Commercial Law Review
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Promise to pay (PN)
Glenn Tuazon, 4-A
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Order to pay (bill of exchange)
Atty. Jack Jimenez
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SY 2010-11
If it does not comply with the requisites of negotiability, it is still a contract, but not covered by the NIL.
4 Quizzes (50 each) + MT (100) + Finals (100) divided by 4 = Final Grade
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Part 1: Negotiable Instruments Law
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HISTORY: contrast a negotiable instrument with a non-negotiable PN:
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First objection: a person stepping into the shoes of the seller is exposed otherwise to the defenses that the buyer may launch
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against the seller
o
Law’s solution – exempt from personal defenses
Second objection: “I don’t know the maker, I just know the one
Either: o
Payable to order – negotiated by indorsement, and delivery
o
Payable to bearer – delivery is sufficient
o
N.B. If payable to a specific person, it is not negotiable
Four basic contracts involved: o
1. Making
o
2. Drawing
o
3. Negotiating
o
4. Accepting
negotiating it to me. How will I know he’s solvent?”
Law’s solution – will make the indorser liable
regardless (Accumulation of secondary contracts)
•
o
The more indorsers, the more you can sue
Two general parts in the law: o
1 – what makes an instrument negotiable
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2 – rights and obligations of parties
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To show consent
N.B. But for all, there must be delivery
Basic principles: NIL is for justice.
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1.
Bad faith: So if a person is in BF, he cannot invoke
defenses. (Ex. Issued a negotiable instrument to pay for a car
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that is defective. The indorsee knows that the car is defective, he is in bad faith.)
Two basic forms:
o
2. Estoppel – ex. A father allowing a son to steal a check and forge his signature is estopped from denying it
o
3. Comparative fault
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Requirements – found in Sec 1. 2-9 are elaborations of such.
o
1a. It must be in writing
o
1b. It must be signed – symbol of consent
If a bank honors a check with a forged signature, the
bank is considered negligent too
If one signed another name or a symbol, it will bind him if he intended for it to bind him
But if the negligence of the drawer outweighs the
negligence of the bank, the law shifts the fault to the drawer
o
o
4. The law will only protect you from personal defenses if you
2a. Must contain a promise or order to pay
are a holder in due course (Sec. 52)
Good faith
With value
Before overdue (see below)
Location is immaterial
Need not use exact words, even equivalent words are fine
Creates a NEW obligation to pay, not a mere acknowledgement of an old debt
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Exception 1: date of payment is mentioned, or at least, a date of maturity
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With no notice of defenses
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5. General rule: there must be demand , before an instrument
Exception 2: insertion of “or order” (words of negotiability) in the old terms
becomes overdue. Exception: If time is of the essence.
Ex. Reserve requirements of banks must be kept afloat, so overnight, banks sometimes transact with each other
“An overdue instrument is shouting to the high heavens – I have been dishonored!”
Authorization to pay or a mere request does not create a binding obligation to pay.
o
2b. The promise to pay or order must be unconditional
Do not look into evidence aliunde. You must confine yourself within the four corners of the instrument to deem whether it is absolute.
Fall back on obligations and contracts – distinguish between
uncertain
events
and
certain
events,
although indeterminate (ex. Moment of death of mother-in-law)
o
•
Most cases involve fraud, by taking advantage of the features of the law.
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Sec 2: when a sum is certain o
2c. Sum certain, and payable in money
Even when there is a stipulation of interest.
It must be in
writing.
Because it is meant to be a substitute for money Also, specify the denomination.
o
Cannot just be a
The stipulated rate controls – there is no more ceiling on interest rate. But it is unconscionable, it is void, and the rate is
number.
reduced to 12% (in circular 416).
o
3. Payable on demand or on a determinable future time
o
If there is stipulated interest, without a rate, 12% as well.
o
4. Payable to order or bearer
o
If payment is by installment, for the instrument to be valid, the amount of installments must be indicated and the date of
Need not use exact words
But there must be reasonable certainty so people
maturity of each installment is specified.
know from whom they could demand payment
installments.” not negotiable
Ex. instead of “order” pay to X or his indorsees;
pay to X or his assigns
o
Nov 2005)
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If name of the drawee is left blank, it is an incomplete instrument which can be filled up as a remedy
If there is an acceleration clause – failure to pay an installment will make the entire balance due and demandable.
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty
You have to specify both AMOUNT and WHEN EACH is due. You cannot just give the starting point (ex.
Ex. instead of “bearer” pay to X or holder; pay to X or possessor
“Promise to pay Jose Cruz or order P100,000 in 10
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It is now valid to stipulate payment in foreign currency.
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If you talk about an exchange rate, you have to talk about at least 2 currencies. It cannot be just one.
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Under Civil Code, general rule is attorney’s fees are not
the CM.
It was negotiated to Elizalde by the car selling
recoverable,
company.
Elizalde sought to collect.
except
when
there
is
written
stipulation.
Issue is whether the
statement of security (CM) made it non-negotiable.
Stipulating such makes the NI more attractive.
HELD:
Negotiable, because the promise to pay is still conditional, and
Ex. “I will pay reasonable attorney’s fees in case there
is not dependent to the CM. Test: does the promise to pay
is failure to pay” – is this a sum certain?
rely on the terms and conditions of the security? If so, it is not
Yes.
Because you know how much is due at the date of
negotiable. Else, it is negotiable.
maturity (it doesn’t matter what you pay after
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maturity). This is the reckoning point – at the date of
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Abubakar: A Treasury Warrant is not negotiable. It is payable
maturity, is the sum certain? ALSO, stipulations on
out of a particular fund, so you do not apply Sec. 66. “No
attorney’s fees is always subject to court control
money should be paid out of the Treasury without an
anyway.
appropriation for that purpose” (Constitution).
Sec 3: promise is unconditional
FACTS here: X deposited treasury warrants with a rural bank. The rural bank deposited with Metrobank.
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Instructions on how payment will be entered into the books of
Even before the treasury warrants were cleared by
account does not affect unconditional nature
the clearing house, Metrobank allowed withdrawal. The warrants were spurious. Metrobank is suing the
Neither does “reimburse yourself” affect
rural bank to recover, since the rural bank warranted
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TEST: it must indicate the source of reimbursement,
the treasury warrants by negotiating it to Metrobank.
not source of payment. The latter is not negotiable.
HELD:
Metrobank is wrong, because the treasury
warrants are not negotiable instruments. Statement of how the original obligation came about does not
o
affect conditionality
BUT a reference from which fund the obligation would be paid does not destroy negotiability if payment is not limited to come
But it will become non-negotiable if mention of the
from such fund.
prior contract (ex. deed of sale) makes the NI subject to the terms and conditions of the contract.
This
makes it conditional.
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Elizalde: Person bought cars. He issued a PN, secured with a CM over vehicles. The PN said that the payment is secured by
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Sec 4; payable at determinable future time
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1st situation: “Pay Jose Cruz or order… if the holder feels insecure, he may demand that I post reasonable securities,
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and if I fail to do so, he can declare the entire balance due and demandable.”
Effect:
everybody
becomes
secondarily
liable by ripening their obligation. Thus, this is not valid.
One view: non-negotiable – because date of maturity
o
becomes uncertain because holder can accelerate payment, and there is an additional undertaking other
or condition happens.
than payment of money.
o
Philippine Education v. Soriano: A money order is not
Other view: negotiable – because the undertaking to
negotiable, because although it says “pay to the order of,”
put up a security is merely an accessory obligation.
under Postal Regulations, obligation to pay is conditional,
The date of maturity is not uncertain because
depending on different grounds where the post office can
acceleration is within control of the maker; he can
refuse to pay. Also, it can only be indorsed once.
prevent it by complying with the additional security. (better view)
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If hinged upon a contingency, non-negotiable even if the event
2nd situation: “same… if the holder feels unsecure, he can
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Sec 5: additional provisions that do not affect negotiability
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GENERAL RULE: Other obligation or undertaking aside from payment of money makes it non-negotiable (“secured by CM
declare the entire balance due and demandable.”
over my car, which I will keep in good condition”)
It is not negotiable, because here, the holder has the absolute option to make the obligation due and demandable.
o
o
EXCEPTIONS:
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Authority for holder to foreclose pledge/CM or collateral securities
Differentiate:
When the maker may choose to pay before a certain
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maturity
date, it is still negotiable (ex. “on or before June 15” maker can pay before June 15 at his option) •
Effect: all other secondary contracts are discharged. It benefits everybody.
Authorizes confession of judgment if instrument not paid upon
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N.B. the SC said, however, this is a void stipulation
Waiver of benefit of law
Waiver of notice of dishonor
Waiver of venue
When the holder may absolutely choose to have the obligation due, it is not
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Waiver of exemption from execution
Holder can require something other than payment of money
If option is upon holder to demand either cash or rice,
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[It may be upon order of]
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1. Order of payee who is not maker, drawer, or drawee
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2. Drawer
it is still negotiable because the holder can ALWAYS
demand money
Ex. Jose Cruz writing a check saying “Pay to the order of Jose Cruz” – this is better than making a
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Sec 6: omissions which do not affect
check paid to cash, which anyone can encash if lost and found
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1. Not dated
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2. Failure to mention consideration
In this example, it is not complete until Jose indorses it, because there has to be delivery (at least two parties to a contract)
It is presumed in this contract
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3. Does not specify place where it is drawn or payable
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3. Drawee
o
4. Bears a seal
o
4. Two or more payees jointly
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5. Designates currency in which payment will be made
Ex. Pay to the order of Jose Cruz AND Manuel Santos
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Sec 7: When it is payable on demand o
o
5. One or some of several payees
Upon sight or presentation
•
o
Instrument is silent on when payment is made
o
When it is overdue
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As to the maker, he is discharged
BUT as to the indorser, it is upon demand
Sec 8: When it is payable to order
Ex. Pay to the order of Jose Cruz OR Manuel Santos
6. Holder of an office for the time being (ex. Treasurer of the city of Makati)
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If the drawee is not indicated with reasonable certainty, then it is not negotiable.
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Sec 9: When it is payable to bearer
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1. Expressed as such
checks. Caltex: [unclear facts] Caltex required collateral for a
(Security Bank).
Caltex accepted it.
corporation
[yada yada
bearer.
just
the
corporate
The Drawer did not intend the payee (the
Corporation) to get the proceeds of the check, EVEN IF the payee actually existed or not. It fell under this
[As explained by Phil. Law Library]: The Certificates of are
was
restoration of the amount. HELD: it is payable to
It is a
bearer instrument.
Deposit
he
himself nonetheless. Y, his partner, sued the bank for
dispute. HELD: It says that the deposit is payable to
Time
where
authorized to indorse; but he indorsed the check to
Caltex and Security bank are in
the depositor, and the depositor is bearer.
He drew a check payable to a
secretary. He was just the corp. sec., and was not
yada] Bottomline, requestor maxed his credit line and disappeared.
X wanted to steal money from the
partnership.
credit line. Requestor had as security a time deposit
Weller and Martin: Either partner can sign or issue
negotiable
instruments.
provision.
The
documents provide that the amounts deposited shall
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be repayable to the depositor. And who, according to
Assume same facts.
If, however, the
company required two signatories to all
the document, is the depositor? It is the "bearer." The
checks, and X signed it with intent to steal,
documents do not say that the depositor is Angel de
and Y signed it not knowing X’s intent, then it
la Cruz and that the amounts deposited are repayable
does not become payable to bearer. For the
specifically to him. Rather, the amounts are to be
payee to be fictitious, both must have same
repayable to the bearer of the documents or, for that
intent.
matter, whosoever may be the bearer at the time of presentment. (Caltex)
American Sash: Had a payroll clerk, who prepares checks payable to employees. He then makes the
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2. To person or bearer
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3. Order of fictitious person
officers sign the checks. Clerk padded payroll with ghost employees, had the officers sign the checks (the officers did not know that the employees didn’t
GENERAL RULE of the following three cases: there
exist), and the clerk collected money. Issue: is this
must be intent by the maker or drawer of the NI that
payable to fictitious persons. These ghost employees
the instrument be issued to a fictitious person
did not actually exist. HELD: [N.B. first, the court
(knowledge is paramount)
found that there was forgery because the drawer did not know the payees were fictitious.] It was not a
bearer instrument. The DRAWERS were the officers
ones who indorsed were the officers and not the
who signed the checks. Their intent controls. So the
supposed borrowers.
checks DID NOT become payable to bearer because
intended for fictitious persons, since there was no
they DID NOT KNOW that the ghost employees were
intent that they actually get the money (even if the
not part of the payroll.
supposed borrowers really exist). HELD: Rodriguez
Contention of PNB: it is
spouses won. For the checks to be considered as Rodriguez v. PNB:
Employees of PNB formed a
savings and loan association (SLA).
payable to fictitious persons, the fact must be known
Rodriguez
to the person issuing the negotiable instrument.
spouses meanwhile, had current accounts with PNB.
Here, the Rodriguez spouses did not know that the
Whenever the SLA lends to members, it issues post-
supposed payees were not the real borrowers (when
dated checks. But most of the time, the SLA does not have enough money. the
checks
to
it fact it was the officers). PNB must reinstate the
The borrowers thus endorse
Rodriguez;
in
turn,
amounts to the Rodriguez spouses.
Rodriguez o
rediscounts the checks (issuing checks lower than
4. Name of payee is not name of existing person
face value). The SLA has a policy: when a member
has an outstanding loan, they cannot get another loan. So the officers who wanted to borrow more, to
o
Classic example: payable to cash
5. Last indorsement is in blank
circumvent this, they made it appear that it is the other members who are borrowing.
The SLA, in
accordance with the usual procedure, issued postdated checks to the “supposed borrowers” (but really for the officers). The officers indorsed the checks to Rodriguez.
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Sec 12: Ante-dating or post-dating does not affect negotiability
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Sec 13:
Rodriguez issued discounted checks.
PNB found out about this and closed the SLA
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When the date of acceptance is not inserted by the drawee, the holder may insert date of issue or date of acceptance
account. Meanwhile, the checks issued to Rodriguez, which bounced because the SLA account was shut down – since the checks they issued were cleared, and the checks issued to them were from a closed account.
Contention of spouses: How can PNB
accept the indorsement of those checks, when the
o
What if he places the wrong date?
If negotiated to a holder in due course, that is the correct date as far as the holder in due course is concerned – even if it is not
Purpose: the law protects a holder in due course, who is relying on that date in good faith
CONTROLLING FACTOR: The blank or incomplete instrument must have been delivered with intent that the holder turn it into a negotiable instrument
o
But what if the one who put the wrong date presented it o
for payment to the acceptor/drawee?
In a case, a person signed an instrument in blank and left it with the bank. The bank filled it up with an amount.
o
Not valid. Cannot claim.
What happens?
SAMPLE QUESTION:
A check drawn by X says “Pay to the order of Y
o
P10000 thirty days after sight.” It was accepted by E on Sept. 15, but did not date the instrument.
What are the two requirements for this instrument to be enforceable?
Y
negotiated it to Z, telling the latter that the instrument was accepted November 1.
The amount inserted by the bank controls.
Z placed in the
1. It must be filled up in accordance with the authority given to him
instrument this date. •
2. It must be filled up within reasonable time
Can he collect from E? o o
X gave a check with a blank amount to Y, telling Y that he
Yes, even if it is more than 30 days
should fill it up according to what X ultimately owes Y, but not
from acceptance. Z is a HIDC and
over P50000. X owes Y P30000, but Y put P60000.
the Nov 2 date is true as to him. •
If Y inserted the wrong date instead and
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did not indorse it to Z, can he collect from E?
o
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Y indorsed the check to Z, a HIDC. Can Z collect
• When it is wanting of a material particular – the person possessing it has prima facie authority to fill up the blanks
No. It was beyond the authority given him.
P60000 from X?
No. He is not a HIDC.
Sec 14: o
Can Y collect P60000 from X?
o
Yes. The defense does not apply to him.
Case: X works abroad, but allows property to be rented out, and the payments are deposited in an account. The husband (retired lawyer) however withdraws money from that account
for his own support, to X’s ire. X asked her inaanak to hire a lawyer for this purpose.
The inaanak hired a lawyer but
subsequently terminated the services so she asked for a return
o
NI is incomplete until delivered
o
Ex. You cannot sue if you hold checks that were not delivered to you. You never acquired a right over them.
of the acceptance fee. The lawyer said that he will return the fee in installments. X asked the inaanak to sign a piece of
paper claiming that it was a “witness” signature that the lawyer
BUT a HIDC will not be subject to this defense (Like Sec. 14)
will pay X back. But X actually made it appear that it was a PN where the inaanak promised to pay money to her five years prior, corresponding to the attorney’s fees.
•
o
HELD: The court
BPI Family Savings:
BPI issued a check payable to City
Treasurer of Iloilo to pay for local taxes. They did not deliver it
believed the contention that the inaanak never intended for the
to the treasurer, and just gave it to the employee.
signature to be for a PN. There must be intent to leave a
employee used it to pay for somebody else’s local taxes.
signature to make a PN.
HELD: There was no payment because BPI never delivered it
The
to the city treasurer, so BPI cannot claim to have paid. Sec 15: incomplete and undelivered instrument
o
Will not be a valid contract in the hands of any holder, as
o
shopping malls (buyers) issued crossed checks. Somehow,
against the person whose signature was placed on the
the checks fell into the hands of someone else, who indorsed it
instrument prior to delivery (real defense)
Associated Bank: Somebody was selling RTW clothes, and
to someone else, and were deposited to Associated Bank. The seller was wondering why she wasn’t being paid. [If you
BUT indorsers are liable
are legalistic, the RTW seller must sue the shopping malls,
o
o
Ex. Left signed checks, and an employee took them and filled
etc., because the checks were not delivered to her. In turn, the
up amounts. Incomplete and undelivered instrument.
shopping malls, etc. must sue the drawee banks, and then the drawee banks sue Associated Bank why it cleared the checks.
Ex.
Officers of country club went abroad and left signed
HELD:
checks for payment of checks. Abusive employees put their own names and signed their own names.
HELD:
The SC allowed the RTW seller to sue Associated
Bank directly because it cleared the checks.
By pre-
(Same in
Westmont Bank case)
signing checks and leaving them with employees, it became possible for them to do this. The officers were negligent and shared in the loss (60-40). •
Sec 16: Complete but undelivered instruments.
o
It may be showed that delivery between immediate parties is conditional, or for a special purpose.
o
Ex.
o
A godson is taking the CPA test, but X is not in the
Philippines. He gave P10,000 check on the condition that he pass the test. The godson cannot enforce payment on the check. BUT if the godson negotiates the check to a holder in
deemed solidarily liable •
due course, the law will protect the HDC. •
Sec 18 – o
o
Words prevail over figures
GENERAL RULE: person whose signature does not appear on the instrument is not liable
Sec 17: Rule of interpretation o
If “I promise to pay” note is signed by two or more persons
EXCEPTIONS:
Romero: Amount indicated in words is One Million Two Hundred Pesos. Amount in figures: 1,200,000. Balance in the account is 1,100,000.
1. Duly authorized agent signing for principal
2. Forger liable for signature he forges
3. Signature in separate paper (“allonge”) because
The check
bounced. The words prevailed.
the instrument has no more space
o
o
Payment of interest
Runs from date from instrument
Or if none, date of issue
4. Estoppel
5. Signing under trade/assumed name
6. Instrument can be negotiated by mere delivery
Not dated assumed to be dated from time of issue •
o
Written > printed provisions
o
If ambiguous whether a bill or note, the holder has the option to
Sec 19/20
o
o
To avoid liability as signing agent:
treat it as either
A) agent must disclose he is an agent
Ambiguous role of signature deemed an indorser
B) disclose his principal
C) he has authority
Because the indorser has the least liability among all characters in a NI
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Minority/incapacity of corporation
o
Maker of a PN cannot refuse to pay to a holder on the ground
•
that the indorser is a minor. Neither can he raise the defense
negotiable instrument, when he thought it was
that the prior indorsee is a minor. ONLY the minor can raise
something else.
Misled to signing instrument, not knowing it was a
the defense of minority, no one else.
o
Can apply this principle by analogy to other incapacitated
3. Duress amounting to forgery
•
persons (Ex. corporation action ultra vires)
It must be duress in the execution (ex. Grab the
hand of the intimidated), NOT duress in inducement o
Exceptions:
1. The minor actively misrepresented his age and it appears that he is physically of such age
2. Minor kept fruits/benefits
3. Minor spent the money in good faith
4. Fraudulent impersonation •
In this case, in general, it is NOT a forgery
•
The person to whom the note was given is
presumed to be intended to receive the note (because
o
Sec 23 – Forgery o
The person whose signature is forged did not give consent to the
contract
Different situations:
1. Promissory note
•
o
he knew the intended payee)
A (signature forged by B)-B-C-D-E
Except when he is estopped o
E cannot collect from A
o
E can collect from B (forger)
o
E can collect from C, D as indorsers
There are different instances of forgery:
1. Signature is copied •
May be done by tracing.
•
Practices imitating a specimen signature
2. Fraud in esse contractus •
Fraud in factum.
(warranted the instrument)
•
EVEN if it is a bearer instrument, then A
(signature forged by B)-B-C-D-E
o
Indorsing an instrument that need not be
[ORDER INSTRUMENT] A-B-C (signature forged
indorsement
was
Neither can he run after A or B,
because he cannot trace his right to
by D)-D-E
o
C’s
forged.
indorsed leads to a warrant of such
•
No,
them [cut off by the forgery]. E cannot collect from A or B (since it is
an order instrument, there is a cut-off to A
and B, since C’s signature is forged)
indorsing the instrument (even if
He can run after D, because by
bearer), he warranted it. o
E cannot collect from C (no consent)
o
E can collect from D as indorser
o •
even if it is not needed, the indorser warrants the instrument as what it purports to be.
A B or bearer-C (signature forged by D)-D-E
o
NOTE: This is an instrument payable to
bearer; delivery is sufficient, no need for
NOTE: if a bearer instrument is indorsed
2. Bill of Exchange •
A. Drawer
indorsement.
o
o
1. Order
Can E collect from A?
due course, A will claim that there was
Accepted
Unaccepted
Depends. If E is not a holder in no
delivery
of
complete
o
instrument by B since C stole it
2. Bearer
from him
Accepted
Unaccepted
If E is a holder in due course,
he may collect from A since it is payable to bearer
•
A’s signature on an order instrument was
forged by B and then indorsed to C-D-E. o
Can E run after C?
accepted as drawee. Can E collect from A?
X
o
•
•
No. No consent.
NOTE: If it’s a bearer instrument, even if C’s
indorsement to D is forged, then the payee can still Can E run after X? o
Yes.
o
Sec.
collect from A (because he just promised to pay the bearer). Remedy of the acceptor is to just run after the thief.
62,
the
acceptor
admits
the
instrument is genuine when he accepts and
pays.
forged C’s signature D E. X accepted and paid.
o
A issued a BOE payable to B or order.
•
What is X’s remedy?
B C.
D
X cannot debit A’s account, because A ordered to
pay B or order. C did not order X to pay D. B’s order
•
To sue B, the forger.
was cut off by forgery.
•
Can E run after B? o
Yes. Forger
o
Can E run after C and D?
Yes.
the indorsers.
Warranted
•
NOTE: If X did not accept, then he cannot be
recovered from, because he did not accept.
o
But the same answers apply for the
others.
•
NOTE: Apply the same rules on indorsement of
a bearer instrument if there was indorsement even if there is no need to do so, there is warrant of the genuineness of the instrument by the indorsers.
E cannot run after A (cut off) or B or C. He can
run after D, who forged.
by
indorsement
•
X can get money back from E because X only
admits A’s signature is genuine (which it is), and not
A issued BOE payable to B or bearer. Indorsed to C.
C’s signature was forged, indorsed to D, then E.
X
accepted the BOE. What happens? •
X can debit A’s account because A promised to
pay bearer. •
X cannot get back the money from E. E is the
bearer. •
C can run after D, the forger.
o
A issued BOE payable to B or bearer. Indorsed to C.
Left check book with his friend, who was in the car. The friend
C’s signature was forged, indorsed to D, then E. X did not
forged his signature in a check book left lying there. HELD:
accept the BOE. What happens to E’s claim?
Not negligent; no reason to suspect friend of bad faith.
•
Cannot go after X, did not accept.
•
Cannot go after C, no consent.
•
Can go after D, indorsed (warranted)
•
Cannot go after B, cannot trace title to him since
•
BPI v. Casa Montessori: o
An external auditor was hired to reconcile records.
He
managed to forge the signatures of the officers of Casa Montessori over a long time. reinstate the amounts. HELD:
C’s signature is forged.
Sued bank, which refused to
Bank argued Casa was negligent.
An external auditor is not an employee.
It is an
independent contractor, so you cannot blame Casa for •
negligence in hiring an employee.
Can go after A if E is a HDC. Cannot go after A if
E is not HDC. o
•
the auditor was stealing money, because he was precisely the
EXCEPTIONS to general rules:
o
Estoppel does not apply, because Casa had no way to know one tasked with safeguarding the school records and
1. When there is estoppel (ex. father saying that his son’s
comparing with bank records.
forgery of his signature was genuine) o
•
Cases on Comparative fault principle
•
Security Bank v. Triumph Lumber:
2. When there is unreasonable delay by the drawer in informing the drawee about the forgery
o
Drawer can check the statements sent by the bank to him
Robbers broke into Triumph Lumber. Check book was stolen, but triumph did not report it to the bank. Robbers were able to cash checks. HELD: Triumph was negligent for not reporting
Test:
If the drawer had acted quickly, would the
the theft.
drawee have been able to stop or freeze payment?
•
o PNB v Quimpo:
But JJ believes that the bank should have been held negligent for authenticating the checks.
•
MWSS v. CA:
o
MWSS did not have their checks printed by the central bank.
forge when he picked up the checks. HELD: Province was
They had a private printing press print their checks.
The
negligent, for allowing the cashier to pick up the checks even
signatures of the officers of MWSS were forged. PNB paid
when he was retired, so he was able to indorse the checks
them. HELD: MWSS must bear the loss for failing to exercise
through forgeries.
caution – did not ask printing press to surrender plates,
o
account for spoilage, and MWSS did not examine the signatures in the bank returns. •
•
Ilusorio: o
Split accountability – 50-50
General rule: o
If the indorsement is forged, the collecting bank must return the money to the drawee bank
Ilusorio was leaving for abroad and he left his checkbook with his secretary, who he asked to reconcile bank statements.
Secretary forged his signature. HELD: Ilusorio should bear the
Basis: Sec 23 – because the payee did not indorse the check
loss for his negligence. He trusted his secretary.
•
Gempesaw: o
This is NOT a case of negotiation, but presentment for payment. argument”
Gempesaw owes several groceries. She trusted a bookkeeper blindly. When she ordered supplies, the bookkeeper prepared
So you cannot use the “warranty
•
Mellicor:
the checks, and Gempesaw signed the checks without
o
verifying the statements. The bookkeeper was able to steal
Maasim forged endorsement of Mellicor, and then PNB
more than P1M. HELD: Negligent; did not confirm or examine
presented check to HSBC for payment. The person was able
the invoices, receipts, etc. before signing the checks used to
to withdraw money for HSBC. Great Eastern sued for return.
pay the suppliers.
HELD: HSBC must return, because Mellicor (drawer) never indorsed the check. [?]
o •
Split accountability – 50-50
•
Ford Philippines:
Province of Tarlac:
o o
Province of Tarlac had account with PNB.
Province issues
checks to the physician/head of the clinic. The cashier already retired, but he was still hanging around. Cashier was able to
Before, you file your ITR with the BIR. So the employee of Ford was tasked to pay sales tax (P18M), made payable to a payee (for payee’s account only), which is the Insular Bank of America, the authorized collecting agent of BIR.
The
employee showed a fake BIR receipt (“See, I paid BIR na.”) to
•
Four general rules:
Ford. Instead, they deposited a worthless check with Insular o
Bank of America (not funded), which they substituted with the check issued by Ford Philippines.
In their internal records,
1. A party whose signature is forged is not liable
Unless he’s in estoppel
they made it appear the worthless check was deposited. Citibank honored the check.
o
o
The person who deposited
2. An acceptor who pays on a BOE cannot recover the money
collected from Bank of America. Ford had to pay BIR again.
because he admits the genuineness of the signature of the
They sued.
drawer
o
HELD: Citibank must return the money to Ford, because Ford ordered it to pay the BIR, which Citibank disobeyed. It says
3. A Holder in Due Course acquires good title if forged indorsement is not necessary for his title
“for payee’s account only” and there was no indorsement from
BIR. o
o
Citibank was guilty only of negligence.
(ex. in a bearer instrument)
4. A person negotiating an instrument after forgery is liable (due to warranties)
o
o
The bank manager (who was complicit) was criminally liable. JJ doesn’t agree with the court as regards Insular Bank of America’s liability.
•
Rules on clearing
o
Checks are brought to a clearing house and are run through a clearing house. They check the magnetic strips on the checks.
o •
Check: G.R. 121413 29 Jan. 2001
Price v. Neal
The amount will then be transferred to the collecting bank. o
Then the checks will be physically given to the drawee bank. The drawee bank has 24 hours to honor/dishonor the check.
o •
See Jack notes o
PNB v. CA o
See Jack notes, too
o
Acceptor cannot get back the money, when it paid, because it admits the genuineness of the signature of the drawer
If it dishonors it, the drawee bank returns the check to the clearing house. The computer will return the amounts paid.
o
Any return beyond 24 hours: time-barred.
Here, the doctrine applies to the forged signature of the drawer.
BUT this 24 hour rule SHOULD NOT apply when it is
purchased. There is a presumption of valuable consideration,
the payee’s or indorsee’s signature that is forged,
and that the check was for such amount.
because the drawee bank has no way to find out, until the drawer informs them.
•
Ex. in BP 22, there is no need to prove the check was issued for valuable consideration
But the SC wrongly applied the 24 hour rule to the payee’s forged signature.
o
•
In civil law, generosity, love, affection, etc. are valid consideration.
o
New rules (to prevent ping-pong of checks):
[Glenn’s note: Sundiang says love and affection, etc. cannot be considered valuable consideration.
If a check is dishonored, you can only present it one
says that a donation is a “simple contract” and the law
more time. [Usual reason why one failure is allowed –
simply requires consideration sufficient to support a
drawn against insufficient funds]
simple contract.
•
•
Rule on holder for value vis-à-vis prior parties:
o
The drawee cannot ask the computer to reverse the entries.
•
So love and affection is valuable
consideration.]
What is the effect when the drawee does not return the check within 24 hours?
Rule: Where value is given for the NI, the holder is a holder for value in respect to all parties who became such prior to [the time consideration was given]
BUT you are not precluded from suing to collect after. But since the computer cannot
o
A issued a PN to B, but there is no consideration.
B
reverse, while you are litigating, you do not
indorsed it to C for consideration. C, then to D. What is
have the amount.
D’s status as holder for value?
Consideration •
But Jack
D is a holder for value with respect to A, B, and C because C gave value.
Under the law, consideration is presumed
A and b are parties who
became bound prior to the value given.
o
Travel Inc.: Travel agency sued on the basis of a bouncing check issued by a guy bringing in passengers. The CA was wrong for asking the agency to prove the value of the ticket
•
Rule on holder who has a lien on the instrument: He is a holder for value only to the extent of the lien.
o
o
Company appealing a lost case posts supersedeas bond (ex.
No. The acceptor cannot use want of consideration
P500,000). Surety company asks for collateral (ex. cash, time
as defense. By accepting, he admits authority of the
deposit, money market placement, treasury bills, etc.)
drawer to draw the instrument, and that he will pay.
The surety company is a holder for value to the extent of
•
P500K, even if the company issued a certificate of time deposit
Accommodation parties o
negotiable for P1M.
Signs as party but does not received consideration or value therefore, from the underlying contract. Only lends his credit.
•
Absence of consideration is a matter of defense against a person not a
HIDC (personal defense) •
value knowing him as merely an accommodation party at the time that holder took the instrument.
Partial failure of consideration is a proportionate defense. Somebody issued a check for P20000 for 10 sacks of rice. The check bounced.
o
The seller however only delivered 5 sacks of rice. HELD: He can only
Ex. Some banks try to get borrowers to get surety companies to sign borrowing agreements.
sue for P10000
•
Liable to a holder for value, even if the holder for
Want of consideration between drawer and payee cannot be invoked as
receiving
defense of drawee who accepted a BOE (Cornell)
accommodation party.
o
Surety companies charge
premiums for signing as co-makers. The surety company, not
A drew a BOE for the amount of P10M in favor of B, the
any
part
of
the
proceeds,
is
deemed
an
Clark: But note that independent consideration for the surety/accommodation is not an absolute prerequisite.
payee, in exchange for 10 cars. B only delivered 5 cars.
The consideration that supports the surety is the o
[Same facts] X, the drawee, did not accept. Can A launch
same consideration for the original obligation.
the defense of partial failure of consideration against B?
•
Jose:
Yes. Want of consideration is a defense against the payee.
o
Dispute over parcel of land.
Decided to settle.
The other
party’s lawyer, Beltran, helped settle by issuing a company o
[Same facts] X accepted. Can X refuse to pay on account
check (check of a corporation, signed by the President, and
of partial failure of consideration?
countersigned by the VP). Mrs. Jose sued the corporation. HELD: Here, the issuance of the check was ultra vires. It was not pursuant to the corporation’s business.
The client of
Beltran was supposed to pay, not the corporation. Sue agents
then the Prudencio spouses should pay PNB because PNB is
for acting in excess of authority.
a holder for value!!!
As a general rule: a
corporation cannot be an accommodation party to an instrument, because there is no business purpose to such
•
[unless that is the business of the corporation].
•
Maniego: o
X was exchanging a post-dated check for cash to the disbursing officer of AFP. AFP asked Y, X’s sister, to sign as
Prudencio: (JJ doesn’t agree)
accommodation indorser.
o
The check bounced.
Y was
Construction project. Borrowed from PNB for working capital.
acquitted for conspiracy charges, but was held civilly liable.
The bank required two other signors.
The firm got the
Correct? HELD: Yes. That’s what an accommodation party is
Prudencio spouses who issued checks.
The project was
tasked to do – when the check bounces, she pays.
failing. PNB agreed to release part of the security money to help the project.
But the project died anyway.
Prudencio spouses. accommodation parties.
HELD:
PNB sued
Prudencio spouses are
Negotiation
•
The court held that PNB is not a
When a bearer instrument is indorsed although unnecessary, but it still ultimately negotiated.
holder in due course, because it knew that the spouses did not
o
receive consideration. When PNB released a portion of the
provisions.
money, it was in BF.
o
See Caltex case. When pledging a NI, there are no specific Fall back on the NCC.
Must comply with
requirements of putting it in a public instrument and JJ’s comment: the law says “Holder for value” not “HIDC.” You
indorsement.
cannot claim PNB was in bad faith when it released the money because the project was already failing.
PNB took a risk,
•
rather than ensure the certain failure of the project, the
o
released funds could have improved the project.
o
Sec. 52: definition of HIDC – point in which a person must be is in GF is when he took the instrument. The release of the funds
Indorsement must appear on the instrument itself.
•
Or to a paper attached to it
Indorsement must be of the entire instrument. o
Indorsing only part of the amount will make it cumbersome.
o
Prohibited to indorse to 2 or more indorsees severally. Ex: A
happened long after.
o
SO IF YOU FOLLOW THE IMPORT OF SEC 29, which makes accommodation parties liable to holders for value,
check for P100K is negotiated to Jose Cruz for 50K and Manuel Santos for P50K.
o
PARTIAL indorsement is treated under law as an assignment.
Cruz only
indorsee is a HIDC, defenses against indorser cannot apply to him
It is subject to personal defenses.
o
EXCEPTION: When it has been paid in part (ex. on installments)
•
Types of indorsements: o
Special – specified person to whom it is being indorsed
o
Blank – does not name any person
To Jose Cruz, for collection only (as agent only)
Yes, but subject to same restriction that he only holds it for collection
X, because the indorsee is a mere agent of the indorser
X, because there is no transfer of title
Yes, defenses against indorser can be raised against indorsee because he is just an agent
To Jose Cruz, as trustee for Glenn Tuazon (indorsee named as trustee)
Yes, but subject to same trust
Yes
Yes, because there is transfer of title
X, because title transfers
Indorsement of an order instrument in blank can convert the indorsement into a special indorsement by writing his name
This ensures that the order instrument does not become a bearer instrument
Ex.
A issued a PN to B or order for P10K.
B
indorses it to C, but in blank. What can C do? •
C can insert “To C” over the signature to keep it an order instrument.
•
C CANNOT put “To C, waiving notice of dishonor.” The contract must be consistent with the tenor of the indorsement
•
Types of restrictive indorsements Negotiability
Pay to Jose
X
Passing of
Consideration
Defense
title
presumed
available
Yes
Yes
X, because
•
Rights of indorsee in restrictive indorsement: o
A) collect payment
o
B) bring action indorser could bring
o
C) transfer rights, if allowed to do so
•
•
Qualified indorsement
Yes.
Because he warranted that the
instrument is genuine as to what it purports o
Done by writing ‘without recourse’ – although the instrument is
to be.
still negotiable
o
This can be done if the instrument will fall due for a long time
If D turned out to have forged C’s indorsement to him, can E collect from D?
(ex. 5 years), and the indorser does not want to be insecure for •
such a long time.
o
Yes, more so. He warranted his valid title to E.
But qualified indorser still has some warranties under Sec. 65; •
Conditional indorsement
Genuine as to what it purports to be •
o (ex. not forged or materially altered)
Warrants his valid title
All prior parties have capacity to contract
The maker (or acceptor) may disregard the condition because the maker made an unconditional promise to pay.
The
indorser cannot change the original obligation o
The maker can also say “let’s wait and see if the condition is fulfilled”
That he is not aware of any fact that makes the
o
instrument valueless
If the maker pays, but the conditioned turned out to be unfulfilled after, the remedy of the conditional indorser to run
•
o
(ex. that the maker is insolvent)
after the indorsee to get back the money.
The conditional
indorser cannot run after the maker/acceptor because the M/A Ex. A issues a PN to B or order for P50K. B indorses to C,
has every right to dispose of his obligation while he feels
then C to D. D indorses to E “without recourse.”
Can E collect from D? •
No. The indorsement is qualified.
If A’s signature turned out to be forged, can E collect from D?
solvent. •
Signing of an instrument payable to bearer o
[wait for discussion on Sec 65]
o
It can still be indorsed through mere delivery
o
title through his indorsement •
Indicates a place o
o
All must endorse
•
Law of that country will govern as to questions of indorsement
Not every restrictive indorsement will destroy negotiability
But if they are partners, there is mutual agency o
Only that in subsection A will destroy
o
Crossed check is still negotiable
Instrument payable to cashier or fiscal officer o
Assumed that the instrument is payable to the corporation he represents
•
•
Useful to establish HIDC
Payable to two or more payees – o
•
But the special indorser is only liable to those who can make
If name is misspelled
•
Can strike out an indorsement not needed for his title
o
Example – bearer instrument: can strike out indorsements B to E
o
Must indorse the instrument according to the misspelled name,
because other parties will not know that there was a mistake made o
•
draw title to the instrument.
his real name, so it will appear wrong name indorsed to real
•
No. Because it is payable to the order of B. You cannot take him out, or else, E cannot
If he wants, after signing as the misspelled name, he can sign name
If it’s an order instrument, can E strike out B?
o
ABCDE. E cancels the indorsement of C to D. He loses the right to run after C. D is also discharged, because D
Indorsed as an agent
lost his chance to run after C. o
Must state that he is negotiating as an agent, and disclose the principal, and that he is duly authorized
•
If there is date attached to the negotiation
o
o
RULE: The indorser who is struck out and ALL indorsers after him are eliminated
o
Presumed to be correct, but rebuttable
o
If no date, the negotiation is presumed to have been done before it was overdue
Ex. If there is indorsement from A to Z, and you cancel C, persons C to Y are discharged.
•
Instruments transferred without indorsement:
Payment at or after maturity is in due course, and without notice his title is defective
o
Transferee will only step into the shoes of the transferor
o
So defenses against transferor apply to the transferee too
o
But the transferee can compel the transferor to indorse it
•
Sec 52 – Holder in due course [very important] o
Requisites:
1. Instrument is complete and regular on its face
2. Must have become a holder before it was overdue
BUT in determining whether he is HIDC, the reckoning point is that time of indorsement
and without notice of prior dishonor, if so
Ex. Did not know necklace was fake at time of transfer; knew it was fake at time of indorsement = not
3. Took it in GF and for value
4. When he took, no notice of infirmity in instrument or
HIDC •
Indorsement to a prior indorser
defect in title of the indorser
o
A-B-C-D-E-B
•
This elaborates #3
o
Can B run after C, D, and E?
•
Defect in title of indorser = if he took it through
No. Because they in turn can run after B too!
There is compensation under law. The law will not
Rights of a holder Can sue in own name
o
Payment in due course discharges the instrument
illegal
faith
Rights of the Holder
o
means,
consideration, or negotiated it in breach of
allow them to run around in circles.
•
unlawful
•
Fraud ex. issuing it for a fake ring
•
Duress ex. ransom money
•
Unlawful means ex. stolen check
•
Illegal
consideration
marijuana o
Rule on instruments payable on installments:
ex.
issued
for
Status on payment
Knowledge
Effect
(which gave change). X stopped payment. ABC sued X. X
An installment has not been paid and there is no acceleration clause
Holder is aware
HDC as to installments not due on the face of the instrument
launched defense of failure of consideration.
An installment is not paid and there is an acceleration clause (automatic)
Holder is aware
An installment is not paid and there is an acceleration clause (automatic)
Holder is not aware
An installment is not paid and there is an optional acceleration clause
Holder not aware of the exercise of this option
HDC as to installments not due on the face of the instrument
An installment is not paid and there is an optional acceleration clause
Holder is aware of its exercise
Not a HDC
o
Issue: is ABC a HDC?
o
No. Since the check was crossed, it can only be deposited.
Not a HDC ABC should have inquired as to the title of Y, but it did not. HDC as to installments not due on the face of the instrument
Similar case: State Investment House and Bataan
GENERAL RULE: If the checks are crossed, the taker must inquire as to the nature of the indorser’s title
•
Banco Atlantico:
o
X paid Y a check, drawn against ABC bank. Y altered the amounts. Y deposited it in DEF (her bank). Y told DEF not to present the check for payment right away, even if it was already due, and to let Y to draw the amount anyway. The alteration was discovered. ABC refused to pay. DEF sued to recover.
•
A holder must be aware that something is wrong, but chose not to investigate further as to not be a HDC. The test: o
Did he take it? Was is honest for him to take the instrument
o
Issue: is DEF a HDC?
o
No. The circumstances show that the check was already due but Y asked DEF not to present it for payment yet. And DEF
under these circumstances?
•
allowed Y to withdraw even if the check has not been cleared yet.
Gatchalian:
o
X issued a crossed check to Y, in order to buy a car from Z. However, Y took the check and paid it to ABC hospital, and the value of the check was greater than his bill to ABC hospital
•
Mesina:
o
X left a cashier’s check (issued by ABC bank) payable to X’s
•
unreasonable length of time the holder is not a HDC.
order. Y stole it and indorsed it to Z. ABC refused to pay. Z sued. o
(53) Negotiation of an instrument payable on demand after an
o
HELD: Z was not a HIDC because Z refused to explain how
Consider the nature of the instrument, customs, and particular facts
the check was indorsed to him. • o
•
amount agreed for the instrument is a HDC only to the extent of the
forged X’s indorsement. But the court used HDC anyway.
amount paid by him.
o
Stelco: o
(54) A transferee who receives notice of infirmity before he has paid the
JJ thinks it’s better to use forgery as the theory of this case. Y
and X told Y to just pay him P80K right away because X could The claimant received a check that was not indorsed to it by
not wait for the maturity of the check. Y has only paid P40K so
the payee, and the check had a notice of prior dishonor due to DAIF (drawn against insufficient funds).
far. Then Y found out that the check was issued for a fake
Claimant is not a
ring. The check was presented but it was dishonored. Y sued
HDC.
•
Z, the drawer. Can he collect?
Salas and State Investment House (2):
o
Ex. X issued a post-dated check to Y with value of P100K,
o
HELD: Yes, but only to P50K, since that is half the value of the
In both cases there was lack or failure of consideration
check, and Y only paid half of the agreed consideration. He is
between the maker/drawer and payee of the NI. In one case, it
a HDC only to the extent of half the check.
was merely issued as security, and in the other, the car
•
Rights of HDC:
delivered had the wrong chassis number. But in both cases, the payee already indorsed the check to another person.
o
1. Sue in own name and receive payment
o
2. Free from personal defenses
o
3. May enforce payment against all parties liable thereon
o
Exception: when he cannot recover full payment –
Those persons are HDCs and the defense of failure/lack of consideration does not vest. •
May a payee be a HDC? o
Yes, because the law simply provides “holder.” A payee is a holder, too.
37 – restrictive indorsement [GT: I don’t know why.]
•
Maybe JJ meant qualified indorsement under
•
38?
Personal defenses are available against a non-HDC. This does not mean the non-HDC cannot collect. It just means that personal defenses may be raised against him.
54 – notice before full amount is paid
124 – when materially altered, a HDC may still
•
(58b) IMPT. Shelter Principle (GT)
o
enforce against the maker/drawee according to the original tenor of the instrument •
What it simply says is that a holder who (1) derives title from a HDC (2) and is not a party to the illegality or fraud has the same rights as the HDC as to the prior parties to the indorser,
General rule: the instrument is avoided as to
even if he is not.
those not party to the alteration or did not
o
indorse it o
order. B C, who was NOT aware of the fraud (HDC). C
But not everyone can invoke real defenses against a HDC.
D who was aware of the fraud but not a party to it. What is the
For instance, an indorser warrants an instrument is genuine in
effect?
all respects it purports to be. Also, an acceptor warrants the authority of the drawer to pay. Personal defenses
Real defenses
There’s a contract with some inequitable or iniquitous fact behind it
No contract because an element is missing; or void against public policy
Voidable contract
Void contract
Ex: no consideration, undelivered complete instrument, acquired by force/illegal means, illegal consideration, negotiation in breach of faith, mistake, ultra vires act of corporation
Ex; material alteration (so the consent is not anymore to this instrument); undelivered incomplete instrument (no consent); forgery (no consent); minority (lack of capacity)
Not applicable to HDC
Applicable to HDC
Ex. A was induced by B through fraud to issue a PN to B or
D is a holder in due course as to the parties prior to the indorser (A and B)
What if D indorses it to E, who is not an HDC?
•
Since E derives title from D, who is not an HDC, E does not have the rights of an HDC.
o
There can be no “curing.” So D can’t indorse the instrument to F, an HDC, and have it re-indorsed back to him to “cure” his title. He resumes his position as not a HDC.
•
PRESUMPTION: o
General rule – every holder is a HDC
o
Exception – if it is shown that the title of the negotiator is
Party
Obligations
Warranties
defective, then the holder has to prove that either the holder or
Maker
Pay according to tenor
1. Existence of payee 2. Capacity of payee to indorse
Drawer
If dishonored, and process of dishonor completed: 1. He will pay the amount to holder, 2. Or to a subsequent indorser who pays for it
1. Existence of payee 2. Capacity of payee to indorse 3. On due presentment, it will be accepted/paid according to its tenor
Acceptor
Pay according to tenor of acceptance
1. Existence of drawer, 2. Genuineness of drawer’s signature 3. Drawer’s capacity and authority to draw 4. Existence of payee and capacity to indorse
the negotiator is a HDC o
Exception to the exception – the exception does not apply to a party that has become bound to the instrument prior to the acquisition of defective title
Ex. A – B – C – D – E. D swindled C, then indorsed to E. •
When E runs after A, he is not required to prove that he is a HDC because A was bound to the instrument before the defective title occurred.
•
Fossum:
o
X issued a check to Y, a HIDC. Y negotiated to Z, which was not a HIDC (it was aware of the failure of consideration between X and Y). Z sued X to collect. X refused and raised personal defense of lack of consideration.
What is the
implication?
The burden of proof shifts upon Z to prove that either Z or Y is a HIDC. In this case, it failed to do so.
In this case, Z loses the presumption of being HDC because Y’s title, as negotiating party, is defective. Y has no benefit of the presumption because it is not a holder anymore.
Liabilities of parties
Qualified indorser or indorser by delivery
1. Instrument is genuine and is what it purports to be 2. He has good title 3. All prior parties had capacity to contract 4. Has no knowledge of any fact that would impair the instrument
General indorser
Either: 1. Upon due presentment he will accept/pay according to tenor 2. Or if DH, he will pay the amount to the holder, or to a subsequent indorser compelled to pay it
1. Instrument is genuine and is what it purports to be 2. He has good title 3. All prior parties had capacity to contract 4. The instrument is valid and subsisting at the time of his indorsement
However, P was unable to receive the money because BPI withheld payment [pending investigation of some anomalies]. P sought to collect from D.
been debited. He warranted that P will be paid, and if not, he will make good the check. •
Liability of acceptor o
•
X issued a check for P4000 to Y. Y indorsed it to Z. Z altered the amount to P40000, and negotiated to H.
Liability of Maker
H
presented it for acceptance to E. E accepted it. For how
o
much can the check be enforced against the acceptor?
Araneta: X issued a PN to Y. Y collected, by X failed to pay. He lodged the defense that he used the money to pay for his
sick daughter’s expenses, and his daughter is a beneficiary of
o
HELD: X must pay. He made an unconditional promise to pay.
View 1: P40000 because that is the tenor of the acceptance.
a trust administered by Y.
View 2 (better view): Acceptance is assent to the order of the drawer (132), which is just P4000. He did
What he did with the money is none of the court’s
not consent to P40000, since there must be
business. •
HELD: D must pay, even if his account has already
knowledge. (124) In fact, for a HDC, even if there is alteration, he can enforce payment according to the
Liability of drawer
original tenor. o
Is merely secondary – liable only if the instrument is o
dishonored.
Acceptor admits existence of drawer because without the drawer, the BOE cannot exist.
o
He can put “without recourse” to limit his liability.
o
Cebu International Finance v. CA:
D issued a check to P, drawn against BPI.
He admits authority of the
drawer to draw. o
because the instrument is meant to circulate.
P
presented for payment, and BPI debited D’s account.
Acceptor admits existence and capacity of payee to indorse,
o
Acceptor does not admit signature of indorser.
•
Far East Bank:
“The acceptor cannot recover the amount from the payee on the ground that the drawer’s signature is
o
Someone wanted to buy jewelry in the amount of 200k. He had a draft for 300+K from Land bank.
forged.”
The jewelry store
accepted the draft but set aside the jewelry. Deposited the check with account in FEB. Landbank paid. Being cleared, the jewelry store guy delivered the jewelry to the buyer, and
•
Sec 64 – irregular indorser
o
He
signs
blank
before
delivery.
Is
actually
an
accommodation party
even paid the buyer change for the 100K difference. Later, Landbank told FEB that the amount was altered from 30 pesos
to 300K. FEB returned the 300K to Landbank and debited the account of the jewelry store.
in
Must be an additional party (not a regular party – signing again will not increase the credit value of the
FEB sued for the difference
check)
against Landbank. o
o HELD:
FEB cannot collect.
A – (X irregular indorser) – B – C – D – E:
The provision on acceptance
applies to payment. Since the tenor is that it is for 300K pesos,
X is liable to B, C, D and E.
RULE: liable to all subsequent parties. (If payable to
Landbank bound itself to pay that amount. FEB should not have returned the money to Landbank and debited the account
the maker or drawer or bearer, he is liable to all
of the jewelry store. [Huh? Read again.]
parties subsequent to the maker or drawer)
o
JJ: the better view might be that a drawee who pays/accepts a
draft must be bound to pay the higher amount –
Acceptance is always inseparably linked to the order.
Sec 61. Sec 139 – acceptance assents to the order of
bound to an amount not in the original tenor.
•
If for the accommodation of the PAYEE
the payee.
Consent should imply
If the acceptor was deceived, it should not be
X is liable to C, D, and E.
B), he is liable to all parties subsequent to
warrants that the amount accepted is the same tenor knowledge.
•
(example if here, for the accommodation of
the drawer. There is nothing said that the acceptor of the bill, as drawn.
What if X indorsed for the accommodation of B?
o
He is called such because you would normally expect the payee as the first signature there. indorser’s signature is found there first.
But here, the irregular
o
•
P v. Maniego: accused had his sister indorse a stolen check
writing to be enforceable. He must be only liable to the person
before the payee did. The law says…
he dealt with •
Sec 65 – warranty where negotiation by delivery
Sec 66 – liability of general indorser
o
See the list of warranties in the law [see table]
o
Same as first 3 warranties of qualified indorser
o
Person negotiating by delivery – only liable to the person to
o
Last – he warrants that the instrument is valid and subsisting
o
If maker is insolvent, even if the indorser was not aware, he is
whom he delivered the instrument. Not liable to subsequent parties
liable. o
Unlike a general indorser, a qualified indorser does not warrant that the instrument will be paid. He is liable only if the maker
o
or acceptor is insolvent and he is aware of that fact (since
Chartered Bank:
here, there is a breach of warranty).
o
NOTE:
bank, drawn against DEF bank.
by
delivery
DOES
NOT
ANSWER
check bounced. ABC asked for return of money.
FOR
SOLVENCY. It only warrants the four listed warranties and is
liable for breach of such. Examples:
Breach of warranty 1: the instrument is forged
Breach of W2: He stole the NI
X was able to
withdraw money although not cleared. Eventually, the
SO IN GENERAL, a qualified indorser or one
negotiating
X deposited (through indorsement) a check with ABC
HELD: X must pay. When you indorsed, you warranted. If for any reason (whatever reason) the drawee does not pay, you are liable.
o
BPI v. CA: Somebody had a manager’s check purportedly issued by American bank payable to cash. But he did not have
Breach of W3: Prior party is a minor
Breach of W4: Knew that M/D was insolvent; or that
Deposited the check there. They agreed that after clearance,
there was failure of consideration
the first friend would withdraw. The friend gave the first guy a
a dollar account. Asked a friend if he could accommodate him – have the check deposited in the friend’s dollar account.
o
Underlying this principle same as Statute of Frauds. An undertaking to answer for the debt of another must be in
withdrawal slip duly signed.
When the first guy returned,
although the check had not been cleared, BPI (deposit bank) paid. But American bank dishonored it. BPI sued.
HELD: The proximate cause of the loss is the bank
No. It did not indorse the check. The signature is to acknowledge payment.
itself. Why did it allow the first guy to withdraw when the bank was not cleared. The depositor even kept
o
the passbook: did not give it to his friend.
The law mentions that warranties of general indorser apply only to HDC. Should we follow this?
o
RCBC:
There is a 45-day holding period if the check
deposited is drawn abroad.
But RCBC accommodates
employees, allowing them to withdraw right away.
The
•
JJ doesn’t think so.
Sec 67 – indorsed when not required incurs liabilities of an indorser
employee, a mother, received a check, and deposited. Bank o
required the employee to indorse the check as an irregular indorser. She was then allowed to withdraw. Some employee placed below the indorsement: “valid up 75,000 pesos only.”
•
Sec 68 – indorsers are presumed to be liable in the manner in which they indorsed
The drawee bank dishonored the check, since the indorsement was irregular.
Whether general or qualified
RCBC asked the employee to return the
o
Parole evidence however may be accepted to prove otherwise
o
For example A B C, C can prove that while B’s signature
immediately withdrawn money.
HELD:
RCBC cannot collect.
The check was
appears first, C indorsed it to him
dishonored because of the partial indorsement made by its employee.
This is why the American bank
•
dishonored.
o
o
It is actually a case of restrictive indorsement (only for collection).
Quiz up to section 69
Sec 66 (general indorsement) is not Presentment for payment
applicable. Signature of indorser was forged. check for payment to the drawee. signed at the back.
If he fails to disclose that he is just an agent, or fails to disclose his principal, he will be liable as an indorser
Far East Bank: (see the details above)
o
Sec 69 – indorsement by agent
Payee presented the It was paid. Payee
Then the forgery was discovered.
•
Sec 70 –
o
Presentment for payment not necessary to charge the primarily liable person
Must payee reimburse drawee?
Maker and acceptor
If the instrument is payable in special place and he is
Production of BOE to drawee for acceptance or
able and willing to pay there at maturity = such
payment, or acceptor for payment, or of a PN to the
willingness is equivalent to tender of payment
maker for payment
•
o
What does this imply? o
What constitutes presentment?
If the person primarily liable is there
1. Personal demand for payment
2. Readiness to present the note and surrender it if
on the place where it is payable on the stated time, holder loses right to
paid
recover interest due subsequent to maturity + costs of collection o
BUT he does not lose the right to
•
[Step-by-step guide on presentment for payment]
o
Step 1: Presentment for acceptance required if –
get paid o
But for those secondarily liable (indorsers and drawer) – there
1. BOE is payable after sight, or acceptance is needed to fix the maturity of the instrument
is need for presentment for payment
What if the holder does not make presentment to
2.
BOE
expressly
requires
presentment
for
acceptance
the person primarily liable?
•
Those secondarily liable are discharged
•
But he can still go after the person primarily
place of business of drawee o
liable
•
So, the bottomline: the instrument must be
3. BOE payable elsewhere apart from residence or
OTHER OPTION – May choose to negotiate it within a reasonable time
o
Consequence: will discharge drawer and all other indorsers
o
EXCEPTIONS – no need to present if/or treated as dishonored
presented for payment on date it is due to charge the secondarily liable persons – see Sec. 71 for special rules on when an
if:
instrument must be presented o
What is presentment?
1. Drawee is dead, has absconded, fictitious, or lacks capacity to contract
2.
Presentment
cannot
be
made
even
•
after
reasonable diligence
omission to protest
o
3. Although presentment is irregular, acceptance was refused on some other ground
o
Except: will not prejudice rights of HIDC after
Step 3: Give notice of dishonor by non-payment to secondarily liable persons (if dishonored by non-payment)
Step 2: Give notice of dishonor by non-acceptance to
See notes above
EXCEPT: When presentment for payment is excused
secondarily liable persons
EXCEPT, no need to give notice: if instrument was
–
made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented
1. Drawee is fictitious person
•
2. Presentment cannot be made even after reasonable diligence
AND will not prejudice rights of HIDC after omission to give notice of dishonor
•
IF foreign bill,
•
• •
Protest for non-acceptance or protest for
3. Waiver of presentment, express or implied
Sec 71 – o
Instrument not payable on demand
non-payment needed •
Make presentment on date due
Except – o o
instrument payable on demand
1. If instrument was made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented
Must be presented within reasonable time from issue
If it’s a BOE, you make it after a reasonable time after last negotiation
o
2. Delay is excused for fortuitous circumstances
•
What does “negotiation” here cover?
o
Negotiation
for
value,
o
not
negotiation for collection between banks •
Wherever
he
may
be
found/last
known
place
of
business/residence •
Sec 74
Sec 72 – when presentment is sufficient o o
REQUISITES:
NI must be exhibited to the person from whom payment is demanded
1. Made by holder or agent
o
So he can check genuineness
2. Reasonable hour on business day
o
This is why telephone as demand is not allowed
3. At proper place defined
o
First Pacific (?) – Check negotiated by car dealer to financing
4. To person primarily liable
company.
•
When the instrument not paid, company sued
maker and indorser. Indorser said he was discharged because
Is absent/inaccessible – to any person found
there was no proper presentment for payment. HELD: Letter
in place where presentment is made
of demand is not sufficient. Law requires that the instrument be shown to the maker. Therefore, presentment not valid and
o
There is a wife who presented a negotiable certificate of time deposit.
indorsement is discharged.
Bank refused to pay her because they paid the o
husband. HELD: it was not presented by the husband, but the wife. Bank should pay the wife.
•
Sec 73 – proper place for presentment o
If there is a stipulation where presentment must be made, it
If none provided, but address of maker is stated, go there
o
If none provided, to usual place of business/residence
1) Instrument was lost
2) payment refused on some other ground •
must be made there. o
Failure excused on two grounds:
Ex. no funds, and not because it was not shown
•
Sec 75
o
Presentment where instrument payable at bank – must be made during banking hours. Law assumes that the bank will be the source of the funds.
o
•
o
But if presentment is made beyond banking hours, it is valid if the funds will not come from the bank, as long as it falls on the
indorser’s accommodation, and indorser has no reason to
date of maturity.
expect it will be paid if presented
Sec 76-78
•
Fortuitous event – excuses delay in presentment
o
•
Presentment for PAYMENT excused if:
Applies when principal debtors is:
Dead
o
1. Cannot be done even after reasonable diligence
Liable as partners
o
2. Drawee is fictitious person
Liable as Joint debtors
o
3. Waiver of presentment – express or implied
o
If there is an address stipulated, pay there.
o
If dead, give to executor/admin
•
o
o
o
•
Even if dissolved already
2. Presentment is excused and it is overdue and unpaid
What is the effect of dishonor by non-payment?
o
Under the law, the moment it is dishonored, there is immediately a right of recourse against those secondarily
If joint debtors, to all of them
liable. NO NEED to go to the primarily liable.
When presentment is not required to charge those secondarily liable:
o
1. Duly presented for payment and payment is refused or cannot be obtained
If there is one, and he can be found with reasonable
If partners, to any of the partners
When is an instrument dishonored by non-payment? o
diligence
•
INDORSER – when instrument was made/accepted for
DRAWER – presentment not required to charge the drawer when there is no reasonable expectation that the drawee or acceptor will pay the instrument
Ex. knows there are no funds or there is stoppage of payment
•
Sec 85 o
If payable in a fixed period, it must be paid on that day
o
If on a Sunday or holiday, then go to next business day
o
If on a Saturday
N.B. Remember, failure to make proper presentment only
hold business on Saturday, they are usually half day.
discharges those secondarily liable.
The law wants a whole business day
person is still liable, although the holder may not claim interest
The primarily liable
subsequent to maturity and costs of collection. Except instruments payable on demand can present before 12 noon, Saturday, if it is not a holiday
o
o
On next business day. Because even if some offices
•
Sec 88 – Payment in due course
Contrast:
o
1. At or after maturity
o
2. To the holder
o
3. By the debtor, in GF and w/o notice that the holder’s title is
Ex. Payable on Friday. But it was declared a public holiday. So it becomes Saturday. But the law says present it on next business day. So Monday.
defective
Ex. BUT if it is payable on demand – then the maker/acceptor MUST pay provided it is presented on working hours of Saturday.
•
•
Sec 86 o
•
Notice of dishonor
Time – exclude first day, include last day
Sec 89 – dishonor o
Give notice of dishonor
o
Any party may be compelled to pay it to the holder with right of reimbursement
Sec 87 – when instrument is payable at a bank o
o
Implied: that it is an order to the bank to pay for account of the principal debtor
o
First National bank: PN payable at FNB. Maker had sufficient
o
funds. But holder did not show up at day of maturity. DillyHELD:
No.
Notice given by a holder benefits all subsequent holders and
notice against
The fact
o
remains that he is the maker, so he is primarily liable, and should pay.
D giving notice to B will benefit E
prior parties that have right of recourse against the one given
dallied – then the maker became insolvent. Had he shown up by then, he would have been paid.
ABCDE
•
Notice may be given by holder himself or agent of the holder.
Sec 90 – Who can give notice of dishonor
•
o
1. Holder
o
2. Agent of holder
o
3. Party to the instrument who may be compelled to pay the
Principal has until Wednesday to notify secondarily liable parties
o
holder, but only to those other parties he may seek
B) notify parties who are secondarily liable
If agent receives notice of dishonor, he must be authorized
reimbursement from o
4. Agent of such party
o
What about strangers?
•
Form of notice:
o
In writing or oral
Cannot give notice, except as agents
o
•
Because this is prejudicial
Who is considered a stranger?
Party discharged from the instrument
Person primarily liable who dishonored the instrument
As long as it sufficiently describes the instrument and indicates that it has been dishonored
Misdescription does not vitiate notice unless the party to whom it is given is in fact misled
o
Personal or through mail
o
If written, need not be signed
Sec 91 – o
Notice may be given by a party or an agent
o
Agent need not be authorized by the party
o
Because this is beneficial
If the agent wants to give notice, on a instrument dishonored
In sufficient written notice may be supplemented by verbal/oral communication
•
Rule as to jointly liable parties: o
If partners?
on Monday, two options:
Notice to one is notice to all
A) notify principal •
o
If joint payees or joint indorsees who indorse?
On Tuesday
Sec 68 treats them as solidarily liable
o
o
If joint drawers or joint accommodation indorsers, and
post-office, due notice is deemed given
others not covered by 68?
•
o
Give notice to all
Sec 103 and 104 – time within which notice must given o
Know the difference in rules where parties reside in the same place (103) or different places (104)
o
•
SAME PLACE:
Deposited in any branch of the P.O.
Deposited in any P.O. box
1. Post office nearest to residence or where he is accustomed to receiving letters
1. If given at place of business – before close of
2. If given at residence – before usual hours of rest the next day
What is “deposit in the post office”?
Sec 108: WHERE notice must be sent –
o
business hours the next day
Sec 105 – if notice was duly addressed and deposited in the
3. If by mail – sufficient to reach him the next day
o
2. To place of business or residence
o
3. Place where he is sojourning
o
If notice is actually received, although not according to these provisions, what happens?
o
DIFF PLACES:
1. If by post office – in time to go by mail the next day; if no mail at a convenient hour that day, the next mail
•
2. If not by post office – within the time it would have been received in due course had it been sent by post
It is still valid
When can there be waiver of notice of dishonor? o
1. Before actual time for giving it comes
o
2. Or after failure to give it
o
Can waiver be implied?
office
o
N.B. This same time is counted again, after a party receives
notice of dishonor, to give that party a chance to give notice to antecedent parties •
What is the effect of miscarriage in mails?
•
Yes.
Who is affected by a waiver in an instrument? o
If written on the instrument – all the parties
o •
If written over a signature – just that person
The check was in the hands of Y who had ABC investment house rediscount it. The check bounced.
Waiver of protest o
HELD: X had no right to expect the bank will pay because she withdrew all her funds.
Includes presentment and notice of dishonor (steps to hold a person secondarily liable)
•
Sec 114 – when notice need not be given o
o
o
Meaning, drawer stopped payment.
N.B. In all these cases, the drawer KNEW that there was or would be dishonor.
Ex. manager’s check
Drawee is fictitious person
5. Drawer countermanded payment
When the drawer and drawee is the same person
•
o
•
When is notice of DH not needed to be given to indorser?
o
When is notice of DH not needed to be given to drawer?
1. Drawee is fictitious person or has no capacity to contract and the indorser is aware of this fact upon indorsement
o
1. Drawer and drawee are the same person
o
2. Drawee is fictitious person or has no capacity to contract
o
3. Drawer is the person to whom instrument was presented for
o
2. Indorser is the person to whom presentment for payment was made
o
3. Instrument was made or accepted for his accommodation
payment Drawer
Drawer and drawee same person
not there.
Drawee fictitious or no capacity
Drawee is fictitious or no capacity, and indorser knows
Drawer is to whom instrument was presented for payment
Indorser is to whom instrument was presented for payment
Drawer has no right to expect it will be paid by drawee
Made or accepted for indorser’s accommodation (same principle: no right to expect it will be paid)
But R, the drawer, who was the office
manager, was there. And the drawer dishonored. o
4. Drawer has no right to expect that drawee or acceptor will honor
Indorser
Ex. C went to the office of X, the drawee, but he was
Ex. X withdrew her money from her bank account and issued a check to cover for expected proceeds of jewelry she had to sell. She failed to sell the jewelry.
Drawer countermanded
•
If an instrument was not accepted, and notice of dishonor by non-
•
When person secondarily liable is discharged:
acceptance is given, is there need to give notice of dishonor by non-payment? o
No.
o
What is the exception?
•
If it was accepted in the meantime.
Failure to give notice of dishonor by non-acceptance does not prejudice
o
1. Discharge of instrument
o
2. Intentional cancellation of his signature by the holder
o
3. Discharge of a prior party
o
4. Valid tender of payment by prior party
o
5. Release of principal debtor, unless holder’s right of recourse against secondarily liable party is expressly reserved
rights of a HIDC subsequent to the omission.
o
o
Ex. A drew a BOE payable to B. B indorsed to C. C presented
instrument
the BOE for acceptance to X. X dishonored the instrument. C did not give notice of dishonor to A or B.
6. By extension of time of payment or right to enforce
C indorsed the
Except if secondarily liable party assents
Or right to recourse is expressly reserved
instrument to D, a HIDC. D will not be precluded by C’s failure to give notice of DH to A and B.
•
Discharge •
What is the effect of an absolute and unconditional renunciation?
o
How a negotiable instrument is discharged:
A holder renouncing against prior parties terminates recourse to that party
o
1. Payment in due course by holder
o
2. Payment in due course by accommodated party
o
3. Intentional cancellation by holder
o
4. Any other act that discharges simple contract for money
o
5. Principal debtor becomes holder of instrument in his own right
o
If against primarily liable person discharges the instrument
o
But it does not affect subsequent HIDC. So if C renounces all claims against A and B, then negotiates it to D, who is a HIDC, D is not prejudiced by the prior renunciation.
•
What is the form of renunciation? o
It must be absolute and unconditional
o
If it is merely oral and the instrument is not surrendered, the
alteration) or D (indorsed and warranted)
renunciation is not effective. o
•
It is not effective if not unintentionally, by mistake, etc.
Enforce the instrument for 40K against C (made the
•
Sections 48. 89. 122. 142. 186. 188. OTHER methods of discharge o
What is the effect of a material alteration?
48 – striking out indorsements (relieves that person and all those subsequent to him)
o
Discharges all parties not party to the alteration
o
Binds the one who made the alteration, those who assented,
o
o
89 – those secondarily liable to whom notice was not given
and subsequent indorsers
o
122 – renunciation by holder
What is the right of a HIDC?
o
142 – qualified acceptance by drawee discharges those secondarily liable
If he is not party to the alteration, he may enforce it
according to the instrument’s original tenor
Unless they assent to it.
Failure to dissent within
reasonable time is an assent o
What is a material alteration?
1. Date goes into the obligation
2. Sum payable, principal or interest into amount
3. Time or place of payment into enforcement
o
186 – stale check
o
188 – holder of a check procures it to be accepted or certified
Acceptance •
4. Number or relations of parties into obligation
5. Medium or currency of payment into amount
Acceptance – assent to order of drawer o
Must be in writing and signed by drawee
o
What if the drawee refuses to sign?
A issued a PN to B for 4K. B indorsed to C. C changed •
the amount to 40K and indorsed to D. D indorsed to E. E
may treat it as dishonored
is a HIDC. What is E’s right?
Enforce the instrument for 4K against A or B
If drawee refused to write and sign, holder
What if the acceptance is written on a different sheet of paper?
•
It does not bind the drawee, except to
Destroys the bill
someone to whom it is shown and receives
•
the bill for value upon faith thereof •
o
NB: this applies when the bill exists as of
What if there is a promise to accept in writing? •
What are the special situations when can the drawee accept pa rin?
time of acceptance
NB: destruction must be on purpose
Deemed an actual acceptance in favor of those who receive the bill for value upon
1. Before it is signed by the drawer
2. Even when it is incomplete
3. When it is overdue
4. Dishonored by prior non-acceptance or non-
faith thereof •
NB: this applies for bills that do not exist yet
payment
when the promise is made (Ex. BOE
pursuant to a LOC)
What is the special rule if the bill was dishonored by prior non-acceptance, but it was accepted
o •
Cannot be other than payment of money
thereafter?
Must accept within 24 hours from presentment o
Acceptance deemed done on date of presentment
o
When is a bill deemed accepted?
Failed to act on it within 24 hours •
•
presentment as date of acceptance •
Kinds of acceptance: o
1. General
Does the drawee have a right to retain the
No. The holder can ask for it back. But the drawee will still have the
Includes local but not confined only at a particular place
bill for the whole 24 hours? o
The holder can consider the date of first
o
2. Qualified
Conditional
Partial
rest of the 24 hours to decide.
•
Local (ONLY at a particular place)
o
Must present the bill for acceptance within reasonable time
As to time
o
Or negotiate the bill within reasonable time
Only some of drawees, but not all
•
What is the consequence of failure to present for acceptance? o
What is the right of parties as to qualified acceptance?
Discharges those secondarily liable
o
Holder can deem it DH by non-acceptance
•
Time for presentment – same as presentment for payment
o
If holder allows qualified acceptance, indorser and drawer
•
Special rule when there is little time to present for acceptance before presenting for payment, where presentment for acceptance
discharged
is needed?
Unless they assent
Failure to dissent is assent
o
Presentment for acceptance
•
and does not discharge those secondarily liable •
When is presentment for acceptance excused?
When is presentment for acceptance needed? o
Delay caused by prior presentment for acceptance is excused
1. Bill payable after sight or acceptance needed to fix maturity
o
1. Drawee is dead, has absconded, fictitious, lacks capacity
o
2. Cannot make presentment even after reasonable diligence
o
3. Although presentment is irregular, acceptance refused on
of instrument o
2. Bill expressly requires acceptance
o
3. Bill is payable elsewhere than residence or place of
some other ground •
What if a bill is DH by non-acceptance?
business of drawee o o
What about other cases?
No need for presentment for acceptance to render
Immediate recourse to secondarily liable parties avail; no need for presentment for payment
BOE
any party to the bill liable •
• What is the option of the holder?
Can a BOE be addressed to more than one drawee?
•
o
Depends. If joint drawees, yes.
o
If alternative or successive, no.
•
What is protest for better security? o
If the drawee was adjudged bankrupt or insolvent, or made assignment for benefit of creditors – even before the bill
When can a BOE be considered a PN? o
1. Drawer and drawee are the same person
o
2. Drawee is fictitious person or has no capacity to contract
o
But can the holder treat it as a BOE still?
matures o
Is this mandatory?
o
What is the purpose?
Yes.
Protest necessary for DH of a bill that on its face appears to be a foreign
•
bill •
When must it be done? o
Day of DH
o
If bill is noted in the notarial register, protest may be made
Where?
o •
Place of DH
o
Except when expressly payable at the residence/business of another person apart from the drawee
Excused – for fortuitous event
When is protest also done? o
When bill is lost, destroyed, wrongly detained – protest made on copy/written particulars of the bill
Bills in set •
o
Dispensed with – for same grounds notice of DH is dispensed with
Made by Notary Public or respectable resident + two or more credible
anytime •
When is protest excused or dispensed with? o
witnesses •
To inform the drawer/indorsers that the drawee is insolvent and therefore they should prepare to pay
Protest •
Nope
Main Principle: each part of the bill, numbered and referring to the other parts, the whole of the parts constitute one bill o
[usually, it is done to ensure that bills can be collected from even if one part is lost in the mail or so]
o
[So usually bills in a set are several copies of the same thing,
•
sent separately] •
What if different parts are negotiated to different HIDCs?
drawer who got goods. He usually redeems it for cash
•
Traveler’s check you sign it twice (first as a specimen signature, and second when paying. You present your passport too)
o
The one whose title accrues first is the true owner
o
But the one who gets acceptance or payment first is the one
• who will be able to collect
•
Indorser of two different parts is liable on every such part
•
How should the drawee accept? o
Memorandum checks just usually used as evidence of credit, by the
Crossing a check has three consequences: o
1. Can be negotiated only once
o
2. Cannot be encashed; must be deposited
Accept on any part, and on one part ONLY. If he accepts on
General – can be deposited in any bank
Special – must be deposited only in that bank
multiple parts and these are severed, he is liable on all parts. o o
If he pays and did not get back the part with the acceptance, and it once again falls in the hands of an HIDC, he can still be liable
•
Discharge of one part is discharge of all
3. To be a HIDC, the holder must inquire as to what purpose the check was issued for
•
STILL negotiable though
•
If you attempt to encash it, and it is obviously denied, you cannot run after the drawer because there is no proper presentment for payment
Promissory notes and checks •
Check – special kind of BOE o
o
•
Sec. 185 – provisions applicable to BOE are applicable to checks
•
Case: Payee of a check presented a check in the morning, the bank
No need to present for acceptance – you can present them for
said the drawer had insufficient funds.
payment immediately
afternoon, but the computers are offline, so the bank accepted it. Bank
Presented again in the
found out after and chased after the payee to recover. HELD: Sec 62 – Rules on BOE apply to checks too, such as the 24 hour
by accepting, the bank admitted authority of drawer to draw.
acceptance rule. If you don’t return it in 24 hours, it is deemed accepted
•
Cashier’s and manager’s checks drawer and drawee is the same
•
Case: Customer bought manager’s check and asked that his account be debited to purchase it. The bank realized that it made a mistake
because the account was actually closed. The customer already used the check to buy goods. HELD: It was a manager’s check so the store Letters of credit
owner was a HIDC.
•
Letter of credit – instrument issued by banks on behalf of a customer authorizing a beneficiary to draw a draft/drafts which will be honored
o •
•
Certified checks:
upon presentation to the bank
Banks usually do not do this anymore
o
Check must be presented for payment within reasonable amount of time
Must be drawn in accordance with the terms and conditions specified in the letter of credit
o
Banking practice: 6 months, or else stale
o
What happens when the check goes stale?
View one (2 cases): the obligation is discharged.
•
Purpose: to ensure certainty of payment
•
Ex. ABC Company wants to buy chemicals from Dupont. But Dupont has no assurance that when it ships chemicals, it will be paid. So ABC
Payment of an obligation with an NI – the obligation
gets a letter of credit (LOC) with PBC. PBC then corresponds with a
is discharged when there is encashment or the value
bank in the US (ex. Citibank) – PBC will transmit to Citibank the text of
is impaired due to the fault of the holder.
the LOC, through SWIFT. Dupont then finds out that when it delivers the chemicals, the bank will pay him.
View two: the obligation remains because the
trustworthy, Dupont is now willing to sell the materials.
drawer’s bank account was not prejudiced. And there was no loss caused by the delay.
This will only
o
happen if the bank becomes insolvent, that if the
PBC tells ABC Company that it will release the goods if there is
money.
a trust receipt arrangement between them. So the proceeds of the goods can be used to pay PBC if ABC does not pay.
Sito: When the payee delays in presenting a check for payment, the indorsers are discharged, because they have an interest to discharge their potential secondary liability.
o
Unreasonable delay will discharge
Dupont will not collect directly from PBC. Dupont will issue a BOE addressed to PBC, to pay it. Dupont then submits the bill
them.
o
Dupont ships the chemicals to PBC. So when the bill of lading arrives, PBC will tell ABC Company that the goods arrived.
payee didn’t dilly-dally, he would have received
•
Since the bank is more
of lading, delivery receipt, etc. to PBC as proof of delivery so that Dupont will be paid.
So contrast the rules: the drawer will not be discharged; the indorsers will bes discharged
•
Transphil: Two types of LOC
o
Commercial LOC – issued as payment pursuant to contract of sale
Something Fabric case: The beneficiary submitted the documents required, so the bank must pay. This, even if the goods delivered turned out to be fake.
The seller will be paid if the seller gives proof that he complied with obligation to deliver
o
•
o
genuineness of the documents submitted to it. Stand-by LOC
Governed now by UCP 600 (Uniform Customs and Practice for
o
Distinguish between out and out fraud vis-à-vis failure to meet specifications:
There are 3 underlying contracts in a LOC: o
All that is
required is the bank act in good faith.
Documentary Credits). This is revised every 10 years or so. •
PBC v. Chua Tiep Seng: The bank does not guarantee the
In a landmark case by the CA of New York, instead of the seller delivering goods, he delivered rubbish. The
COMMERCIAL
court allowed the buyer to have a preliminary
1. Application of customer for LOC – where customer
injunction to stop payment be issued because this
undertakes that he will reimburse the bank when it
involves out-and-out fraud.
pays the draft, and pays for bank charged
2. LOC – bank tells beneficiary that if it draws the
However,
if
there
is
mere
failure
to
meet
specifications, you cannot enjoin payment.
draft, it will pay him after submitting documents
o •
3. Underlying contract
timber to someone abroad.
o
There was an agreement that
payment is by LOC. Among the documents is a certification of
Independence principle (always asked in Bar)
o
There was a case (Feati Bank) where somebody shipped
the buyer that the goods delivered were the proper goods. The
A bank which issued a LOC is obliged to pay the draft so long
buyer collected the goods but refused to send the certification!
as the beneficiary submits the documents required by the LOC,
HELD:
without verifying if he actually complied with the obligation in
need not pay. (This is a stupid move by the seller, because he
the underlying contract
is at the mercy of the buyer.)
“Banks deal with documents only!”
They do not deal with
goods nor are they required to examine them.
o
The LOC requires buyer’s certification, so the bank
A seller can commit fraud by submitted forged or false documents.
To combat this, the buyer may require a
o
surveyor’s certificate to examine the goods. But the seller may always give a fake one if he really wanted to defraud the buyer. •
may get payment in advance, meaning, even if the beneficiary/seller has not yet delivered the goods to the buyer.
Interpretation of Letters of Credit – MUST BE STRICT
o
This is usually because the beneficiary will purchase goods from a thirty party producer that does not accept anything but
1. Particular genus – If the LOC requires that the seller
cash (hunters, lumberjacks, etc.). If the beneficiary does not
submit an invoice for pine lumber, but the invoice states “pine
deliver the goods, too bad. The buyer still bears the risk.
timber,” the bank may refuse to pay
o
2. Quality specifications – If the LOC requires Italian marble
•
and the document just says “marble,” the bank may refuse to
“Evergreen clause”
o
pay
o
A provision that allows an expiring LOC to be automatically extended for indefinite number of periods until the issuing bank informs the beneficiary of its termination.
3. Misspellings – If the LOC requires noodles but the document says “woodles” the Bank may refuse to pay – who
o
knows what a woodle is or could be. •
A clause, usually written in red ink, where the beneficiary/seller
Ex. A foreign company not doing business here sues and asks for a provisional remedy. The court requires a bond, so the company obtains one from a surety firm.
When the bank discovers a discrepancy, what does it do?
The surety firm
requires that the company open a stand-by LOC with a bank, o
It forwards the documents to the buyer and notifies the latter of
which will pay the surety firm if the company is held liable.
discrepancies it discovered. If the buyer agrees to waive the
This LOC will most likely contain an evergreen clause, to keep
discrepancy, then the bank pays. If the buyer does not waive,
renewing it until the case is over.
the bank does not pay.
o
•
May the seller in the Feati bank case (where the buyer refused to
Cojack: Buyer is a con artist, so it ordered 3M worth of bags
issue a certification so the seller was not paid) sue the
from Cojac company.
correspondent bank when it failed or advance funds?
It opened a letter of credit, and the
condition is that an invoice from “Cojack” be submitted. Cojac o
submitted an invoice, of course, without the misspelled K. The
to Cojac. •
“Red clause”
The correspondent bank cannot be sued unless it
confirmed the letter of credit. It becomes solidarily liable.
bank asked the buyer if he waives the discrepancy; the buyer refused. The bank did not pay. Later, the buyer just paid 1M
No.
•
Revocable, irrevocable –
o
o •
Revocable: no need to notify the beneficiary, can be done
to a third party, who has the better right? HELD: The bank. It
anytime
had a lien on the deposit.
Usually it’s irrevocable, for certainty of payment
•
Can there be enjoinment of payment in a stand-by LOC?
o
Revolving letter of credit
1) Proof of fraud is strong, 2) fraud must involve abuse of independence principle, 3) irreparable injury
o
Automatically replenishes, whether per month, when the amount is finished, or cumulative, etc.
•
•
payment from a stand-by LOC. It is a solidary obligation, there is no Nature of LOC – a contract between the customer who applied for it and
need to exhaust the resources of the applicant corporation that applied
the bank, with a stipulation in favor of a third person •
Metro v. Daway: Case for corporate rehabilitation does not suspend
An LOC is a primary, absolute, and unconditional obligation o
It cannot be affected by defects in the underlying obligation
o
Philamlife: X took a loan from ABC. ABC required X to open
for the stand-by LOC. Trust receipts •
Trust receipt transaction (TRT) – transaction where;
o
a standby LOC from Z bank. Z bank issued the LOC, payable
The entruster, who has absolute title over the goods, releases these to the entrustee (bank)
when ABC shows documents proving that X defaulted on the
o
loan. ABC gave this document. Z bank, however, refused to pay the whole amount stating that X informed it that X had
The entrustee executes and delivers a trust receipt, where: (buyer)
already made some payments, so these have to be deducted. HELD: Cannot do this! The LOC is a primary, absolute, and unconditional obligation. It is not an accessory obligation, so
1. He holds the goods in trust for the entruster
2. Sell or otherwise dispose of the goods
3. Turn over to the bank/entruster the proceeds of the
the defect in the underlying contract cannot affect it. If there really was overpayment, X just has to run after ABC. •
sale to the extent he is indebted Bank lien over applicant’s property
o
4. Or turn over the goods to the bank, in case unsold
Usual stipulation in a LOC if the applicant has a deposit there, too. In a case, where the depositor/applicant owed the bank for a LOC, but he also assigned the certificate of time deposit
•
Note: if the entrustee returns the goods, he does not incur any further liability. The entruster/bank then sells the goods
•
Allied Banking: X imported goods, and opened a LOC with ABC bank.
bank did not have any lien or title to the goods; they were purchased
When the equipment arrived, X took the goods from ABC and issued a
separately from the credit application.
trust receipt in ABC’s favor. X installed the goods in his factory. X failed to pay. ABC sued X for violation of PD 115. X claimed the goods were not covered because he did not sell nor manufacture/process them.
•
TR can apply even in domestic transactions
•
Nature of ownership/security interest – Vintola:
HELD: The goods were covered. It says “sell or otherwise dispose.” o
“Otherwise dispose” covers the installed goods.
X imported puka shells, covered by a trust receipt with ABC bank. X failed to sell the puka shells. X decided to return the
o
“Otherwise dispose” can cover giving goods to a sister
shells and claim he is not liable anymore because X claimed
company •
ABC was the real ownership of the shells and X just held it in trust. HELD: X is wrong. ABC can still recover the money. A
For estafa, there has to be misappropriation
TRT is a security transaction, and the buyer is still really the
o
Meralco/steel towers case: X fabricated steel towers (hired
owner of the goods; it just relies on a legal fiction to create a
by Meralco). X imported materials, which X received and gave
lien. ABC still has the right to recover the money; or it can sell
a trust receipt to ABC bank for. X used the materials to build
the goods.
the steel towers. But Meralco hasn’t paid X yet, so X couldn’t
o
pay ABC bank. ABC sued X for estafa. HELD: No estafa, no
PNB Case:
The bank getting back the goods does not
terminate the obligation. It just has a lien, and to realize it, the
misappropriation.
bank must foreclose – otherwise, it is pactum comissorium.
o
Another case: X could not sell the goods covered by the TR.
The bank then returns the excess or runs after the deficiency.
X tried returning the goods to ABC, but it refused. HELD: X did not commit estafa. •
Can the trustee execute a Chattel Mortgage over the goods covered by the TR? o
•
•
No. He does not have free disposition of the property.
X purchased goods.
Warehouse Receipts Law
Independent of this purchase, X applied for a
credit facility with ABC bank.
ABC bank required X to sign a trust
receipt for the goods he just purchased. HELD: This is invalid. The
When is a WHR negotiable? o
If payable to order or bearer
o
If payable to order or bearer, can one insert a stipulation that it is non-negotiable?
•
No. The stipulation is void.
•
To whom must the WHM deliver the goods to discharge his liability?
When is it non-negotiable? o
o
1. Person lawfully entitled to the goods or his agent
o
2. Person entitled to delivery under non-negotiable WHR or
Not payable to order or bearer AND there is a large print, usually in red, that it is non-negotiable
who has authority from the person entitled to delivery (SPA) o
What is the consequence of not doing so?
o upon it, it will be treated as negotiable.
•
•
Rules on refusal to deliver: o
What is the rule on duplicate WHR? o
1. WHM cannot refuse to deliver the goods just because of a third party claim
Same as non-negotiable – if the holder though in GF that it was the original, he could sue the WHM for damages
•
3. For negotiable WHR, the person in possession
If someone relied in GF that it is negotiable and acted
o
What are the obligations of the WHM?
But he may submit the situation for interpleader
2. WHM is excused for failure to deliver if he sold the goods to satisfy an unpaid lien
o
1. Safeguard the goods
o
2. Deliver the goods
o •
3. WHM is excused for selling perishable or hazardous goods
What is the effect of alteration?
To deliver •
o
What are the conditions before the WHM delivers the goods?
Unlike in NIL, it does not discharge the WHM. The WHM is liable under the original tenor of the WHR.
o
1. Holder pays the WHM’s liens
o
2. If the WHR is negotiable, to surrender the receipt
o
3. Readiness and willingness to sign an acknowledgment of
telling the WHM to deliver the goods, after proof of loss. He
receipt of the goods
also has to post a bond, in case the WHR falls in the hands of
•
What is the effect of loss of the receipt? o
The claimant has to file a case in court and get a court order
a person who took it in GF and for value. The latter goes against the bond.
•
How does a creditor go about attaching/levying the goods covered by a negotiable WHR?
o
Ask for enjoinment of indorsement or renegotiation of the receipt – have the WHR frozen or surrendered, so it doesn’t
•
If the goods are lost, he is presumed to be at fault
•
But not for fortuitous events
•
What is the duty in keeping goods?
end up in the hands of someone who takes it for value and in GF.
deliver.
•
o
He must segregate the goods belonging to different depositors
o
But he is allowed to commingle if:
Until this is done, the WHM cannot be compelled to
The WHM in general, as a bailee, cannot claim ownership over the goods. What are the exceptions? o
1. WHR negotiated to him, so takes the goods in his own right
o
2. Has unpaid lien, so he foreclosed it and bought the goods
•
•
o
of the WHR?
o
What if the WHM makes partial delivery of the goods?
He must cancel the WHR and issue a new one reflecting the balance of the goods, or indicate partial delivery on the receipt.
Again, failure to do so makes him liable to one who takes the WHR in GF and for value.
To safeguard
It is customary to do so
Each depositor gets a pro rata portion of the common mass
What happens if there is partial loss?
He is liable for damages to any person who takes the WHR in GF and for value.
upon claim
What if the WHM delivers the goods without asking for surrender
o
It is stipulated
What are the rules on commingled goods? o
during auction
•
•
o
INSURANCE
It does not adhere to the property insured because the personality of both parties is crucial and is the primary
In general •
consideration for the contract.
Elements o
cars.
1. Insured possesses interest susceptible of pecuniary estimation
o
Ex. teenagers will be charged higher insurance over
o
The buyer of a car, for instance, will only be insured if the insurance company allows for an endorsement of the seller’s
2. Insured is subject to risk of loss
insurance contract. o •
3. As consideration, the insured pays premium •
It is unilateral
Someone organized a jeepney association. You give membership fees o
and if a driver gets into an accident, the association pays indemnity.
It is only the insurer that has an obligation to perform (the insured already paid).
Sued by Insurance Commission for not having license to do Insurance Business.
•
It is conditional
o
•
What is the structure of the insurance code?
Held: Was conducting insurance business without license. Al requisites concurred.
o
o Contra Maxicare: Even if all elements are present, but if
elements
of
contract,
form
of
•
You cannot insure the winning of the lottery. This is wagering.
therapy after injury or loss, but the main purpose is to give medical services. But here, even if you did not get injured or sick, you can avail of medical checkup.
•
Parties •
It is an aleatory contract. o
If you don’t lose what was insured, there is no indemnity.
It is a personal contract.
contract,
contract (marine, fire, etc.), regulation of insurance companies
In Maxicare there is no insurance
contract because physicians pay for the first six sessions of
•
the
performance of the contract (for what losses), special types of
primary purpose of contract is to provide services, then it is not an insurance contract.
Parties,
Who can be the insurer? o
•
One authorized by the Insurance Commission
Who can be insured? o
Anyone except a public enemy
o
Citizen of a country with which the Philippines is at war with.
o
Wenfeld:
family home as usufruct.
Germany and USA were at war (WWII) so the company cannot
continue the life of their parents •
pay. If the mortgagor performs an act that prejudices, the mortgagee cannot collect.
o
MAIN DIFFERENCE: there must be a valid legal interest
o
The insurance cannot go beyond the value of the property
Ex. The Mortgagor brought fireworks to the building and it
benefit the contract
•
o
2. Over any person on whom he depends solely or in part for education or support, or in whom he has pecuniary interest
The interest must exist when the policy takes effect AND when loss occurs.
Insurable interest over life 1. Over own life, spouse and children
o
respecting property or services – whose death might delay or prevent performance
Only exception: you cannot name one to whom you are prohibited to make donations to
Ex. a key basketball player you signed for your team;
3. Any person with legal obligation to pay money to him, or
In life, need only exist when the policy takes effect
In life insurance, one can name anyone to be the beneficiary.
•
a concert impresario in an opera you organized o
EXCEPT: if there is a way to place pecuniary value in the life of the person.
o
o
Whereas in life, you cannot put value over life of a person
The mortgagor can have the mortgagee perform acts that
Insurable interest
They have interest to
Over property
exploded. The mortgagee cannot collect. o
Ex. You are a married couple allowed to stay in the
Company, and the Philippines was under US at that time. The
Sec. 8 – The mortgagor can sue the insurance company if it does not
o
him depends
German company filed claim with Insurance
collect.
•
4. Any person upon whose life any estate or interest vested in
Ex. co-guilty party of adultery/concubinage
You can insure anyone’s life, but you have to get his consent + you must have insurable interest
o
o
Case: There was a couple that hatched a diabolical scheme
(the beneficiary cannot benefit)
with an insurance company (in cahoots). Picked up a boy from the straits and adopted him, promised to raise him well. Then they insured his life, with themselves as beneficiary. But they were planning to kill him. The first boy disappeared. They did
•
Insurable interest over property:
o
the same for a second boy and killed him. The second boy’s
Filipino Merchant:
The importer has insurable interest in
goods he is buying even if undelivered, because he can
fingerprints did not match the first boy’s prints, so the insurance
compel delivery.
company did not pay. Then they were found out. •
If killing is unlawful the benefits go to the estate of the insured
The seller also has insurable interest
because he has legal title.
Insured can change the beneficiary UNLESS it was made irrevocable in
o
Contractor: has insurable interest over the building
o
Mortgagee has insurable interest
o
Also, under the law, he bears the risk of loss prior to
the policy. o
If the beneficiary is irrevocable, can it still be changed?
Yes. But if irrevocable, can only change beneficiary
completion
with the latter’s consent.
o
o
Lessor and lessee both have insurable interest
o
Mere possessor.
Case: The father made the child an irrevocable beneficiary of an insurance contract.
The father wanted to revoke.
The
company said the child must consent. The father said he is the
legal guardian anyway. HELD: father is wrong. He must go
by the owner, as a school. It insured the building. It
through guardianship proceedings to have another one make
caught fire. HELD: There was insurable interest.
the decision for the child. But how does he prove that revoking is for the best interest of the child? •
Harvardian Colleges was allowed to use a building
o
When does the beneficiary forfeit?
Inchoate interest founded upon existing interest
Ex. stocks, which is based on subscription contract
o
If he causes the insured’s death.
o
Partners, over the property of a partnership
o
EXCEPTIONS?
o
Carrier, over goods it is transporting since he will be liable
o
WH man, over goods for safekeeping since he will be liable
When the killing is lawful (ex. self-defense, the beneficiary is the executioner in death penalty)
•
•
A mere contingent interest over something: - NOT insurable
If you sold your car, if the buyer wants insurance, you have to endorse the policy.
o
Creditor with no collateral over properties of buyer
o
Expectant heir
o
Fictitious contract of sale (completely simulated)
•
Change in interest after the loss does not change indemnity.
It is
already an accrued liability at this time. It is a chose in action. •
A person leases property. In the contract, it said that
Change in interest in one or more listed things: o
the lessor may shares of stock of a lessee… [See
Taxi company insured 20 units.
Sold 4 of them.
The
insurance over 16 is still valid.
“chuck” case in transcript] • o •
o When must interest exist?
o
When the policy takes effect and when loss occurs
o
Need not exist in the meantime
Ex. Owned a car, insured, then sold it.
o
o
to redemption. HELD: Lost insurable interest.
o
He still has insurable interest
X insured his wife’s life. They annulled their marriage. But the wife failed to revoke the insurance. X can collect.
Insurance does not transfer.
X Y and Z co-owned a house. X bought Y and Z’s shares and became sole owner. The house burned. Insurance company must pay because X was part of the original insured.
•
Stipulation that there need not be an insurance interest for an insurance contract – NULL AND VOID.
What if he still possessed the right of redemption?
For life: interest need only exist upon taking effect. o
What if the children bought the house from the father
Then
A person mortgaged his building. The property had been sold
X died and children
when he was still alive?
in foreclosure. Then it was lost by fire. He had no more right
o
X insured Family Home against fire.
inherited. The house burned. The children can collect.
repurchased, and then loss in fire.
•
Change of interest in will or succession does not avoid insurance.
Smuggled property – against public policy
Title IV – concealment •
Failure to communicate what a party knows and ought to communicate
•
Consequence: injured party can rescind
•
Need not be intentional
•
Requisites: o
hospitalized and gave the contact # of the hospital, 1. Party must have known the fact concealed
o
Case; If a party discloses that he has been
the insurer’s failure to look into his records – there were means to ascertain the fact
Ex. he did not know he had cancer
2. Must be material to the policy
•
If the agent commits a concealment, the applicant will be bound by that, the insured made the agent his own agent for the purpose of filling up
Test: the other party would not have entered into the
the application form
contract had he known of the fact concealed •
There are matters the party need not indicate:
Or the conditions in the K would have been different
Life insurance: usually involves failure to disclose
squatter’s area.
serious ailments
policy anyway.
o
The inspectors went to the place and found that it was near a But the company issued a fire insurance A fire broke out.
The insurance company
cannot use the defense that it was near a squatter’s area, Case: Couple got an insurance policy for their
because it sent inspectors.
mongoloid baby, but they did not say he was a mongoloid. HELD: concealment
o
Insured an oil tanker. Cannot use the defense, “why did you not disclose that there was a war in Afghanistan.” They should
There is a law prohibiting insurance companies from
have known.
refusing to issue insurance to someone with AIDS, as o
long as he discloses that he has AIDS
Nurse with a personal accident policy.
Insurance refused,
saying that she did not disclose there was a problem with
o
Need not disclose very minor sickness/injury
peace and order in Pampanga. HELD: Insurance company should have known it was the center of the HUK movement
3. Party must make no warranty of the fact concealed
before.
In this case, if there was a warranty, the violation is not a concealment but a breach of contract
•
Even if you die from another reason apart from the fact concealed, the company is still not liable because it wouldn’t have issued a policy.
o
4. Other party has no means to ascertain the fact concealed
•
Not required to disclose information of one’s own judgment.
•
Can there be waiver?
o
Yes. Either express (in the terms of insurance) or implied (as
•
when there is failure to make follow up inquiries as to facts
Misrepresentation is not part of the contract.
It is a collateral
inducement.
already communicated0. o •
Is there need to disclose nature or amount of one’s interest? o
•
As a rule, parole evidence is not allowed to vary the terms and
No. EXCEPT if one is not the absolute owner of the insured
conditions of the contract. It may qualify an implied warranty. It is
property.
imposed by law.
Need not disclose matters which pertain to excluded or excepted risks. o
•
But it may qualify as an implied warranty
•
A representation is presumed to refer to the date on which the policy goes into effect.
Ex. need not disclose that members of NPA are burning o
houses in their neighborhood if the fire insurance policy exempts rebellion/coup/etc.-related destruction
If somebody applied to insure his vessel.
Ex. voyage from
Manila to Cebu. “Where is the vessel?” “It is anchored in Manila Yacht Club.” But it is actually in Curimao. However,
Misrepresentation
•
when the policy takes effect and the vessel is in Manila already, there is no misrepresentation.
Statements made to induce the other party to enter into the contract o
1. Untrue statement
o
2. With knowledge and intent to deceive; or stated as true
•
If the insured has no personal knowledge of a fact, he may repeat the information he has on the subject which he believes to be true o
without knowing it to be true and which tends to mislead
There is a question in life insurance about medical history of the family. If one thinks his father died as a soldier, in action,
o •
3. Fact is material
when he actually died of AIDS, and he says the former. o
Consequence – voidable at option of insurer o
But if the info came from the insured’s agent, and exercise of due diligence was possible, he is liable for the truth of the
But waived for acceptance of premium payments despite
statement
knowledge of ground for rescission •
•
Misrepresentation as to the future is deemed a promise
•
Can be written or oral
Representation is false if facts do not coincide with what was asserted
o
Test for defense: “substantially true” in every particular material to the risk
o
o
EXCEPT: Marine insurance – where what is required is the exact and whole truth
•
under different conditions Sec48(a) – action to rescind
Ng Gan Zee: o
There is no misrepresentation because he relied on what the
•
If insurer has right to rescind, insurer must rescind prior to commencement of action on the contract
physician told him. o
If the other party would not have entered into the contract, or
“Have you ever applied for a life insurance policy and the
•
Tender of premiums and notice that the policy is cancelled before suit is deemed a rescission
application was rejected?” He said no. But before, he had an application denied, but then accepted on reconsideration.
Sec 48(b) – incontestability clause
HELD: No misrepresentation. •
Insured filled up the application form, the Insurance company said that
•
effect or last reinstatement – insurer is BARRED from questioning it or
they will only accept if the applicant is not more than 60 years old. He
alleging misrepresentation or concealment, or deceit/fraud
was more than 60 years old. Held: he wrote on the application form his date of birth, but the company still issued a policy.
If a life insurance policy has been in force for at least 2 years since first
There was no
o
misrepresentation. •
N.B. Really, what you are barring are defenses against fraudulent misrepresentation or concealment, but not anything else
“Do you take alcoholic beverages?” Applicant said no. But he has been drinking since he was 16. He died of liver failure – Misrep. But if he only
•
Requisites
drank small amounts on cocktail parties, it is not material. There is no
•
misrep.
o
1. Life insurance
Application did not disclose incidents of defalcation by clients. There
o
2. Payable proceeds upon death
o
3. In force for 2 years since issuance or reinstatement
was another such case.
Insurance company found out.
Applicant
claimed that the question asked whether there was criminal conviction. Insurer said that the application did not require that.
The bank
•
In old days, there was no such clause.
•
If the policy lapsed and was reinstated, the 2 year period will run again.
•
BUT there are still defenses that can be invoked even in this period:
threatened to sue, but never did. [JJ’s stories]
•
Test of materiality – SAME AS CONCEALMENT.
o
1. Claimant has no insurable interest
o
2. Uncovered risks (ex. insured engaged in car racing)
o
3. Policy lapsed and insured did not pay
o
4. Policy was entered into pursuant to scheme to kill insured
o
JJ: If the insured did not disclose that he had tuberculosis and he died after, the beneficiary CANNOT delay claim to beyond two years and invoke the incontestability clause. THE LAPSE OF THE TWO YEAR PERIOD MUST HAVE LAPSED WHILE THE INSURED IS ALIVE. This is the proper meaning.
(“vicious fraud”) o
5. Someone substituted for the insured during medical test
The Policy •
Preliminary policy/cover note o
This fraud is not barred by the clause – there is NO
issued. Insurance company cannot collect separate premium
perfected contract with the insured because it was
on preliminary policy and actual policy.
another person o
o
6. If insured is riding in a plane and it is not a commercial flight (ex. 8-seater plane)
o
Has terms and conditions of policy that would have been
Common in car insurance and marine insurance
But there is still some delay or information to be determined (ex. looking for third-party liability in car
7. Entered into military without consent
insurance first [give to LTO the cover note] or looking o
8. Failure to furnish proof of death
o
9. Action not filed on time
for adequate carrier for goods for marine goods – since the policy depends on the state of the boat]
•
If there is concealment or misrepresentation, insurance company is still
•
Law requires that policies are in printed form. It can’t be handwriting anymore. Before you issue a new policy, the terms and conditions have
liable even if the cause was not due to the cause concealed or
to be approved by insurance commission.
misrepresented.
•
•
What is the rule on riders and additional attached clauses?
In one case, the insured died within two year clause. This was invoked by the insurance company. Beneficiary delayed claim after two years
o
Does not bind insured UNLESS the descriptive name/title of
have lapsed. SC said that when the person died, there is no more
the rider or clause is mentioned and written on the blank
policy; liability has accrued. So count from death.
spaces in the policy
o
JJ agrees with the result, but not the interpretation
•
What is the rule on additional riders or clauses issued after the
•
original?
•
o
Must be countersigned by the insured or owner
o
N.B. No need for signature of insured otherwise
Rules on interpretation: o
If the provision is clear, there is no room to interpret
o
[SPACED OUT]
o
Tantoco Terminal: had two mills. Old mill was insured. When the new mill was finished it was insured. The policy however
If a cover note was issued within 60 days, the policy must be issued.
mentioned the old mill. o
In marine insurance, this is a problem because 60 days have
HELD:
one even if the policy says otherwise.
The law says if the cover note extends beyond 60 days, written
o
agreement of insured must be obtained.
Insurer refused.
Clearly they intended the new mill to be insured, not the old
lapsed but no vessel has been found by the exporter. o
Burned.
Fortune: HELD: Security guard and driver of armored van had possession of the money.
They stole money.
Insurance
NOW: there is a circular that allows cover notes to
company refused to pay because it claimed they were not
extend beyond 60 days.
employees of the company, but the agency.
HELD:
The
insurance company lost. The very purpose of the insurance is •
Insurance proceeds applied exclusively to person in whose name or for
to insure against acts of those holding the money, which in this
whose benefit the policy is made
case are the two.
o
Aboitiz:
One vessel got burned in shipyard.
Asked Cebu
•
Open policy –
Shipyard to pay. Held; policy clearly mentions Aboitiz as sole o
insured. Cannot claim Cebu Shipyard is also insured. [?]
There must be a maximum amount mentioned.
It is a
maximum liability of the insurer. o
If description is so general that it may comprehend any class or o
persons, only he who can show it was intended to include him
quantify the value within this amount.
can claim the benefit. •
When does insurance taken by one partner or part-owner apply to the interest of his co-partners or co-owners? o
The terms of the policy must be applicable to the joint or common interest
So there can be an amount mentioned, but you still have to
•
Valued policy – o
One expressing a policy that the thing be valued at a specified sum
o •
•
Marine policies are usually this
It’s void, because you have to submit your claim to the insurer first, and this takes time.
Running policy –
The insurer might decide beyond one year
o
Successive insurances
o
Ex. Goodyear, instead of getting insurance whenever it ships
sometimes. In this case, the action given to the insured will be less than 1 year from the time cause of action accrues.
tires to distributors, it gets a running policy that covers all of
o
these
N.B. One year period to file a case is not like period for appeal. Asking for reconsideration from the company does not
o
In any case, it would have to notify the insurance company which would issue an indorsement, for it to be covered
•
What is the rule on validity of agreements limiting times for commencing action? o
suspend running of the period.
•
(64) Non-life policies cannot be cancelled without prior notice and only for the grounds stated in law here
o
1. Non-payment of premium
o
2. Conviction of crime from acts increasing hazard insured
In general, a clause in an insurance policy that action upon the policy must be brought upon by the insured within a certain
against
period is valid
o
But if the period fixed is less than one year from the time cause of action accrues, the stipulation is void (the period becomes
o
3. Discovery of fraud/material misrepresentation
o
4. Discovery of willful or reckless acts increasing hazard
the default 10 years, from a written contract)
insured against
In industrial life insurance – period cannot be less
than 6 months from accrual of cause of action o
When does cause of action accrue?
From rejection of the claim by the insurer, because prior to this, there is no necessity to bring suit yet
What if the clause says that action must be brought one year from loss?
Ex. a bus company that always gets into accidents every week
o
5. Physical changes in property that makes it uninsurable
o
6. Determination by Commissioner that continuation of policy will place the insurer in violation of the code
Ex. Maximum risk it can insure is 20% of its net worth
•
Express or implied
(Ex. 100M net worth, so they can issue up to 20M). It can issue policies beyond that but it must be reinsured. •
Notice of cancellation: o
Must be in writing
o
State ground for cancellation
o
State that if the insured asks for the facts as basis, the insurer
•
o
Express – found in terms and conditions
o
Implied – imposed by law
Usually embodied in a rider o
•
These riders, issued with the policy, need not be signed
What is the difference of warranties from representations? o
Warranties are express and placed in the contract
o
Representations are not written and are but collateral
will disclose o •
* Prudent thing: to send by registered mail
(66) Insured in a non-life policy can automatically renew the policy as
inducements •
May relate to:
long as he is willing to pay the premium o
o
Past – ex. warranty that insured was never confined
o
Present – ex. warranty that insured is in good health
o
Future – ex. warranty in fire insurance that owner of property
Unless 45 days before expiration of policy, the insurer informs him that it will not renew
If insurer does not do this, insured can renew as a
will not store flammable materials
matter of right •
Policy written for term longer than 1 year, it will be treated as written for
•
policy?
successive terms of 1 year
o
When does non-compliance with a future warranty not avoid the
Ex. construction contract requires policy covering the building as it is completed. There were 2 fires, and 3 years. It will be treated as if it is expiring at every anniversary of the policy.
Warranties •
o
1. Loss occurs
o
2. Performance becomes unlawful
o
3. Performance becomes impossible
Give an example
o
Somebody tried to insure his house for fire. Inspectors said his
Another example, Qua Chee Gan, where there was
neighborhood is not nice. Insurer said that it will insure, but
gasoline in the warehouse for consumption of the
insured must put up a firewall within 30 days. A fire razed his
owner’s car within 2 days.
house in 10 days. HELD: the insurer is liable.
•
o
Same if there is no cement available
o
Or if it becomes unlawful
•
Double insurance not just to those he acquired before but also the future. Failure to give information is a breach of warranty.
Violation of warranty allows the other party to rescind. o
o
X obtained fire insurance over his house with Insurer A. He warranted against past and future double insurance.
Can the insured argue that it is not material?
Then he obtained fire insurance over his house with
No. The fact that it is in the policy entitles the insurer
Insurer B. The same clause is included. The house burns
to rescind. The basis is not materiality but breach of
down. Is Insurer A liable? Is insurer B liable?
contract.
•
Or mothballs in a drug store.
Both are not liable.
There was breach of future
If there is a breach of warranty, and loss occurs EVEN IF not related to
double insurance warranty for contract A and breach
the breach of warranty, the insurer is not liable.
of past double insurance for contract B.
o
Ex. cannot bring explosive materials into his house. brought fireworks inside.
He
•
Geagonia case: X insured his stocks in trade. Mortgaged them, and insured them again, where there is loss proceeds go to mortgagee. Fire
His kitchen caught fire without
destroyed the things. Insurer said X did not disclose second insurance.
relation to the fireworks. Insurer not liable.
HELD: No need to disclose. Different interests involved. First goes to o o
Because the risk increased regardless.
the mortgagor.
What is the exception?
When it is merely incidental to the business.
Second goes to the mortgagee.
It is not double
insurance.
For
•
instance, placing alcohol to retouch the varnish of
When is there a waiver by the insurer? o
one’s insured furniture store does not breach the
When despite knowledge of the breach, it accepts the renewal premium
warranty against placing inflammable materials.
•
Case on motor vehicle policies.
X was issued an ordinary driver’s
license. Can only drive 4 wheeled vehicles. He drove a 10 wheeler.
Vehicle involved in accident.
Insurer not liable because X is not
out. The insurer is not liable for the Dec 31 fire, but is
authorized to drive the 10 wheeled vehicle.
o
liable for the Sept fire. o
Palermo case: ASKED IN BAR. Insurance contains provision
What if there was fraud, i.e. there were inflammable materials inside the house?
that the driver must be owner or the third party authorized with valid driver license. Brought car to repair shop, and it was
driven for a road test. Employees drove it for a road test. If it’s a third party driving [check?]
o
•
•
…[spaced out]
•
“Under influence of liquor” clause – no need to actually be drunk, as
[I give up. Not listening today.
•
[The next day…]
•
The insurer is not liable for loss caused by connivance of insured o
long as he is under the influence •
Just read transcript on breach of
warranty. Page 17-18 transcript]
Stokes [?] case: European driving with his own license (which is valid for a period, but not after).
The policy doesn’t attach in the first place.
Ex. told someone to steal his car, sell parts, and claim insurance
Violation of material warrant entitles the other to rescind. Even if not
•
Loss from unlawful act – not liable
rescinded, it can be launched as defense by the insurer. o
•
When there is breach of warranty, it is presumed to be material.
•
When there is breach of warranty without fraud, what is the rule?
•
Loss in which peril insured against is only a remote cause o
o
It only exempts the insurer from the time the breach occurred.
o
Give an example.
Ex. committed arson
Ex. fire insurance policy covers store and stocks in trade. The house across the street caught fire. Everyone congregated. While distracted, robbers broke into the store and stole the stocks in trade. Fire is just a remote cause.
X obtained fire insurance over his house. Warranted against storage of inflammable materials. 31, a fire broke out.
On Sept
On December 31 he stored
inflammable materials (fireworks), then a fire broke
•
Loss, the proximate cause of which is an excepted risk o
Fire insurance policies say that they do not cover loss due to coup d’etat, rebellion, riots, etc.
•
Loss where the insured is guilty of gross negligence
o
•
When proof is required, insured is not required to give proof that stands in court
SMC hired a shipping company to transport thousand cases of
o
beer. Loaded on a barge. Towed by a tug boat. When the tug boat arrived, the SMC rep met the captain and told the latter that the boat should be moved to a safer place since there is a
•
Noda: police report should be sufficient
Defects in the notice or substantiation thereof which the insurer didn’t specify waived
typhoon brewing. The captain ignored it and tied the barge to the wharf. During the typhoon the rope broke, the barge was
o
Because the insured is usually a layman
cut loose. Claim against insurance – the captain was grossly negligent. There insurer is not liable. •
•
Delay in presentation of a claim/proof of loss is waived if the insurance company did not invoke that as a reason to deny the claim
Burden is on the insurer to prove that it is an excepted risk o
• But for fire insurance, the burden is on the insured to prove
enough to say that he cannot produce it not because … [eh] check
that it is not under an exempted risk o
If the policy requires a certificate, and the insured cannot produce it, it is section 92
Ratio: because the thing is in possession of the insured, so he
o
can best give an explanation for the loss
o •
o
If reported an unreasonable time later – ex. 6 months – opportunity is gone
o
report are prejudicial, but because the investigator is abroad and cannot be found”
Radio Mindanao Case: [wrong interpretation of this rule]
Fire insurance – notice must be given without unnecessary delay
“I cannot submit the report not because the contents of the
Double insurance •
Requisites: o
Usually fire policies have a provision that claims must be filed
1. Insured must be the same
Ex. mortgagor mortgagee – not the same
within a certain time. Beyond that, barred.
o
o
2. Several insurers
o
3. Same subject matter
Look at purpose to give the insurer a chance to investigate the claim
Ex. factory and stocks in trade – not the same
o
4. Same interest
o
5. Risk is the same
o
Cathay: pipes arrived in rusty condition because it was stored in the hull of sea. The insurer was liable because it was perils
•
Learn the rules on reimbursement
of the sea. WRONG! Because nothing was unusual •
Reinsurance •
•
Barratry o
Two types: o
Treaty
o
Facultative – case by case
•
A reinsurer cannot intervene in the case of insurer and insured because
Willful misconduct, not mere wrong judgment
Answers for general average o
Those who were saved will contribute to the general average
o
Insurance policy will cover share in general average
o
DOES NOT cover particular average
the reinsurer has his own interest anyway
•
After first layer, the subsequent layers are called reprocession
•
…
•
Insurance is covered by the rule of blah blah blah fides
•
Take note of the cut-through clause
•
“Arrest of the vessel” covers order by administrative officials, and does not cover arrest order of court
o
Insured can go straight to the reinsurer
o
Ok in California, invalid in England
Marine insurance •
Ex. fruits became rotten due to nature of the fruits
•
DOESN’T ANSWER for perils of the ship o
•
Ship is unseaworthy
Rule on concealment is stricter, because the ship is usually in the high seas so the insurer is at a disadvantage – harder to inspect.
•
Marine insurance – belief of a third person as regards what is material o
Perils of the sea:
Ex. surveyor saying that the ship is not seaworthy MUST BE DISCLOSED – it is material
o
1. Connected with navigation
o
2. Unusual movement of the sea/winds
•
[On flag of the ship, etc. spaced out
o
Use of simulated papers, etc.]
o
If the loss was not due to these, even if these were committed,
o
Renders it valueless
Constructive total loss is unique in marine insurance
the insurer is STILLLL liable •
loss. He relinquishes his share to the insurer
IMPLIED WARRANTIES o
1. Sea worthy
o
2. will not deviate
o
3. Will not engage in illegal ventures
o
4. It will carry necessary papers if nationality was stipulated
Abandonment is act of insured after constructive total
If damage is more than ¾ of value of property insured, insured can declare constructive total loss
•
Insurer is liable for those acts of insured in good faith o
•
•
•
If abandonment is proper but insurer refuses unjustly,
properly laden, and the complement of the vessel (master, etc.) is
•
Silence for unreasonable period of time = acceptance
If there are different portions of the voyage, it must be seaworthy in all
•
Marine insurer liable for all expenses (repairs, labor for recovery of
Warranty of seaworthiness extends from the hull also that it is
property, etc.)
such portions •
Ex. salvor’s fee, repairs in GF
•
Deviation
o
Check the three types of deviations
o
Check when it is proper to make deviations
Motor vehicle liability insurance
• •
•
“Third party” excludes
Any other deviation is not proper o
Driver, etc.
insurer is exonerated.
o
Relative by affinity/consanguinity within 2nd degree
Loss is either total or partial
o
Employee [see qualification]
Once the vessel deviates, even if it returns to the original route, the
o
Actual total loss actual loss of the thing
o
Examples
of
these
are
dramatizations
of
novels,
or
translations. Intellectual Property •
o
Or adaptations (ex. Miss Saigon, from Madame Buttefly)
Rights of intellectual creator exists from moment of creation •
o
Even if you haven’t registered yet with the National Library
o
Unilever: Came out with an advertisement that is similar to
What about compilations? o
This involves judgment of, for instance, the best Filipino short stories. So he has to get the consent of those whose stories
PNG’s prior commercial. Unilever said that PNG’s commercial
he included in the compilation.
is not yet registered with the National Library. But the law is o
clear – no need to register to have rights over intellectual
And if someone else wants to make another compilation, he cannot use the same set of stories since these were chosen by
creation.
the first compiler; unless, of course, he gets permission. •
Are email and letters also covered? o
•
Even
choreography,
musical
compositions,
drawings,
To be protected it must be original. This is the main principle.
•
Plagiarism is different from infringement.
•
If the writer is anonymous, then it is the publisher that represents. But if
paintings,
architecture, sculptures, computer etc.
•
• Yes. Any form of text is covered.
the writer can still be identified (ex. Nick Joaquin as Quijano de Manila), Paglinawan: A dictionary can be copyrighted.
He came up with a
then the writer still gives consent.
Spanish-English dictionary where he borrowed 87% of the entries. He o
argued that you cannot have a monopoly on words. Court held that the
have copyright over the parts they prepare.
original writer used his judgment in selecting which words will be used. •
Pilita Corales adopted A Million Thanks To You as her final song in concerts.
In response, someone printed the word “thanks” a million
times and it was not allowed to be registered because it is not an
If there are several writers and the parts are distinct, they only
•
For DVDs? o
The producer, music composer, director of photography, screenwriter, author of the work on which the movie is based,
intellectual creation.
etc. •
Are derivative works also created? o
Yes, but you have to get the consent of the original creator.
o
But for collecting, the producer has the right.
•
If the work is done for hire or is part of his duties, then the employer will
•
Then they sold the paintings for a fortune when he became
own the copyright. •
famous. What is X’s right? Torrens system. o
o If you sell, mortgage, convey your copyright, you must register it with the National Library to bind third parties.
•
Owner can object to the distortion of his work.
•
Transfer of the work to new media will not violate… [?]
•
How long do these rights last?
•
o
Modern rights last up to 50 years after the death of the author.
o
They are not assignable.
The economic rights of author – need permission: o
Reproduction or substantial reproduction (ex. photocopying an entire book)
•
o
Derivative works
o
Public distribution or exhibition
Businesses started playing certain songs to drum up business. Technically, this is economic exploitation of the work.
•
Some artist connoisseurs bought X’s paintings for a cheap price.
The character Charlie Brown is copyrighted. So sporting goods cannot use Charlie Brown on their goods. Or a bakery cannot use Cookie Monster.
•
He must get 5% of the selling price.
