San Beda College *Compiled Notes in Negotiable Instruments Law * By Atty.

Oliver CachaperoJr (OCJ)

NEGOTIABLE INSTRUMENT

It is a written contract for the payment of money which is intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free
from defenses available to prior parties

An oral arrangement cannot be considered a negotiable instrument

If the instrument is payable to goods, wares, properties, labor or service, corporate stocks, checks, it is no longer
negotiable because the same is not in payment of money; their value is not standard since it fluctuates

GOVERNING LAW

1) Negotiable Instruments Law (NIL);
2) Provisions of Code of Commerce which were not impliedly repealed by the NIL;
3) Civil Code which applies suppletorily;
4) Decisions of the Courts in the United States and England

The NIL was enacted on February 3, 1911 and it was never amended since then

If the instrument is non-negotiable, what applies is the Civil Code and applicable special laws

FUNCTIONS OF NEGOTIABLE INSTRUMENTS

1) It operates as a substitute for money;
2) It is a means of creating and transferring credit;
3) It facilitates the sale of goods;
4) It increases the purchasing medium in circulation

DISTINCTIVE FEATURES OF NEGOTIABLE INSTRUMENTS

1) Negotiability;
2) Accumulation of secondary contracts

Negotiability is an attribute whereby a NI passes or may pass from hand to hand similar to money, so as to give the
HIDC the right to hold the instrument and collect the sum free from defenses

LEGAL TENDER

According to Section 52 of the New Central Bank Act, only notes and coins issued by the Bangko Sentral
ngPilipinas (BSP) are considered legal tender. Nevertheless, a check that has been cleared and credited to the
account of the creditor shall be equivalent to delivery to the creditor of cash.

NEGOTIABILITY VS ASSIGNABILITY

a) Assignability pertains to contracts in general while Negotiability pertains to negotiable instruments (NI);
b) One who takes an instrument by assignment takes the instrument subject to the defenses obtaining among the
original parties (he merely steps into the shoes of the transferor) while a person who takes the instrument by
negotiation takes it free from personal defenses available among parties

NEGOTIABLE INSTRUMENT VS NON-NEGOTIABLE INSTRUMENT

a) Only NIs are governed by the NIL, if it is not negotiable, NIL only applies by analogy;
b) NIs can be transferred by negotiation or by assignment while non-NIs can be transferred only by assignment;
c) A transferee of a NI can be a holder in due course, while a transferee of a non-NI can never be a holder in due
course but remains to be an assignee;
d) In NI, the transferee takes the NI free from personal defenses, while in non-NI, all defenses available to prior
parties may be raised against the last transferee;

ARE THE FF. COMMERCIAL PAPERS NEGOTIABLE INSTRUMENT

a) Crossed Check – Yes. Because it complies with Section 1 of the NIL
b) Trade Acceptance – Yes. It is a kind of bill of exchange
c) Money Order – No. It is governed by Postal Rules and Regulations which may be inconsistent with NIL
d) Bill of Lading – No. It represents goods, not money
e) Warehouse Receipt – No. It represents goods, not money
f) Pawn Ticket – No. It represents the pawned article and not money
g) Trust Receipt – No. It is an evidence of ownership of goods, not money

KINDS OF NEGOTIABLE INSTRUMENTS

1. Bill of Exchange (BOE)
2. Promissory Note (PN)
3. Check

Bill of Exchange

P10,000.00 Makati City

October 21, 2013

Thirty days after sight, pay to the order of Juan Dela Cruz the amount of
ten thousand pesos (P10,000.00). Value received and charged to the account
of:


To: Maria Clara
Makati City



Promissory Note
P10,000.00
Makati City

October 21, 2013

For the value received, I promise to pay to the order of Juan Dela Cruz the

amount of ten thousand pesos (P10,000.00) on or before December 1, 2013,

atPhilippine National Bank, Makati City.









Check

October 21, 2013

Pay to the order of Juan Dela Cruz the sum of ten thousand pesos
(P10,000.00).



To: Philippine National Bank
Makati City


DISTINCTION BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE

a) Unconditional promise vs unconditional order;
b) Involves two parties vs involves three parties;
c) Maker is primarily liable vs Drawer is secondarily liable;
d) Only one presentment vs two presentments needed

DISTINCTION BETWEEN A BILL OF EXCHANGE AND A CHECK

a) Not drawn on a deposit, hence, it is not necessary that a drawer of a BOE should have funds in the hands of the
draweevs it is necessary that a check is drawn on a deposit, otherwise, there would be fraud;
b) Death of the drawer of a BOE with the knowledge of the bank does not revoke the authority of the banker to
pay vs Death of the drawer of a check with the knowledge of the bank revokes the authority of the banker to pay;
c) May be presented for payment within a reasonable time after its last negotiation vs may be presented for payment
within a reasonable time after its last issue

PERSONS/PARTIES INVOLVED

Maker, Payee, Drawer, Drawee, Acceptor, Holder, Referee in Case of Need

INCIDENTS IN LIFE OF NEGOTIABLE INSTRUMENTS

1. issue
2. negotiation
3. presentment for acceptance (in certain kinds of BOE)
4. acceptance
5. dishonour by non-acceptance
6. presentment for payment
7. dishonour by non-payment
8. notice of dishonour
9. discharge

REQUISITES OF NEGOTIABILITY

1) It must be in writing and signed by the maker or drawer
2) It must contain an unconditional promise or order to pay a sum certain in money
3) It must be payable on demand or at a fixed or determinable future time
4) It must be payable to order or to bearer
5) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty

Requisite #5 applies only to Bills of Exchange

HOW IS THE NEGOTIABILITY OF AN INSTRUMENT DETERMINED

1. by considering the whole of the instrument;
2. by considering what appears on the face of the instrument;
3. by complying with the provisions of Sec 1 of the NIL

Illustration #1

P10,000.00 Makati City

October 21, 2013

For the value received, I promise to pay to the order of Juan Dela Cruz the
amount of ten thousand pesos (P10,000.00) on or before December 1, 2013,
subject to the terms and stipulations contained in the Deed of Sale executed
by us to date, at Philippine National Bank, Makati City.



Illustration #1 is not negotiable because it does not comply with #2 (by considering what appears on the face of
the instrument)

IT MUST BE IN WRITING

Written includes printed and the terms may be written on any kind of materials as long as it is a substitute of paper

SIGNED BY THE MAKER OR DRAWER

Illustration #2

P10,000.00 Makati City

October 21, 2013

For the value received, I promise to pay to the order of Juan Dela Cruz the
amount of ten thousand pesos (P10,000.00) on or before December 1, 2013,
at Philippine National Bank, Makati City.


X



Illustration #2 still complies with Section 1 of NIL. It is not necessary that the signature is the usual signature of
the maker. As long as it is intended to be the signature of the maker

PROMISE OR ORDER TO PAY

The words “promise” or “order” need not appear on the instrument to make it negotiable. It would be sufficient as
long as the words written indicate a promise or order to pay. Example: “payable”, “paid when called for”, “due to A
or order” and the like

Mere acknowledgment of the debt or mere request or mere authority to pay is not sufficient. It must be a promise
or order to pay.

PROMISE OR ORDER MUST BE UNCONDITIONAL

It is unconditional if there is an indication of a particular fund out of which reimbursement is to be made.

Hence, it is conditional if it is:
1. To be paid out of a particular fund;
2. Payable upon a contingency

An instrument which states that the maker promises to pay “as soon as his means permit him to do so” is not
negotiable because the same makes the payment conditional

PAYABLE IN SUM CERTAIN IN MONEY

When it can be ascertained by mere mathematical computation

If the instrument is payable in foreign bill (i.e. dollar, yen) it is still negotiable under R.A. 8183

Illustration #3

P10,000.00 Makati City

October 21, 2013

For the value received, I promise to deliver to Juan Dela Cruz or bearer the
amount of ten thousand pesos (P10,000.00) or a sack of rice, at my option,
on or before December 1, 2013, at Philippine National Bank, Makati City.




Illustration #4
P10,000.00
Makati City

October 21, 2013

For the value received, I promise to pay to Juan Dela Cruz or bearer the

amount of ten thousand pesos (P10,000.00) or a sack of rice, at the option

of the holder, on or before December 1, 2013, at Philippine National Bank,
Makati City.



Illustration #3 is non-negotiable because the option is given to the debtor; while Illustration #4 is negotiable
because the option is given to the creditor

Stated instalments require that the amount to be paid for each instalment and the date for every instalment must be
fixed or at least determinable

PAYABLE ON DEMAND

1. When it is so expressed to be payable on demand or at sight or on presentation;
2. In which no time for payment is expressed;
3. Where an instrument is issued, accepted, or indorsed when overdue, it is as regards the persons so issuing,
accepting or indorsing it, payable on demand

The instrument is payable on demand if it should be paid the moment it is presented for payment

PAYABLE AT A FIXED TIME

Example: Payable on January 1, 2014

PAYABLE AT A DETERMINABLE FUTURE TIME

1. At a fixed period after date or sight (ex. 20 days after date);
2. On or before a fixed or determinable future time specified therein (ex. Payable on or before Jan 1 2014);
3. 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 (ex. Payable within 5 days from the death of Mr. X)

PAYABLE TO ORDER

For an instrument payable to order to be negotiable, it must be either any of the following: “payable to order of Mr
A”, “payable to order of Mr A or bearer”, “payable to Mr A or order”

An instrument payable to order cannot be negotiated without indorsement

PAYABLE TO BEARER

1. When it is expressed to be so payable;
2. When it is payable to a person named therein or bearer;
3. When it is payable to the order of a fictitious person or non-existing person and such fact was known to the
person making it so payable;
4. When the name of the payee does not purport to be the name of any person (ex. pay to cash);
5. When the only or last indorsement is an indorsement in blank

Payable to “bearer A” is payable to a specified person, hence, non-negotiable; same with payable to “A or his agent”

in #3, it is not required that the person is actually fictitious or non-existent. As long as the drawer does not intend
the payee to have any right over the instrument, even if the payee is actually existing, it is payable to bearer

OMISSIONS THAT DO NOT AFFECT NEGOTIABILITY

1. Not dated (referring to the date of issuance);
2. Does not specify the value given or that any value had been given therefor
3. Does not specify the place where it is drawn or the place where it is payable
4. Bears a seal
5. Designates a particular kind of current money in which payment is to be made
6. Addressed to more than one drawees jointly

Illustration #5

P10,000.00 Makati City

October 21, 2013

For the value received, we jointly and severally promise to pay to the ITM
Corporation the amount of ten thousand pesos (P10,000.00), the said
principal sum to be payable equally in 24 monthly instalments starting July
15, 2013 and every 15th of the month thereafter until fully paid at Philippine
National Bank, Makati City.


OTHER CONSTRUCTIONS AND INTERPRETATIONS

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 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 to from which the
interest is to run, the instrument 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 provision
prevails;
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 the 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 deemed to be 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

PRESUMPTION OF CONSIDERATION

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

Said presumption is disputable and not conclusive

WHAT CONSTITUTES VALUE

A consideration sufficient to support a simple contract. This includes antecedent debts and a lien on the instrument

A consideration founded on love and affection is a good consideration but does not constitute such valuable
consideration as is sufficient of itself to support the obligation of a bill or note

ACCOMMODATION PARTY

A person who signs the instrument as maker, drawer, acceptor or indorser but does not receive value therefore, for
the purpose of lending his name to some other person

Requistes:
1. He must be a party to the instrument signing as maker, drawer, acceptor or indorser;
2. He must not receive value therefor; and
3. He must sign for the purpose of lending his name or credit

#2 requisite pertains to thevalue by virtue of the instrument, hence, not receiving payment for lending his name
thereof

A corporation cannot be an accommodation party since a corporation cannot issue or indorse a negotiable
instrument without consideration and for the accommodation of another, the same being an ultra vires act

The relationship between the accommodation party and the accommodated party is one of principal and surety;
principal is the accommodated and surety is the accommodation party

An AP can either be primary or secondary liable on the instrument based on what capacity he is signing for

If A is the accommodation party and B is the accommodated party, while C is a holder in due course, A can validly
refuse paying C on the ground that there is absence of consideration between him (A) and B. But A cannot refuse
payment on the ground that he did not receive any consideration from the instrument.

If P, the president of X Corporation, accommodated his friend A by signing as drawer in a check and VP, the vice
president of the corporation, co-signed the check. The check was delivered to B but the same was dishonoured for
lack of funds, X Corporation cannot be held liable. It is P and VP who should be held liable and in their personal
capacities, not as President or Vice President of X Corporation

DISTINCTIONS BETWEEN REAL AND PERSONAL DEFENSES

Real or (1)AbsoluteDefenses, attach to the instrument and (2)are available against all holders, whether in due course
or not, (3)but only by the party or parties entitled to raise them.

Personal or (1)Equitable Defenses are available only against the holder who stands in privity with the party who is
entitled to set up or (2)those who are not or do not have the rights of a holder in due course.

HOLDER IN DUE COURSE

A holder could be the payee or indorsee in an order instrument; while a holder could be a payee or bearer in a
bearer instrument

REQUISITES (Section 52 of the NIL):
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 the holder of it before it was overdue and without notice that it has 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 the person negotiating it;

Even if you are not a HIDC, you are still a creditor and the obligation to be paid by the instrument still subsists.
The only disadvantage of being a non HIDC is that you are subject to defenses as if it were non-negotiable – real as
well as personal

NEGOTIATION

When it is transferred from one person to another so 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 and completed by delivery

An instrument payable to bearer which is specially indorsed may nevertheless be further negotiated by delivery since
a bearer instrument is always a bearer instrument. But any person indorsing specially is liable as indorser but only to
holders who secured title from such indorsement.

INDORSEMENT

By affixing the signature either (1)on the instrument itself; or (2)on a separate piece of paper attached to the
instrument called “allonge”

WARRANTY OF A GENERAL INDORSER (Sec. 66 of the NIL):

(1) That the instrument is genuine and in all respects what it purports to be;
(2) That he has a good title to it;
(3) That all prior parties had capacity to contract;
(4) That the instrument is, at the time of the endorsement, valid and subsisting
It also engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its
tenor; and if it be dishonoured and the necessary proceedings on dishonour be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

TO WHOM WARRANTIES EXTEND

If bearer instrument, extends only to immediate transferee
If order instrument: (1)subsequent holders in due course; (2)persons who derive their title from holders in due
course; (3)immediate transferees even if not a holder in due course

A makes a note payable to P or order. P, on the other hand, negotiated the instrument by indorsement to C, then C
to D, then D to E, the current holder. To enforce payment, E should go after A, the party primarily liable. If A
refuses to pay, E, now, can go after any of the indorsers (P, C or D) since they are the parties secondarily liable.

A makes a note payable to bearer. He negotiates this thru delivery to B, then B delivers it to C, C delivers it to D,
then the same to H, the current holder. (A---B---C---D---H). Who is the person primarily liable? It is A since it is a
promissory note. So, H can go after A for payment. But ifA refuses for a valid reason, H can go after D only, the
party to whom H has a privity and considered the immediate party since the instrument is a bearer instrument and
there are no indorsements made.

A makes a promissory payable to bearer and delivers the same to B. B, however, indorses it to C. C, without
indorsing the instrument, delivers the same to H. Can H hold A liable? Yes, since a bearer instrument is always a
bearer instrument. Even if there was an indorsement, the instrument remains to be a bearer instrument and A
undertakes to pay the bearer of the instrument.Indorsement is not necessary to derive title in a bearer instrument

WHAT ARE THE DIFFERENT DEFENSES

 PERSONAL DEFENSES REAL DEFENSES
1. Failure or absence of consideration 1. Minority (available only to minor)
2. Illegal consideration 2. Forgery
3. Non-delivery of complete instrument 3. Non-delivery of incomplete instrument
4. Conditional delivery of complete instrument 4. Material alteration
5. Fraud in inducement 5. Ultra vires act of corporation
6. Filling up blank not within authority 6. Fraud in factum or essecontractus
7. Duress or intimidation 7. Illegality (if declared void for any purpose)
8. Filling up blank beyond reasonable time 8. Vicious force or violence
9. Transfer in breach of faith 9. Want of authority
10. Mistake 10. Prescription
11. Insertion of a wrong date 11. Discharge in insolvency
12. Ante-dating or post-dating for illegal fraudulent
purpose

TWO STEPS IN PREPARINGA NEGOTIABLE INSTRUMENT

1. Mechanical act of writing and complying with the requisites of Sec. 1 of NIL
2. Delivery

WHEN DATE MAY BE INSERTED (SEC. 13)

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 HIDC; but as to him,
the date so inserted is to be regarded as the true date.

A makes a note payable to B or bearer and the same is payable 60 days after date. A delivers it to B and B delivers it
to C, the current holder. The instrument, however, is not dated. Who can insert the date? The holder, C, can insert
date. What if C inserted a wrong date then later on delivered it to D, then D to E, E to F, F to G and G to H who
knew that the date inserted is a wrong date. If H enforces payment of the instrument against A, the party primarily
liable, A can refuse payment since the defense of insertion of a wrong date is a personal defense and it can be raised
against a non-HIDC. H is a non-HIDC. But if H is a HIDC, A cannot refuse payment.

INCOMPLETE BUT DELIVERED (SEC. 14)

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.

Material particulars are as follows: omission that will render the instrument non-negotiable like name of the payee
or that of the drawee; as well as omission that will not render the instrument non-negotiable like date, rate of
interest, place of payment

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 out 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 (1)filled up strictly in accordance with the authority given and
(2)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.

Reasonable time would depend on the (1)nature of the instrument (2)usage of trade or business (3)facts of the
particular case

A fan of Marian Rivera, A, asked herto autograph a blank paper. Later on, A added on top of the signature the
following: “Marian Rivera promises to pay the bearer P1M.”Does it create a prima facie authority for A to fill up the
paper? NO because the person whose signature appears thereon had no intention of converting the blank
instrument into a NI.

D authorizes P to write the amount of P10,000 on the check. But P wrote P100,000 thereon. The same was
dishonoured by Drawee B. How much can D be held liable? NONE, since the instrument was not filled out in
accordance with the authority given and since it is a personal defense, it can be set up against P, a non-HIDC.

What if P negotiates it to A, a HIDC. How much can A recover? The whole P100,000 since for him, the instrument
has been filled out in accordance with the authority given.

INCOMPLETE AND UNDELIVERED (SEC. 15)

Where an incomplete instrument has not been delivere, 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

A signed a blank check but X stole it then filled out with the amount and named himself as payee.X indorsed it to
to C to D to E then to F, the current holder who is a HIDC. Can H enforce the instrument against A since it is his
signature that appears on the instrument? NO since his signature appears thereon prior to delivery and the defense
of incomplete and undelivered is a real defense which can be raised against any kind of holder. To whom, then, can
H enforce the payment? X as the thief or C, D, E, F as indorsers.

COMPLETE BUT UNDELIVERED (SEC. 16)

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 remote party other than a HIDC, 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 HIDC, 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.

A signs a promissory note payable to B or bearer. Before delivery, however, A misplaced the note. X found it
somewhere, then he negotiated it by delivery to B, who took the note in bad faith. Can B enforce payment against
A? Yes since A is the party primarily liable, but A can raise the personal defense of want of delivery which can be
set up against a non-HIDC like B.

CONDITIONAL DELIVERY

If the condition is attached on the delivery, the instrument is still negotiable. However, if the condition is attached
on the promise or order to pay, the instrument, this time, is non-negotiable.

A makes a note in favour of B with the understanding that delivery will not be complete until B passes the Bar
Exams. The instrument is still negotiable but it is subject to the personal defense of conditional delivery.

LOST INSTRUMENT

If a drawer loses the instrument, so as to avoid negligence, what should he do? No title to a lost bill or note is
vested in the finder; but the owner of the lost instrument must observe due diligence such as informing the drawee
bank in case of a bill that the instrument is lost and should not pay to anyone therefore

FRAUD

(1)fraud in factum or fraud in essecontractusand (2)fraud in inducement

First one is present when a person is induced to sign an instrument not knowing its character as a note or a bill.
Example: a blind person who was made to sign a piece of paper he believes to be a credit application although it is
really a promissory note; it is a real defense. Here, there was no intention on the part of the blind person to make a
negotiable instrument.

Second one is present when a person who signs the instrument intends to sign the same as a negotiable instrument
but was induced to do so only through fraud, hence, his consent was vitiated by fraud; a personal defense. Example:
A sells to B what he represents to B as a diamond ring, which in fact is only glass. B issues to A a check. Here, there
is an intention (of B) to issue an instrument.

FAILURE, ABSENCE OF, OR ILLICIT CONSIDERATION

These are only personal defenses, but with respect to illegality, it could be a real defense if the law declares the
instrument void for any purpose

A bill of exchange was issued because of the love and affection of the drawer for the payee. Can the drawer be held
secondarily liable on the instrument? NO, while the love and affection may be a good consideration, it is not a
valuable consideration. The defense of absence of consideration may be raised, the payee being a non-HIDC. This
general rule applies between a drawer and a payee. But what if payee indorses it to A, B, C and D, a HIDC. Can D
hold the drawer secondarily liable? YES, because absence of consideration is only a personal defense.

MINORITY OR INCAPACITY OR WANT OF AUTHORITY

It includes ultra vires act of a corporation (beyond the powers)

They are real defenses, but in case of minority or incapacity, it can only be raised by the party suffering minority or
incapacity

M makes a note payable to X (a minor) or bearer.X indorses it to A, the current holder who is a HIDC. Can A hold
X, a minor, liable? NO, he can raise the defense of minority which is a real defense. Can A hold M liable? YES. Can
A raise the real defense of minority? NO since it is only X who can raise the said defense. Besides, by making the
instrument, M admits the existence of the payee and his capacity to indorse.

PRESCRIPTION

The prescriptive period for filing a claim based on negotiable instruments is ten years from the time the cause of
action accrued. So, if the payee did not encash a check for more than 10 years, the check is already impaired thru
the payee’s unreasonable and unexplained delay in encashing it. BUT, the contractual obligation remains.

FORGERY

WHAT ARE THE EFFECTS OF FORGERY?

1. The signature is wholly inoperative
2. No right to retain the instrument
3. No right to give a discharge by virtue of the instrument
4. No right to enforce payment against any party

Except when the party is precluded from setting up the forgery

IS THE INSTRUMENT WHOLLY INOPERATIVE IF THE SIGNATURE APPEARING THEREON IS
FORGED?

No, only the forged signature is wholly inoperative. Instrument and genuine signatures remain valid.

WHO ARE THOSE PRECLUDED FROM SETTING UP THE DEFENSE OF FORGERY?

1. Those who warrant such as the indorser, acceptor
2. Those who are estopped by virtue of their act, silence, omission or negligence
3. The forger, himself
4. Party negotiating by delivery in a bearer instrument

WHEN THE DRAWER/MAKER’S SIGNATURE IS FORGED

 X forged the signature of A, making it appear that A draws a bill payable to X or order and drawn against
drawee bank B.

X indorsed the said instrument to C, to D, then to E, the current holder who took it in good faith and for
value.

Can B be held liable? (YES/NO)

What if B accepted the bill and paid, can he ask reimbursement from A by debiting the account of A for
the amount it paid? (NO)

To whom should B ask payment? (X)

What if B dishonoured the instrument, can E hold A liable? (NO)

To whom should E enforce payment? (X, C and D)


WHEN AN INDORSER’S SIGNATURE IS FORGED AND THE INSTRUMENT IS PAYABLE TO ORDER

A makes a note payable to B or order

B indorsed the instrument to C, in whose hands it is stolen by X

X forged C’s signature and indorsed it to E. E indorsed the instrument to F, a HIDC

Can F hold A liable? (NO, cut-off rule)

Can F hold B liable, he being an indorser? (NO, cut-off rule)

Can enforce payment against C? (NO)

To whom should F validly enforce payment? (X and E)

Now, can C still enforce payment against A or B? (Yes, he being the real owner, but before payment,
instrument must be surrendered so he also has the right to recover possession of the instrument from F)

WHEN AN INDORSER’S SIGNATURE IS FORGED AND THE INSTRUMENT IS PAYABLE TO BEARER

A makes a note payable to B or bearer.

A, then, delivers the note to B, B delivers it to C.

Thereafter, X obtains possession of the note fraudulently. He indorsed the note to D by forging the
signature of C. D indorsed the instrument as well to E, the current holder who took it in good faith and for
value.

Can E hold A liable? (YES, indorsement is not necessary in the title of E)

Can E hold B liable? (NO, not immediate party, hence, no privity, not cut-off rule)

Can E hold C liable? (NO)

Who can E hold liable? (X and D)

Why D, it is a bearer instrument and indorsement is not necessary to pass title? (Immediate party)

What if E is not a HIDC, can he still enforce liability against A? (NO this time since A can raise the defense
of want of delivery, it being a personal defense)


DRAWEE ACCEPTS THEN LATER ON REFUSES

A draws a bill against B payable to the order of P

Bill was stolen by X before delivery to P and forged the signature of A. X indorsed it to C, C indorsed it to
H, who knew that the instrument was the product of forgery

B accepted the bill. When H was about to encash the instrument, B discovered that the signature of A was a
forgery and so he now refused to pay.

Can B validly refuse payment? (NO)

Who can be held liable then? (X and C)


NEGLIGENCE ON THE PART OF THE PERSON WHOSE SIGNATURE IS FORGED

A appears to be the maker of a promissory note but the truth is his signature is forged by X. The said note
is payable to B or bearer.

C wants to buy the note but before buying it, he asked A if the signature appearing thereon is his signature.

A says it is his signature.

Can C collect from A? (YES, A is estopped from setting up the defense of forgery)


WITH A COLLECTING BANK

D draws a bill payable to the order of P and it is drawn against X drawee bank

Before delivery to P, the bill was stolen by T

T then forged the signature of P

T opened an account with Y collecting bank and deposited the check

Y bank forwarded the check for clearing. Check was cleared by X bank and paid it to Y bank

T withdrew the entire amount from Y bank and disappeared in a blink of an eye

Discuss the liabilities of each party.

Can X debit the amount paid on the account of D? (NO since it is not the order of P and cut off rule)

To whom can drawee ask reimbursement of the amount it paid? (T, as forger or Y, collecting bank since by
forwarding the instrument for clearing, it acted as a last indorser)

If drawee erroneously debited the amount paid against the account of drawer, what is the recourse of D?
From Y? (NO, no privity) From X? (YES since it is the one which debited the amount but drawee has a
recourse from Y)

Can P, the original payee, still recover? (YES, but not based on the instrument but on the contractual
obligation of D) Can he go after X and Y? (NO, no privity)

So, who bears the loss? (Y, as between two negligent banks, the one which made the loss possible should
bear the loss)

MATERIAL ALTERATION

WHAT IS MATERIAL ALTERATION?
It is any alteration which changes the date, sum payable, time or place of payment, number or relation of parties, or
medium or currency of payment, or adds a place of payment where none is specified or which alters the effect of
the instrument in any respect

WHAT’S THE EFFECT?
Avoids the instrument but a HIDC can enforce it according to its original tenor.

EXCEPTIONS?
except as against the (1)party who made, authorized, or assented to the alteration and (2)subsequent indorsers.

IS ALTERATION OF SERIAL NUMBER OF A CHECK A MATERIAL ALTERATION?
NO. it does not alter the effect of the instrument, nor does it modify in any respect the obligation of a party. It
does not change the items which are required to be stated under Sec 1 of NIL

EXAMPLE OF MATERIAL ALTERATION
Example would be substituting the word ‘or bearer’ for ‘order’, change of date from which interest is to run, adding
the word ‘with interest’, altering the maturity of the note

IS IT A REAL OR PERSONAL DEFENSE?
It is a PARTIAL real defense because although it can be raised against any holder, a HIDC can still enforce the
instrument according to its original tenor.

DISTINGUISH MATERIAL ALTERATION FROM FORGERY
forgery applies to forged signature or signature without authority, if alteration of those mentioned under sec. 124, it
is material alteration

WHAT IF THE ALTERATION MADE IT MORE BENEFICIAL TO THE PARTIES
It is still alteration because the law does not distinguish and the purpose is to uphold the integrity of the instrument


M – maker
P – payee

M made a note payable to the order of P for P5,000.

P altered it and made it P50,000.

P negotiated it to A, B and C, who in good faith and for value took the instrument.

Q: Can C enforce the instrument against M? (YES)

Q: How much? (P5,000 only, original tenor)

Q: if refused to pay, to whom can C enforce payment and how much? (P, A, B; P50,000)

Q: What if C is not a HIDC, can he enforce payment against M? (NO)

Q: So he cannot enforce the instrument to anyone now that he is a non-HIDC? (to P, A and B as indorsers)

WHAT IS A BILL OF EXCHANGE?

It 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 a sum certain in money on demand or at a fixed or determinable future
time to order or to bearer

WHAT ARE THE DIFFERENT KINDS OF BILL OF EXCHANGE?

a. DRAFT – normally refers to a bill of exchange used in documentary exchange like letters of credit transactions

b. INLAND and FOREIGN BILL – an inland bill is a bill which is, or on its face purports to be, both drawn and
payable within the Philippines. Any other bill is a foreign bill

WHY IS IT IMPORTANT TO DISTINGUISH INLAND FROM FOREIGN BILL?
1. To determine which law should apply
2. A foreign bill, if dishonoured, must be protested, otherwise, parties secondarily liable are discharged

Illustration of a foreign bill:

Boston, Massachusetts
January 1, 2014

 Pay to Juan Dela Cruz or order, P10,000 at Suffolk Bank, Boston, Ma., 60
days after date

(Sgd.) Pedro Santos


c. TIME DRAFT – draft that is payable at a fixed date

d. SIGHT or DEMAND DRAFT – draft that is payable when the holder presents it for payment

e. TRADE ACCEPTANCE – bill that is used in contracts of sale where the seller as drawer orders the buyer as
drawee to pay a sum certain to the same seller (payee)

f. BANKER’s ACCEPTANCE – a time draft across the face of which the drawee has written the word accepted

g. CHECK – a bill of exchange drawn on a bank payable on demand

WHEN CAN A BILL OF EXCHANGE BE TREATED AS A PROMISSORY NOTE? WHO HAS THE
OPTION TO TREAT IT AS SUCH?

The HOLDER may treat a bill as a promissory note if:
1. The drawer and the drawee are the same person;
2. The drawee is a fictitious person;
3. The drawee has no capacity to contract;
4. The instrument is so ambiguous that there is doubt whether it is a bill or a note (optional)

WHAT ARE THE EFFECTS OF TREATING A BILL AS AS A PROMISSORY NOTE?
1. Drawer becomes a maker
2. Drawer becomes the party primarily liable

WHO IS A REFEREE IN CASE OF NEED? WHO INSERTS IT?

One whose name is inserted (by the holder) in the instrument to whom the current HOLDER may resort in case of
need, that is, when the bill is dishonoured

Illustration:

Pay to Juan Dela Cruz or order P10,000, 30 days after sight.

(Sgd.) John Doe

To Jane Doe
Quiapo, Manila

In case of need, apply to Pedro Santos, Kamuning Quezon City (Inserted by
Juan Dela Cruz)

Referee in case of need was inserted by Juan Dela Cruz. The bill, then, is indorsed by Juan Dela Cruz to A, B, C and
D. Jane Doe dishonors the bill.

Questions:
To whom should D ask payment? (John Doe, drawer, Juan Dela Cruz, A, B, C as indorsers or Pedro Santos as the
referee in case of need)

Pedro Santos paid, to whom should he ask reimbursement? (John Doe, drawer or Juan Dela Cruz, the one
who inserted his name in the instrument)

*****************

WHAT IS THE DEFINITION OF ACCEPTANCE?
It is the signification of the drawee of his assent to the order of the drawer

WHAT ARE THE REQUISITES OF ACTUAL ACCEPTANCE?
1. It must be in writing;
2. Signed by the drawee;
3. It must not express that the drawee will perform his promise by any other means than the payment of money;
4. It must be communicated or delivered to the holder

Can acceptance through telephone be valid?
No

How is acceptance made?
Writing on the face of the instrument any word which signifies to the order of the drawer

WHAT IF THE DRAWEE ACCEPTS THE BILL BUT DID NOT WRITE ITS ACCEPTANCE ON
THE INSTRUMENT?
The holder has the right to require that the acceptance must be written on the instrument.

What if after requiring, drawee still refuses to write its acceptance on the instrument?
Holder may treat the bill as dishonoured

IF A BILL HAS BEEN PRESENTED FOR ACCEPTANCE TO THE DRAWEE, WHAT TIME DOES
THE LAW REQUIRE FOR THE DRAWEE TO ACCEPT?
The drawee is allowed 24 hours from presentment to accept it; and such acceptance retroacts to the date when it is
presented

IF DRAWEE DOES NOT ACCEPT OR DESTROYED THE BILL DURING THE PERIOD GIVEN
BY LAW, WHAT IS THE EFFECT?
It is deemed to have accepted the same; this is what NIL considers as CONSTRUCTIVE ACCEPTANCE

WHAT ARE THE DIFFERENT KINDS OF ACCEPTANCE?
1. Actual
2. Constructive
3. General
4. Qualified

WHAT IS QUALIFIED ACCEPTANCE?
When it is conditional, partial, local, qualified as to time, etc.

WHAT ARE THE RIGHTS OF A HOLDER AS REGARDS QUALIFIED ACCEPTANCE?
Holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat
the bill as dishonoured by non-acceptance

WHAT IS THE EFFECT OF TAKING A QUALIFIED ACCEPTANCE?
Drawers and indorsers are discharged from liability
EXCEPTIONS:
-When drawer or indorsers expressly or impliedly authorized the holder to take a qualified
acceptance
-Or subsequently assented thereto
-Or when after being notified of the qualified acceptance, did not express his dissent thereto within
a reasonable time

**************

WHAT ARE BILLS IN SET?
It is only one bill that is composed of several parts, each part being numbered and containing a reference to the
other parts

WHAT IS THE PURPOSEFOR DRAWING BILLLS IN SET?
It is used in cases where a bill had to be sent to a distant place. If each part is sent by different means of
conveyances, the chance that at least one part of the set would reach its destination would be greater

DIFFERENT PARTS OF BILLS IN SET ARE CONSIDERED AS ONE AND THE SAME ONLY,
BUT WHAT IF AN INDORSER INDORSES DIFFERENT PARTS INDIVIDUALLY, OR ACCEPTOR
ACCEPTS DIFFERENT PARTS INDIVIDUALLY, WHAT IS THE EFFECT?
*If you indorse or accept different parts of a bill in set individually, then you will become liable for every part
individually, as if it is a separate bill from the set

HOW TO DISCHARGE BILLS IN SET?
Discharge of one part of a bills in set is discharge of the whole set

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

CAN A MAKER MAKE A NOTE WHICH IS PAYABLE TO HIS OWN ORDER?

I, Juan Dela Cruz, promise to pay to the order of myself P20,000 on December 25,
2013.

(Sgd.) Juan Dela Cruz

Question:
How will he negotiate the instrument? (Indorse)

Will he be liable as a maker or as an indorser? (As a maker)

************

WHAT IS A CHECK?
A bill of exchange drawn on a bank payable on demand.

LET’S SAY YOUR DEBTOR ISSUED TO YOU A CHECK BUT YOU FOUND OUT THAT HE HAS
NO FUNDS FROM THE DRAWEE BANK, WHAT CRIME WILL YOU PROSECUTE HIM FOR? AS
A COMPLAINANT, BETWEEN THE TWO, WHICH ONE WILL YOU FILE AGAINST HIM?

WHEN ESTAFA COMMITTED WHEN ISSUING A CHECK?
-Issuing a check without or with insufficient funds in the drawee bank and it is done as a means of obtaining money
and merchandize (debt is not pre-existing)
-Deceit and damage, or at least intent to cause damage are essential to commit the crime; hence, knowledge is
necessary
-Mala in se

WHEN B.P. 22 COMMITTED WHEN ISSUING A CHECK?
-Same as estafa but it also comprehend payment for a pre-existing debt
-Deceit and damage not necessary, the gravamen of the crime is the issuing of an unfunded check; hence,
knowledge is not necessary
-Malumprohibitum

LIABILITY OF AN INDORSER IN INDORSING A WORTHLESS CHECK?
-Indorser not liable if he did not act with deceit; if it can be proved that he acted with deceit, he can be liable but
only in the prosecution for the crime of estafa

WHAT ARE THE DIFFERENT KINDS OF CHECKS?

CASHIER’S CHECK
A bill of exchange drawn by a bank upon itself, signed by the cashier and is accepted by its issuance

MANAGER’S CHECK
Same as a cashier’s check but is signed by the manager

CERTIFIED CHECK
One drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be
paid when duly presented for payment

MEMORANDUM CHECK
In the form of an ordinary check with the word “memorandum”, “memo” or “mem” written across its face,
signifying that the drawer engages to pay the holder absolutely without any condition concerning its presentment

IN CHECK WHAT IS THE EFFECT OF CERTIFICATION?
Certification is equivalent to acceptance

CROSSED CHECK
-Done by writing two (2) parallel lines diagonally on the left top portion of the check (writing therein blank, & Co.,
name of bank or the company)
-Crossing a check means that the drawee should pay only with the intervention of that company.

WHAR ARE THE EFFECTS OF CROSSING A CHECK?
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once – to one who has an account with the bank
3. The act of crossing serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that purpose
4. Intervention as already discussed

No. 24324A

To Banco De Oro
Manila, Phil
January 2, 2014

Pay to Paul or order P150,000 only

(Sgd.) John

Illustration:
B
N

Here, the drawee bank is BDO and it should pay only with the intervention of PNB. Hence, if let’s say X stole the
check and forged the signature of Paul, payee, then BDO paid X without the intervention of PNB, Paul may
compel BDO to pay him despite previously paying to X already. Crossing of a check should only be paid if it is
with the intervention of the bank written across the face of the instrument.

Illustration:
John issued to Paul a crossed check with the understanding that Paul should deliver to John newspaper everyday for
one month. Paul never delivered newspaper to John. Paul thereafter negotiated the instrument to his creditor
George. George now wants to enforce payment.

QUESTION:
Is George a holder in due course? (No, since the check that was negotiated to him was a crossed check, it should
have put him into inquiry whether or not the specific purpose for crossing the check had been complied with by
Paul. Failure to do it, he becomes a holder in bad faith, hence, not in due course)

Can George enforce the instrument against John? (No, John may set up the personal defense of absence of
consideration against Paul, a non-holder in due course)

Illustration:
John crossed a check and negotiated it to Paul. Paul then went to the drawee bank BDO to encash the said check.
BDO encashed the check.

QUESTION:
After paying, should BDO debit the amount it paid against the account of John? (No, crossed check is for
deposit only and not for encashment; also, BDO paid without the intervention of PNB)

Who should bear the loss? What is his recourse? (BDO bears the loss, its recourse is to go after Paul)

WHAT DO YOU UNDERSTAND BY COUNTERMANDING PAYMENT (STOPPING PAYMENT)?
-The drawer has the right to order the drawee to stop payment of a check and this right flows from the rule that the
issuance of a check by itself is not an assignment of funds by the drawee
-If a bank pays a check after it has been notified to stop payment, it pays on its own responsibility and will not be
permitted to charge the account


PRESENTMENT FOR ACCEPTANCE
It is the production of the bill of exchange to the drawee for his acceptance

Applicable to bills of exchange only

WHEN PRESENTMENT FOR ACCEPTANCE BE MADE? (Sec. 143)
1. Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order
to fix maturity of the instrument;
2. Where the bill expressly stipulates that it shall be presented for acceptance;
3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee

Is the list exclusive?
Yes

Who will present the instrument for acceptance?
Holder

To whom will he present the instrument for acceptance?
Drawee (How about the maker?)

What is the effect if holder failed to present the instrument for acceptance?
Drawer and all indorsers are discharged

Is there any instance when holder did not present the instrument for acceptance yet drawer and indorsers
are not discharged?
Yes, when he negotiated it within a reasonable time

Time for making presentment for acceptance?
1. Before the bill is overdue
2. Within a reasonable time after acquisition thereof

What if there more than one drawees, to whom should presentment for acceptance be made?
-If they are partners, to any one of them since a partner is the agent of each other
- If they are not partners, to them all, otherwise, there would be a qualified acceptance

When presentment is excused? (Sec. 148)
1. Where the drawee is dead;
2. He has absconded;
3. Is a fictitious person;
4. Person not having capacity to contract;
5. Where after the exercise of reasonable diligence, presentment can not be made;
6. Where an irregular presentment had been refused on some other ground

Duty of the holder where bill is dishonoured by non-acceptance?
The holder must give notice of dishonour and protest, otherwise, the drawer and indorsers are discharged from
liability

Right of holder where bill is dishonoured by non-acceptance?
Holder has an immediate right of recourse against the drawer and indorsers, AND PRESENTMENT FOR
PAYMENT IS NOT NECESSARY

However, if a bill which was previously not accepted is now accepted, holder is required to present it for payment.

PRESENTMENT FOR PAYMENT
Production of the instrument to the person liable for payment

How Presentment for Payment is done?
1. Personal demand for payment
2. At the proper place
3. To exhibit the instrument if required
4. Surrender the instrument to the person paying

Is a demand over the telephone sufficient?
No, unless the debtor waives the right to ask for an exhibition of the note

Guide:
Presentment for Acceptance
-Necessary to charge drawee
-Not necessary to charge parties secondarily liable (drawer, indorsers)
Presentment for Payment
-Not necessary to charge parties primarily liable (maker, drawee)
-(As a rule) Necessary to charge parties secondarily liable
-Not necessary to charge parties secondarily liable if instrument not accepted
-Necessary to charge parties secondarily liable if instrument accepted and if the instrument is a note

Illustration:
A draws a bill payable to B or order. X drawee bank accepts the bill on September 1, 2013. B negotiates the bill to
C, D, E and F. On September 2, 2013, the bill is still unpaid.

Question:
Can F file an action against X to hold the latter liable even if it was not presented to it for payment?
Yes, presentment for payment not necessary to charge persons primarily liable
What is the effect of such non-presentment for payment as regards parties secondarily liable?
They are discharged. (A, B, C, D and E); hence it is only X which remains as the party liable
What is the moral of the story?
Make presentment for payment

Guide:
In case of a note, presentment for payment must be made within a reasonable time from its last issue
In case of a bill, presentment for payment must be made within a reasonable time from its last negotiation
OTHERWISE, parties secondarily liable are discharged from liability

Guide:
Where the instrument is not payable on demand, presentment for payment must be made on the day it falls due
Where the instrument is payable on demand, in case of a note, presentment for payment must be made within a
reasonable time from its last issue; in case of a bill, presentment for payment must be made within a reasonable
time from its last negotiation

PLACE OF PRESENTMENT (Sec. 73)
1. If place is specified, it is there presented
2. No place specified, but the address of the person who will pay is given in the instrument, it is there presented
3. If both not specified, usual place of business or residence of the person who will pay
4. In default, in the place wherever he can be found, or his last known place of business or residence

What is the reason why exhibition of the instrument necessary during presentment for payment?
1. To determine the genuineness of the instrument
2. For the holder to reclaim possession of the instrument upon payment

Sections 76, 77, 78 (reading matters)

WHEN PRESENTMENT NOT REQUIRED TO CHARGE DRAWER?
Where drawer has no right to expect or require that the drawee or acceptor will pay the instrument

Illustration:
A draws a bill payable to B against X drawee bank. B negotiated it to C, D, E and F. B thereafter withdrew all his
money from X bank. F did not present to X the instrument for payment.

Question:
As a rule, what is the effect of the non-presentment for payment as regards A?
A is discharged from liability
Does this rule apply to the facts given?
No, since in withdrawing all his money from X bank, A had no right to expect that the drawee will pay the
instrument, hence presentment for payment not required to charge A liable
But as regards C, D and E, they are discharged

WHEN PRESENTMENT NOT REQUIRED TO CHARGE THE INDORSER?
Where (1)the instrument was made or accepted for his accommodation (2)he has no reason to expect that the
instrument will be paid if presented

Illustration:
A makes a note to accommodate B and made B the payee. B indorsed the note to C, D, E then F. F did not present
the note to A for payment.

Question:
As a rule, what is the effect of the non-presentment for payment as regards parties secondarily liable?
They are discharged
Does this rule apply to the facts given?
No. As regards B, he is not discharged despite non-presentment because the note was only made for his
accommodation
But as regards A, C, D and E, they are discharged.

WHEN DELAY IN MAKING PRESENTMENT IS EXCUSED?
When delay is caused by circumstances beyond the control of the holder and not imputable to his fault, misconduct
or negligence
But when the cause of delay ceases to operate, presentment must be made with reasonable diligence

*What is excused here is the delay in making presentment, NOT the presentment itself

WHEN PRESENTMENT FOR PAYMENT IS EXCUSED?
1. Where after exercise of reasonable diligence, presentment cannot be made
2. Drawee is a fictitious person
3. By waiver of presentment, express or implied

Implied waiver, illustration:
-Drawer/indorser undertook to be the one to collect payment on the bill
-Where presentment for payment not made which should have discharged parties secondarily liable, but drawer/
indorser paid nevertheless

Time how computed?
Illustration:
Instrument is payable 20 days after sight. It was presented to the party liable September 20, 2013.

Question:
When is the instrument overdue?
October 10, 2013

Illustration:
Instrument dated August 12, 2013. It is payable 30 days after date.

Question:
When overdue?
September 11, 2013

PAYMENT IN DUE COURSE, REQUISITES?
1. Payment be made at or after date of maturity
2. Payment must be to the holder
3. Payment must be made by the debtor in good faith and without notice that the holder’s title is defective


NOTICE OF DISHONOR

TO WHOM GIVEN
Must be given to the drawer and indorser

SHOULD PARTIES PRIMARILY LIABLE BE GIVEN NOTICE
No, since they are the ones who dishonour the instrument

EFFECT OF FAILURE TO GIVE NOTICE OF DISHONOR
Party is discharged

HOW NOTICE OF DISHONOR IS MADE
Either verbally or by writing

Illustration:
A makes a note payable to order of B. B negotiated the note to C, D, E then F. F wants to enforce payment and so
he presented the instrument to A for acceptance. A did not accept the instrument, hence dishonoured by non-
acceptance. F failed to give notice of dishonour for non-acceptance to parties secondarily liable.

Questions:
Are B, C, D and E discharged from liability?
(No)
Based on the same facts, but this time F presented the note to A for payment and the latter dishonoured it.
Should F go directly to B, C, D or E and collect payment?
(Must give notice of dishonor first before enforcing payment)
What if F gave notice of dishonour to B only, can he enforce payment against any of the indorsers?
(No, B only, all others are discharged)

Illustration:
A draws a bill payable to B, drawn against X. B indorsed the instrument to C, D, E and F. F presented the bill to X
for acceptance but X dishonoured it.

Questions:
Can F go directly to A, B, C, D and E to enforce payment without presenting the bill for payment?
(Yes, immediate right of recourse)
What is only needed?
(Notice of dishonour by non-acceptance)
Same facts, but X accepted it for the whole amount, what will happen next?
(F will present the instrument for payment)
Same facts but X accepted it for half amount only, F took such acceptance, what is the effect?
(Parties secondarily liable are discharged by virtue of taking a qualified acceptance)
Is the rule absolute?
(No, 3 exceptions)
Let’s say after taking a qualified acceptance, A and B were notified of such and yet both did not express
their dissent, what is the effect?
(They are not discharged, this is an exception to the rule, hence, the other half may be enforced against any of
them)
Is notice of dishonour needed to charge A and B?
(No, the bill was in fact not dishonoured. What is only needed is presentment for payment)

WHAT IS AN ACCELERATION CLAUSE
One which requires that upon default in payment of any instalment or of interest, the whole shall become due

Illustration:
A makes a note payable to the order of Mr. Cash, president of X company, the amount of one million pesos
(P1,000,000.00) in four equal instalments (P250,000 each) starting September 15, 2013 and every 15th of the month
thereafter until fully paid. Mr. Cash negotiated it to Y then Y to Z. On September 15, 2013, Y failed to make
payment. Z wants to enforce payment to A but dishonoured it. Z wants to enforce it against the parties secondarily
liable but failed to give notice of dishonour.

Questions:
As regards the first instalment which was not paid, can Z collect from the parties secondarily liable?
(No, there was no notice of dishonor)
By such failure, can Z no longer collect for the three remaining instalments?
(Can still collect if there is no acceleration clause)
(Can no longer collect if with acceleration clause)

WHO GIVES NOTICE OF DISHONOR
1. the holder;
2. another in behalf of the holder;
3. any party to the instrument who may be compelled to pay it to the holder;
4. another person in behalf of #3

*as regards #3, he can give notice only to another party against whom he has a right of reimbursement should such
party giving notice pay the instrument

Illustration:
A makes a note payable to the order of B. B negotiates it to C, D, E then F. F wants to enforce payment on the
instrument and presented it to A for payment. A dishonoured it.

Questions:
Can F give notice of dishonour by non-payment?
Yes
Can X, not a party to the instrument, give notice of dishonour?
Yes (i.e. as agent of F)
Can B, C, D and E give notice of dishonour?
Yes
Why?
Because any of them may be compelled by F to pay
Even if they were not given by F notice of dishonour?
No, only if they were given, otherwise they are discharged
As regards E, who should he notify of the dishonour?
D, C and B.
Can Y give notice of dishonour?
If agent of B, C, D or E.
What if F only notified D, can D give notice of dishonour to E?
No because E is already discharged and even if not discharged, he cannot ask reimbursement from him since he is
his creditor
As regards F, are other parties secondarily liable discharged as well (B and C)
As a rule, B and C discharged, meaning F can not go after them because he did not give them notice of dishonour,
subject to the next section (section 93).
But D can notify B and C so that if B paid, he can ask reimbursement from them

SECTION 93
The one who will give notice is #3

So if #3 gives notice, it inures to the benefit of who
1. to the holder;
2. all parties subsequent to the party to whom notice is given

Illustration
A makes a note payable to B or order, B negotiates it to C, D, E then F. A dishonoured the bill when presented for
payment. F gives notice to E only. However, E gives notice to B.

By E giving notice to B, benefit inures to which parties
Holder F and parties subsequent to B, that is, C and D. So even if F did not give notice to B, C and D, they are not
discharged. And as regards E, even if he only gives notice to B, C and D are not discharged. And even if C and D
did not give notice to B, B is not discharged and C and D can hold B liable

What if E only gave notice to C, it inures to who
To F, holder and to D. B is discharged as regards F and E, C and D.

When an instrument is dishonoured in the hands of an agent, what can he do
1. can directly give notice to the persons secondarily liable
2. or give notice to his principal

If he gives notice to his principal, give within the time required by law as if he is a holder.

Principal will give notice to parties secondarily liable within the same time.

Should a notice of dishonour be signed
No

How can an insufficient written notice may be validated
Supplemented and validated by verbal communication

How can it be communicated to the parties secondarily liable
Delivering it personally or through mails

What should notice of dishonour contain
1. sufficient description to identify the instrument
2. a statement that it has been presented for payment or for acceptance and that it has been dishonoured

What if there is misdescription (date of maturity, amount, name of the parties) of the instrument, does it
vitiate the instrument
As a rule, no, unless the party to whom the notice is given is misled by such misdescription

Can notice of dishonour be given by phone
Yes

To whom notice of dishonour given
To the party himself or his agent (as regards the agent, he must be duly authorized to receive notice of dishonor)

Notice where party is dead
1. to his personal representative if his death is known to the party, if there be one and if with reasonable diligence
he can be found
2. if none, notice may be sent to the last residence or last place of business of the deceased

Question
There was a personal representative of the dead drawer but after diligent search, holder cannot find him,
hence he just sent the notice to the last known residence of the drawer, valid?
Yes

Notice to partners
Rule on partnership

Notice to persons jointly liable
Notice must be given to both unless they are partners or the one authorized the other to receive the notice in his
behalf

Time within which notice must be given
Could it be given before the date of maturity
No, since it cannot be said to have been dishonoured

Can it be given on the date of maturity itself
Yes provided it had been presented and dishonoured

What if it is payable at a bank
Not dishonoured until the close of the bank, hence, notice of dishonour may only be given after the close of
banking hours on the date of maturity

When sender (by mail) deemed to have given due notice
1. duly addressed and 2. deposited in the post office
Notwithstanding any miscarriage in the mails
Otherwise, party is discharged

So, there is presumption, conclusive or disputable
Conclusive (manifestacion)

Sections 103, 104, 108 (reading matters)

Waiver of notice
May be express or implied

When waiver can be given
1. before the time of giving due notice
2. after omission to give due notice (discharge and yet still paid)

Whom affected by waiver
If embodied on the instrument itself, it is binding upon all parties

If written above the signature of an indorser, it binds him only

Illustration:
Pay to B or order P10,000. Notice of dishonour waived. To X (Sgd.) A. B indorsed it to C, D, E then F. X
dishonoured the bill. F did not give any notice of dishonour.

Question
To whom can F enforce payment on the instrument
A, B, C, D or E.

What if the following appears:
To C, (Sgd.) B
To D, Notice of dishonour waived, (Sgd.) C
To E, (Sgd.) D
To F, (Sgd.) E

Here, only C is bound by the waiver, B, D and E must still be given notice of dishonour by F to preserve their
liability, otherwise, they are discharged

What is the effect of waiver of protest
Protest, presentment and notice of dishonour are all waived

What is the effect of waiver of presentment
Presentment and notice of dishonour are waived

What is the effect of waiver of notice of dishonour
Only notice of dishonour is waived

When delay in giving notice is excused
Acts of God

When giving notice is excused
After reasonable diligence

When notice need not be given to the drawer
1. drawer and drawee are the same person
2. drawee is a fictitious person
3. drawee not having capacity to contract
4. drawer is the person to whom the instrument is presented for payment
5. where the drawer has no right to expect or require that the drawee will honor the instrument
6. where the drawer has countermanded payment

Drawer and draweeare the same person
If this is the case, you don’t need to make two presentments, why?

Drawer is the person to whom instrument is presented for payment
Example, drawer is the agent of drawee so no need to notify him if instrument is dishonoured

Drawer has no right to expect
No money in his account with drawee

Countermanded payment, why notice is dispensed with
Because it is the drawer who asked that payment be stopped hence he knew by then that instrument will be
dishonoured

When notice need not be given to an indorser
1. whendrawee is a fictitious person or not having capacity to contract, and indorser was aware of that fact at the
time he indorsed the instrument
2. where the indorser is the person to whom the instrument is presented for payment
3. where the instrument is made or accepted for his accommodation

When due notice of dishonour by non-acceptance had been given, then the instrument is subsequently
dishonoured by non-payment, should notice to that effect be given to the parties secondarily liable?
No longer, unless in the meantime the instrument has been accepted

Illustration
A bill is payable on Dec. 31, 2013. F, holder presents it for acceptance to X, drawee on Dec 1, 2013. X refused to
accept the bill. F then gives notice of dishonour to A, drawer and to B, C, D and E, indorsers

Question:
Is presentment for payment necessary to charge them
No
Is notice of dishonour for non-payment necessary
No
What if on December 15, 2013, Drawee changed his mind and accepted the instrument instead
F, then, must present the bill to X for payment, and if X refuses to pay, F must give notice of dishonour by non-
payment to parties secondarily liable, otherwise, they are discharged

Effect of omission to give notice of non-acceptance

Illustration:
A, drawer, draws a bill payable to B, drawn against X. Bill is payable on Dec 31, 2013. Was indorsed by B to C, D, E
then F. X refused to accept the bill. F failed to give notice of dishonour to B, C, D and E. F negotiated the bill to G,
who took the instrument in bad faith.

Question:
As regards G, are A, B, C, D and E discharged from liability?
Yes
To whom can he enforce liability then?
To X, or F only
What if G is a holder in due course
No one is discharged because under Section 117, omission to give notice of dishonour by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the omission

HOW IS A NI DISCHARGED? (SEC. 119)
1. By payment in due course by or on behalf of the principal debtor;
2. By payment in due course by the party accommodated, where the instrument is made or accepted for his
accommodation;
3. By the intentional cancellation thereof by the holder;
4. By any other act which will discharge a simple contract for the payment of money;
5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

WHAT ARE THE REQUISITES OF PAYMENT IN DUE COURSE?
1. Payment be made at or after date of maturity
2. Payment must be to the holder
3. Payment must be made by the debtor in good faith and without notice that the holder’s title is defective

WHAT ARE THE MODES OF EXTINGUISHING AN OBLIGATION/CONTRACT?
1. Payment or performance
2. Loss of the thing due
3. Compensation
4. Confusion or merger
5. Condonation or remission of debt
6. Novation

PAYMENT BY THE PRINCIPAL DEBTOR
1. It must be payment in due course
2. Made by the principal debtor

WHO IS A PRINCIPAL DEBTOR?
A person ultimately bound to pay the debt. Not just maker or drawee but also an accommodated party.

Illustration:
A makes a note payable to B on November 30, 2013. B negotiated the note to C, D, E then F. On November 5,
2013, A won Lotto and decided to pay F.

Questions:
Was there a payment in due course?
None
Is the instrument already discharged by the payment of A, a principal debtor?
No
Of course as a holder, you will accept the payment. What will you do then?
Present the instrument for payment then surrender it after it has already been paid.
As the maker who paid, you are now holding the bill, what can you do with it?
You can renegotiate it.
What if it was C who won the Lotto and paid F on November 5, 2013. Is the instrument discharged?
No
Of course you will accept the payment. What will you do then?
Present the instrument for payment then surrender it after it has already been paid.
As an indorser who paid, you are now the holder of the bill, what can you do with it?
Renegotiate it and prior parties remain as parties to the instrument while C can cancel the indorsement of his
subsequent parties.

PAYMENT BY THIRD PERSON
Is the instrument discharged?
No
So what is the presumption if a non-party pays the instrument with his own money?
He bought it and not paid it off; unless he is an agent
Payment by the accommodation party, discharged?
No
-It is the accommodated party who is the principal debtor
-If paid by the accommodation party, he is not discharged and still has to enforce the instrument against the party
he accommodated for reimbursement
-But still it depends whether if accommodated party’s liability is primary or secondary (only if it was made or
accepted for his accommodation)
Payment by drawer, indorser, discharged?
No
Payment by a referee in case of need, discharged?
No
Payment by check or a NI?
No. Shall produce the effect of payment only when it is accepted and encashed or when through the fault of the
creditor, it has been impaired

CANCELLATION
Requisites?
1. Intentional
2. Made by the holder
Ways of cancelling?
Tearing, burning, writing across the instrument the word “cancelled”

Illustration:
A makes a note payable to B. B negotiated it to C, D, E then F. A found the note on F’s desk and with the intention
of canelling it, burns it.

Questions:
Is the note discharged?
No
Same set of facts but it was the agent of F who burned it, discharged?
Yes provided he was authorized
Same set of facts but F inadvertently tore the note into pieces, discharged?
No
Same set of facts but F under a mistaken belief that it was already paid, intentionally wrote the word
“cancelled” on the instrument, discharged?
No
On the date of maturity, party liable cannot pay hence holder gave him an extension of time to pay,
discharged?
No

PRINCIPAL DEBTOR ACQUIRES INSTRUMENT
Requisites:
1. Reacquisition must be by the principal debtor;
2. In his own right;
3. At or after date of maturity

In his own right, what does it mean?
Not in a representative capacity

Illustration:
A makes a note payable to B and the latter negotiated it to C, D, E then F. A buys the note from F under
authorization from his (A) principal, X.

Questions:
Is the note discharged?
No

When instrument is reacquired before maturity?
No discharge, it will merely constitute as a negotiation back to the principal debtor who may renegotiate the
instrument and may cancel the indorsements subsequent to him

Illustration:
A makes a note payable to B on January 1, 2014. B negotiated it to C, D, E then F. On November 1, 2013, A, the
principal debtor, acquired the instrument in his own right.

Questions:
Is the instrument discharged?
No
What can A do then?
May renegotiate and cancel the indorsements of B, C, D and E.

DISCHARGE BY OPERATION OF LAW
-judgment is obtained on a bill or a note
-discharge in bankruptcy

WHEN PERSONS SECONDARILY LIABLE ARE DISCHARGED? (SEC. 120)
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender of payment made by a prior party;
5. By a release of the principal debtor unless the holder’s right of recourse against the party secondarily liable is
expressly reserved;
6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right
to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of
recourse against such party is expressly reserved.

BY ANY ACT WHICH DISCHARGES THE INSTRUMENT
Sec. 119

INTENTIONAL CANCELLATION
A makes a note payable to B and the latter negotiated it to C, D, E then F.
Let’s say holder F intentionally cancelled the signature/indorsement of an indorser (ex. D), that indorser is
discharged.
Is consideration necessary to discharge by intentional cancellation?
No

DISCHARGE OF PRIOR PARTY
Same facts, holder intentionally cancelled C’s indorsement, in that case, D and E are also discharged, that is, the
subsequent parties of the party who had been discharged are discharged as well
Rationale:
Because if D or E was made to pay by F, they would not be able to exercise their right of recourse against C.

DISCHARGE BY OPERATION OF LAW
Not included

VALID TENDER OF PAYMENT BY A PRIOR PARTY
Same set of facts, D validly tendered payment to F but the latter refused without any justification. In that case, D is
discharged.
Who is also discharged?
E also since a prior part had been discharged
What does valid tender of payment mean?
When payment had been produced and offered to a person holding a claim or demand thereto at the time it was
due or thereafter
Can there be a valid tender of payment before date of maturity?
Yes but creditor can validly refuse for interest, etc. purposes

RELEASE OF PRINCIPAL DEBTOR
A makes a note payable to B and the latter negotiated it to C, D, E then F. F releases A from liability.
What is the effect?
Parties secondarily liable are discharged.
Why?
Because they are deprived of their right of recourse against A, and that this discharges the instrument
Is the rule absolute?
No
If holder reserved his right against parties secondarily liable, to whom will they ask reimbursement if they
pay since A is already discharged?
Such reservation includes an implied reservation that when parties secondarily liable pay, they can ask
reimbursement from A
Can there be an implied reservation?
No, express only.
Release, requisites?
It must be by the holder and not by operation of law and it must be for value
Releases of an accommodation party, parties secondarily liable are discharged?
No, accommodation party is not a principal debtor

EXTENSION OF TIME
A makes a note payable to B and the latter negotiated it to C, D, E then F. F agrees to extend the time of payment.
What is the effect?
Parties secondarily liable are discharged
Is the rule absolute?
No
Requisites of extension?
It must be a binding contract supported by a valuable consideration and it must be made with the principal debtor
and not with a third party

RIGHT OFPARTY WHO DISCHARGES THE INSTRUMENT
Where the instrument is paid by a party secondarily liable, is it discharged?
No
But what are his rights after paying?
1. He is remitted to his former rights against parties prior to him;
2. He may strike out his own and all subsequent indorsements; and
3. Again negotiate the instrument
There is an exception, but it only applies to the right to renegotiate or to all?
No, a) where it is payable to the order of a third person and has been paid by the drawer; and b) where it was made
or accepted for accommodation and has been paid by the party accommodated

Illustration:
A draws a billdrawn against X and payable to the order of B and the latter indorsed it to C, D, E then F. Suppose
that D, an indorser, pays the bill
What are the effects?
1. The instrument is not discharged but it discharges D, the party paying;
2. D is remitted to his former rights against prior parties to him (C, B and A) (So even if at the time of
payment, D is not a HIDC because he knew of some defects of the instrument, but before he was a HIDC,
he was remitted to his former rights, so he can enforce the instrument free from personal defenses)
3. D can strike out his indorsement and subsequent indorsements (E and F)
4. D can renegotiate the instrument

RENUNCIATION BY HOLDER
What is the difference by renunciation and release/discharge
Renunciation is a gratuitous waiver of liability (hence without valuable consideration)
Form of renunciation?
Must be express and in writing, except when the instrument is delivered to person primarily liable, renunciation may
be oral
Time for making renunciation
Before, at or after maturity
When renunciation discharges the instrument?
1. If it is absolute and unconditional;
2. It is made in favour of the person primarily liable;
3. It is made at or after maturity.

EFFECTS OF RENUNCIATION TO A HOLDER IN DUE COURSE
Illustration:
A draws a billdrawn against X and payable to the order of B and the latter indorsed it to C, D, E then F.Suppose F
absolutely renounces his rights against X.
What is the effect?
It discharges the instrument
But F negotiated the instrument further to G, who took the instrument in good faith and for value without
being notified of such renunciation. Can G enforce the instrument against X?
Yes

PROTEST
When protest necessary?
1. When foreign bill is dishonoured by non-acceptance;
2. Where foreign bill is dishonored by non-payment, it not having been previously dishonoured by non-
acceptance
3. Where the bill contains a referee in case of need, it must be protested for non-payment before it is presented
for payment to the referee in case of need
When is it merely optional?
1. Where bill is lost or destroyed or wrongly detained from the person entitled to hold it
2. When it was previously protested for non-acceptance, protest for non-payment is optional

HOW PROTEST MADE
1. Must be annexed to the bill or must contain a copy thereof;
2. Notarized
3. And must specify the ff.:
a. The time and place of presentment
b. The fact that presentment was made and the manner thereof
c. The cause or reason for protesting the bill
d. The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be
found
Reasons for requiring protest?
For uniformity in international transactions because most countries require it
When protest be made?
On the day of its dishonour, unless delay is excused
Place where making protest?
-As a rule, it must be at the place where bill is dishonoured. Except where the bill is payable at a place other than the
residence of the drawee
-Where the residence of the drawee and place of payment are different , it may be protested at either place

WAREHOUSE RECEIPTS LAW

Warehouse Receipt
A document of title which is issued by a warehouseman.

Warehouseman
A person lawfully engaged in the business of storing goods for profit

Negotiability of Warehouse Receipts
A receipt in which it is stated that the goods received will be delivered: a)to the bearer; or b)to the order of any
person named in such receipt is a negotiable receipt

Formalities
Prescribed in Sections 2 and 3 of the WRL. However, the absence of any of the provisions will not necessarily
invalidate the recipt

Negotiation of Warehouse Receipts
A bearer document of title is not always a bearer document in the sense that a special indorsement has the effect of
converting the bearer instrument into an order instrument

Effect of an Order Warehouse Receipt which was Only Delivered
a. Transferee acquires title against the transferor;
b. There is no direct obligation of the warehouseman
c. The transferee can compel the transferor to complete the negotiation by indorsing the instrument. The
negotiation takes effect on the date of the indorsement only

Effects of Negotiating a Warehouse Receipt
Negotiation of the document has the effect of manual delivery so as to constitute the transferee the owner of the
goods. Negotiation carries with it both the title to and possession of the property. And in negotiating, the transferee
acquires the following rights: a)such title to the goods as the person negotiating the receipt to him had or had ability
to convey to a purchaser in good faith for value; b)such title to the goods as the depositor or person to whose order
the goods were to be delivered by the term of the receipt had or had ability to convey to a purchaser in good faith
for value; c)the direct obligation of the warehouseman to hold possession of the goods for him according to the
terms of the receipt as fully as if the warehouseman had contracted directly with him

Who may Negotiate a Warehouse Receipt
1. By the owner thereof;
2. By any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the
terms of the recipt, the warehouseman undertakes to deliver the goods to the order of the person to whom
the possession or custody of the receipt has been entrusted, or if, at the time of such entrusting, the receipt
is in such form that it may be negotiated by delivery
*Hence, even a thief can negotiate the receipt but it should be in such a form that he need not forge any
signature and only if it is a bearer warehouse receipt

Warranties
If the warehouseman failed to deliver the goods, the indorser or one who negotiates for value shall not be liable to
the bona fide purchaser. He does not guarantee the performance of the obligation of the warehouseman as the case
may be

As regards the transferor (negotiating by indorsement or delivery), he warrants that: a)the receipt is genuine; b)he
has a legal right to negotiate or transfer it; c)that he has knowledge of no fact which should impair the validity or
worth of the receipt; d)that he has a right to transfer the title to the goods and that the goods are merchantable or
fit for a particular purpose

Non-Negotiable Receipts
A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it ‘non-negotiable.’ In
case of failure to do so, a holder of the receipt who purchased it for value supposing it to be negotiable, may, at his
option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the
receipt been negotiable

Rights of Transferee of a Non-Negotiable Receipt
1. Acquires the title of the goods subject to the terms of any agreement with the transferor;
2. Acquires the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire
the direct obligation of the warehouseman to hold possession of the goods for him according to the terms
of the receipt
*Prior to the notification, the title of the transferee to the goods and the right to acquire the obligation of the
warehouseman may be defeated by a)the levy of an attachment or execution upon the goods by a creditor of
the transferor or 2)by a notification of the warehouseman by the transferor or a subsequent purchaser from the
transferor of a subsequent sale of the goods by the transferor

Warehouseman’s Defenses for Non-Delivery or Misdelivery
1. Loss or destruction of the goods without the fault of the bailee (warehouseman);
2. Failure to satisfy the bailee’s lien;
3. Failure to surrender the negotiable document of title;
4. Lack of willingness to sign acknowledgment;
5. Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right of property or
possession in the goods, not to make such delivery;
6. The bailee has no information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods;
7. Delivery to a claimant with a better right;
8. Attachment or levy of the goods by a creditor where the document is surrendered or its negotiation is
enjoined or the document is impounded;
9. Where the document of title is attached by a creditor;

Warehouseman’s Lien
1. All lawful charges for storage and preservation of the goods;
2. All lawful claims for money advanced;
3. All reasonable charges and expenses for notice, and advertisements of sale
*It is necessary however that the charges that are present at the time of the issuance of the receipt must be so
stated in the receipt with the amounts thereof specified, otherwise, the warehouseman shall have no lien

Loss of Lien
1. By surrendering possession thereof;
2. By refusing to deliver the goods when a demand is made with which he is bound to comply

Attachment or Levy
Goods represented by a warehouse receipt can not, while in the possession of the warehouseman, be attached by
garnishment or otherwise, or be levied upon under an execution unless the recipt be first surrendered to the
warehouseman or its negotiation enjoined

TRUST RECEIPTS LAW

BACKGROUND
A background that issues a letter of credit has the right to ask for reimbursement from the applicant-buyer. This
obligation to pay the issuing bank may also be secured by trust receipts. Under the law, the bank becomes the
entruster of the goods while the buyer-importer is the entrustee. The goods will in effect be released by the bank to
the buyer by the delivery of the document of title/bill of lading covering the goods. The buyer as entrustee is
obligated to sell the goods and to apply the proceeds thereof to the payment of the loan extended by the entruster-
bank. The buyer will only get the balance of the proceeds of the sale after making such application.

TRUST RECEIPT
A security transaction intended to aid in financing importers or dealers in merchandise by allowing them to obtain
delivery of goods under certain covenants

Sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments
for profit

Usually, the entruster releases the goods to the entrustee so that the latter may sell the goods. However, the purpose
is not limited to sale. Hence, the goods may also be released for other purposes substantially equivalent to the
following: a)the sale or the procurement of their sale; b)the manufacture or processing with purpose of ultimate
sale; c)the loading, unloading, shipment or transhipment or otherwise dealing with them in a manner preliminary or
necessary to their sale

The entrustee may still be criminally liable under the Trust Receipts Law even if the goods that were released by
virtue of the trust receipts were not resold but were used for his own use

No agency relationship is established when the entrustee executes the trust receipt. However, an entrustee’s breach
will make him liable for estafa.




PARTIES
Entrustee– the person having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor-in-interest of such person for the purpose or purposes specified in the trust receipt
agreement

Entruster– the person holding title over the goods, documents, or instruments subject of a trust receipt
transaction, and any successor-in-interest of such person

OBLIGATIONS OF THE PARTIES
Entruster releases the possession of the goods to the entrustee upon the latter’s execution of the trust receipt

Entrustee binds himself 1)to hold the goods in trust for the entrustor; 2)sell or otherwise dispose of the goods and
to turn over to the entrustor the amount still owing; 3)to return the goods if unsold

NATURE OF ENTRUSTER’S TITLE
Since the interest of the entruster is a mere security interest: 1)the entruster shall not, merely by virtue of such
interest, be responsible as principal or as vendor under any sale or contract to sell made by the entrustee; 2)the
entrustee bears the loss of the goods after delivery to him

Entrustee is not the owner of the property. Hence, the entrustee cannot mortgage the property. However, it is
believed that the entrustee is still the owner and the entruster acquires only security interest. The entrustee cannot
mortgage the property not because he is not the owner but because he does not have free disposal of the property
to be mortgaged.

NOVATION OF AGREEMENT
It extinguishes the obligation under the existing trust receipt. Hence, the liability for breach would be purely civil in
nature and no criminal liability can be imposed

LETTERS OF CREDIT

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

1)It must be issued in favour of a definite person and not to order; 2)be limited to a fixed and specified amount or
to one or more undetermined amount but with maximum limit stated exactly

PARTIES
Buyer – one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of
the document of title

Issuing Bank – the bank issuing the letter of credit which undertakes to pay the seller upon receipt of the draft
and proper documents of titles and to surrender the documents to the buyer upon reimbursement

Unless expressly provided, the liability of the issuing bank is solidary with the buyer-applicant

Seller – one 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

Advising (Notifying) Bank – maybe utilized to convey to the seller the existence of the credit

Confirming Bank – a bank which will lend credence to the letter of credit issued by a lesser known issuing bank;
the confirming bank is directly liable to pay the seller-beneficiary

Paying Bank – a bank which undertakes to encash the drafts drawn by the exporter/seller

Negotiating Bank – instead of going to the place of the issuing bank to claim payment, the buyer may approach a
negotiating bank to have the draft discounted

INDEPENDENT CONTRACTS
There are at least three (3) distinct and independent contracts involved in a letter of credit namely: 1)the contract of
sale between the buyer and the seller; 2)the contract of the buyer with the issuing bank; 3)the letter of credit proper

INDEPENDENCE PRINCIPLE
Contracts involved in a letter of credit arrangement are to be maintained in a state of perpetual separation

A direct consequence of the independence principle is the rule that banks only deal with documents and not with
goods, services or obligations to which they relate

EXCEPTION ON THE INDEPENDENCE PRINCIPLE
The exception is when there is fraud or forgery in the underlying transaction or the tender documents

KINDS OF LETTERS OF CREDIT
Confirmed LC – whenever the beneficiary stipulates that the obligation of the opening bank shall also be made the
obligation of another bank to himself

Irrevocable LC – a definite undertaking on the part of the issuing bank where the provisions contained in the
credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with

Revolving LC – one that provides for renewed credit

Back to Back LC – a credit with indentical documentary requirements and covering the same merchandise as
another letter of credit

Standby LC – a security arrangement for the performance of certain obligations. It can be drawn against only if
another business transaction is not performed

BULK SALES LAW

When is a Sale Considered a Sale in Bulk?
1. There is a sale, transfer, mortgage or disposition other than in the ordinary course of trade and the regular
prosecution of the business
2. The sale is of all or substantially all of the business or trade
3. When the sale is of all or substantially all of the fixtures and equipment used in business

Purpose
It seeks toprevent the defrauding of creditors by the secret sale or disposal in bulk of all or substantially all of a
merchant’s stock of goods

Formalities Required
a. The sale in bulk to be accompanied by sworn statement of the vendor/mortgagor listing the names and
addresses of and amounts owing to creditors
b. The sworn statement shall be furnished to the buyer
c. The seller is required to prepare an inventory of stock to be sold
d. The seller is required to notify the creditors of projected sale at least 10 days before such sale

When Formalities Need Not be Complied With
a. Sale is made in the ordinary course of business
b. There is a waiver from all the creditors and must be written
c. Sale is by virtue of a judicial order
d. Those sold by assignee in insolvency or those beyond the right of creditors
e. When properties are exempt from execution

Effects of Violation of Bulk Sale Law
a. Sale in bulk is void as to creditors (but valid between parties)
b. Purchaser holds property in trust for seller
c. Purchaser is liable to seller’s creditors for properties forming part of bulk, and already disposed by him

DOCUMENT OF TITLE

Includes any bill of lading, dock warrant, quedan or warehouse receipt for delivery of goods, or any other
document used in the ordinary course of business in the sale or transfer of goods, as proof of possession or
control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or
receive either by indorsement or by delivery, goods represented by such document

Bill of Lading
A document that serves as evidence of receipt of goods for shipment issued by a common carrier

Quedan
A warehouse receipt that covers sugar

Dock Warrant
A warrant given by dock owners to the owner of merchandise imported and warehoused on the dock, upon the
faith of the bills of lading as a recognition of his title to the goods

Functions of Documents of Title
1. It is a contract
2. Evidence of receipt of goods
3. Represents the goods and therefore operates as transferrable document that carries with it control over the
goods. It is used to pass title to the goods. It can be a negotiable document of title.

“Rejoice in hope, be patient in tribulation, be constant in prayer.”