

The Supreme Court held that the transactions referred to in relation to trust receipts mainly involved sales
and if the entruster knew even before the execution of the alleged trust receipt agreement that the goods
subject to the trust receipt were never intended by the entrustee for the resale or for the manufacture of
items to be sold, the agreement is not a trust receipt transaction but a simple loan, notwithstanding the
label.

Penal Sanction if Offender is a Corporation (S13)

The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return
said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the
trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315 (1b) of the RPC

If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal
offense.

Persons criminally liable

1. Directors;
2. Officers; and/or
3. Employees or other officials or persons therein responsible for the offense

Being charged with a criminal liability is without prejudice to the civil liabilities arising from the criminal
offense of a corporation, partnership, association or other judicial entities found to have violated the
obligation imposed under the law, the rationale being that these officers and employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law, and if they fail to
do so, they are held criminally accountable.

The principle of res perit domino will not apply in trust receipt transaction. Under the law, while the entruster
is made to appear as owner of the goods covered by thegard trust receipt, such ownership is only a legal
fiction to enhance the entruster security interest over the goods.

Civil case filed by the entruster against the entrustee is proper because the breach of obligation is spate
and distinct from any criminal liability for misuse/misappropriate of goods or proceeds realized from the sale
of goods released under trust receipts. Being based on an obligation ex contractu, the civil obligation may
 proceed independently of the criminal proceedings instituted against the entrustees regardless of the result
of the latter.

REMEDIES AVAILABLE

Remedies of entruster when the entrustee fails to comply with terms and conditions of the trust receipt:
1. Cancel the trust
2. Tale possesions of the proceeds realized therefrom
3. Take possession of the goods, documents or instruments subject of the trust and sell them at public or
private sale
4. Criminal liability for Estafa both under the TRL and RPC
5. Liability for Damages under Article 33 of the Civil code, without need of proving intent to defraud because it
is malum prohibitum

Implications if entrustee has been criminally charged but he complied with his obligations:
1. If the entrustee complied with his obligations before there has been a criminal charge, there is no criminal
liability
2. If the entrustee complied with his obligations after there has been a criminal charge, but before conviction,
the criminal liability shall be extinguished.

WAREHOUSEMANS LIEN
A warehouseman has a lien on the goods deposited on the proceeds thereof in his hands for:
1. all lawful charges for storage and preservation of the goods;
2. all lawful claims for money advanced; and
3. all reasonable charges and expenses for notice and advertisement of the sale, and for the sale of the goods
where default has been made in satisfying the warehousemans lien.

GR: A warehouseman cannot set up title in himself.

EXC: When such title or right is derived directly or indirectly from a transfer made by the depositor at the time of
or subsequent to the deposit for storage, or from the warehousemans lien, shall excuse the warehouseman from
liability for refusing to deliver the goods according to the
terms of the receipt.

The legal remedy of the warehouseman in case of conflicting claims is to file an action for interpleader.

The unconditional presentment of the receipts for payment carried with it the admissions of the existence
and validity of the terms, conditions and stipulations written on the face of the warehouse receipts, including
the unqualified recognition of the payment of warehousemans lien for storage fees and preservation
expenses.
 NEGOTIABLE INSTRUMENTS LAW

Requisites of Negotiability:
a. It must be in writing and signed by maker or drawer;
b. Must contain an unconditional promise or order to pay of 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 bearer (badges of negotiability); and
e. If the instrument is addressed to a drawee; he must be named or otherwise indicated therein with
reasonable certainty.

The negotiability or non-negotiability of an instrument is determined from the face of the instrument itself.
The duty of the court in such case is to ascertain, not what the parties may have secretly intended but the
meaning of the words they have used.

A negotiable instrument need not follow the exact language of the code, as long as the terms are sufficient
which clearly indicate an intention to conform to the requirements of the law. Letter e this section applies
only to bills of exchange, because a promissory note has no drawee.

A negotiable instrument may, instead of being negotiated, also be assigned or transferred. A non-negotiable
instrument may not be negotiated, but may be assigned or transferred, absent an express prohibition
against assignment or transfer written on the face of the instrument.

The electronic messages are not negotiable instruments since:

1. It is not signed
2. Do not contain an unconditional order to pay a sum certain in money as the payment is supposed to
come from a specific fund
3. They are not payable to order or bearer but to a specifically designated third party

Fictitious payee rule

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. A check is a bill of exchange drawn on a bank payable on
demand. It is either an order or a bearer instrument.

Bearer vs. Order Instruments

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 mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. An instrument is negotiated when it is

transferred from one person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder completed by delivery.

When is an instrument payable to a specified payee considered a bearer instrument

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.

Effect of fictitious-payee situation

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 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.

Exception to the fictitious-payee rule:

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 this defense. The
exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme.

Effect of antedating or postdating an instrument

The instrument is not invalid provided that this 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.

Section 14 of NIL
If the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a
negotiable instrument, that person is deemed to have prima facie authority to fill it up. In order, however, that any
such instrument when completed may be enforced against any person who became party thereto prior to its
completion, two requisites must exist:
1. That the blank must be filled strictly in accordance with authority given; and
2. It must be filled up within a reasonable time.

If it was proven that the instrument had not been filled up strictly in accordance with the authority given and within
reasonable time, the maker can set up as a personal defense and avoid liability.

Holder In Due Course

A holder in due course is a holder who has taken the instrument under the following conditions:
1. That it is complete and regular upon its face;
2. That he became holder of it before it was overdue and without notice that it had been previously
dishonoured, if such was the fact;
3. That he took it in good faith and for value;
4. 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 person negotiating it.

Shelter Rule
A holder who derives his title through a holder in due course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.
(S58)

Accommodation Party
An accommodation party as a person "who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to some other person."
The accommodation party is liable on the instrument to a holder for value even though the holder, at the time of
taking the instrument, knew him or her to be merely an accommodation party, as if the contract was not for
accommodation.

Material Alteration
A material alteration is defined in Section 125 of the NIL to be one which changes the date, the sum payable, the
time or place of payment, the number or relations of the parties, the currency in which payment is to be made or
one which adds a place of payment where no place of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect.

It means an unauthorized change in an instrument that purports to modify in any respect the obligations of a
party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to
the obligation of a party.

Drawee bank pays a materially altered check

When the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to
charge its clients account only for bona fide disbursements he had made. Since the drawee bank, in the instant
case, did not pay according to the original tenor of the instrument, as directed by the drawer, then it has no right
to claim reimbursement from the drawer, much less, the right to deduct the erroneous payment it made from the
drawers account which it was expected to treat with utmost fidelity.

Exception would be when the drawer was one who made or authorized the alteration or when he failed to
exercise reasonable diligence to avoid it

Forgery; Effect: Exception

It is a rule that when a signature is forged or made without the authority of the person whose signature it purports
to be, the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party, can be acquired through or under such signature. However, the rule
does provide for an exception, namely: unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.

The general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception
arises only when the 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.

Where an instrument is payable to the order of two or more payees or indorsees, who are not partners, all must
indorse unless the one indorsing has authority to indorse for the others. The payment of an instrument over a
missing indorsement is the equivalent of payment on a forged indorsement or an unauthorized indorsement in
itself in the case of joint payees. The collecting bank or last endorser, generally suffers the loss because it has
the duty to ascertain the genuineness of all prior indorsements 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 prior indorsements.

The reasonable period within which to present a check to the drawee bank is 6 months, thereafter, the check
becomes stale and the drawer is discharged from liability.

Managers Check; Cashier Check;

1. Managers check is one drawn by the banks manager upon the bank itself. It is regarded substantially
to be as good as the money it represents
2. Cashiers check is a check of the banks cashier on his own or another check. 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.
Effects of certifying a check
The effects are the following:
1. It is equivalent to acceptance and is the operative act that makes the bank liable (S187)
2. It amounts to the assignment of the funds of the drawer in the hands of the drawee (S189)
3. If obtained by the holder, persons secondariliy liable are discharged.

Considerations
Under the NIL, it is presumed that every party to an instrument acquires the same for a consideration or for
value. It devolves upon the party who claims that there is no consideration to present convincing evidence to
overthrow the presumption and prove that the checks were in fact issued without valuable consideration.

Inland vs. Foreign Bill

INLAND BILL OF EXCHANGE FOREIGN BILL OF EXCHANGE
Bill which is, or on its face purports to be, both drawn Bill which may be drawn outside the Philippines,
and payable within the Philippines payable outside the Philippines, or both drawn and
payable outside of the Philippines.

Need not to be protested Must be protested in case of dishonor to charge the

drawer

Effect of Failure to Protest a sight draft

The drawer will be discharged from liability under the sight draft when there is a failure to protest the draft for
non-acceptance. A sight draft made payable outside the Philippines is a foreign bill of exchange. When a foreign
bill of exchange is dishonoured by non-acceptance or non-payment, protest is necessary to hold the drawer and
indorsers liable.

Effect on the liability of indorsers if instrument is dishonoured for non-payment

After an instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable; they become
principal debtors whose liability becomes identical to that of the original obligor. The holder of a negotiable
instrument need not even proceed against the maker before suing the indorser.

Effects of crossing a check

1. that the check may not be encashed but only deposited in the bank;
2. that the check may be negotiated only once - to one who has an account with a bank; and
3. that 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 such holder must inquire if the check has been received pursuant to that purpose.

Cases where the drawer not excused from payment despite lack of notice of dishonor

Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer
in either of the following cases:
a. Where the drawer and drawee are the same person;
b. When the drawee is fictitious person or a person not having capacity to contract;
c. When the drawer is the person to whom the instrument is presented for payment;
d. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
e. Where the drawer has countermanded payment.

Thus, where drawers bank account was already closed even before the issuance of the subject check, he had
no right to expect or require the drawee bank to honor his check. By virtue of the aforequoted provision of law,
petitioner is not entitled to be given a notice of dishonor.

Acceptance of bill mean; how made

Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not
express that the drawee will perform his promise by any other means than the payment of money.

When is acceptance of bill qualified

Sec. 141. Qualified acceptance. - An acceptance is qualified which is:
(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition
therein stated;
(b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a particular place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but not of all.

Instances when presentment is needed

Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Instances when a general indorser is liable despite lack of notice of dishonor

Sec. 115. When notice need not be given to indorser. Notice of dishonor is not required to be given to an
indorser in either of the following cases:chanroblesvirtuallawlibrary
(a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was
aware of that fact at the time he indorsed the instrument;
(b) Where the indorser is the person to whom the instrument is presented for payment;
(c) Where the instrument was made or accepted for his accommodation.

Discharge of NIL
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or accepted for
his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing
an obligation by another which substitutes the same.
1. novation must be explicitly stated and declared in unequivocal terms as novation is never presumed.
2. the old and the new obligations must be incompatible on every point.
In the instant case, there was no express agreement that holders acceptance of the replacement check will
discharge drawer and endorser from liability.

Neither is there incompatibility because both checks were given precisely to terminate a single obligation
arising from same transaction.