122735504 commercial law

8/10/2019 122735504 Commercial Law

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Commercial Law Review

Glenn Tuazon, 4-A

Atty. Jack Jimenez

SY 2010-11

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:

o 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

Law’s solution – exempt from personal defenses

o Second objection: “I don’t know the maker, I just know the one

negotiating it to me. How will I know he’s solvent?”

Law’s 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:

o 1 – what makes an instrument negotiable

o 2 – rights and obligations of parties

• Two basic forms:

o Promise to pay (PN)

o Order to pay (bill of exchange)

• If it does not comply with the requisites of negotiability, it is still a

contract, but not covered by the NIL.

• Either:

o Payable to order – negotiated by indorsement, and delivery

o Payable to bearer – delivery is sufficient

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

•

Four basic contracts involved:

o 1. Making

o 2. Drawing

o 3. Negotiating

o 4. Accepting

To show consent

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

• Basic principles: NIL is for justice.

o 1. 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.)

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

forge his signature is estopped from denying it

o 3. Comparative fault

If a bank honors a check with a forged signature, the

bank is considered negligent too

But if the negligence of the drawer outweighs the

negligence of the bank, the law shifts the fault to the

drawer

o 4. The law will only protect you from personal defenses if you

are a holder in due course (Sec. 52)

Good faith

With value

Before overdue ( see below )

With no notice of defenses

o 5. General rule: there must be demand , before an instrument

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!”

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

o 1a. It must be in writing

o 1b. It must be signed – symbol of consent

If one signed another name or a symbol, it will bind

him if he intended for it to bind him

Location is immaterial

o 2a. Must contain a promise or order to pay

Need not use exact words, even equivalent words are

fine

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

• Exception 2: insertion of “or order” (words of

negotiability) in the old terms

Authorization to pay or a mere request does notcreate a binding obligation to pay.

o 2b. The promise to pay or order must be unconditional

Do not look into evidence aliunde. You must confine

yourself within the four corners of the instrument to

deem whether it is absolute.

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Fall back on obligations and contracts – distinguish

between uncertain events and certain events,

although indeterminate (ex. Moment of death of

mother-in-law)

o 2c. Sum certain, and payable in money

Because it is meant to be a substitute for money

Also, specify the denomination. Cannot just be a

number.

o 3. Payable on demand or on a determinable future time

o 4. Payable to order or bearer

Need not use exact words

But there must be reasonable certainty so people

know from whom they could demand payment

Ex. instead of “order” pay to X or his indorsees;

pay to X or his assigns

Ex. instead of “bearer” pay to X or holder; pay to X

or possessor

o 5. Where the instrument is addressed to a drawee, he must be

named or otherwise indicated with reasonable certainty

If name of the drawee is left blank, it is an incomplete

instrument which can be filled up as a remedy

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

law.

• Sec 2: when a sum is certain

o Even when there is a stipulation of interest. It must be in

writing.

o 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).

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

o If payment is by installment, for the instrument to be valid, the

amount of installments must be indicated and the date of

maturity of each installment is specified.

“Promise to pay Jose Cruz or order P100,000 in 10

installments.” not negotiable

You have to specify both AMOUNT and WHEN EACH

is due. You cannot just give the starting point (ex.

Nov 2005)

o If there is an acceleration clause – failure to pay an installment

will make the entire balance due and demandable.

o It is now valid to stipulate payment in foreign currency.

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

least 2 currencies. It cannot be just one.

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o Under Civil Code, general rule is attorney’s fees are not

recoverable, except when there is written stipulation.

Stipulating such makes the NI more attractive.

Ex. “I will pay reasonable attorney’s fees in case thereis failure to pay” – is this a sum certain? Yes.

Because you know how much is due at the date of

maturity (it doesn’t matter what you pay after

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

maturity, is the sum certain? ALSO, stipulations on

attorney’s fees is always subject to court control

anyway.

• Sec 3: promise is unconditional

o Instructions on how payment will be entered into the books of

account does not affect unconditional nature

Neither does “reimburse yourself” affect

TEST: it must indicate the source of reimbursement ,

not source of payment . The latter is not negotiable.

o Statement of how the original obligation came about does not

affect conditionality

But it will become non-negotiable if mention of the

prior contract (ex. deed of sale) makes the NI subject

to the terms and conditions of the contract. This

makes it conditional.

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

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

the CM. It was negotiated to Elizalde by the car selling

company. Elizalde sought to collect. Issue is whether the

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

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

is not dependent to the CM. Test: does the promise to payrely on the terms and conditions of the security? If so, it is not

negotiable. Else, it is negotiable.

o Abubakar: A Treasury Warrant is not negotiable. It is payable

out of a particular fund , so you do not apply Sec. 66. “No

money should be paid out of the Treasury without an

appropriation for that purpose” (Constitution).

FACTS here: X deposited treasury warrants with a

rural bank. The rural bank deposited with Metrobank.

Even before the treasury warrants were cleared by

the clearing house, Metrobank allowed withdrawal.

The warrants were spurious. Metrobank is suing the

rural bank to recover, since the rural bank warranted

the treasury warrants by negotiating it to Metrobank.

HELD: Metrobank is wrong, because the treasury

warrants are not negotiable instruments.

o BUT a reference from which fund the obligation would be paiddoes not destroy negotiability if payment is not limited to come

from such fund.

• Sec 4; payable at determinable future time

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

insecure, he may demand that I post reasonable securities,

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

demandable.”

One view: non-negotiable – because date of maturity

becomes uncertain because holder can acceleratepayment, and there is an additional undertaking other

than payment of money.

Other view: negotiable – because the undertaking to

put up a security is merely an accessory obligation.

The date of maturity is not uncertain because

acceleration is within control of the maker; he can

prevent it by complying with the additional security.

(better view )

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

declare the entire balance due and demandable.”

It is not negotiable, because here, the holder has the

absolute option to make the obligation due and

demandable.

o Differentiate:

When the maker may choose to pay before a certaindate, 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.

When the holder may absolutely choose to have the

obligation due, it is not

• Effect: everybody becomes secondarily

liable by ripening their obligation. Thus, this

is not valid.

o

If hinged upon a contingency, non-negotiable even if the eventor condition happens.

o Philippine Education v. Soriano: A money order is not

negotiable, because although it says “pay to the order of,”

under Postal Regulations, obligation to pay is conditional,

depending on different grounds where the post office can

refuse to pay. Also, it can only be indorsed once.

• Sec 5: additional provisions that do not affect negotiability

o GENERAL RULE: Other obligation or undertaking aside from

payment of money makes it non-negotiable (“secured by CM

over my car, which I will keep in good condition”)

o EXCEPTIONS:

o Authority for holder to foreclose pledge/CM or collateral

securities

o

Authorizes confession of judgment if instrument not paid uponmaturity

N.B. the SC said, however, this is a void stipulation

o Waiver of benefit of law

Waiver of notice of dishonor

Waiver of venue

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Waiver of exemption from execution

o Holder can require something other than payment of money

If option is upon holder to demand either cash or rice,

it is still negotiable because the holder can ALWAYS

demand money

• Sec 6: omissions which do not affect

o 1. Not dated

o 2. Failure to mention consideration

It is presumed in this contract

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

o 4. Bears a seal

o 5. Designates currency in which payment will be made

• Sec 7: When it is payable on demand

o Upon sight or presentation

o Instrument is silent on when payment is made

o 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

o [It may be upon order of]

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

o 2. Drawer

Ex. Jose Cruz writing a check saying “Pay to the

order of Jose Cruz” – this is better than making a

check paid to cash, which anyone can encash if lost

and found

In this example, it is not complete until Jose indorses

it, because there has to be delivery (at least two

parties to a contract)

o 3. Drawee

o 4. Two or more payees jointly

Ex. Pay to the order of Jose Cruz AND Manuel

Santos

o 5. One or some of several payees

Ex. Pay to the order of Jose Cruz OR Manuel Santos

o 6. Holder of an office for the time being (ex. Treasurer of the

city of Makati)

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

is not negotiable.

• Sec 9: When it is payable to bearer

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o 1. Expressed as such

Caltex: [unclear facts] Caltex required collateral for a

credit line. Requestor had as security a time deposit

(Security Bank). Caltex accepted it. [yada yadayada] Bottomline, requestor maxed his credit line and

disappeared. Caltex and Security bank are in

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

the depositor, and the depositor is bearer. It is a

bearer instrument.

[As explained by Phil. Law Library]: The Certificates of

Time Deposit are negotiable instruments. The

documents provide that the amounts deposited shall

be repayable to the depositor. And who, according to

the document, is the depositor? It is the "bearer." The

documents do not say that the depositor is Angel de

la Cruz and that the amounts deposited are repayable

specifically to him. Rather, the amounts are to be

repayable to the bearer of the documents or, for that

matter, whosoever may be the bearer at the time of

presentment. ( Caltex )

o 2. To person or bearer

o 3. Order of fictitious person

GENERAL RULE of the following three cases: there

must be intent by the maker or drawer of the NI that

the instrument be issued to a fictitious person

(knowledge is paramount)

Weller and Martin: Either partner can sign or issue

checks. X wanted to steal money from the

partnership. He drew a check payable to a

corporation where he was just the corporate

secretary. He was just the corp. sec., and was notauthorized to indorse; but he indorsed the check to

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

restoration of the amount. HELD: it is payable to

bearer. 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

provision.

•

Assume same facts. If, however, thecompany required two signatories to all

checks, and X signed it with intent to steal,

and Y signed it not knowing X’s intent, then it

does not become payable to bearer. For the

payee to be fictitious, both must have same

intent.

American Sash: Had a payroll clerk, who prepares

checks payable to employees. He then makes the

officers sign the checks. Clerk padded payroll with

ghost employees, had the officers sign the checks

(the officers did not know that the employees didn’t

exist), and the clerk collected money. Issue: is this

payable to fictitious persons. These ghost employees

did not actually exist. HELD: [N.B. first, the court

found that there was forgery because the drawer did

not know the payees were fictitious.] It was not a

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bearer instrument. The DRAWERS were the officers

who signed the checks. Their intent controls. So the

checks DID NOT become payable to bearer because

they DID NOT KNOW that the ghost employees were

not part of the payroll.

Rodriguez v. PNB: Employees of PNB formed a

savings and loan association (SLA). Rodriguez

spouses meanwhile, had current accounts with PNB.

Whenever the SLA lends to members, it issues post-

dated checks. But most of the time, the SLA does not

have enough money. The borrowers thus endorse

the checks to Rodriguez; in turn, Rodriguez

rediscounts the checks (issuing checks lower thanface 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

circumvent this, they made it appear that it is the

other members who are borrowing. The SLA, in

accordance with the usual procedure, issued post-

dated checks to the “supposed borrowers” (but really

for the officers). The officers indorsed the checks to

Rodriguez. Rodriguez issued discounted checks.

PNB found out about this and closed the SLA

account. Meanwhile, the checks issued to Rodriguez,

which bounced because the SLA account was shut

down – since the checks they issued were cleared,

and the checks issued to them were from a closed

account. Contention of spouses: How can PNB

accept the indorsement of those checks, when the

ones who indorsed were the officers and not the

supposed borrowers. Contention of PNB: it is

intended for fictitious persons, since there was no

intent that they actually get the money (even if the

supposed borrowers really exist). HELD: Rodriguezspouses won. For the checks to be considered as

payable to fictitious persons, the fact must be known

to the person issuing the negotiable instrument.

Here, the Rodriguez spouses did not know that the

supposed payees were not the real borrowers (when

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

amounts to the Rodriguez spouses.

o 4. Name of payee is not name of existing person

Classic example: payable to cash

o 5. Last indorsement is in blank

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

• Sec 13:

o When the date of acceptance is not inserted by the drawee,

the holder may insert date of issue or date of acceptance

o What if he places the wrong date?

If negotiated to a holder in due course, that is the

correct date as far as the holder in due course is

concerned – even if it is not

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for his own support, to X’s ire. X asked her inaanak to hire a

lawyer for this purpose. The inaanak hired a lawyer but

subsequently terminated the services so she asked for a return

of the acceptance fee. The lawyer said that he will return the

fee in installments. X asked the inaanak to sign a piece ofpaper claiming that it was a “witness” signature that the lawyer

will pay X back. But X actually made it appear that it was a PN

where the inaanak promised to pay money to her five years

prior, corresponding to the attorney’s fees. HELD: The court

believed the contention that the inaanak never intended for the

signature to be for a PN. There must be intent to leave a

signature to make a PN.

• Sec 15: incomplete and undelivered instrument

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

against the person whose signature was placed on the

instrument prior to delivery ( real defense)

BUT indorsers are liable

o Ex. Left signed checks, and an employee took them and filled

up amounts. Incomplete and undelivered instrument.

o Ex. 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. HELD: By pre-

signing checks and leaving them with employees, it became

possible for them to do this. The officers were negligent and

shared in the loss (60-40).

• Sec 16: Complete but undelivered instruments.

o NI is incomplete until delivered

o Ex. You cannot sue if you hold checks that were not delivered

to you. You never acquired a right over them.

BUT a HIDC will not be subject to this defense (Like

Sec. 14)

o BPI Family Savings: BPI issued a check payable to City

Treasurer of Iloilo to pay for local taxes. They did not deliver it

to the treasurer, and just gave it to the employee. The

employee used it to pay for somebody else’s local taxes.

HELD: There was no payment because BPI never delivered it

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

o Associated Bank : Somebody was selling RTW clothes, and

shopping malls (buyers) issued crossed checks. Somehow,

the checks fell into the hands of someone else, who indorsed it

to someone else, and were deposited to Associated Bank.

The seller was wondering why she wasn’t being paid. [If you

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

etc., because the checks were not delivered to her. In turn, the

shopping malls, etc. must sue the drawee banks, and then the

drawee banks sue Associated Bank why it cleared the checks.HELD: The SC allowed the RTW seller to sue Associated

Bank directly because it cleared the checks. (Same in

Westmont Bank case)

o It may be showed that delivery between immediate parties is

conditional, or for a special purpose.

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o Ex. 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

due course, the law will protect the HDC.

• Sec 17: Rule of interpretation

o Words prevail over figures

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. The check

bounced. The words prevailed.

o Payment of interest

Runs from date from instrument

Or if none, date of issue

o Not dated assumed to be dated from time of issue

o Written > printed provisions

o If ambiguous whether a bill or note, the holder has the option totreat it as either

o Ambiguous role of signature deemed an indorser

Because the indorser has the least liability among all

characters in a NI

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

deemed solidarily liable

• Sec 18 –

o GENERAL RULE: person whose signature does not appear on

the instrument is not liable

o EXCEPTIONS:

1. Duly authorized agent signing for principal

2. Forger liable for signature he forges

3. Signature in separate paper (“allonge”) because

the instrument has no more space

4. Estoppel

5. Signing under trade/assumed name

6. Instrument can be negotiated by mere delivery

• Sec 19/20

o To avoid liability as signing agent:

A) agent must disclose he is an agent

B) disclose his principal

C) he has authority

• Minority/incapacity of corporation

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o Maker of a PN cannot refuse to pay to a holder on the ground

that the indorser is a minor. Neither can he raise the defense

that the prior indorsee is a minor. ONLY the minor can raise

the defense of minority, no one else.

o Can apply this principle by analogy to other incapacitated

persons (Ex. corporation action ultra vires)

o Exceptions:

1. The minor actively misrepresented his age and it

appears that he is physically of such age

2. Minor kept fruits/benefits

3. Minor spent the money in good f aith

Sec 23 – Forgery

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

contract

Except when he is estopped

o 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.

• Misled to signing instrument, not knowing it was a

negotiable instrument, when he thought it was

something else.

3. Duress amounting to forgery

• It must be duress in the execution (ex. Grab the

hand of the intimidated), NOT duress in inducement

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

he knew the intended payee)

o Different situations:

1. Promissory note

• A (signature forged by B)-B-C-D-E

o E cannot collect from A

o E can collect from B (forger)

o E can collect from C, D as indorsers

(warranted the instrument)

• EVEN if it is a bearer instrument, then A

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

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o Indorsing an instrument that need not be

indorsed leads to a warrant of such

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

by D)-D-E

o E cannot collect from A or B (since it is

an order instrument, there is a cut-off to A

and B, since C’s signature is forged)

o E cannot collect from C (no consent)

o E can collect from D as indorser

• A B or bearer-C (signature forged by D)-D-E

o NOTE: This is an instrument payable to

bearer; delivery is sufficient, no need for

indorsement.

o Can E collect from A?

Depends. If E is not a holder in

due course, A will claim that there

was no delivery of complete

instrument by B since C stole it

from him

If E is a holder in due course,

he may collect from A since it is

payable to bearer

o Can E run after C?

No, C’s indorsement was

forged.

Neither can he run after A or B,

because he cannot trace his right tothem [cut off by the forgery].

He can run after D, because by

indorsing the instrument (even if

bearer), he warranted it.

o NOTE: if a bearer instrument is indorsed

even if it is not needed, the indorser warrants

the instrument as what it purports to be.

2. Bill of Exchange

• A. Drawer

o 1. Order

Accepted

Unaccepted

o 2. Bearer

Accepted

Unaccepted

• A’s signature on an order instrument was

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

accepted as drawee. Can E collect from A?

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o No. No consent.

• Can E run after X?

o Yes.

o Sec. 62, the acceptor admits the

instrument is genuine when he accepts and

pays.

o What is X’s remedy?

To sue B, the forger.

• Can E run after B?

o Yes. Forger

o Can E run after C and D?

Yes. Warranted by

indorsement

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

recovered from, because he did not accept.

o But the same answers apply for the

others.

• NOTE: Apply the same rules on indorsement of

a bearer instrument if there was indorsement even

if there is no need to do so, there is warrant of the

genuineness of the instrument by the indorsers.

• NOTE: If it’s a bearer instrument, even if C’s

indorsement to D is forged, then the payee can still

collect from A (because he just promised to pay the

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

the thief.

A issued a BOE payable to B or order. B C. D

forged C’s signature D E. X accepted and paid.

• X cannot debit A’s account, because A ordered to

pay B or order. C did not order X to pay D. B’s order

was cut off by forgery.

• X can get money back from E because X only

admits A’s signature is genuine (which it is), and notthe indorsers.

• E cannot run after A (cut off) or B or C. He can

run after D, who forged.

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

C’s signature was forged, indorsed to D, then E. X

accepted the BOE. What happens?

• X can debit A’s account because A promised topay bearer.

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

bearer.

• C can run after D, the forger.

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

C’s signature was forged, indorsed to D, then E. X did not

accept the BOE. What happens to E’s claim?

•

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

C’s signature is forged.

• Can go after A if E is a HDC. Cannot go after A if

E is not HDC.

• EXCEPTIONS to general rules:

o 1. When there is estoppel (ex. father saying that his son’s

forgery of his signature was genuine)

o 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

him

Test : If the drawer had acted quickly, would the

drawee have been able to stop or freeze payment?

• PNB v Quimpo:

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

forged his signature in a check book left lying there. HELD:

Not negligent; no reason to suspect friend of bad faith.

•

BPI v. Casa Montessori:

o An external auditor was hired to reconcile records. He

managed to forge the signatures of the officers of Casa

Montessori over a long time. Sued bank, which refused to

reinstate the amounts. Bank argued Casa was negligent.

HELD: An external auditor is not an employee. It is an

independent contractor, so you cannot blame Casa for

negligence in hiring an employee.

o Estoppel does not apply, because Casa had no way to knowthe auditor was stealing money, because he was precisely the

one tasked with safeguarding the school records and

comparing with bank records.

• Cases on Comparative fault principle

• Security Bank v. Triumph Lumber:

o Robbers broke into Triumph Lumber. Check book was stolen,

but triumph did not report it to the bank. Robbers were able tocash checks. HELD: Triumph was negligent for not reporting

the theft.

o But JJ believes that the bank should have been held negligent

for authenticating the checks.

• MWSS v. CA:

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o MWSS did not have their checks printed by the central bank.

They had a private printing press print their checks. The

signatures of the officers of MWSS were forged. PNB paid

them. HELD: MWSS must bear the loss for failing to exercise

caution – did not ask printing press to surrender plates,account for spoilage, and MWSS did not examine the

signatures in the bank returns.

• Ilusorio:

o 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

loss for his negligence. He trusted his secretary.

• Gempesaw:

o Gempesaw owes several groceries. She trusted a bookkeeper

blindly. When she ordered supplies, the bookkeeper prepared

the checks, and Gempesaw signed the checks without

verifying the statements. The bookkeeper was able to steal

more than P1M. HELD: Negligent; did not confirm or examine

the invoices, receipts, etc. before signing the checks used to

pay the suppliers.

o Split accountability – 50-50

• Province of Tarlac:

o Province of Tarlac had account with PNB. Province issues

checks to the physician/head of the clinic. The cashier already

retired, but he was still hanging around. Cashier was able to

forge when he picked up the checks. HELD: Province was

negligent, for allowing the cashier to pick up the checks even

when he was retired, so he was able to indorse the checks

through forgeries.

o Split accountability – 50-50

• General rule:

o If the indorsement is forged, the collecting bank must return the

money to the drawee bank

Basis: Sec 23 – because the payee did not indorse

the check

This is NOT a case of negotiation, but presentment

for payment. So you cannot use the “warranty

argument”

• Mellicor:

o Maasim forged endorsement of Mellicor, and then PNB

presented check to HSBC for payment. The person was able

to withdraw money for HSBC. Great Eastern sued for return.

HELD: HSBC must return, because Mellicor (drawer) never

indorsed the check. [?]

• Ford Philippines:

o Before, you file your ITR with the BIR. So the employee of

Ford was tasked to pay sales tax (P18M), made payable to a

payee (for payee’s account only), which is the Insular Bank of

America, the authorized collecting agent of BIR. The

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

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,

they made it appear the worthless check was deposited.Citibank honored the check. The person who deposited

collected from Bank of America. Ford had to pay BIR again.

They sued.

o HELD: Citibank must return the money to Ford, because Ford

ordered it to pay the BIR, which Citibank disobeyed. It says

“for payee’s account only” and there was no indorsement from

BIR .

o Citibank was guilty only of negligence.

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

o JJ doesn’t agree with the court as regards Insular Bank of

America’s liability.

o Check: G.R. 121413 29 Jan. 2001

• Price v. Neal

o See Jack notes

• PNB v. CA

o See Jack notes, too

o Acceptor cannot get back the money, when it paid, because it

admits the genuineness of the signature of the drawer

• Four general rules :

o 1. A party whose signature is forged is not liable

Unless he’s in estoppel

o 2. An acceptor who pays on a BOE cannot recover the money

because he admits the genuineness of the signature of the

drawer

o 3. A Holder in Due Course acquires good title if forged

indorsement is not necessary for his title

(ex. in a bearer instrument)

o 4. A person negotiating an instrument after forgery is liable(due to warranties)

• Rules on clearing

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

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

The amount will then be transferred to the collecting bank.

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

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

o If it dishonors it, the drawee bank returns the check to the

clearing house. The computer will return the amounts paid.

o Any return beyond 24 hours: time-barred.

Here, the doctrine applies to the forged signature of

the drawer.

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BUT this 24 hour rule SHOULD NOT apply when it is

the payee’s or indorsee’s signature that is forged,

because the drawee bank has no way to find out, until

the drawer informs them.

But the SC wrongly applied the 24 hour rule to the

payee’s forged signature.

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

If a check is dishonored, you can only present it one

more time. [Usual reason why one failure is allowed –

drawn against insufficient funds]

What is the effect when the drawee does not return

the check within 24 hours?

• The drawee cannot ask the computer to

reverse the entries.

• BUT you are not precluded from suing to

collect after. But since the computer cannot

reverse, while you are litigating, you do not

have the amount.

Consideration

• Under the law, consideration is presumed

o Travel Inc.: Travel agency sued on the basis of a bouncing

check issued by a guy bringing in passengers. The CA was

wrong for asking the agency to prove the value of the ticket

purchased. There is a presumption of valuable consideration,

and that the check was for such amount.

• Ex. in BP 22, there is no need to prove the check was issued for

valuable consideration

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

o [Glenn’s note: Sundiang says love and affection, etc.

cannot be considered valuable consideration. But Jack

says that a donation is a “simple contract” and the law

simply requires consideration sufficient to support a

simple contract. So love and affection is valuable

consideration.]

• Rule on holder for value vis-à-vis prior part ies :

o 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]

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

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

D’s status as holder for value?

D is a holder for value with respect to A, B, and C

because C gave value. A and b are parties who

became bound prior to the value given.

• Rule on holder who has a lien on the instrument: He is a holder for

value only to the extent of the lien.

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Beltran was supposed to pay, not the corporation. Sue agents

for acting in excess of authority. 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].

• Prudencio : (JJ doesn’t agree)

o Construction project. Borrowed from PNB for working capital.

The bank required two other signors. The firm got the

Prudencio spouses who issued checks. The project was

failing. PNB agreed to release part of the security money to

help the project. But the project died anyway. PNB sued

Prudencio spouses. HELD: Prudencio spouses are

accommodation parties. The court held that PNB is not a

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.

o JJ’s 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.

o Sec. 52: definition of HIDC – point in which a person must be is

in GF is when he took the instrument. The release of the funds

happened long after.

o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which

makes accommodation parties liable to holders for value,

then the Prudencio spouses should pay PNB because PNB is

a holder for value!!!

• Maniego:

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

disbursing officer of AFP. AFP asked Y, X’s sister, to sign as

accommodation indorser. The check bounced. Y was

acquitted for conspiracy charges, but was held civilly liable.

Correct? HELD: Yes. That’s what an accommodation party is

tasked to do – when the check bounces, she pays.

Negotiation

• When a bearer instrument is indorsed although unnecessary, but it still

ultimately negotiated.

o See Caltex case. When pledging a NI, there are no specific

provisions. Fall back on the NCC. Must comply with

requirements of putting it in a public instrument and

indorsement.

• Indorsement must appear on the instrument itself.

o Or to a paper attached to it

• Indorsement must be of the entire instrument.

o Indorsing only part of the amount will make it cumbersome.

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

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

Manuel Santos for P50K.

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o PARTIAL indorsement is treated under law as an assignment.

It is subject to personal defenses.

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

installments)

• Types of indorsements:

o Special – specified person to whom it is being indorsed

o Blank – does not name any person

Indorsement of an order instrument in blank can

convert the indorsement into a special indorsement by

writing his name

This ensures that the order instrument does not

become a bearer instrument

Ex. A issued a PN to B or order for P10K. B

indorses it to C, but in blank. What can C do?

• C can insert “To C” over the signature to

keep it an order instrument.

•

C CANNOT put “To C, waiving notice ofdishonor.” The contract must be consistent

with the tenor of the indorsement

• Types of restrictive indorsements

Negotiability Passing oftitle

Considerationpresumed

Defenseavailable

Pay to Jose X Yes Yes X, because

Cruz only indorsee isa HIDC,defensesagainstindorsercannotapply to him

To JoseCruz, forcollectiononly (asagent only)

Yes, butsubject tosamerestrictionthat he onlyholds it forcollection

X, becausetheindorsee isa mereagent of theindorser

X, becausethere is notransfer of title

Yes,defensesagainstindorser canbe raisedagainstindorseebecause he

is just anagent

To JoseCruz, astrustee forGlennTuazon(indorseenamed astrustee)

Yes, butsubject tosame trust

Yes Yes, becausethere istransfer of title

X, becausetitletransfers

• Rights of indorsee in r estrictive indorsement:

o A) collect payment

o B) bring action indorser could bring

o C) transfer rights, if allowed to do so

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• Qualified indorsement

o Done by writing ‘without recourse’ – although the instrument is

still negotiable

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

(ex. 5 years), and the indorser does not want to be insecure for

such a long time.

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

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

That he is not aware of any fact that makes the

instrument valueless

• (ex. that the maker is insolvent)

o Ex. A issues a PN to B or order for P50K. B indorses to C,

then C to D. D indorses to E “without recourse.”

Can E collect from D?

• No. The indorsement is qualified.

If A’s signature turned out to be forged, can E

collect from D?

• Yes. Because he warranted that the

instrument is genuine as to what it purports

to be.

If D turned out to have forged C’s indorsement to

him, can E collect from D?

• Yes, more so. He warranted his valid title to

E.

• Conditional indorsement

o The maker (or acceptor) may disregard the condition because

the maker made an unconditional promise to pay. The

indorser cannot change the original obligation

o The maker can also say “let’s wait and see if the condition is

fulfilled”

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

unfulfilled after, the remedy of the conditional indorser to run

after the indorsee to get back the money. The conditional

indorser cannot run after the maker/acceptor because the M/A

has every right to dispose of his obligation while he feels

solvent.

• Signing of an instrument payable to bearer

o [wait for discussion on Sec 65]

o It can still be indorsed through mere delivery

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o X left a cashier’s check (issued by ABC bank) payable to X’s

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

sued.

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

the check was indorsed to him.

o JJ thinks it’s better to use forgery as the theory of this case. Y

forged X’s indorsement. But the court used HDC anyway.

• Stelco:

o The claimant received a check that was not indorsed to it by

the payee, and the check had a notice of prior dishonor due to

DAIF (drawn against insufficient funds). Claimant is not a

HDC.

• Salas and State Investment House (2):

o In both cases there was lack or failure of consideration

between the maker/drawer and payee of the NI. In one case, it

was merely issued as security, and in the other, the car

delivered had the wrong chassis number. But in both cases,

the payee already indorsed the check to another person.

Those persons are HDCs and the defense of failure/lack ofconsideration does not vest.

• May a payee be a HDC?

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

holder, too.

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

unreasonable length of time the holder is not a HDC.

o Consider the nature of the instrument, customs, and particular

facts

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

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

amount paid by him.

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

and X told Y to just pay him P80K right away because X could

not wait for the maturity of the check. Y has only paid P40K so

far. Then Y found out that the check was issued for a fake

ring. The check was presented but it was dishonored. Y suedZ, the drawer. Can he collect?

o HELD: Yes, but only to P50K, since that is half the value of the

check, and Y only paid half of the agreed consideration. He is

a HDC only to the extent of half the check.

• Rights of HDC:

o 1. Sue in own name and receive payment

o 2. Free from personal defenses

o 3. May enforce payment against all parties liable thereon

o Exception: when he cannot recover full payment –

37 – restrictive indorsement [ GT: I don’t know why.]

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• Maybe JJ meant qualified indorsement under

38?

54 – notice before full amount is paid

124 – when materially altered, a HDC may stillenforce against the maker/drawee according to the

original tenor of the instrument

• General rule: the instrument is avoided as to

those not party to the alteration or did not

indorse it

o But not everyone can invoke real defenses against a HDC.

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 defensesThere’s a contract with someinequitable or iniquitous fact behindit

No contract because an element ismissing; or void against public policy

Voidable contract Void contractEx: no consideration, undeliveredcomplete instrument, acquired byforce/illegal means, illegalconsideration, negotiation in breachof faith, mistake, ultra vires act ofcorporation

Ex; material alteration (so theconsent is not anymore to thisinstrument); undelivered incompleteinstrument (no consent); forgery (noconsent); minority (lack of capacity)

Not applicable to HDC Applicable to HDC

• 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.

• (58b) IMPT. Shelter Principle (GT)

o 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 ,

even if he is not.

o Ex. A was induced by B through fraud to issue a PN to B or

order. B C, who was NOT aware of the fraud (HDC). C

D who was aware of the fraud but not a party to it. What is the

effect?

D is a holder in due course as to the parties prior to

the indorser (A and B)

What if D indorses it to E, who is not an HDC?

• Since E derives title from D, who is not an

HDC, E does not have the rights of an HDC.

o There can be no “curing.” So D can’t indorse the instrument to

F, an HDC, and have it re-indorsed back to him to “cure” his

title. He resumes his position as not a HDC.

• PRESUMPTION:

o General rule – every holder is a HDC

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General indorser Either:1. Upon duepresentment he willaccept/pay accordingto tenor2. Or if DH, he will paythe amount to theholder, or to asubsequent indorsercompelled to pay it

1. Instrument isgenuine and is what itpurports to be2. He has good title3. All prior parties hadcapacity to contract4. The instrument isvalid and subsisting atthe time of hisindorsement

• Liability of Maker

o 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 hissick daughter’s expenses, and his daughter is a beneficiary of

a trust administered by Y.

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

pay. What he did with the money is none of the court’s

business.

• Liability of drawer

o Is merely secondary – liable only if the instrument isdishonored.

o He can put “without recourse” to limit his liability.

o Cebu International Finance v. CA:

D issued a check to P, drawn against BPI. P

presented for payment, and BPI debited D’s account.

However, P was unable to receive the money

because BPI withheld payment [pending investigation

of some anomalies]. P sought to collect from D.

HELD: D must pay, even if his account has already

been debited. He warranted that P will be paid, and if

not, he will make good the check.

• Liability of acceptor

o X issued a check for P4000 to Y. Y indorsed it to Z. Z

altered the amount to P40000, and negotiated to H. H

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

much can the check be enforced against the acceptor?

View 1: P40000 because that is the tenor of the

acceptance.

View 2 (better view): Acceptance is assent to the

order of the drawer (132), which is just P4000. He did

not consent to P40000, since there must be

knowledge. (124) In fact, for a HDC, even if there is

alteration, he can enforce payment according to the

original tenor.

o Acceptor admits existence of drawer because without the

drawer, the BOE cannot exist. He admits authority of the

drawer to draw.

o Acceptor admits existence and capacity of payee to indorse,

because the instrument is meant to circulate.

o Acceptor does not admit signature of indorser.

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• Far East Bank:

o 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

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. FEB sued for the difference

against Landbank.

o HELD: FEB cannot collect. The provision on acceptance

applies to payment. Since the tenor is that it is for 300K pesos,Landbank bound itself to pay that amount. FEB should not

have returned the money to Landbank and debited the account

of the jewelry store. [Huh? Read again.]

o JJ : the better view might be that a drawee who pays/accepts a

draft must be bound to pay the higher amount –

Acceptance is always inseparably linked to the order.

Sec 61. Sec 139 – acceptance assents to the order ofthe drawer. There is nothing said that the acceptor

warrants that the amount accepted is the same tenor

of the bill, as drawn. Consent should imply

knowledge.

If the acceptor was deceived, it should not be

bound to an amount not in the original tenor.

“The acceptor cannot recover the amount from the

payee on the ground that the drawer’s signature is

forged.”

• Sec 64 – irregular indorser

o He signs in blank before delivery. Is actually an

accommodation party

Must be an additional party (not a regular party –

signing again will not increase the credit value of the

check)

o A – (X irregular indorser) – B – C – D – E:

X is liable to B, C, D and E.

RULE: liable to all subsequent parties. (If payable to

the maker or drawer or bearer, he is liable to all

parties subsequent to the maker or drawer)

What if X indorsed for the accommodation of B?

• X is liable to C, D, and E.

•

If for the accommodation of the PAYEE(example if here, for the accommodation of

B), he is liable to all parties subsequent to

the payee.

o He is called such because you would normally expect the

payee as the first signature there. But here, the irregular

indorser’s signature is found there first.

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o P v. Maniego: accused had his sister indorse a stolen check

before the payee did. The law says…

• Sec 65 – warranty where negotiation by delivery

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

o Person negotiating by delivery – only liable to the person to

whom he delivered the instrument. Not liable to subsequent

parties

o 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

here, there is a breach of warranty).

o NOTE: SO IN GENERAL, a qualified indorser or one

negotiating by delivery DOES NOT ANSWER FOR

SOLVENCY. It only warrants the four listed warranties and is

liable for breach of such. Examples:

Breach of warranty 1: the instrument is forged

Breach of W2: He stole the NI

Breach of W3: Prior party is a minor

Breach of W4: Knew that M/D was insolvent; or that

there was failure of consideration

o Underlying this principle same as Statute of Frauds. An

undertaking to answer for the debt of another must be in

writing to be enforceable. He must be only liable to the person

he dealt with

• Sec 66 – liability of general indorser

o Same as first 3 warranties of qualified indorser

o Last – he warrants that the instrument is valid and subsisting

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

liable.

o Chartered Bank:

X deposited (through indorsement) a check with ABC

bank, drawn against DEF bank. X was able towithdraw money although not cleared. Eventually, the

check bounced. ABC asked for return of money.

HELD: X must pay. When you indorsed, you

warranted. If for any reason (whatever reason) the

drawee does not pay, you are liable.

o BPI v. CA: Somebody had a manager’s check purportedly

issued by American bank payable to cash. But he did not have

a dollar account. Asked a friend if he could accommodate him – have the check deposited in the friend’s dollar account.

Deposited the check there. They agreed that after clearance,

the first friend would withdraw. The friend gave the first guy a

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.

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HELD: The proximate cause of the loss is the bank

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.

o RCBC: There is a 45-day holding period if the check

deposited is drawn abroad. But RCBC accommodates

employees, allowing them to withdraw right away. The

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.”

The drawee bank dishonored the check, since the indorsement

was irregular. RCBC asked the employee to return the

immediately withdrawn money.

HELD: RCBC cannot collect. The check was

dishonored because of the partial indorsement made

by its employee. This is why the American bank

dishonored.

o Far East Bank: (see the details above)

It is actually a case of restrictive indorsement (only for

collection). Sec 66 (general indorsement) is not

applicable.

o Signature of indorser was forged. Payee presented the

check for payment to the drawee. It was paid. Payee

signed at the back. Then the forgery was discovered.

Must payee reimburse drawee?

No. It did not indorse the check. The signature is to

acknowledge payment.

o The law mentions that warranties of general indorser

apply only to HDC. Should we follow this?

JJ doesn’t think so.

• Sec 67 – indorsed when not required incurs liabilities of an indorser

o Whether general or qualified

• Sec 68 – indorsers are presumed to be liable in the manner in which

they indorsed

o

Parole evidence however may be accepted to prove otherwise

o For example A B C, C can prove that while B’s signature

appears first, C indorsed it to him

• Sec 69 – indorsement by agent

o If he fails to disclose that he is just an agent, or fails to disclose

his principal, he will be liable as an indorser

Quiz up to section 69

Presentment for payment

• Sec 70 –

o Presentment for payment not necessary to charge the primarily

liable person

Maker and acceptor

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If the instrument is payable in special place and he is

able and willing to pay there at maturity = such

willingness is equivalent to tender of payment

• What does this imply?

o If the person primarily liable is there

on the place where it is payable on

the stated time, holder loses right to

recover interest due subsequent to

maturity + costs of collection

o BUT he does not lose the right to

get paid

o But for those secondarily liable (indorsers and drawer) – there

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

liable

• So, the bottomline: the instrument must be

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

o What is presentment?

Production of BOE to drawee for acceptance or

payment, or acceptor for payment, or of a PN to the

maker for payment

o What constitutes presentment?

1. Personal demand for payment

2. Readiness to present the note and surrender it if

paid

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

o Step 1: Presentment for acceptance required if –

1. BOE is payable after sight, or acceptance isneeded to fix the maturity of the instrument

2. BOE expressly requires presentment for

acceptance

3. BOE payable elsewhere apart from residence or

place of business of drawee

o OTHER OPTION – May choose to negotiate it within a

reasonable time

o Consequence: will discharge drawer and all other indorsers

o EXCEPTIONS – no need to present if/or treated as dishonored

if:

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

capacity to contract

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2. Presentment cannot be made even after

reasonable diligence

3. Although presentment is irregular, acceptance was

refused on some other ground

o Step 2: Give notice of dishonor by non-acceptance to

secondarily liable persons

EXCEPT, no need to give notice: if instrument was

made/accepted for his accommodation and he has no

reason to expect the instrument will be paid if

presented

AND will not prejudice rights of HIDC after omission to

give notice of dishonor

IF foreign bill,

• Protest for non-acceptance or protest for

non-payment needed

• Except –

o 1. If instrument was made/accepted

for his accommodation and he hasno reason to expect the instrument

will be paid if presented

o 2. Delay is excused for fortuitous

circumstances

• Except: will not prejudice r ights of HIDC af ter

omission to protest

o Step 3: Give notice of dishonor by non-payment to secondarily

liable persons (if dishonored by non-payment)

See notes above

EXCEPT: When presentment for payment is excused

–

• 1. Drawee is fictitious person

• 2. Presentment cannot be made even after

reasonable diligence

• 3. Waiver of presentment, express or implied

• Sec 71 –

o Instrument not payable on demand

Make presentment on date due

o instrument payable on demand

Must be presented within reasonable time from issue

If it’s a BOE, you make it after a reasonable time after

last negotiation

• What does “negotiation” here cover?

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o Negotiat ion for value, not

negotiation for collection between

banks

• Sec 72 – when presentment is sufficient

o REQUISITES:

1. Made by holder or agent

2. Reasonable hour on business day

3. At proper place defined

4. To person primarily liable

• Is absent/inaccessible – to any person found

in place where presentment is made

o There is a wife who presented a negotiable certificate of time

deposit. 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

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

must be made there.

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

o If none provided, to usual place of business/residence

o Wherever he may be found/last known place of

business/residence

• Sec 74

o NI must be exhibited to the person from whom payment isdemanded

o So he can check genuineness

o This is why telephone as demand is not allowed

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

company. When the instrument not paid, company sued

maker and indorser. Indorser said he was discharged because

there was no proper presentment for payment. HELD: Letterof demand is not sufficient. Law requires that the instrument

be shown to the maker. Therefore, presentment not valid and

indorsement is discharged.

o Failure excused on two grounds:

1) Instrument was lost

2) payment refused on some other ground

• Ex. no funds, and not because it was not

shown

• Sec 75

o Presentment where instrument payable at bank – must be

made during banking hours. Law assumes that the bank will

be the source of the funds.

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o But if presentment is made beyond banking hours, it is valid if

the funds will not come from the bank, as long as it falls on the

date of maturity.

• Sec 76-78

o Applies when principal debtors is:

Dead

Liable as partners

Liable as Joint debtors

o If there is an address stipulated, pay there.

o If dead, give to executor/admin

If there is one, and he can be found with reasonable

diligence

o If partners, to any of the partners

Even if dissolved already

o If joint debtors, to all of them

• When presentment is not required to charge those secondarily liable:

o DRAWER – presentment not required to charge the drawer

when there is no reasonable expectation that the drawee or

acceptor will pay the instrument

Ex. knows there are no funds or there is stoppage of

payment

o INDORSER – when instrument was made/accepted for

indorser’s accommodation, and indorser has no reason to

expect it will be paid if presented

• Fortuitous event – excuses delay in presentment

• Presentment for PAYMENT excused if:

o 1. Cannot be done even after reasonable diligence

o 2. Drawee is fictitious person

o 3. Waiver of presentment – express or implied

• When is an instrument dishonored by non-payment?

o 1. Duly presented for payment and payment is refused or

cannot be obtained

o 2. Presentment is excused and it is overdue and unpaid

• What is the effect of dishonor by non-payment?

o Under the law, the moment it is dishonored, there is

immediately a right of recourse against those secondarily

liable. NO NEED to go to the primarily liable.

• Sec 85

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

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

o If on a Saturday

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On next business day. Because even if some offices

hold business on Saturday, they are usually half day.

The law wants a whole business day

Except instruments payable on demand can

present before 12 noon, Saturday, if it is not a holiday

o Contrast :

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

o Time – exclude first day, include last day

• Sec 87 – when instrument is payable at a bank

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

principal debtor

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

funds. But holder did not show up at day of maturity. Dilly-

dallied – then the maker became insolvent. Had he shown up

by then, he would have been paid. HELD: No. The fact

remains that he is the maker, so he is primarily liable, and

should pay.

o N.B. Remember, failure to make proper presentment only

discharges those secondarily liable. The primarily liable

person is still liable, although the holder may not claim interest

subsequent to maturity and costs of collection.

• Sec 88 – Payment in due course

o 1. At or after maturity

o 2. To the holder

o 3. By the debtor, in GF and w/o notice that the holder’s title is

defective

Notice of dishonor

• Sec 89 – dishonor

o Give notice of dishonor

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

reimbursement

o A B C D E

D giving notice to B will benefit E

o Notice given by a holder benefits all subsequent holders and

prior parties that have right of recourse against the one given

notice against

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

• Sec 90 – Who can give notice of dishonor

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o 1. Holder

o 2. Agent of holder

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

holder, but only to those other parties he may seekreimbursement from

o 4. Agent of such party

o What about strangers?

Cannot give notice, except as agents

o Who is considered a stranger?

Party discharged from the instrument

Person primarily liable who dishonored the instrument

• Sec 91 –

o Notice may be given by a party or an agent

o Agent need not be authorized by the party

Because this is beneficial

o If the agent wants to give notice, on a instrument dishonored

on Monday, two options:

A) notify principal

• On Tuesday

• Principal has until Wednesday to notify

secondarily liable parties

B) notify parties who are secondarily liable

o If agent receives notice of dishonor, he must be authorized

Because this is prejudicial

• Form of notice:

o In writing or oral

As long as it sufficiently describes the instrument and

indicates that it has been dishonored

Misdescription does not vitiate notice unless the party

to whom it is given is in fact misled

o Personal or through mail

o If written, need not be signed

In sufficient written notice may be supplemented by

verbal/oral communication

•

Rule as to jointly liable parties:

o If partners?

Notice to one is notice to all

o If joint payees or joint indorsees who indorse?

Sec 68 treats them as solidarily liable

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o If joint drawers or joint accommodation indorsers, and

others not covered by 68?

Give notice to all

• Sec 103 and 104 – time within which notice must given

o Know the difference in rules where parties reside in the same

place (103) or different places (104)

o SAME PLACE:

1. If given at place of business – before close of

business hours the next day

2. If given at residence – before usual hours of restthe next day

3. If by mail – sufficient to reach him the next day

o DIFF PLACES:

1. If by post office – in time to go by mail the next day;

if no mail at a convenient hour that day, the next mail

2. If not by post office – within the time it would have

been received in due course had it been sent by post

office

o N.B. This same time is counted again, after a party receives

notice of dishonor, to give that party a chance to give notice to

antecedent parties

• What is the effect of miscarriage in mails?

o Sec 105 – if notice was duly addressed and deposited in the

post-office, due notice is deemed given

o What is “deposit in the post office”?

Deposited in any branch of the P.O.

Deposited in any P.O. box

• Sec 108: WHERE notice must be sent –

o 1. Post office nearest to residence or where he is accustomed

to receiving letters

o 2. To place of business or residence

o 3. Place where he is sojourning

o If notice is actually received, although not according to

these provisions, what happens?

It is still valid

• When can there be waiver of notice of dishonor?

o 1. Before actual time for giving it comes

o 2. Or after failure to give it

o Can waiver be implied?

Yes.

• Who is affected by a waiver in an instrument?

o If written on the instrument – all the parties

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• If an instrument was not accepted, and notice of dishonor by non-

acceptance is given, is there need to give notice of dishonor by

non-payment?

o No.

o What is the exception?

If it was accepted in the meantime.

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

rights of a HIDC subsequent to the omission.

o 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. C indorsed theinstrument to D, a HIDC. D will not be precluded by C’s failure

to give notice of DH to A and B.

Discharge

• How a negotiable instrument is discharged:

o 1. Payment in due course by holder

o 2. Payment in due course by accommodated party

o 3. Intentional cancellation by holder

o 4. Any other act that discharges simple contract for money

o 5. Principal debtor becomes holder of instrument in his own

right

• When person secondarily liable is discharged:

o 1. Discharge of instrument

o 2. Intentional cancellation of his signature by the holder

o 3. Discharge of a prior party

o 4. Valid tender of payment by prior party

o 5. Release of principal debtor, unless holder’s right of recourse

against secondarily liable party is expressly reserved

o 6. By extension of time of payment or right to enforce

instrument

Except if secondarily liable party assents

Or right to recourse is expressly reserved

• What is the effect of an absolute and unconditional renunciation?

o A holder renouncing against prior parties terminates

recourse to that party

o If against primarily liable person discharges the instrument

o But it does not affect subsequent HIDC . So if C renounces all

claims against A and B, then negotiates it t o D, who is a HIDC,

D is not prejudiced by the prior renunciation.

• What is the form of renunciation?

o It must be absolute and unconditional

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• It does not bind the drawee, except to

someone to whom it is shown and receives

the bill for value upon faith thereof

• NB: this applies when the bill exists as of

time of acceptance

What if there is a promise to accept in writing?

• Deemed an actual acceptance in favor of

those who receive the bill for value upon

faith thereof

• NB: this applies for bills that do not exist yet

when the promise is made (Ex. BOE

pursuant to a LOC)

o Cannot be other than payment of money

• Must accept within 24 hours from presentment

o Acceptance deemed done on date of presentment

o When is a bill deemed accepted?

Failed to act on it within 24 hours

• Does the drawee have a right to retain the

bill for the whole 24 hours?

o No. The holder can ask for it back.

But the drawee will still have the

rest of the 24 hours to decide.

Destroys the bill

• NB: destruction must be on purpose

o What are the special situations when can the drawee

accept pa rin?

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-

payment

What is the special rule if the bill was dishonored

by prior non-acceptance, but it was accepted

thereafter?

• The holder can consider the date of first

presentment as date of acceptance

• Kinds of acceptance:

o 1. General

Includes local but not confined only at a particular

place

o 2. Qualified

Conditional

Partial

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o Depends. If joint drawees, yes.

o If alternative or successive, no.

• When can a BOE be considered a PN?

o 1. Drawer and drawee are the same person

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

o But can the holder treat it as a BOE still?

Yes.

Protest

•

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

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

witnesses

• When must it be done?

o Day of DH

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

anytime

• Where?

o Place of DH

o Except when expressly payable at the residence/business of

another person apart from the drawee

• What is protest for better security?

o If the drawee was adjudged bankrupt or insolvent, or made

assignment for benefit of creditors – even before the bill

matures

o Is this mandatory?

Nope

o What is the purpose?

To inform the drawer/indorsers that the drawee is

insolvent and therefore they should prepare to pay

• When is protest excused or dispensed with?

o Dispensed with – for same grounds notice of DH is dispensed

with

o Excused – for fortuitous event

• When is protest also done?

o When bill is lost, destroyed, wrongly detained – protest made

on copy/written particulars of the bill

Bills in set

• Main Principle: each part of the bill, numbered and referring to the other

parts, the whole of the parts constitute one bill

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

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

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o [So usually bills in a set are several copies of the same thing,

sent separately]

• What if different parts are negotiated to different HIDCs?

o The one whose title accrues first is the t rue owner

o But the one who gets acceptance or payment first is the one

who will be able to collect

• Indorser of two different parts is liable on every such part

• How should the drawee accept?

o Accept on any part, and on one part ONLY. If he accepts on

multiple parts and these are severed, he is liable on all parts.

o If he pays and did not get back the part with the acceptance,

and it once again falls in the hands of an HIDC, he can still be

liable

• Discharge of one part is discharge of all

Promissory notes and checks

• Check – special kind of BOE

o No need to present for acceptance – you can present them for

payment immediately

o Rules on BOE apply to checks too, such as the 24 hour

acceptance rule. If you don’t return it in 24 hours, it is deemed

accepted

• Cashier’s and manager’s checks drawer and drawee is the same

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

drawer who got goods. He usually redeems it for cash

• Traveler’s check you sign it twice (first as a specimen signature, and

second when paying. You present your passport too)

• Crossing a check has three consequences:

o 1. Can be negotiated only once

o 2. Cannot be encashed; must be deposited

General – can be deposited in any bank

Special – must be deposited only in that bank

o 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

• Sec. 185 – provisions applicable to BOE are applicable to checks

•

Case: Payee of a check presented a check in the morning, the banksaid the drawer had insufficient funds. Presented again in the

afternoon, but the computers are offline, so the bank accepted it. Bank

found out after and chased after the payee to recover. HELD: Sec 62 –

by accepting, the bank admitted authority of drawer to draw.

• Case: Customer bought manager’s check and asked that his account

be debited to purchase it. The bank realized that it made a mistake

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because the account was actually closed. The customer already used

the check to buy goods. HELD: It was a manager’s check so the store

owner was a HIDC.

• Certified checks:

o Banks usually do not do this anymore

• Check must be presented for payment within reasonable amount of time

o Banking practice: 6 months, or else stale

o What happens when the check goes stale?

View one (2 cases): the obligation is discharged.

Payment of an obligation with an NI – the obligation

is discharged when there is encashment or the value

is impaired due to the fault of the holder.

View two: the obligation remains because the

drawer’s 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

payee didn’t dilly-dally, he would have received

money.

• 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

them.

o So contrast the rules: the drawer will not be discharged; the

indorsers will bes discharged

Letters of credit

• Letter of credit – instrument issued by banks on behalf of a customer

authorizing a beneficiary to draw a draft/drafts which will be honoredupon presentation to the bank

o Must be drawn in accordance with the terms and conditions

specified in the letter of credit

• Purpose : to ensure cer tainty 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

gets a letter of credit (LOC) with PBC. PBC then corresponds with abank in the US (ex. Citibank) – PBC will transmit to Citibank the text of

the LOC, through SWIFT. Dupont then finds out that when it delivers

the chemicals, the bank will pay him. Since the bank is more

trustworthy, Dupont is now willing to sell the materials.

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

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

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.

o Dupont will not collect directly from PBC. Dupont will issue a

BOE addressed to PBC, to pay it. Dupont then submits the bill

of lading, delivery receipt, etc. to PBC as proof of delivery so

that Dupont will be paid.

• Transphil: Two types of LOC

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surveyor’s certificate to examine the goods. But the seller may

always give a fake one if he really wanted to defraud the buyer.

• Interpretation of Letters of Credit – MUST BE STRICT

o 1. Particular genus – If the LOC requires that the sellersubmit an invoice for pine lumber, but the invoice states “pine

timber,” the bank may refuse to pay

o 2. Quality specifications – If the LOC requires Italian marble

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

pay

o 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.

• When the bank discovers a discrepancy, what does it do?

o It forwards the documents to the buyer and notifies the latter of

discrepancies it discovered. If the buyer agrees to waive the

discrepancy, then the bank pays. If the buyer does not waive,

the bank does not pay.

o Cojack : Buyer is a con artist, so it ordered 3M worth of bags

from Cojac company. 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

bank asked the buyer if he waives the discrepancy; the buyer

refused. The bank did not pay. Later, the buyer just paid 1M

to Cojac.

• “Red clause”

o A clause, usually written in red ink, where the beneficiary/seller

may get payment in advance, meaning, even if the

beneficiary/seller has not yet delivered the goods to the buyer.

This is usually because the beneficiary will purchase goods

from a thirty party producer that does not accept anything but

cash (hunters, lumberjacks, etc.). If the beneficiary does not

deliver the goods, too bad. The buyer still bears the risk.

• “Evergreen clause”

o A provision that allows an expiring LOC to be automatically

extended for indefinite number of periods until the issuing bank

informs the beneficiary of its termination.

o 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. The surety firm

requires that the company open a stand-by LOC with a bank,

which will pay the surety firm if the company is held liable.

This LOC will most likely contain an evergreen clause, to keep

renewing it until the case is over.

• May the seller in the Feati bank case ( where the buyer refused to

issue a certification so the seller was not paid ) sue the

correspondent bank when it failed or advance funds?

o No. The correspondent bank cannot be sued unless it

confirmed the letter of credit. It becomes solidarily liable.

• Revocable, irrevocable –

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• Allied Banking: X imported goods, and opened a LOC with ABC bank.

When the equipment arrived, X took the goods from ABC and issued a

trust receipt in ABC’s favor. X installed the goods in his factory. X failed

to pay. ABC sued X for violation of PD 115. X claimed the goods were

not covered because he did not sell nor manufacture/process them.

HELD: The goods were covered. It says “sell or otherwise dispose.”

“Otherwise dispose” covers the installed goods.

o “Otherwise dispose” can cover giving goods to a sister

company

• For estafa, there has to be misappropriation

o Meralco/steel towers case: X fabricated steel towers (hired

by Meralco). X imported materials, which X received and gave

a trust receipt to ABC bank for. X used the materials to build

the steel towers. But Meralco hasn’t paid X yet, so X couldn’t

pay ABC bank. ABC sued X for estafa. HELD: No estafa, no

misappropriation.

o Another case: X could not sell the goods covered by the TR.

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 goodscovered by the TR?

o No. He does not have free disposition of the property.

• X purchased goods. 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

bank did not have any lien or title to the goods; they were purchased

separately from the credit application.

• TR can apply even in domestic transactions

• Nature of ownership/security interest – Vintola:

o X imported puka shells, covered by a trust receipt with ABC

bank. X failed to sell the puka shells. X decided to return the

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

TRT is a security transaction, and the buyer is still really the

owner of the goods; it just relies on a legal fiction to create a

lien. ABC still has the right to recover the money; or it can sell

the goods.

o 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.

The bank then returns the excess or runs after the deficiency.

Warehouse Receipts Law

• When is a WHR negotiable?

o If payable to order or bearer

o If payable to order or bearer, can one insert a stipulation

that it is non-negotiable?

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No. The stipulation is void.

• When is it non-negotiable?

o Not payable to order or bearer AND there is a large print,

usually in red, that it is non-negotiable

o What is the consequence of not doing so?

If someone relied in GF that it is negotiable and acted

upon it, it will be treated as negotiable.

• What is the rule on duplicate WHR?

o Same as non-negotiable – if the holder though in GF that it

was the original, he could sue the WHM for damages

• What are the obligations of the WHM?

o 1. Safeguard the goods

o 2. Deliver the goods

To deliver

• What are the conditions before the WHM delivers the goods?

o 1. Holder pays the WHM’s liens

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

o 3. Readiness and willingness to sign an acknowledgment of

receipt of the goods

• To whom must the WHM deliver the goods to discharge his

liability?

o 1. Person lawfully entitled to the goods or his agent

o 2. Person entitled to delivery under non-negotiable WHR orwho has authority from the person entitled to delivery (SPA)

o 3. For negotiable WHR, the person in possession

• Rules on refusal to deliver:

o 1. WHM cannot refuse to deliver the goods just because of a

third party claim

But he may submit the situation for interpleader

o 2. WHM is excused for failure to deliver if he sold the goods to

satisfy an unpaid lien

o 3. WHM is excused for selling perishable or hazardous goods

• What is the effect of alteration?

o Unlike in NIL, it does not discharge the WHM. The WHM is

liable under the original tenor of the WHR.

• What is the effect of loss of the receipt?

o The claimant has to file a case in court and get a court order

telling the WHM to deliver the goods, after proof of loss. He

also has to post a bond, in case the WHR falls in the hands of

a person who took it in GF and for value. The latter goes

against the bond.

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• How does a creditor go about attaching/levying the goods covered

by a negotiable WHR?

o Ask for enjoinment of indorsement or renegotiation of the

receipt – have the WHR frozen or surrendered, so it doesn’t

end up in the hands of someone who takes it for value and in

GF. Until this is done, the WHM cannot be compelled to

deliver.

• The WHM in general, as a bailee, cannot claim ownership over the

goods. What are the exceptions?

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

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

during auction

• What if the WHM delivers the goods without asking for surrender

of the WHR?

o He is liable for damages to any person who takes the WHR in

GF and for value.

o What if the WHM makes partial delivery of the goods?

He must cancel the WHR and issue a new onereflecting 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

• If the goods are lost, he is presumed to be at fault

• But not for fortuitous events

• What is the duty in keeping goods?

o He must segregate the goods belonging to different depositors

o But he is allowed to commingle if:

It is stipulated

It is customary to do so

• What are the rules on commingled goods?

o

Each depositor gets a pro rata portion of the common massupon claim

o What happens if there is partial loss?

•

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• INSURANCE

In general

• Elements

o 1. Insured possesses interest susceptible of pecuniary

estimation

o 2. Insured is subject to risk of loss

o 3. As consideration, the insured pays premium

• Someone organized a jeepney association. You give membership fees

and if a driver gets into an accident, the association pays indemnity.

Sued by Insurance Commission for not having license to do Insurance

Business.

o Held: Was conducting insurance business without license. Al

requisites concurred.

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

primary purpose of contract is to provide services, then it is not

an insurance contract. In Maxicare there is no insurance

contract because physicians pay for the first six sessions of

therapy after injury or loss, but the main purpose is to givemedical services. But here, even if you did not get injured or

sick, you can avail of medical checkup.

• It is an aleatory contract.

o If you don’t lose what was insured, there is no indemnity.

• It is a personal contract.

o It does not adhere to the property insured because the

personality of both parties is crucial and is the primary

consideration for the contract.

Ex. teenagers will be charged higher insurance over

cars.

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

insurance company allows for an endorsement of the seller’s

insurance contract.

• It is unilateral

o It is only the insurer that has an obligation to perform (the

insured already paid).

• It is conditional

• What is the structure of the insurance code?

o Parties, elements of contract, form of the contract,

performance of the contract (for what losses), special types of

contract (marine, fire, etc.), regulation of insurance companies

• You cannot insure the winning of the lottery. This is wagering.

Parties

• Who can be the insurer?

o One authorized by the Insurance Commission

• Who can be insured?

o Anyone except a public enemy

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Citizen of a country with which the Philippines is at

war with.

o Wenfeld : German company filed claim with Insurance

Company, and the Philippines was under US at that time. The

Germany and USA were at war (WWII) so the company cannot

collect.

• Sec. 8 – The mortgagor can sue the insurance company if it does not

pay. If the mortgagor performs an act that prejudices, the mortgagee

cannot collect.

o Ex. The Mortgagor brought fireworks to the building and it

exploded. The mortgagee cannot collect.

o The mortgagor can have the mortgagee perform acts that

benefit the contract

Insurable interest

• Insurable interest over life

o 1. Over own life, spouse and children

o 2. Over any person on whom he depends solely or in part for

education or support, or in whom he has pecuniary interest

Ex. a key basketball player you signed for your team;

a concert impresario in an opera you organized

o 3. Any person with legal obligation to pay money to him, or

respecting property or services – whose death might delay or

prevent performance

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

him depends

Ex. You are a married couple allowed to stay in the

family home as usufruct. They have interest to

continue the life of their parents

• Over property

o MAIN DIFFERENCE: there must be a valid legal interest

o The insurance cannot go beyond the value of the property

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

person

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

the life of the person.

o The interest must exist when the policy takes effect AND when

loss occurs.

In life, need only exist when the policy takes effect

o In life insurance, one can name anyone to be the beneficiary.

Only exception: you cannot name one to whom youare prohibited to make donations to

• Ex. co-guilty party of adultery/concubinage

You can insure anyone’s life, but you have to get his

consent + you must have insurable interest

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• A mere contingent interest over something: - NOT insurable

o Creditor with no collateral over properties of buyer

o Expectant heir

o Fictitious contract of sale (completely simulated)

A person leases property. In the contract, it said that

the lessor may shares of stock of a lessee… [See

“chuck” case in transcript]

o Smuggled property – against public policy

• When must interest exist?

o When the policy takes effect and when loss occurs

o Need not exist in the meantime

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

repurchased, and then loss in fire.

o A person mortgaged his building. The property had been sold

in foreclosure. Then it was lost by fire. He had no more right

to redemption. HELD: Lost insurable interest.

o What if he still possessed the right of redemption?

He still has insurable interest

• For life: interest need only exist upon taking effect.

o X insured his wife’s life. They annulled their marriage. But the

wife failed to revoke the insurance. X can collect.

• If you sold your car, if the buyer wants insurance, you have to endorse

the policy.

• 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.

• Change in interest in one or more listed things:

o Taxi company insured 20 units. Sold 4 of them. The

insurance over 16 is still valid.

• Change of interest in will or succession does not avoid insurance.

o X insured Family Home against fire. X died and children

inherited. The house burned. The children can collect.

o What if the children bought the house from the father

when he was still alive?

Insurance does not transfer.

o X Y and Z co-owned a house. X bought Y and Z’s shares and

became sole owner. The house burned. Insurance company

must pay because X was part of the original insured.

• Stipulation that there need not be an insurance interest for an insurance

contract – NULL AND VOID.

Title IV – concealment

• Failure to communicate what a party knows and ought to communicate

• Consequence: injured party can rescind

• Need not be intentional

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o 1. Claimant has no insurable interest

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

o 3. Policy lapsed and insured did not pay

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

(“vicious fraud”)

o 5. Someone substituted for the insured during medical test

This fraud is not barred by the clause – there is NO

perfected contract with the insured because it was

another person

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

(ex. 8-seater plane)

o 7. Entered into military without consent

o 8. Failure to furnish proof of death

o 9. Action not filed on time

• If there is concealment or misrepresentation, insurance company is still

liable even if the cause was not due to the cause concealed or

misrepresented.

• In one case, the insured died within two year clause. This was invoked

by the insurance company. Beneficiary delayed claim after two years

have lapsed. SC said that when the person died, there is no more

policy; liability has accrued. So count from death.

o JJ agrees with the result, but not the interpretation

o JJ: If the insured did not disclose that he had tuberculosis and

he died after, the beneficiary CANNOT delay claim to beyond

two years and invoke the incontestability clause. THE LAPSE

OF THE TWO YEAR PERIOD MUST HAVE LAPSED WHILE

THE INSURED IS ALIVE. This is the proper meaning.

The Policy

• Preliminary policy/cover note

o Has terms and conditions of policy that would have been

issued. Insurance company cannot collect separate premium

on preliminary policy and actual policy.

o 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

insurance first [give to LTO the cover note] or looking

for adequate carrier for goods for marine goods –

since the policy depends on the state of the boat]

• Law requires that policies are in printed form. It can’t be handwriting

anymore. Before you issue a new policy, the terms and conditions have

to be approved by insurance commission.

• What is the rule on riders and additional attached clauses?

o Does not bind insured UNLESS the descriptive name/title of

the rider or clause is mentioned and written on the blank

spaces in the policy

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

original?

o Must be countersigned by the insured or owner

o N.B. No need for signature of insured otherwise

• If a cover note was issued within 60 days, the policy must be issued.

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

lapsed but no vessel has been found by the exporter.

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

agreement of insured must be obtained.

NOW: there is a circular that allows cover notes to

extend beyond 60 days.

• Insurance proceeds applied exclusively to person in whose name or for

whose benefit the policy is made

o Aboitiz: One vessel got burned in shipyard. Asked Cebu

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

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

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

persons, only he who can show it was intended to include him

can claim the benefit.

• When does insurance taken by one partner or part-owner apply to

the interest of his co-partners or co-owners?

o The terms of the policy must be applicable to the joint or

common interest

• Rules on interpretation:

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

o [SPACED OUT]

o Tantoco Terminal : had two mills. Old mill was insured. When

the new mill was finished it was insured. The policy however

mentioned the old mill. Burned. Insurer refused. HELD:

Clearly they intended the new mill to be insured, not the old

one even if the policy says otherwise.

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

possession of the money. They stole money. Insurance

company refused to pay because it claimed they were not

employees of the company, but the agency. HELD: Theinsurance company lost. The very purpose of the insurance is

to insure against acts of those holding the money, which in this

case are the two.

• Open policy –

o There must be a maximum amount mentioned. It is a

maximum liability of the insurer.

o So there can be an amount mentioned, but you still have toquantify the value within this amount.

• Valued policy –

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

sum

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Ex. Maximum risk it can insure is 20% of its net worth

(Ex. 100M net worth, so they can issue up to 20M). It

can issue policies beyond that but it must be

reinsured.

• Notice of cancellation:

o Must be in writing

o State ground for cancellation

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

will disclose

o * Prudent thing: to send by registered mail

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

long as he is willing to pay the premium

o 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

matter of right

• Policy written for term longer than 1 year, it will be treated as written for

successive terms of 1 year

o Ex. construction contract requires policy covering the building

as it is completed. There were 2 fires, and 3 years. It will be

treated as if it is expiring at every anniversary of the policy.

Warranties

• Express or implied

o Express – found in terms and conditions

o Implied – imposed by law

• Usually embodied in a rider

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

• What is the difference of warranties from representations?

o Warranties are express and placed in the contract

o Representations are not written and are but collateral

inducements

• May relate to:

o Past – ex. warranty that insured was never confined

o Present – ex. warranty that insured is in good health

o Future – ex. warranty in fire insurance that owner of property

will not store flammable materials

• When does non-compliance with a future warranty not avoid the

policy?

o 1. Loss occurs

o 2. Performance becomes unlawful

o 3. Performance becomes impossible

• Give an example

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o Somebody tried to insure his house for fire. Inspectors said his

neighborhood is not nice. Insurer said that it will insure, but

insured must put up a firewall within 30 days. A fire razed his

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

o Same if there is no cement available

o Or if it becomes unlawful

• Violation of warranty allows the other party to rescind.

o Can the insured argue that it is not material?

No. The fact that it is in the policy entitles the insurer

to rescind. The basis is not materiality but breach of

contract.

• If there is a breach of warranty, and loss occurs EVEN IF not related to

the breach of warranty, the insurer is not liable.

o Ex. cannot bring explosive materials into his house. He

brought fireworks inside. His kitchen caught fire without

relation to the fireworks. Insurer not liable.

o Because the risk increased regardless.

o What is the exception?

When it is merely incidental to the business. For

instance, placing alcohol to retouch the varnish of

one’s insured furniture store does not breach the

warranty against placing inflammable materials.

Another example, Qua Chee Gan , where there was

gasoline in the warehouse for consumption of the

owner’s car within 2 days.

Or mothballs in a drug store.

• Double insurance not just to those he acquired before but also the

future. Failure to give information is a breach of warranty.

o X obtained fire insurance over his house with Insurer A.

He warranted against past and future double insurance.

Then he obtained fire insurance over his house with

Insurer B. The same clause is included. The house burns

down. Is Insurer A liable? Is insurer B liable?

Both are not liable. There was breach of futuredouble insurance warranty for contract A and breach

of past double insurance for contract B.

• Geagonia case: X insured his stocks in trade. Mortgaged them, and

insured them again, where there is loss proceeds go to mortgagee. Fire

destroyed the things. Insurer said X did not disclose second insurance.

HELD: No need to disclose. Different interests involved. First goes to

the mortgagor. Second goes to the mortgagee. It is not double

insurance.

• When is there a waiver by the insurer?

o When despite knowledge of the breach, it accepts the renewal

premium

• Case on motor vehicle policies. X was issued an ordinary driver’s

license. Can only drive 4 wheeled vehicles. He drove a 10 wheeler.

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Vehicle involved in accident. Insurer not liable because X is not

authorized to drive the 10 wheeled vehicle.

o Palermo case: ASKED IN BAR. Insurance contains provision

that the driver must be owner or the third party authorized with

valid driver license. Brought car to repair shop, and it wasdriven for a road test. Employees drove it for a road test. If it’s

a third party driving [check?]

o Stokes [?] case: European driving with his own license (which

is valid for a period, but not after).

• …[spaced out]

• “Under influence of liquor” clause – no need to actually be drunk, as

long as he is under the influence

• Violation of material warrant entitles the other to rescind. Even if not

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?

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

o Give an example.

X obtained fire insurance over his house. Warranted

against storage of inflammable materials. On Sept

31, a fire broke out. On December 31 he stored

inflammable materials (fireworks), then a fire broke

out. The insurer is not liable for the Dec 31 fire, but is

liable for the Sept fire.

o What if there was fraud, i.e. there were inflammable

materials inside the house?

The policy doesn’t attach in the first place.

• [I give up. Not listening today. Just read transcript on breach of

warranty. Page 17-18 transcript ]

• [The next day… ]

• The insurer is not liable for loss caused by connivance of insured

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

insurance

• Loss from unlawful act – not liable

o Ex. committed arson

• Loss in which peril insured against is only a remote cause

o 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 thestocks in trade. Fire is just a remote cause.

• Loss, the proximate cause of which is an excepted risk

o Fire insurance policies say that they do not cover loss due to

coup d’etat, rebellion, riots, etc.

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• Loss where the insured is guilty of gross negligence

o 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 atyphoon brewing. The captain ignored it and tied the barge to

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

cut loose. Claim against insurance – the captain was grossly

negligent. There insurer is not liable.

• Burden is on the insurer to prove that it is an excepted risk

o But for fire insurance, the burden is on the insured to prove

that it is not under an exempted risk

o Ratio: because the thing is in possession of the insured, so he

can best give an explanation for the loss

o Radio Mindanao Case : [wrong interpretation of this rule]

• Fire insurance – notice must be given without unnecessary delay

o If reported an unreasonable time later – ex. 6 months –

opportunity is gone

o Usually fire policies have a provision that claims must be filed

within a certain time. Beyond that, barred.

o Look at purpose to give the insurer a chance to investigate

the claim

• When proof is required, insured is not required to give proof that stands

in court

o Noda: police report should be sufficient

•

Defects in the notice or substantiation thereof which the insurer didn’tspecify waived

o Because the insured is usually a layman

• 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

• If the policy requires a certificate, and the insured cannot produce it, it is

enough to say that he cannot produce it not because … [eh] check

section 92

o “I cannot submit the report not because the contents of the

report are prejudicial, but because the investigator is abroad

and cannot be found”

Double insurance

• Requisites:

o 1. Insured must be the same

Ex. mortgagor mortgagee – not the same

o 2. Several insurers

o 3. Same subject matter

Ex. factory and stocks in trade – not the same

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o 4. Same interest

o 5. Risk is the same

• Learn the rules on reimbursement

Reinsurance

• Two types:

o Treaty

o Facultative – case by case

• A reinsurer cannot intervene in the case of insurer and insured because

the reinsurer has his own interest anyway

• After first layer, the subsequent layers are called r eprocession

• …

• Insurance is covered by the rule of blah blah blah fides

• Take note of the cut-through clause

o Insured can go straight to the reinsurer

o Ok in California, invalid in England

Marine insurance

• Perils of the sea:

o 1. Connected with navigation

o 2. Unusual movement of t he sea/winds

o Cathay : pipes arrived in rusty condition because it was stored

in the hull of sea. The insurer was liable because it was perils

of the sea. WRONG! Because nothing was unusual

• Barratry

o Willful misconduct, not mere wrong judgment

• Answers for general average

o Those who were saved will contribute to the general average

o Insurance policy will cover share in general average

o DOES NOT cover particular average

Ex. fruits became rotten due to nature of the fruits

• “Arrest of the vessel” covers order by administrative officials, and

does not cover arrest order of court

• DOESN’T ANSWER for perils of the ship

o Ship is unseaworthy

• Rule on concealment is stricter, because the ship is usually in the high

seas so the insurer is at a disadvantage – harder to inspect.

• Marine insurance – belief of a third person as regards what is material

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

DISCLOSED – it is material

• [On flag of the ship, etc. spaced out

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Intellectual Property

• Rights of intellectual creator exists from moment of creation

o Even if you haven’t registered yet with the National Library

o Unilever: Came out with an advertisement that is similar to

PNG’s prior commercial. Unilever said that PNG’s commercial

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

clear – no need to register to have rights over intellectual

creation.

• Are email and letters also covered?

o Yes. Any form of text is covered.

• Even choreography, musical compositions, drawings, paintings,

architecture, sculptures, computer etc.

• Paglinawan: A dictionary can be copyrighted. He came up with a

Spanish-English dictionary where he borrowed 87% of the entries. He

argued that you cannot have a monopoly on words. Court held that the

original writer used his judgment in selecting which words will be used.

• Pilita Corales adopted A Million Thanks To You as her final song in

concerts. In response, someone printed the word “thanks” a million

times and it was not allowed to be registered because it is not an

intellectual creation.

• Are derivative works also created?

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

o Examples of these are dramatizations of novels, or

translations.

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

•

What about compilations?

o This involves judgment of, for instance, the best Filipino short

stories. So he has to get the consent of those whose stories

he included in the compilation.

o 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.

• 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

the writer can still be identified (ex. Nick Joaquin as Quijano de Manila),

then the writer still gives consent.

o If there are several writers and the parts are distinct, they only

have copyright over the parts they prepare.

• For DVDs?

o The producer, music composer, director of photography,

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

etc.

o But for collecting, the producer has the right.

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• If the work is done for hire or is part of his duties, then the employer will

own the copyright.

• Torrens system.

o

If you sell, mortgage, convey your copyright, you must registerit with the National Library to bind third parties.

• Owner can object to the distortion of his work.

• Transfer of the work to new media will not violate… [?]

• How long do these rights last?

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

o They are not assignable.

• The economic rights of author – need permission:

o Reproduction or substantial reproduction (ex. photocopying an

entire book)

o Derivative works

o Public distribution or exhibition

• Businesses started playing certain songs to drum up business.

Technically, this is economic exploitation of the work.

• The character Charlie Brown is copyrighted. So sporting goods cannot

use Charlie Brown on their goods. Or a bakery cannot use Cookie

Monster.

• Some artist connoisseurs bought X’s paintings for a cheap price.

Then they sold the paintings for a fortune when he became

famous. What is X’s right?

o He must get 5% of the selling price.

•

122735504 commercial law

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