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Commercial Law Review

Promise to pay (PN)

Glenn Tuazon, 4-A

Order to pay (bill of exchange)

Atty. Jack Jimenez

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

Part 1: Negotiable Instruments Law

HISTORY: contrast a negotiable instrument with a non-negotiable PN:

First objection: a person stepping into the shoes of the seller is

exposed otherwise to the defenses that the buyer may launch

against the seller

Laws solution exempt from personal defenses

Second objection: I dont know the maker, I just know the one


Payable to order negotiated by indorsement, and delivery

Payable to bearer delivery is sufficient

N.B. If payable to a specific person, it is not negotiable

Four basic contracts involved:


1. Making

2. Drawing

3. Negotiating

4. Accepting

negotiating it to me. How will I know hes solvent?

Laws solution will make the indorser liable

regardless (Accumulation of secondary contracts)

The more indorsers, the more you can sue

Two general parts in the law:


1 what makes an instrument negotiable

2 rights and obligations of parties

To show consent

N.B. But for all, there must be delivery

Basic principles: NIL is for justice.


Bad faith: So if a person is in BF, he cannot invoke

defenses. (Ex. Issued a negotiable instrument to pay for a car

that is defective. The indorsee knows that the car is defective,

he is in bad faith.)

Two basic forms:

2. Estoppel ex. A father allowing a son to steal a check and

forge his signature is estopped from denying it

3. Comparative fault

Requirements found in Sec 1. 2-9 are elaborations of such.

1a. It must be in writing

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


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


Creates a NEW obligation to pay, not a mere

acknowledgement of an old debt

Exception 1: date of payment is mentioned,

or at least, a date of maturity

With no notice of defenses

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.

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







although indeterminate (ex. Moment of death of


Most cases involve fraud, by taking advantage of the features of the


Sec 2: when a sum is certain


2c. Sum certain, and payable in money

Even when there is a stipulation of interest.

It must be in


Because it is meant to be a substitute for money

Also, specify the denomination.

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


reduced to 12% (in circular 416).

3. Payable on demand or on a determinable future time

If there is stipulated interest, without a rate, 12% as well.

4. Payable to order or bearer

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

Nov 2005)

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

It is now valid to stipulate payment in foreign currency.

If you talk about an exchange rate, you have to talk about at

least 2 currencies. It cannot be just one.

Under Civil Code, general rule is attorneys fees are not

the CM.

It was negotiated to Elizalde by the car selling



Elizalde sought to collect.







Issue is whether the

statement of security (CM) made it non-negotiable.

Stipulating such makes the NI more attractive.


Negotiable, because the promise to pay is still conditional, and

Ex. I will pay reasonable attorneys 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


Because you know how much is due at the date of

negotiable. Else, it is negotiable.

maturity (it doesnt matter what you pay after

maturity). This is the reckoning point at the date of

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

attorneys fees is always subject to court control

money should be paid out of the Treasury without an


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.

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

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.


Metrobank is wrong, because the treasury

warrants are not negotiable instruments.

Statement of how the original obligation came about does not

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.


makes it conditional.

Elizalde: Person bought cars. He issued a PN, secured with a

CM over vehicles. The PN said that the payment is secured by

Sec 4; payable at determinable future time

1st situation: Pay Jose Cruz or order if the holder feels

insecure, he may demand that I post reasonable securities,

and if I fail to do so, he can declare the entire balance due and





liable by ripening their obligation. Thus, this

is not valid.

One view: non-negotiable because date of maturity

becomes uncertain because holder can accelerate

payment, and there is an additional undertaking other

or condition happens.

than payment of money.

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)

If hinged upon a contingency, non-negotiable even if the event

2nd situation: same if the holder feels unsecure, he can

Sec 5: additional provisions that do not affect negotiability

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


Authority for holder to foreclose pledge/CM or collateral



When the maker may choose to pay before a certain


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

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

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,

[It may be upon order of]

1. Order of payee who is not maker, drawer, or drawee

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

Sec 6: omissions which do not affect

check paid to cash, which anyone can encash if lost

and found

1. Not dated

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

3. Does not specify place where it is drawn or payable

3. Drawee

4. Bears a seal

4. Two or more payees jointly

5. Designates currency in which payment will be made

Ex. Pay to the order of Jose Cruz AND Manuel


Sec 7: When it is payable on demand


5. One or some of several payees

Upon sight or presentation

Instrument is silent on when payment is made

When it is overdue

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)

If the drawee is not indicated with reasonable certainty, then it

is not negotiable.

Sec 9: When it is payable to bearer

1. Expressed as such

Caltex: [unclear facts] Caltex required collateral for a

(Security Bank).

Caltex accepted it.


[yada yada





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



restoration of the amount. HELD: it is payable to

It is a

bearer instrument.



himself nonetheless. Y, his partner, sued the bank for

dispute. HELD: It says that the deposit is payable to



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


X wanted to steal money from the


credit line. Requestor had as security a time deposit

Weller and Martin: Either partner can sign or issue





documents provide that the amounts deposited shall

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 Xs 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


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

2. To person or bearer

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 didnt

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


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.



it fact it was the officers). PNB must reinstate the

The borrowers thus endorse




amounts to the Rodriguez spouses.


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

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

Sec 12: Ante-dating or post-dating does not affect negotiability

Sec 13:

Rodriguez issued discounted checks.

PNB found out about this and closed the SLA

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

Contention of spouses: How can PNB

accept the indorsement of those checks, when the

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

But what if the one who put the wrong date presented it

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.

Not valid. Cannot claim.

What happens?


A check drawn by X says Pay to the order of Y

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


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?


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

did not indorse it to Z, can he collect from


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:

Can Y collect P60000 from X?

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 Xs 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

NI is incomplete until delivered

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 attorneys fees.

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 elses local taxes.

signature to make a PN.

HELD: There was no payment because BPI never delivered it


to the city treasurer, so BPI cannot claim to have paid.

Sec 15: incomplete and undelivered instrument

Will not be a valid contract in the hands of any holder, as

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 wasnt being paid. [If you

BUT indorsers are liable

are legalistic, the RTW seller must sue the shopping malls,

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.


Officers of country club went abroad and left signed


checks for payment of checks. Abusive employees put their

own names and signed their own names.


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.

It may be showed that delivery between immediate parties is

conditional, or for a special purpose.


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

Words prevail over figures

GENERAL RULE: person whose signature does not appear on

the instrument is not liable

Sec 17: Rule of interpretation


If I promise to pay note is signed by two or more persons


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

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

Written > printed provisions

If ambiguous whether a bill or note, the holder has the option to

Sec 19/20

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

Minority/incapacity of corporation

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.

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



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

Sec 23 Forgery

The person whose signature is forged did not give consent to the


Different situations:

1. Promissory note

he knew the intended payee)

A (signature forged by B)-B-C-D-E

Except when he is estopped


E cannot collect from A

E can collect from B (forger)

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

Indorsing an instrument that need not be

[ORDER INSTRUMENT] A-B-C (signature forged



Neither can he run after A or B,

because he cannot trace his right to

by D)-D-E



indorsed leads to a warrant of such


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 Cs signature is forged)

indorsing the instrument (even if

He can run after D, because by

bearer), he warranted it.


E cannot collect from C (no consent)

E can collect from D as indorser

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

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


1. Order

Can E collect from A?

due course, A will claim that there




Depends. If E is not a holder in





instrument by B since C stole it

2. Bearer

from him



If E is a holder in due course,

he may collect from A since it is

payable to bearer

As signature on an order instrument was

forged by B and then indorsed to C-D-E.


Can E run after C?

accepted as drawee. Can E collect from A?

No. No consent.

NOTE: If its a bearer instrument, even if Cs

indorsement to D is forged, then the payee can still

Can E run after X?



collect from A (because he just promised to pay the

bearer). Remedy of the acceptor is to just run after
the thief.






instrument is genuine when he accepts and


forged Cs signature D E. X accepted and paid.

A issued a BOE payable to B or order.

What is Xs remedy?

B C.

X cannot debit As account, because A ordered to

pay B or order. C did not order X to pay D. Bs order

To sue B, the forger.

was cut off by forgery.

Can E run after B?


Yes. Forger

Can E run after C and D?


the indorsers.


NOTE: If X did not accept, then he cannot be

recovered from, because he did not accept.

But the same answers apply for the


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.



X can get money back from E because X only

admits As signature is genuine (which it is), and not

A issued BOE payable to B or bearer. Indorsed to C.

Cs signature was forged, indorsed to D, then E.

accepted the BOE. What happens?

X can debit As account because A promised to

pay bearer.

X cannot get back the money from E. E is the


C can run after D, the forger.

A issued BOE payable to B or bearer. Indorsed to C.

Left check book with his friend, who was in the car. The friend

Cs 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 Es 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:


An external auditor was hired to reconcile records.


managed to forge the signatures of the officers of Casa

Montessori over a long time.
reinstate the amounts.

Cs 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.

the auditor was stealing money, because he was precisely the

EXCEPTIONS to general rules:

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 sons

comparing with bank records.

forgery of his signature was genuine)


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

Drawer can check the statements sent by the bank to


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


If the drawer had acted quickly, would the

the theft.

drawee have been able to stop or freeze payment?

PNB v Quimpo:

But JJ believes that the bank should have been held negligent
for authenticating the checks.


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.


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,

account for spoilage, and MWSS did not examine the

signatures in the bank returns.


Split accountability 50-50

General rule:

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.


This is NOT a case of negotiation, but presentment

for payment.

Gempesaw owes several groceries. She trusted a bookkeeper

blindly. When she ordered supplies, the bookkeeper prepared

So you cannot use the warranty


the checks, and Gempesaw signed the checks without

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. [?]

Split accountability 50-50

Ford Philippines:

Province of Tarlac:


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 payees account only), which is the Insular Bank of
America, the authorized collecting agent of BIR.


employee showed a fake BIR receipt (See, I paid BIR na.) to

Four general rules:

Ford. Instead, they deposited a worthless check with Insular


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 hes in estoppel

they made it appear the worthless check was deposited.

Citibank honored the check.

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.


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 payees account only and there was no indorsement from


Citibank was guilty only of negligence.

(ex. in a bearer instrument)

4. A person negotiating an instrument after forgery is liable

(due to warranties)

The bank manager (who was complicit) was criminally liable.

JJ doesnt agree with the court as regards Insular Bank of
Americas liability.

Rules on clearing

Checks are brought to a clearing house and are run through a

clearing house. They check the magnetic strips on the checks.

Check: G.R. 121413 29 Jan. 2001

Price v. Neal

The amount will then be transferred to the collecting bank.


Then the checks will be physically given to the drawee bank.

The drawee bank has 24 hours to honor/dishonor the check.

See Jack notes



See Jack notes, too

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.

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 payees or indorsees 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

payees forged signature.

In civil law, generosity, love, affection, etc. are valid consideration.

New rules (to prevent ping-pong of checks):

[Glenns 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--vis prior parties:

The drawee cannot ask the computer to

reverse the entries.

So love and affection is valuable


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

A issued a PN to B, but there is no consideration.

reverse, while you are litigating, you do not

indorsed it to C for consideration. C, then to D. What is

have the amount.

Ds status as holder for value?


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.

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.

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

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.

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


defense of drawee who accepted a BOE (Cornell)

accommodation party.

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









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


[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?


Yes. Want of consideration is a defense against the


Dispute over parcel of land.

Decided to settle.

The other

partys lawyer, Beltran, helped settle by issuing a company


[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 corporations 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].


X was exchanging a post-dated check for cash to the

disbursing officer of AFP. AFP asked Y, Xs sister, to sign as

Prudencio: (JJ doesnt agree)

accommodation indorser.

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. Thats 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.


PNB sued

Prudencio spouses are


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

receive consideration. When PNB released a portion of the


money, it was in BF.

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

JJs comment: the law says Holder for value not HIDC. You


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

released funds could have improved the project.

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.


Indorsing only part of the amount will make it cumbersome.

Prohibited to indorse to 2 or more indorsees severally. Ex: A

happened long after.


makes accommodation parties liable to holders for value,

check for P100K is negotiated to Jose Cruz for 50K and

Manuel Santos for P50K.

PARTIAL indorsement is treated under law as an assignment.

Cruz only

indorsee is
apply to him

It is subject to personal defenses.

EXCEPTION: When it has been paid in part (ex. on


Types of indorsements:

Special specified person to whom it is being indorsed

Blank does not name any person

agent only)

that he only
holds it for

X, because
indorsee is
agent of the

there is no
transfer of title

indorser can
because he
is just an

trustee for
named as

same trust


Yes, because
transfer of title

X, because

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


A issued a PN to B or order for P10K.

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


Pay to Jose

Passing of








X, because

Rights of indorsee in restrictive indorsement:


A) collect payment

B) bring action indorser could bring

C) transfer rights, if allowed to do so

Qualified indorsement


Because he warranted that the

instrument is genuine as to what it purports


Done by writing without recourse although the instrument is

to be.

still negotiable

This can be done if the instrument will fall due for a long time

If D turned out to have forged Cs 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.

Yes, more so. He warranted his valid title to


But qualified indorser still has some warranties under Sec. 65;

Conditional indorsement

Genuine as to what it purports to be

(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.


indorser cannot change the original obligation


The maker can also say lets wait and see if the condition is

That he is not aware of any fact that makes the

instrument valueless

If the maker pays, but the conditioned turned out to be

unfulfilled after, the remedy of the conditional indorser to run

(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 As signature turned out to be forged, can E

collect from D?


Signing of an instrument payable to bearer


[wait for discussion on Sec 65]

It can still be indorsed through mere delivery

title through his indorsement

Indicates a place

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


Only that in subsection A will destroy

Crossed check is still negotiable

Instrument payable to cashier or fiscal officer


Assumed that the instrument is payable to the corporation he


Useful to establish HIDC

Payable to two or more payees


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

Example bearer instrument: can strike out indorsements B to


Must indorse the instrument according to the misspelled name,

because other parties will not know that there was a mistake

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


If its an order instrument, can E strike out B?

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.


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

RULE: The indorser who is struck out and ALL indorsers after
him are eliminated

Presumed to be correct, but rebuttable

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

Transferee will only step into the shoes of the transferor

So defenses against transferor apply to the transferee too

But the transferee can compel the transferor to indorse it

Sec 52 Holder in due course [very important]



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


Indorsement to a prior indorser

defect in title of the indorser


This elaborates #3

Can B run after C, D, and E?

Defect in title of indorser = if he took it


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

Payment in due course discharges the instrument



Rights of the Holder


consideration, or negotiated it in breach of

allow them to run around in circles.


Fraud ex. issuing it for a fake ring

Duress ex. ransom money

Unlawful means ex. stolen check




Rule on instruments payable on installments:




Status on payment



(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

Holder is aware

An installment is not
paid and there is an

Holder is not aware

An installment is not
paid and there is an

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

Holder is aware of its


Not a HDC

Issue: is ABC a HDC?

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 indorsers title

Banco Atlantico:

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

A holder must be aware that something is wrong, but chose not to

investigate further as to not be a HDC. The test:

Did he take it? Was is honest for him to take the instrument

Issue: is DEF a HDC?

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



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


X left a cashiers check (issued by ABC bank) payable to Xs

unreasonable length of time the holder is not a HDC.

order. Y stole it and indorsed it to Z. ABC refused to pay. Z


(53) Negotiation of an instrument payable on demand after an

HELD: Z was not a HIDC because Z refused to explain how

Consider the nature of the instrument, customs, and particular


the check was indorsed to him.

amount agreed for the instrument is a HDC only to the extent of the

forged Xs indorsement. But the court used HDC anyway.

amount paid by him.


(54) A transferee who receives notice of infirmity before he has paid the

JJ thinks its 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


Z, the drawer. Can he collect?

Salas and State Investment House (2):

Ex. X issued a post-dated check to Y with value of P100K,

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.

1. Sue in own name and receive payment

2. Free from personal defenses

3. May enforce payment against all parties liable thereon

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?


Yes, because the law simply provides holder. A payee is a

holder, too.

37 restrictive indorsement [GT: I dont know why.]

Maybe JJ meant qualified indorsement under


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)

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

indorse it

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


all respects it purports to be. Also, an acceptor warrants the

authority of the drawer to pay.
Personal defenses

Real defenses

Theres a contract with some

inequitable or iniquitous fact behind

No contract because an element is

missing; or void against public policy

Voidable contract

Void contract

Ex: no consideration, undelivered

complete instrument, acquired by
consideration, negotiation in breach
of faith, mistake, ultra vires act of

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.

There can be no curing. So D cant 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.


General rule every holder is a HDC

Exception if it is shown that the title of the negotiator is




defective, then the holder has to prove that either the holder or


Pay according to tenor

1. Existence of payee
2. Capacity of payee to


process of dishonor
completed: 1. He will
pay the amount to
holder, 2. Or to a
who pays for it
limiting his liability>

1. Existence of payee
2. Capacity of payee to
3. On due presentment,
it will be accepted/paid
according to its tenor


Pay according to tenor

of acceptance

1. Existence of drawer,
drawers signature
3. Drawers capacity
and authority to draw
4. Existence of payee
and capacity to indorse

the negotiator is a HDC


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.


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


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 Ys 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

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
warranties only extend

General indorser

presentment he will
accept/pay according
to tenor
2. Or if DH, he will pay
the amount to the
compelled to pay it

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

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

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

presented it for acceptance to E. E accepted it. For how

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 daughters expenses, and his daughter is a beneficiary of

HELD: X must pay. He made an unconditional promise to


View 1: P40000 because that is the tenor of the


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 courts

not consent to P40000, since there must be


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.

Is merely secondary liable only if the instrument is



Acceptor admits existence of drawer because without the

drawer, the BOE cannot exist.

He can put without recourse to limit his liability.

Cebu International Finance v. CA:

D issued a check to P, drawn against BPI.

He admits authority of the

drawer to draw.

because the instrument is meant to circulate.

presented for payment, and BPI debited Ds account.

Acceptor admits existence and capacity of payee to indorse,

Acceptor does not admit signature of indorser.

Far East Bank:

The acceptor cannot recover the amount from the

payee on the ground that the drawers signature is

Someone wanted to buy jewelry in the amount of 200k. He

had a draft for 300+K from Land bank.


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









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.


Must be an additional party (not a regular party

signing again will not increase the credit value of the

FEB sued for the difference


against Landbank.


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)

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


(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?

He is called such because you would normally expect the

payee as the first signature there.
indorsers signature is found there first.

But here, the irregular

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

See the list of warranties in the law [see table]

Same as first 3 warranties of qualified indorser

Person negotiating by delivery only liable to the person to

Last he warrants that the instrument is valid and subsisting

If maker is insolvent, even if the indorser was not aware, he is

whom he delivered the instrument. Not liable to subsequent



Unlike a general indorser, a qualified indorser does not warrant

that the instrument will be paid. He is liable only if the maker

or acceptor is insolvent and he is aware of that fact (since

Chartered Bank:

here, there is a breach of warranty).


bank, drawn against DEF bank.






check bounced. ABC asked for return of money.


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


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.

BPI v. CA: Somebody had a managers 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 friends dollar account.

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

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?


There is a 45-day holding period if the check

deposited is drawn abroad.

But RCBC accommodates

employees, allowing them to withdraw right away.


JJ doesnt think so.

Sec 67 indorsed when not required incurs liabilities of an indorser

employee, a mother, received a check, and deposited. Bank


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

Parole evidence however may be accepted to prove otherwise

For example A B C, C can prove that while Bs signature

immediately withdrawn money.


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


It is actually a case of restrictive indorsement (only for


Quiz up to section 69

Sec 66 (general indorsement) is not

Presentment for payment

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)

Sec 69 indorsement by agent

Payee presented the

It was paid. Payee

Then the forgery was discovered.

Sec 70

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

What does this imply?


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


recover interest due subsequent to

maturity + costs of collection

BUT he does not lose the right to

[Step-by-step guide on presentment for payment]

Step 1: Presentment for acceptance required if

get paid

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








the person primarily liable?

Those secondarily liable are discharged

But he can still go after the person primarily

place of business of drawee



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

Consequence: will discharge drawer and all other indorsers

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


instrument must be presented

What is presentment?

1. Drawee is dead, has absconded, fictitious, or lacks

capacity to contract








reasonable diligence

omission to protest

3. Although presentment is irregular, acceptance was

refused on some other ground

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

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

Instrument not payable on demand

non-payment needed

Make presentment on date due


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 its a BOE, you make it after a reasonable time after

last negotiation

2. Delay is excused for fortuitous


What does negotiation here cover?





negotiation for collection between











Sec 74

Sec 72 when presentment is sufficient



NI must be exhibited to the person from whom payment is


1. Made by holder or agent

So he can check genuineness

2. Reasonable hour on business day

This is why telephone as demand is not allowed

3. At proper place defined

First Pacific (?) Check negotiated by car dealer to financing

4. To person primarily liable


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

There is a wife who presented a negotiable certificate of time


indorsement is discharged.

Bank refused to pay her because they paid the


husband. HELD: it was not presented by the husband, but the

wife. Bank should pay the wife.

Sec 73 proper place for presentment


If there is a stipulation where presentment must be made, it

If none provided, but address of maker is stated, go there

If none provided, to usual place of business/residence

1) Instrument was lost

2) payment refused on some other ground

must be made there.


Failure excused on two grounds:

Ex. no funds, and not because it was not


Sec 75

Presentment where instrument payable at bank must be

made during banking hours. Law assumes that the bank will
be the source of the funds.

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

indorsers 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

Presentment for PAYMENT excused if:

Applies when principal debtors is:


1. Cannot be done even after reasonable diligence

Liable as partners

2. Drawee is fictitious person

Liable as Joint debtors

3. Waiver of presentment express or implied

If there is an address stipulated, pay there.

If dead, give to executor/admin

Even if dissolved already

2. Presentment is excused and it is overdue and unpaid

What is the effect of dishonor by non-payment?

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:

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?



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


Sec 85

If payable in a fixed period, it must be paid on that day

If on a Sunday or holiday, then go to next business day

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

On next business day. Because even if some offices

Sec 88 Payment in due course


1. At or after maturity

2. To the holder

3. By the debtor, in GF and w/o notice that the holders 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.


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

Notice of dishonor

Time exclude first day, include last day

Sec 89 dishonor

Give notice of dishonor

Any party may be compelled to pay it to the holder with right of


Sec 87 when instrument is payable at a bank


Implied: that it is an order to the bank to pay for account of the

principal debtor

First National bank: PN payable at FNB. Maker had sufficient

funds. But holder did not show up at day of maturity. DillyHELD:


Notice given by a holder benefits all subsequent holders and

notice against

The fact

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.


Notice may be given by holder himself or agent of the holder.

Sec 90 Who can give notice of dishonor

1. Holder

2. Agent of holder

3. Party to the instrument who may be compelled to pay the

Principal has until Wednesday to notify

secondarily liable parties

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

4. Agent of such party

What about strangers?

Form of notice:

In writing or oral

Cannot give notice, except as agents

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

Personal or through mail

If written, need not be signed

Sec 91

Notice may be given by a party or an agent

Agent need not be authorized by the party

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:


If partners?

on Monday, two options:

Notice to one is notice to all

A) notify principal

If joint payees or joint indorsees who indorse?

On Tuesday

Sec 68 treats them as solidarily liable

If joint drawers or joint accommodation indorsers, and

post-office, due notice is deemed given

others not covered by 68?

Give notice to all

Sec 103 and 104 time within which notice must given

Know the difference in rules where parties reside in the same

place (103) or different places (104)


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

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

2. To place of business or residence

3. Place where he is sojourning

If notice is actually received, although not according to

these provisions, what happens?


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?


1. Before actual time for giving it comes

2. Or after failure to give it

Can waiver be implied?


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?


Who is affected by a waiver in an instrument?


If written on the instrument all the parties

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

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


Meaning, drawer stopped payment.

N.B. In all these cases, the drawer KNEW that there was or
would be dishonor.

Ex. managers check

Drawee is fictitious person

5. Drawer countermanded payment

When the drawer and drawee is the same person

When is notice of DH not needed to be given to indorser?

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

1. Drawer and drawee are the same person

2. Drawee is fictitious person or has no capacity to contract

3. Drawer is the person to whom instrument was presented for

2. Indorser is the person to whom presentment for payment

was made

3. Instrument was made or accepted for his accommodation


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 indorsers

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.


4. Drawer has no right to expect that drawee or acceptor will



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



What is the exception?

If it was accepted in the meantime.

Failure to give notice of dishonor by non-acceptance does not prejudice

1. Discharge of instrument

2. Intentional cancellation of his signature by the holder

3. Discharge of a prior party

4. Valid tender of payment by prior party

5. Release of principal debtor, unless holders right of recourse

against secondarily liable party is expressly reserved

rights of a HIDC subsequent to the omission.

Ex. A drew a BOE payable to B. B indorsed to C. C presented


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 Cs failure

to give notice of DH to A and B.


What is the effect of an absolute and unconditional renunciation?

How a negotiable instrument is discharged:

A holder renouncing against prior parties terminates

recourse to that party

1. Payment in due course by holder

2. Payment in due course by accommodated party

3. Intentional cancellation by holder

4. Any other act that discharges simple contract for money

5. Principal debtor becomes holder of instrument in his own


If against primarily liable person discharges the instrument

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?


It must be absolute and unconditional

If it is merely oral and the instrument is not surrendered, the

alteration) or D (indorsed and warranted)

renunciation is not effective.


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

What is the effect of a material alteration?

48 striking out indorsements (relieves that person and all

those subsequent to him)

Discharges all parties not party to the alteration

Binds the one who made the alteration, those who assented,

89 those secondarily liable to whom notice was not given

and subsequent indorsers

122 renunciation by holder

What is the right of a HIDC?

142 qualified acceptance by drawee discharges those

secondarily liable

If he is not party to the alteration, he may enforce it

according to the instruments original tenor

Unless they assent to it.

Failure to dissent within

reasonable time is an assent


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

186 stale check

188 holder of a check procures it to be accepted or certified


4. Number or relations of parties into obligation

5. Medium or currency of payment into amount

Acceptance assent to order of drawer


Must be in writing and signed by drawee

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 Es 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

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


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

Cannot be other than payment of money


Must accept within 24 hours from presentment


Acceptance deemed done on date of presentment

When is a bill deemed accepted?

Failed to act on it within 24 hours

presentment as date of acceptance

Kinds of acceptance:

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


bill for the whole 24 hours?


The holder can consider the date of first

2. Qualified



rest of the 24 hours to decide.

Local (ONLY at a particular place)

Must present the bill for acceptance within reasonable time

As to time

Or negotiate the bill within reasonable time

Only some of drawees, but not all

What is the consequence of failure to present for acceptance?


What is the right of parties as to qualified acceptance?

Discharges those secondarily liable

Holder can deem it DH by non-acceptance

Time for presentment same as presentment for payment

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


is needed?

Unless they assent

Failure to dissent is assent

Presentment for acceptance

and does not discharge those secondarily liable

When is presentment for acceptance excused?

When is presentment for acceptance needed?


Delay caused by prior presentment for acceptance is excused

1. Bill payable after sight or acceptance needed to fix maturity

1. Drawee is dead, has absconded, fictitious, lacks capacity

2. Cannot make presentment even after reasonable diligence

3. Although presentment is irregular, acceptance refused on

of instrument

2. Bill expressly requires acceptance

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

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


any party to the bill liable

What is the option of the holder?

Can a BOE be addressed to more than one drawee?

Depends. If joint drawees, yes.

If alternative or successive, no.

What is protest for better security?


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?


1. Drawer and drawee are the same person

2. Drawee is fictitious person or has no capacity to contract

But can the holder treat it as a BOE still?


Is this mandatory?

What is the purpose?


Protest necessary for DH of a bill that on its face appears to be a foreign


When must it be done?


Day of DH

If bill is noted in the notarial register, protest may be made


Place of DH

Except when expressly payable at the residence/business of

another person apart from the drawee

Excused for fortuitous event

When is protest also done?


When bill is lost, destroyed, wrongly detained protest made

on copy/written particulars of the bill

Bills in set

Dispensed with for same grounds notice of DH is dispensed


Made by Notary Public or respectable resident + two or more credible


When is protest excused or dispensed with?



To inform the drawer/indorsers that the drawee is

insolvent and therefore they should prepare to pay



Main Principle: each part of the bill, numbered and referring to the other
parts, the whole of the parts constitute one bill

[usually, it is done to ensure that bills can be collected from

even if one part is lost in the mail or so]

[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

Travelers check you sign it twice (first as a specimen signature, and

second when paying. You present your passport too)

The one whose title accrues first is the true owner

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?


Memorandum checks just usually used as evidence of credit, by the

Crossing a check has three consequences:


1. Can be negotiated only once

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.


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

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


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 dont return it in 24 hours, it is deemed


Cashiers and managers checks drawer and drawee is the same

Case: Customer bought managers 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 managers 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

Certified checks:

upon presentation to the bank

Banks usually do not do this anymore

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

Banking practice: 6 months, or else stale

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.

drawers bank account was not prejudiced. And there

was no loss caused by the delay.

This will only

happen if the bank becomes insolvent, that if the

PBC tells ABC Company that it will release the goods if there is


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.

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


Dupont ships the chemicals to PBC. So when the bill of lading

arrives, PBC will tell ABC Company that the goods arrived.

payee didnt 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

Commercial LOC issued as payment pursuant to contract of


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

genuineness of the documents submitted to it.

Stand-by LOC

Governed now by UCP 600 (Uniform Customs and Practice for

Distinguish between out and out fraud vis--vis failure to

meet specifications:

There are 3 underlying contracts in a LOC:


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


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









specifications, you cannot enjoin payment.

draft, it will pay him after submitting documents

3. Underlying contract

timber to someone abroad.

There was an agreement that

payment is by LOC. Among the documents is a certification of

Independence principle (always asked in Bar)

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,


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.

The LOC requires buyers certification, so the bank

A seller can commit fraud by submitted forged or false


To combat this, the buyer may require a

surveyors 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

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

2. Quality specifications If the LOC requires Italian marble

and the document just says marble, the bank may refuse to

Evergreen clause


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

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,


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.

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


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


Revocable, irrevocable

Revocable: no need to notify the beneficiary, can be done

to a third party, who has the better right? HELD: The bank. It


had a lien on the deposit.

Usually its irrevocable, for certainty of payment

Can there be enjoinment of payment in a stand-by LOC?

Revolving letter of credit

1) Proof of fraud is strong, 2) fraud must involve abuse of

independence principle, 3) irreparable injury

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


It cannot be affected by defects in the underlying obligation

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;

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

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:


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 applicants property

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 ABCs 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.


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

Otherwise dispose can cover giving goods to a sister

shells and claim he is not liable anymore because X claimed


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

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 hasnt paid X yet, so X couldnt

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


bank must foreclose otherwise, it is pactum comissorium.

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?

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?


If payable to order or bearer

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


When is it non-negotiable?

1. Person lawfully entitled to the goods or his agent

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)


What is the consequence of not doing so?

upon it, it will be treated as negotiable.

Rules on refusal to deliver:


What is the rule on duplicate WHR?


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

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

1. Safeguard the goods

2. Deliver the goods

3. WHM is excused for selling perishable or hazardous goods

What is the effect of alteration?

To deliver

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.

1. Holder pays the WHMs liens

2. If the WHR is negotiable, to surrender the receipt

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?


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?

Ask for enjoinment of indorsement or renegotiation of the

receipt have the WHR frozen or surrendered, so it doesnt

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



He must segregate the goods belonging to different depositors

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?

1. WHR negotiated to him, so takes the goods in his own right

2. Has unpaid lien, so he foreclosed it and bought the goods

of the WHR?

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

It is stipulated

What are the rules on commingled goods?


during auction


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.



1. Insured possesses interest susceptible of pecuniary


Ex. teenagers will be charged higher insurance over

The buyer of a car, for instance, will only be insured if the

insurance company allows for an endorsement of the sellers

2. Insured is subject to risk of loss

insurance contract.

3. As consideration, the insured pays premium

It is unilateral

Someone organized a jeepney association. You give membership fees


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


It is conditional

What is the structure of the insurance code?

Held: Was conducting insurance business without license. Al

requisites concurred.

Contra Maxicare: Even if all elements are present, but if






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.


It is an aleatory contract.

If you dont lose what was insured, there is no indemnity.

It is a personal 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


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.


Who can be the insurer?


One authorized by the Insurance Commission

Who can be insured?


Anyone except a public enemy

Citizen of a country with which the Philippines is at

war with.


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.

MAIN DIFFERENCE: there must be a valid legal interest

The insurance cannot go beyond the value of the property

Ex. The Mortgagor brought fireworks to the building and it

benefit the contract

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

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


EXCEPT: if there is a way to place pecuniary value in

the life of the person.

Whereas in life, you cannot put value over life of a


The mortgagor can have the mortgagee perform acts that

Insurable interest

They have interest to

Over property

exploded. The mortgagee cannot collect.


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

him depends

German company filed claim with Insurance


4. Any person upon whose life any estate or interest vested in

Ex. co-guilty party of adultery/concubinage

You can insure anyones life, but you have to get his
consent + you must have insurable interest

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:

the same for a second boy and killed him. The second boys

Filipino Merchant:

The importer has insurable interest in

goods he is buying even if undelivered, because he can

fingerprints did not match the first boys 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

Contractor: has insurable interest over the building

Mortgagee has insurable interest

Also, under the law, he bears the risk of loss prior to

the policy.

If the beneficiary is irrevocable, can it still be changed?

Yes. But if irrevocable, can only change beneficiary


with the latters consent.

Lessor and lessee both have insurable interest

Mere possessor.

Case: The father made the child an irrevocable beneficiary of

an insurance contract.

The father wanted to revoke.


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

When does the beneficiary forfeit?

Inchoate interest founded upon existing interest

Ex. stocks, which is based on subscription contract

If he causes the insureds death.

Partners, over the property of a partnership


Carrier, over goods it is transporting since he will be liable

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.

Creditor with no collateral over properties of buyer

Expectant heir

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:


the lessor may shares of stock of a lessee [See

Taxi company insured 20 units.

Sold 4 of them.


insurance over 16 is still valid.

chuck case in transcript]

When must interest exist?

When the policy takes effect and when loss occurs

Need not exist in the meantime

Ex. Owned a car, insured, then sold it.

to redemption. HELD: Lost insurable interest.

He still has insurable interest

X insured his wifes 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 Zs 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.


What if the children bought the house from the father


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

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


hospitalized and gave the contact # of the hospital,

1. Party must have known the fact concealed

Case; If a party discloses that he has been

the insurers 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

squatters area.

serious ailments

policy anyway.

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 squatters 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

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


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

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


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 wouldnt have issued a policy.

4. Other party has no means to ascertain the fact concealed

Not required to disclose information of ones own judgment.

Can there be waiver?

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


already communicated0.

Is there need to disclose nature or amount of ones interest?


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


imposed by law.

Need not disclose matters which pertain to excluded or excepted risks.


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


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,


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

1. Untrue statement

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

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,

3. Fact is material

when he actually died of AIDS, and he says the former.


Consequence voidable at option of insurer


But if the info came from the insureds agent, and exercise of
due diligence was possible, he is liable for the truth of the

But waived for acceptance of premium payments despite


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

Test for defense: substantially true in every particular material

to the risk

EXCEPT: Marine insurance where what is required is the

exact and whole truth

under different conditions

Sec48(a) action to rescind

Ng Gan Zee:

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.


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


N.B. Really, what you are barring are defenses against

fraudulent misrepresentation or concealment, but not anything

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


drank small amounts on cocktail parties, it is not material. There is no


1. Life insurance

Application did not disclose incidents of defalcation by clients. There

2. Payable proceeds upon death

3. In force for 2 years since issuance or reinstatement

was another such case.

Insurance company found out.


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. [JJs stories]

Test of materiality SAME AS CONCEALMENT.

1. Claimant has no insurable interest

2. Uncovered risks (ex. insured engaged in car racing)

3. Policy lapsed and insured did not pay

4. Policy was entered into pursuant to scheme to kill insured

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
THE INSURED IS ALIVE. This is the proper meaning.

(vicious fraud)

5. Someone substituted for the insured during medical test

The Policy

Preliminary policy/cover note


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

6. If insured is riding in a plane and it is not a commercial flight

(ex. 8-seater plane)

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


8. Failure to furnish proof of death

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 cant 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.


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

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

JJ agrees with the result, but not the interpretation

What is the rule on additional riders or clauses issued after the


Must be countersigned by the insured or owner

N.B. No need for signature of insured otherwise

Rules on interpretation:

If the provision is clear, there is no room to interpret


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.


In marine insurance, this is a problem because 60 days have


one even if the policy says otherwise.

The law says if the cover note extends beyond 60 days, written

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.



Fortune: HELD: Security guard and driver of armored van had

possession of the money.

They stole money.


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.



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.


One vessel got burned in shipyard.

Asked Cebu

Open policy

Shipyard to pay. Held; policy clearly mentions Aboitiz as sole


insured. Cannot claim Cebu Shipyard is also insured. [?]

There must be a maximum amount mentioned.

It is a

maximum liability of the insurer.


If description is so general that it may comprehend any class or


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?

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

One expressing a policy that the thing be valued at a specified


Marine policies are usually this

Its 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

Successive insurances

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


N.B. One year period to file a case is not like period for appeal.
Asking for reconsideration from the company does not

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?

suspend running of the period.

(64) Non-life policies cannot be cancelled without prior notice and only
for the grounds stated in law here

1. Non-payment of premium

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


period is valid

But if the period fixed is less than one year from the time cause
of action accrues, the stipulation is void (the period becomes

3. Discovery of fraud/material misrepresentation

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


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

5. Physical changes in property that makes it uninsurable

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

Notice of cancellation:

Must be in writing

State ground for cancellation

State that if the insured asks for the facts as basis, the insurer

Express found in terms and conditions

Implied imposed by law

Usually embodied in a rider


These riders, issued with the policy, need not be signed

What is the difference of warranties from representations?


Warranties are express and placed in the contract

Representations are not written and are but collateral

will disclose

* Prudent thing: to send by registered mail

(66) Insured in a non-life policy can automatically renew the policy as


May relate to:

long as he is willing to pay the premium


Past ex. warranty that insured was never confined

Present ex. warranty that insured is in good health

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


successive terms of 1 year

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.


1. Loss occurs

2. Performance becomes unlawful

3. Performance becomes impossible

Give an example

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

owners car within 2 days.

house in 10 days. HELD: the insurer is liable.

Same if there is no cement available

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.


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?


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.

Ex. cannot bring explosive materials into his house.

brought fireworks inside.


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


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



instance, placing alcohol to retouch the varnish of

When is there a waiver by the insurer?


ones insured furniture store does not breach the

When despite knowledge of the breach, it accepts the renewal


warranty against placing inflammable materials.

Case on motor vehicle policies.

X was issued an ordinary drivers

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.

liable for the Sept fire.


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 its
a third party driving [check?]

[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


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 doesnt attach in the first place.

Ex. told someone to steal his car, sell parts, and claim

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.


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


It only exempts the insurer from the time the breach occurred.

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


Fire insurance policies say that they do not cover loss due to
coup detat, rebellion, riots, etc.

Loss where the insured is guilty of gross negligence

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

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 didnt

specify waived

typhoon brewing. The captain ignored it and tied the barge to

the wharf. During the typhoon the rope broke, the barge was

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


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


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

can best give an explanation for the loss

If reported an unreasonable time later ex. 6 months

opportunity is gone

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


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.

2. Several insurers

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

4. Same interest

5. Risk is the same

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



Two types:


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


Those who were saved will contribute to the general average

Insurance policy will cover share in general average

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

Insured can go straight to the reinsurer

Ok in California, invalid in England

Marine insurance

Ex. fruits became rotten due to nature of the fruits

DOESNT ANSWER for perils of the ship


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


Perils of the sea:

Ex. surveyor saying that the ship is not seaworthy MUST BE

DISCLOSED it is material

1. Connected with navigation

2. Unusual movement of the sea/winds

[On flag of the ship, etc. spaced out

Use of simulated papers, etc.]

If the loss was not due to these, even if these were committed,

Renders it valueless

Constructive total loss is unique in marine insurance

the insurer is STILLLL liable

loss. He relinquishes his share to the insurer


1. Sea worthy

2. will not deviate

3. Will not engage in illegal ventures

4. It will carry necessary papers if nationality was stipulated

Abandonment is act of insured after constructive total

If damage is more than of value of property

insured, insured can declare constructive total loss

Insurer is liable for those acts of insured in good faith


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. salvors fee, repairs in GF




Check the three types of deviations

Check when it is proper to make deviations

Motor vehicle liability insurance

Third party excludes

Any other deviation is not proper


Driver, etc.

insurer is exonerated.

Relative by affinity/consanguinity within 2nd degree

Loss is either total or partial

Employee [see qualification]

Once the vessel deviates, even if it returns to the original route, the

Actual total loss actual loss of the thing









Intellectual Property

Or adaptations (ex. Miss Saigon, from Madame Buttefly)

Rights of intellectual creator exists from moment of creation

Even if you havent registered yet with the National Library

Unilever: Came out with an advertisement that is similar to

What about compilations?


This involves judgment of, for instance, the best Filipino short
stories. So he has to get the consent of those whose stories

PNGs prior commercial. Unilever said that PNGs commercial

he included in the compilation.

is not yet registered with the National Library. But the law is

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


the first compiler; unless, of course, he gets permission.

Are email and letters also covered?







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


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


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


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?

The producer, music composer, director of photography,

screenwriter, author of the work on which the movie is based,

intellectual creation.


Are derivative works also created?


Yes, but you have to get the consent of the original creator.

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 Xs right?

Torrens system.

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?

Modern rights last up to 50 years after the death of the author.

They are not assignable.

The economic rights of author need permission:


Reproduction or substantial reproduction (ex. photocopying an

entire book)

Derivative works

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 Xs 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

He must get 5% of the selling price.