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ATENEO CENTRAL BAR OPERATIONS 2007

Commercial Law

SUMMER REVIEWER

TABLE OF CONTENTS

I. Code of Commerce ...............................................................................................2

II. Bulk Sales Law......................................................................................................3

III. Warehouse Receipts Law......................................................................................4

IV. Trust Receipts Law................................................................................................6

V. Negotiable Instruments Law..................................................................................8

VI. Insurance Code ...................................................................................................24

VII. Concurrence and Preference of Credits..............................................................39

VIII. Chattel Mortgage Law .....................................................

....................................43

IX. Corporation Code................................................................................................46

X. Anti-Dumping Act.................................................................................................62

XI. Intellectual Property Law .....................................................................................66

XII. Bank Secrecy Law...............................................................................................83

XIII. Insolvency Law....................................................................................................84


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XIV. Corporate Suspension of Payments....................................................................89

XV. Corporate Rehabilitation......................................................................................92

XVI. Securities Regulation Code .................................................................................94

XVII. Truth in Lending Act ..........................................................................................102

XVIII. Transportation Code..........................................................................................105

XIX. Maritime Commerce ..........................................................................................109

XX. Carriage of Goods By Sea Act ..........................................................................114

XXI. Warsaw Convention ..........................................................................................115

XXII. Public Service Act..............................................................................................116

XXIII. National Electrification Decree .........................................

.................................118

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XXIV. Franchise for TV and Radio Stations.................................................................118

XXV. EPIRA Law..................................................................

......................................118

XXVI. Ship Mortgage Decree.......................................................................................118

XXVII. Philippine Deposit Insurance Corporation Act ...................................................119


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Commercial Law

SUMMER REVIEWER

COMMERCIAL LAW that branch of private law,which regulates the juridical relations arising fromcommercial acts.

CONTRACTS BY CORRESPONDENCE acontract entered into by correspondence like letters,telegrams, by messengers but not including thosemade by phone or through agents.

RULE ON THE PERFECTION OF CONTRACTS BYCORRESPONDENCE

Theory ofManifestationTheory of CognitionMercantile contracts areperfected from the

moment the acceptanceis sent, even if it has notyet been received bythe offeror.Offeror can no longerwithdraw the offer orchange the terms andconditions.Contracts governed bycivil law such aspartnerships, agencies,deposits, loans, salesand guaranties will be

perfected only uponreceipt by the offeror ofthe unconditionalacceptance by theofferee.

JOINT ACCOUNT is a business arrangementwhereby two or more persons interest themselves inthe business of another, making contributionsthereto, and participating in the results of thebusiness in the proportion they may determine.

FEATURES OF A JOINT ACCOUNT

1.It may be contracted orally or in writing.2.No common name can be adopted.3.Only one member is ostensible and can sueor be sued. The others are silent.4.No common fund. QuickTime and a


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(Articles 240-242, Code of Commerce)

COMPARISON OF JOINT ACCOUNT WITHCOMMERCIAL PARTNERSHIP (see Annex C)

LETTER OF CREDIT a letter issued by onemerchant to another for the purpose of attending to acommercial transaction. In banking practice, it is arequest by one bank to another bank to advance or

give money to a third person on the basis of the letterand on the credit of the person issuing it.

SIGNIFICANCE OF LETTERS OF CREDIT

Roughly at least 85% of importations arefinanced by letters of credit. The underlying idea of aletter of credit is to ensure certainty of payment.Seller is assured of payment because the bankintervenes and makes the commitment to pay. Theidea behind it is like your credit card. You walk into adepartment store and they sell to you on credit

although youre a total stranger because you showyour credit card, which means that the bank whichissued the credit card tells the seller that it will paythe goods being bought.

ESSENTIAL CONDITIONS OF A LETTER OFCREDIT

1.Issued in favor of a definite person and not toorder. In effect, it is not a negotiableinstrument governed by the NegotiableInstruments Law.

2.Limited to fixed or specified amount, or toone or more amounts, but with maximumstated limit. If any circumstance is missing,the letter is a mere letter of recommendation(Article 568, Code of Commerce)PARTIES TO A LETTER OF CREDIT

1.Buyer - who procures the letter of credit andobliges himself to reimburse the issuing bankupon receipt of the documents title;2.

Issuing bank - which undertakes to pay theseller upon receipt of the draft and properdocuments of titles and to surrender thedocuments to the buyer uponreimbursement; and3.Seller - who in compliance with the contractof sale ships the goods to the buyer anddelivers the documents of title and draft tothe issuing bank to recover payment.


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Commercial Law Summer Reviewer


directly liable to pay the seller-beneficiary;

3.Paying bank - which undertakes to encashthe drafts drawn by the exporter/seller4.Instead of going to the place of the issuingbank to claim payment, the buyer mayapproach another bank, termed thenegotiating bank to have the draft discounted(Charles Lee v. CA, GR No. 117913February 1, 2002)LIABILITIES OF PARTIES

1.Drawer liable to person on whom it wasissued provided identity proven, for theamount paid within fixed maximum.

2.Bearer has no right of action if not paid byperson who issued it.3.Drawer may annul the letter of credit,informing the bearer and to whom it isaddressed.4.Bearer shall pay the amount received todrawer, otherwise action for execution maybe filed with interest and current exchange inplace where payment made on place whererepaid.

5.If a bearer does not make use of letter ofcredit within agreed period, or if none, within6 months from date if in the Philippines, and12 months if outside the Philippines, it shallbe void. (Articles 569-572, Code ofCommerce)INDEPENDENCE PRINCIPLE in a letter of credittransaction means that a bank, in determiningcompliance with the terms of a letter of credit isrequired to examine only the shipping documentspresented by the seller and is precluded fromdetermining whether or not the main contract is

actually accomplished or not.

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RULE OF STRICT COMPLIANCE in a letter ofcredit transaction means that the documentstendered by the seller or beneficiary must strictlyconform to the terms of the letters of credit, i.e., theymust include all documents required by the letter of


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credit. Thus, a correspondent bank which departs

from what has been stipulated under the letter ofcredit, as when it accepts a faulty tender, acts on itsown risk and may not thereafter be able to recoverfrom the buyer or the issuing bank, as the case maybe, the money thus paid to the beneficiary (FeatiBank vs. CA, G.R. No. 94209, April 30, 1991)

COMMON TYPES OF LETTERS OF CREDIT (seeAnnex D)

BULK SALES LAWPURPOSE OF THE LAW

1.To prevent the defrauding of creditors by thesecret sale or disposal or mortgage in bulk ofall or substantially all of a merchants stock ofgoods.2.

To prevent secret or fraudulent sale ormortgage of goods in bulk until the creditor ofthe seller shall have been paid in full.IMPORTANT: The law covers all transactions,whether done in good faith or not, or whether theseller is in a state of insolvency or not, as long asthe transaction falls within the description of what is abulk sale.

TRANSACTIONS CONSIDERED AS BULK SALE

sale, transfer, mortgage or assignment of1.

a stock of goods, wares, merchandise,provisions, or materials otherwise than in theordinary course of trade2.all, or substantially all, of the business of thevendor, mortgagor, transferor, or assignor3.all, or substantially all, of the fixtures andequipment used in the business of thevendor, mortgagor, transferor, or assignor.EXEMPTED TRANSACTIONS

1.

When accompanied with a written waiver byall the seller/mortgagors creditors2.The law does not apply to executors,administrators, receivers, assignees ininsolvency, or public officers, acting underlegal process3.Sale or mortgage is made in the ordinarycourse of business


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4.Sale by assignee in insolvency or thosebeyond the right of creditors5.Sale of properties exempt from attachment orexecutionVENDORBUYER, ASSIGNEE,MORTGAGEE,TRANSFERORHas obligations and

No direct liability nor any

liabilities under the Bulk

obligation under the Bulk

Sales Law.

Sales Law

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OBLIGATIONS OF THE VENDOR UNDER THELAW The vendor, mortgagor, transferor or assignormust:

1.deliver to the vendee, mortgagee, transferee,or assignee a written statement of:a.names and addresses of all creditors towhom said vendor or mortgagor may beindebtedb.amount of indebtedness due or owing toeach of said creditors2.apply the purchase money to the pro-ratapayment of bona fide claims of the creditorsas shown in the verified statement.

3.at least 10 days before the sale, shall:a.make a full detailed inventory of thegoods, merchandise, etc., cost price ofeach article to be included in the saleb.notify every creditor at least 10 daysbefore transferring possession of thegoods, of the price, terms and conditionsof the saleEFFECTS OF VIOLATION

1.As between the parties: VALID CONTRACT2.As between persons other than the creditors:VALID CONTRACT3.As to affected creditors of theseller/mortgagor: VOID CONTRACT4.Criminal liability, if expressly providedRULE AS TO TRANSFERS WITHOUTCONSIDERATION OR FOR NOMINALCONSIDERATION

1.What the law says - The law makes itunlawful for any person, firm, or corporation,as owner of any stock of goods, wares,merchandise, provisions, or materials, inbulk, to transfer title to the same withoutconsideration or for a nominal considerationonly.2.


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Effect - This will make the seller criminallyliable, and the sale would be void for lack ofconsideration.QuickTime and aTIFF (Uncompressed) decompressor


WAREHOUSE RECEIPTS LAWPURPOSE OF THE LAW

1.to prescribe the rights and duties of awarehouseman2.to regulate the relationship between awarehouseman and:a.the depositor of the goods orb.holder of a warehouse receipt for thegoods orc.the person lawfully entitled to the

possession of the goods ord.other persons.TERMS OR INFORMATION THAT SHOULD BECONTAINED IN A RECEIPT ISSUED BY THEWAREHOUSEMAN FOR THE COMMODITY HERECEIVES FOR STORAGE Although the law doesnot prescribe any particular form, the receipt must atleast contain the following:

1.Location of the warehouse2.

Date of Issue3.Receipt number4.Language to indicate if the receipt werenegotiable or non-negotiable5.Rate of storage charges6.Description of goods or packages containingthem7.Signature of the warehouseman or his agent

8.Language indicating if the warehouseman isan owner solely or jointly with others, of thegoods deposited and9.Statement of advances made by thewarehouseman for which he claims a lienRULE ON ADDITIONAL TERMS IN THE RECEIPT

A warehouseman could add or insert any other terms


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to his receipt provided that

1.such additional terms are not contrary to theprovisions of the Act2.they do not impair the degree of care in thesafekeeping of the goods entrusted to himrequired under the Act.Note: A warehouseman cannot provide in thewarehouse receipt that the risk of loss of the goodsby fire or theft shall be for the depositors account asthat would be contrary to his obligation to keep thegoods safe.

What is the degree of care required of awarehouseman in the safekeeping of goodsentrusted to him?

The degree of care that a reasonably carefulman would exercise in regard to similar goods of hisown.

KINDS OF RECEIPTS ISSUED BY A

WAREHOUSEMAN

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Non NegotiableReceiptNegotiable ReceiptA receipt which statesthat the goods receivedby the warehousemanwill be delivered to thedepositor or to any otherspecified person.To make a receipt nonnegotiable,the wordnon-negotiable shouldbe placed plainly uponits face.A receipt which statesthat the goods receivedby the warehousemanwill be delivered to the

bearer or to the order ofany person named insuch receipt.It can never beconverted into a nonnegotiableby insertingprovisions. Suchprovision, if inserted,shall be void.Note: A negotiablewarehouse receipt is nota negotiable instrumentunder the NIL.

WAREHOUSEMANS OBLIGATION TO DELIVERTHE GOODS

1.Deliver to whom upon demanda.Holder of the receipt for the goodsb.Depositor2. The demand should be accompanied by:a.An offer to satisfy the warehousemans

lienb.An offer to surrender the receipt if it isnegotiablec.A readiness and willingness to sign anacknowledgement, when the goods aredelivered, that they have been deliveredif such is requested by thewarehouseman.


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KINDS OF DELIVERY BY THE WAREHOUSEMAN

1.JUSTIFIED DELIVERY A warehousemanQuickTime and aTIFF (Uncompressed) decompressor


is justified in delivering the goods to any of

the following:

a.The person lawfully entitled to thepossession of the goodsb.The person who is himself entitled todelivery of the goods:i.by the terms of a non-negotiablereceipt orii.who has been authorized to take

delivery of the goods by the personentitled to such delivery, whichauthority is endorsed upon thereceipt or written on another paper

c.The person in possession of a negotiablereceipt by the terms of which the goodsare deliverable:i.to him or order, orii.to bearer, or

iii.which has been endorsed to him orin blank by the person to whomdelivery was promised by the termsof the receipt of immediate endorsee.2.MISDELIVERY or CONVERSION Awarehouseman would be liable formisdelivery or conversion if he delivers thegoods to:a.the one who is not in fact lawfully entitledto the possession of goods

b.a person holding a non-negotiablereceipt or a negotiable receipt if prior tosuch delivery he had been requested notto make such delivery or had informationthat the delivery about to be made was toone not lawfully entitled to thepossession of goods.STEPS THAT A WAREHOUSEMAN COULD TAKETO PROTECT HIMSELF FROM A MISDELIVERY


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1.Warehouseman is entitled to reasonable timewithin which to ascertain the validity of theadverse claim or to bring legal proceedingsto compel the claimants to interplead2.Warehouseman may require the claimants tointerplead.RULE AS TO THE ATTACHMENT,

GARNISHMENT, OR LEVY OF GOODS INPOSSESSION OF A WAREHOUSEMANGeneral Rule: Goods in the possession of awarehouseman for which a negotiable receipt hasbeen issued may be attached by garnishment or belevied upon under an execution provided, the receiptcovering the goods is first surrendered to thewarehouseman or its negotiation enjoined.Exceptions:

1.Where the person who made the deposit isnot the owner of the goods or is not a person

whose act in conveying title to them to apurchaser in good faith for value would bindthe owner.2.In an action filed by the owner of the goodsfor their recovery or delivery to him.Page 5 of 124


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3.Where the attachment of the goods ondeposit is made before the negotiable receiptis issued.RULE AS TO COMMINGLING OF GOODSGeneral Rule: Warehouseman must keep the goodsof the depositor separate from the goods of otherdepositors, or from the goods of the same depositorfrom a separate receipt (Ratio: to permit theinspection and redelivery of the goods deposited atall times)Exceptions:

1.If the goods are fungible, i.e., any unit of thegoods is, from its nature or by mercantilecustom, treated as the equivalent of anyother unit

2.The commingling is authorized by agreementor by customOTHER LIABILITIES OF A WAREHOUSEMAN (seeAnnex E)

WAREHOUSEMANS LIEN

1.Object of the Lien on the goods depositedwith him or on the proceeds thereof in hishands2.

Purpose for all lawful charges for storageand preservation of goods, money advancedby him in relation to such goods such asexpenses of transportation or labor.3.Against what Property may the lien beenforced all goods belonging to the personliable for the charges, as well as against allgoods belonging to others deposited by theperson liable for the charges and could havevalidly pledged the same.4.Loss of lien by warehouseman -by

surrendering the possession of the goods orrefusing to deliver the goods when demand ismade with which he is bound to comply.5.Effect of the sale of goods to satisfy thewarehousemans lien or on account of thegoods perishable or hazardous nature warehouseman, after the sale, shall not beQuickTime and aTIFF (Uncompressed) decompressor


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liable for failing to deliver the goods to the

person lawfully entitled to the goods, even ifsuch receipt were negotiable.

RIGHTS ACQUIRED BY A PERSON TO WHOM ANEGOTIABLE RECEIPT HAS BEEN NEGOTIATED

1.Title to the goods as the person negotiatingor transferring the receipt could convey2.Direct obligation of the warehouseman tohold possession of the goods for him as fullyas if the warehouseman contracted with himdirectly.

TRUST RECEIPTS LAWPURPOSE OF THE LAW

1.

To encourage and promote the use of trustreceipts as an additional and convenient aidto commerce and trade;2.To provide for the regulation of trust receiptstransactions in order to assure the protectionof the rights and enforcement of obligationsof the parties involved therein; and,3.To declare the misuse and/ormisappropriation of goods or proceedsrealized from the sale of goods, documentsor instruments released under trust receipts

as a criminal offense punishable as estafa.TRUST RECEIPT -a written/printed documentsigned and delivered by the entrustee in favor of theentruster, whereby the latter releases the goods,documents or instruments over which he holdsabsolute title or a security interest to the possessionof the former, upon the entrustees promise to holdsaid goods in trust for the entruster, and to sell orotherwise dispose of the goods, etc. with theobligation to turn over the proceeds thereof to theextent of what is owing to the entruster; or to returnthe goods if UNSOLD, or for other purposes.

OBLIGATIONS IN THE TRUST RECEIPT

FOR GOODS ORDOCUMENTSFOR INSTRUMENTS1. To sell them2. To manufacturethe for the purposes ofsale


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3. To unload/shipor deal with them in amanner preliminary totheir sale1. To sell them2. To deliver them to aprincipal3. To effect theconsummation of atransaction involvingdelivery to a depositaryor a register4. To effect theirpresentation,

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collection or renewalNATURE OF THE TRUST RECEIPT AGREEMENT

1.A trust receipt agreement is merely acollateral agreement, the purpose of which isto serve as security for a loan.2.In relation to a letter of credit, a letter of creditis a separate document from a trust receipt.While the trust receipt may have beenexecuted as a security on the letter of credit,still the two documents involve differentundertakings and obligations.CONTENTS OF A TRUST RECEIPT A trust receiptneed not be in any form but it must substantiallycontain the following:

1.A description of the goods, documents orinstruments subject of the trust receipt2.The total invoice value of the goods and theamount of the draft to be paid by theentrustee3.An undertaking or a commitment of theentrustee:a.to hold in trust for the entruster thegoods, documents or instruments therein

describedb.to dispose of them in the mannerprovided for in the trust receipt; andc.to turn over the proceeds of the sale ofthe goods, documents or instruments tothe entruster to the extent of the amountowing to the entruster or as appears inthe trust receipt or to return the goods,documents or instruments in the event oftheir non-sale within the period specifiedtherein.

4.The trust receipt may contain other termsand conditions agreed upon by the parties inaddition to those hereinabove enumeratedprovided that such terms and conditions shallnot be contrary to the provisions of thisDecree, any existing laws, public policy ormorals, public order or good customs.QuickTime and aTIFF (Uncompressed) decompressor


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5.Trust receipts are denominated in Philippineare needed to see this picture.

currency or acceptable and eligible foreign

currency.

RIGHTS OF ENTRUSTER AND ENTRUSTEE

ENTRUSTER ENTRUSTEE1. Entitled to the 1. To receive theproceeds from the surplus from the

sale of goods, public sale;documents orinstruments;2. Entitled to the returnof goods, etc. in caseof non-sale;2. To havepossession of the

goods as acondition for hisliability under the3. To enforce all other TRL (Ramos v.rights conferred onhim under the TRL;CA).4. Extent of securityinterest:a. As againstinnocentpurchaserfor value: not

preferred (Sec.12)b. As againstcreditors ofentrustee:preferred5. To cancel the trust,take possession ofgoods and to sell thegoods in public salein case of default;6. May purchase at theintended public sale

(Sec. 7)

OBLIGATIONS OF THE ENTRUSTER ANDENTRUSTEE

ENTRUSTER ENTRUSTEE1. To give possessionof the goods to theentrustee;2. To give at least 5


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days notice to theentrustee of theintention to sell thegoods at theintended publicsale;1. To hold the goods othe entruster;2. To comply with his3. To ensure agaisnt l4. To keep the goodsidentifiable;5. To observe theconditions of thetrust receipt notcontrary to theprovisions of theTRL.

NOTES

1.Liability of the entruster in any sale orcontract made by the entrustee not be

responsible as principal or as vendor underany sale or contract to sell made by thePage 7 of 124


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entrustee by virtue of such interest or havinggiven the entrustee liberty of sale or otherdisposition of the goods, documents orinstruments under the terms of the trustreceipt transaction.

2.Who bears risk of loss Entrustee3.Rights of a purchaser for value and ingood faith of the goods covered by theTrust Receipt He acquires said goods,documents or instruments free from theentruster's security interest.4.Novation of a trust agreement - SupremeCourt ruled that a Memorandum ofAgreement entered into betweenthe bankentruster

and entrustee extinguished theobligation under the existing trust receiptbecause the agreement did not onlyreschedule the debts of the entrustee but itprovided principal conditions which areincompatible with the trust agreement.Hence, the liability for breach of theMemorandum of Agreement would be purelycivil in nature and no criminal liability underthe Trust receipt Law can be imposed.(Philippines Bank v. Alfredo T. Ong, GR No.133176, August 8, 2002)NEGOTIABLE INSTRUMENTS

LAWNEGOTIABLE INSTRUMENT

Written contracts for the payment of money; by itsform, intended as a substitute for money andintended to pass from hand to hand, to give theholder in due course the right to hold the same andcollect the sum due.

Negotiable Instruments vs. NegotiableDocuments of Title (see Annex F)

PROMISSORY NOTE

An unconditional promise to pay in writing made byone person to another, signed by the maker,engaging to pay on demand or a fixed determinablefuture time a sum certain in money to order or bearer.When the note is drawn to makers own order, it isnot complete until indorsed by him. (Sec. 184)

Promissory Note vs. Bill of Exchange


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Promissory Note Bill of ExchangeUnconditional promise unconditional orderInvolves 2 parties(maker, payee)involves 3 parties (drawer,payee, drawee)Maker primarily liable drawer only secondarilyliableOnly 1 presentment - forpaymentgenerally 2 presentments -for acceptance and forpayment

BILL OF EXCHANGE

An unconditional order in writing addressed by oneperson to another, signed by the person giving it,requiring the person to whom it is addressed to payon demand or at a fixed or determinable future time asum certain in money to order or to bearer. (Sec.126)

CHECK

A bill of exchange drawn on a bank and payable ondemand. (Sec. 185)

CHARACTERISTICS OF NEGOTIABLE

INSTRUMENTS: QuickTime and a

Check vs. Bill of Exchange


1.Negotiability - right of transferee to hold theinstrument and collect the sum due2.Accumulation of secondary contracts -instrument is negotiated from person topersonNegotiable Instruments vs. Non-NegotiableInstruments (see Annex G)

CHECK BOE- always drawn upon a

bank or banker- may or may not bedrawn against a bankalways payable ondemand- may be payable ondemand or at a fixed ordeterminable future time

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- not necessary that it bepresented for acceptance- necessary that it bepresented foracceptance- drawn on a deposit - not drawn on a deposit- the death of a drawer of acheck, with knowledge bythe banks, revokes theauthority of the banker topay- the death of the drawerof the ordinary bill ofexchange does notrevoke the authority ofthe banker to pay- must be presented forpayment within a

reasonable time after itsissue (6 months)- may be presented forpayment within areasonable time after itslast negotiation.

Promissory Note vs. Check

PN CHECKthere are two (2) parties,the maker and the payeethere are three (3) parties,

the drawer, the draweebank and the payeemay be drawn againstany person, notnecessarily a bankalways drawn against abankmay be payable ondemand or at a fixed ordeterminable future timealways payable ondemanda promise to pay An order to pay

TYPES OF CHECKS

1. Managers check -One drawn by the banksmanager upon the bank itself; and it is similar to acashiers check both as to effect and use.[International Corporate Bank v Gueco 351 SCRA516 (2001)BPI Family Savings Bank v Manikan, 395 SCRA373 (2003)] QuickTime and a


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TIFF (Uncompressed) decompressorBy peculiar are needed to see this picture.and in

its character general usecommerce, a managers check is regardedsubstantially to be as good as the money itrepresents

Consequently, when a bank allows the deliveryof a managers check to a person who is not directlycharged with the collection of its tax liabilities, suchbank must be deemed to have assumed the risk of apossible misuse thereof, as it appears to have fallen

short of the diligence expected from it. It may still,however, pursue an action against the person

responsible or who may have unjustly benefited.Pabugais vs. Sahijwani, 423 SCRA 596 (2004)Generally, a managers check is not legal tender andthe creditor may accept or refuse it. But, payment bycheck may be accepted as valid if no prompt

objection is made.2. Crossed checkThough the NIL is silent as to crossed checks, courtscan take judicial cognizance of the practice that acheck crossed with two parallel lines in the upper lefthand corner means that it can only be deposited andnot converted to cash. The effects of a crossed checkthus relate to the mode of payment meaning thatthe drawer intends it to be only for deposit by therightful person, the named payee.

Bataan Cigar vs. CAA holder of crossed-checks is not obliged to inquire,

when he acquires them, as to purpose for which thechecks were issued. A payee who further negotiatescross-checks that he accepted from someone cannotbe considered a holder in good faith (and thus not aHIDC) is not applicable to this case. Here, when thepayee acquired the checks, he duly deposited themin his bank account, and therefore, the purpose

behind the crossing was satisfied by the payee.Ngo vs. People, 434 SCRA 522 (2004)The law does not require the payee to be interestedin the obligation in consideration for which the checkwas issued. The cause or reason of issuance is

inconsequential (in connection with BP 22) in

determining criminal liability.Associated Bank v. Court of Appeals, 208 SCRA465

The payee of crossed checks issued with the notationfor payees account only can sue a collecting bankwhich allowed an unauthorized third person todeposit the checks in his own account and to


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withdraw the proceeds of the checks, because theproceeds of the checks belonged to the payee andthe bank paid the checks although the third person

had no title to the checks.Page 9 of 124


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REQUISITES OF A NEGOTIABLE INSTRUMENT

Sec. 1. An instrument to be negotiable, must conformto the following requirements:

(a) It must be in writing and signed by the makeror drawer;(b) Must contain an unconditional promise ororder to pay a certain sum in money;(c) Must be payable on demand, or at a fixed ordeterminable future time;(d) Must be payable to order or to bearer; andWhere the instrument is addressed to a drawee, hemust be named or otherwise indicated therein with

reasonable certainty.HOW NEGOTIABILITY IS DETERMINED

1.By the provisions of the NegotiableInstrument Law, particularly Section 1thereof2.By considering the whole instrument3.By what appears on the face of theinstrument and not elsewhereNOTE: In determining whether the instrument isnegotiable, only the instrument itself and no other,must be examined and compared with the

requirements stated in Sec. 1. If it appears on theinstrument that it lacks one of the requirements, it isnot negotiable and the provisions of the NIL do notgovern the instrument. The requirement lackingcannot be supplied by using a separate instrument inwhich that requirement appears.

WHEN A SUM IS CERTAIN

Sec 2. The sum payable is a sum certain within themeaning of this Act, although it is to be paid:

(a) With interest; or

(b) By stated installments; or(c) By stated installments, with a provision that,upon default in payment of any installment orof interest, the whole shall become due; or(d) With costs of collection or an attorneys fee,in case payment shall not be made atmaturity.EFFECT OF A CONDITIONAL PROMISE ORORDER


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A promise or order should not depend on acontingent event. If it is conditional, it is nonnegotiable.

WHEN PROMISE IS UNCONDITIONAL

Sec 3. An unqualified order or promise to pay isunconditional within the meaning of this Act, thoughcoupled with

(a) An indication of a particular fund out of whichreimbursement is to be made, or a particular accountto be debited with the amount; or(b) A statement of the transaction which gives rise tothe instrument.is not unconditional.But an order or promise to pay out of a particular fund

WHAT CONSTITUTES DETERMINABLE FUTURETIME

Sec 4. An instrument is payable at a determinablefuture time, within the meaning of this Act, which is

expressed to be payable

(a) At a fixed period after date or sight; or(b) On or before a fixed or determinable future timespecified therein; or(c) On or at a fixed period after the occurrence of aspecified event, which is certain to happen, thoughthe time of happening be uncertain.An instrument payable upon a contingency is notcure the defect.negotiable, and the happening of the event does not

WHEN SOME OTHER ACT IS REQUIRED OTHERTHAN PAYMENT OF MONEY IN AN INSTRUMENT

Page 10 of 124Sec 5. An instrument which contains an order orpromise to do any act in addition to the payment ofmoney is not negotiable. But the negotiable characterof an instrument otherwise negotiable is not affectedby a provision which (a) Authorizes the sale of collateral securities in casethe instrument be not paid at maturity; or(b) Authorizes a confession of judgment if the

instrument be not paid at maturity; or(c) Waives the benefit of any law intended for theadvantage or protection of the obligor; or


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(d) Gives the holder an election to require somethingto be done in lieu of payment of money.or stipulation otherwise illegal.But nothing in this section shall validate any provision

Notes on Section 5:

1.Limitation on the provision: it cannot requiresomething illegal.2.There are two kinds of judgments byconfession:a.cognovit actionemb.

relicta verificatione3.Confessions of judgment in the Philippinesare void as against public policy.4.If the choice lies with the debtor, theinstrument is rendered non-negotiable.INSTANCES THAT DO NOT AFFECT THEVALIDITY AND NEGOTIABILITY OF ANINSTRUMENT

Sec 6. The validity and negotiable character of aninstrument are not affected by the fact that

(a) It is not dated; or(b) Does not specify the value given, or that anyvalue has been given therefor; or(c) Does not specify the place where it is drawn orthe place where it is payable; or(d) Bears a seal; or(e) Designates particular kind of current money inwhich payment is to be made.But nothing in this section shall alter or repeal anyconsideration to be stated in the instrument.statute requiring in certain cases the nature of the

WHEN AN INSTRUMENT IS PAYABLE UPONDEMAND

Sec. 7 An instrument is payable on demand (a) Where it is expressed to be payable ondemand, or at sight, or on presentation; or(b) In which no time for payment is expressed.Where an instrument is issued, accepted, or indorsedwhen overdue, it is, as regards the person so issuing,


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accepting, or indorsing it, payable on demand.WHEN AN INSTRUMENT IS PAYABLE TO ORDER

An instrument is payable to order when it is drawnpayable to the order of a specified person or to aspecified person or his order.

FOR WHOSE ORDER AN INSTRUMENT CAN BEDRAWN

Sec. 8 The instrument is payable to order where it isdrawn payable to the order of a specified person or tohim or his order. It may be drawn payable to theorder of

(a) A payee who is not maker, drawer, or drawee; or(b) The drawer or maker; or(c) The drawee; or(d) Two or more payees jointly; or(e) One or some of several payees; or(f) The holder of an office for the time being.Where the instrument is payable to order the payee

must be named or otherwise indicated therein withreasonable certainty.INSTRUMENTS PAYABLE TO BEARERSec. 9 The instrument is payable to bearer (a) When it is expressed to be so payable; or(b) When it is payable to a person named therein orbearer; or(c) When it is payable to the order of a fictitious ornon-existing person, and such fact was known to theperson making it so payable; or(d) When the name of the payee does not purport tobe the name of any person; or(e) When the only or last indorsement is an

indorsement in blank.INSTANCES WHEN A DATE MAY BE INSERTEDIN AN INSTRUMENTSec. 13. Where an instrument expressed to bepayable at a fixed period after date is issued undated,or where the acceptance of an instrument payable ata fixed period after sight is undated, any holder mayinsert therein the true date of issue or acceptance,and the instrument shall be payable accordingly. Theinsertion of a wrong date does not avoid theinstrument in the hands of a subsequent holder inbe regarded as the true date.due course; but as to him, the date so inserted is to

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EFFECT WHEN A DATE IS INSERTED IN ANINSTRUMENT

A holder may insert the true date of issuance oracceptance, the insertion of a wrong date does notavoid the instrument in the hands of a subsequentholder in due course. As regards to the holder in duecourse, the date inserted (even if it is a wrong date) isregarded as the true date.

DEFICIENCIES THAT DO NOT AFFECT THERIGHTS OF A SUBSEQUENT HOLDER IN DUECOURSE

1.Incomplete but delivered instrument (Sec.14)

2. Complete but undelivered (Sec. 16)3.Complete and delivered issued withoutconsideration or a consideration consisting ofa promise which was not fulfilled (Sec 28)DEFICIENCIES/ABNORMALITIES THAT AFFECTTHE RIGHTS OF A HOLDER IN DUE COURSE

1.Incomplete and undelivered instrument (Sec.15)2. Maker/drawers signature forged (Sec. 23)Where the amount of the check was altered by

increasing it but the drawee bank failed to return it tothe collecting bank within 24 hours, the collectingbank is absolved from liability for the drawee bank

Republic Bank v. Court of Appeals, 196 SCRA 100should detect the alteration.PNB v. Court of Appeals, 256 SCRA 491The alteration of a serial number of a check is notmaterial and does not entitle the drawee bank whichpaid it to recover the payment.WHEN INSTRUMENTS ARE INCOMPLETE BUTDELIVERED

1.Where an instrument is wanting in anymaterial particular:QuickTime and a


a.Holder has prima facie authority to fill upthe blanks therein.


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b.It must be filled up strictly in accordancewith the authority given and within areasonable time.c.If negotiated to a holder in due course, itis valid and effectual for all purposes asthough it was filled up strictly inaccordance with the authority given andwithin reasonable time. (Sec. 14)2.Where only a signature on a blank paperwas delivered:a.It was delivered by the person making itin order that it may be converted into anegotiable instrumentb.The holder has prima facie authority to fillit up as such for any amount. (Sec. 14)WHEN AN INSTRUMENT IS INCOMPLETE ANDUNDELIVERED

been delivered, it will not, if completed andnegotiated without authority, be a valid contract in thesignature was placed thereon before delivery.hands of any holder, as against any person whose

Sec. 15. Where an incomplete instrument has notNote: It is a real defense. It can be interposedagainst a holder in due course. Delivery is notconclusively presumed where the instrument isincomplete. Defense of the maker is to prove nondeliveryof the incomplete instrument.

WHEN AN INSTRUMENT IS COMPLETE BUT

UNDELIVERED

incomplete and revocable until delivery of theinstrument for the purpose of giving effect thereto. Asbetween immediate parties, and as regards a remoteparty other than a holder in due course, the delivery,in order to be effectual, must be made either by orunder the authority of the party making, drawing,accepting, or indorsing, as the case may be; and insuch case the delivery may be shown to have beenconditional, or for a special purpose only, and not forthe purpose of transferring the property in theinstrument. But where the instrument is in the hands

Sec. 16. Every contract on a negotiable instrument isof a holder in due course, a valid delivery thereof byall parties prior to him so as to make them liable tohim is conclusively presumed. And where theinstrument is no longer in the possession of a partywhose signature appears thereon, a valid andintentional delivery by him is presumed until thecontrary is proved.Rules On Delivery Of Negotiable Instruments


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invalid as to him for want of delivery even inthe hands of a holder in due course

4.But there is prima facie presumption ofdelivery of an instrument signed but notcompleted by the drawer or maker andretained by him if it is in the hands of a holderin due course. This may be rebutted by proofof non-delivery.5.An instrument entrusted to another whowrongfully completes it and negotiates it to aholder in due course, delivery to the agent orcustodian is sufficient delivery to bind themaker or drawer.6.If an instrument is completed and is found in

the possession of another, there is primafacie evidence of delivery and if it be a holderin due course, there is conclusivepresumption of delivery.7.Delivery may be conditional or for a specialpurpose but such do not affect the rights of aholder in due course.PERSONS LIABLE IN AN INSTRUMENTGeneral rule: A person whose signature doesnot appear on the instrument is not liable.

Exception:

1.One who signs in a trade or assumed name(Sec. 18)2.A duly authorized agent (Sec. 19)3.A forger (Sec. 23)WHEN AN AGENT IS LIABLE ON THEINSTRUMENT

Sec. 20. Where the instrument contains or a personadds to his signature words indicating that he signs

for or on behalf of a principal, or in a representativecapacity, he is not liable on the instrument if he wasduly authorized; but the mere addition of wordsdescribing him as an agent, or as filling aprincipal, does not exempt him from personal liability.representative character, without disclosing his

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SIGNATURE BY PROCURATION - operates as


notice that the agent has a limited authority to sign.

Effects:

1.The principal is only bound if the agent actedwithin the limits of the authority given2.The person who takes the instrument isbound to inquire into the extent and nature ofthe authority given. (Sec. 21)LIABILITY OF INFANTS AND CORPORATIONSFOR THEIR INDORSEMENT OR ASSIGNMENT

Sec. 22. The indorsement or assignment of theinstrument by a corporation or by an infant passesthe property therein, notwithstanding that from wantliability thereon.of capacity the corporation or infant may incur no

EFFECT OF A FORGED SIGNATURE OR ONEMADE WITHOUT AUTHORITY

Sec. 23. When a signature is forged or made withoutthe authority of the person whose signature itpurports to be, it is wholly inoperative, and no right toretain the instrument, or to give a discharge therefor,or to enforce payment thereof against any partythereto, can be acquired through or under suchsignature, unless the party against whom it is soughtforgery or want of authority.to enforce such right is precluded from setting up the

Notes:

1.Section 23 applies only to forgedsignatures or signatures made withoutauthority2.Alterations such as to amounts or the likefall under section 1243.Forms of forgery are a) fraud in factum;b) duress amounting to fraud; c)

fraudulent impersonation4.Only the signature forged or madewithout authority is inoperative, theinstrument or other signatures which aregenuine are not affected5.The instrument can be enforced byholders to whose title the forgedsignature is not necessary


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6.Persons who are precluded from settingup the forgery are a) those who warrantor admit the genuineness of thesignature b) those who are estopped.7.Persons who are precluded bywarranting are: a) indorsers; b) personsnegotiating by delivery; c) acceptors.8.drawee bank is conclusively presumed toknow the signature of its drawer9.if endorsers signature is forged, loss willbe borne by the forger and partiessubsequent thereto10. draweebank is not conclusivelypresumed to know the signature of theindorser. The responsibility falls on thebank which last guaranteed theindorsement and not the drawee bank.Page 13 of 124


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11. Where the payees signature is forged,payments made by the drawee bank tothe collecting bank are ineffective. Nodebtor/creditor relationship is created.An agency to collect is created betweenthe person depositing and the collectingbank. The drawee bank may recoverfrom collecting bank who may, in turn,recover from the person depositing.Rules On Liabilities Of Parties On A ForgedInstrument

In a PN

1.A party whose indorsement is forged on anote payable to order and all parties prior tohim including the maker cannot be held liableby any holder

2.A party whose indorsement is forged on anote originally payable to bearer and allparties prior to him including the maker maybe held liable by a holder in due courseprovided that it was mechanically completebefore the forgery3.A maker whose signature was forgedcannot be held liable by any holderIn a BOE

1.

The drawers account cannot be charged bythe drawee where the drawee paid2.The drawer has no right to recover from thecollecting bank3.The drawee bank can recover from thecollecting bank4.The payee can recover from the drawer5.The payee can recover from the recipient ofthe payment, such as the collecting bank

6.The payee cannot collect from the draweebank7.The collecting bank bears the loss but canrecover from the person to whom it paid8.If payable to bearer, the rules are the sameas in PN.9.


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If the drawee has accepted the bill, theQuickTime and a

drawee bears the loss and his remedy is to

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go after the forger

10. If the drawee has not accepted the bill buthas paid it, the drawee cannot recover fromthe drawer or the recipient of the proceeds,absent any act of negligence on their part.LIABILITY OF BANK FOR ALLOWING PAYMENTON CHECKS WHERE THE DRAWERSSIGNATURE IS FORGED

Bank of P.I. vs. Casa Montessori Internationale,430 SCRA 261 (2004]

Forgery is the counterfeiting of any writing, consistingof the signing of anothers name with intent to

defraud, is forgery.The bank which allows the payment on a checkwhere the signature is forged is liable to thedepositor-drawer. When one of two persons suffersthe wrongful act of a third person, he whosenegligence was the proximate cause of the loss mustbear the loss. Pursuant to its prime duty to ascertainwell the genuineness of the signatures of its client-depositors, the drawee-bank is expected to usereasonable business prudence. In the performance ofthat obligation, it is bound by its internal banking rulesand regulation that form part of the contract it entersinto with its depositors.

A drawee bank must restore to the account of thedrawer the amounts of checks on which the signatureof its president was forged even of the forger was theindependent auditor of the drawer, who was inrecords of the drawer.charge of reconciling the bank statements with the

Astro-Electronics Corp. vs. Philguarantee, 411SCRA 462 (2003)

The Pres is personally liable. In signing his nameapart from being the Pres., he became a co-maker.

Persons who write their names on the fact of PNs are

makers.Metropolitan Waterworks & Sewerage System v.Court of Appeals, 143 SCRA 20

Where a depositor who was allowed to print itschecks privately adopted no security measures in theprinting of the checks, 23 checks with forged


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signatures of the authorized signatories weredeposited over a period of three months, and thefraud was not discovered because of the failure of thedepositor to reconcile the bank statements with itsits negligence.records, the depositor must bear the loss because of

Philippine National Bank v. Court of Appeals, 25SCRA 693

A drawee bank which paid a check on which thesignature of the drawer had been forged cannotrecover the payment from the collecting bank,because payment implies acceptance and anthe drawer.acceptor admits the genuineness of the signature of

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Associated Bank v. Court of Appeals, 252 SCRAWhile a drawee bank which paid several checkspayable to order with forged endorsements canrecover the payment from the collecting bankbecause the forged endorsement is inoperative, thedrawer must share one-half of the loss where thedrawer substantially contributed to the loss bycontinuing to release the check to the forger althoughit knew the forger was no longer the cashier of the

drawer.Banco de Oro Savings & Mortgage Bank v.Equitable banking Corporation, 157 SCRA 188

Where the endorsements on a check presented by acollecting bank for clearing are forged, the draweebank can recover the payment, for it is the duty of the

collecting bank to see to it that the endorsements are

genuine.CONSIDERATION

Sec. 24. Every negotiable instrument is deemedprima facie to have been issued for a valuableconsideration; and every person whose signatureappears thereon to have become a party thereto forvalue.Sec. 26. Where value has at any time been given for

the instrument, the holder is deemed a holder forvalue in respect to all parties who became such priorto that time.Sec. 28. Absence or failure of consideration is matter

of defense as against any person not a holder in duecourse; and partial failure of consideration is adefense pro tanto, whether the failure is anascertained and liquidated amount or otherwise.Notes:

1.

Absence of consideration is where noconsideration was intended to pass.2.Failure of consideration implies thatconsideration was intended but that it failedto passQuickTime and a

3.The defense of want of consideration is


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ineffective against a holder in due course

4.A drawee who accepts the bill cannot allegewant of consideration against the drawerYang vs. CA, 409 SCRA 159 (2003)He who posits that there was no consideration, isobliged to present convincing evidence to overthrowthe presumption that every Negotiable Instrument is

acquired by every party for value.Samson v. Court of Appeals, 402 SCRA 348Since consideration is presumed, the maker is liableto pay under a negotiable promissory note.Villaluz v. Court of Appeals, 278 SCRA 540Since a check which was dishonored for lack of fundsis presumed to have been issued for valuableconsideration. The drawer should be ordered to pay

its value if he failed to rebut the presumption.

ACCOMMODATION PARTY

An accommodation party is one who signs theinstrument as maker, drawer, acceptor, or indorserwithout receiving value for it and for the purpose oflending his name to some other person.

LIABILITY OF AN ACCOMMODATION PARTY

Sec. 29. An accommodation party is one who hassigned the instrument as maker, drawer, acceptor, orindorser, without receiving value therefor, and for the

purpose of lending his name to some other person.Such a person is liable on the instrument to a holderfor value, notwithstanding such holder at the time oftaking the instrument knew him to be only an

accommodation party.Notes:

1.The accommodated party cannot recoverfrom the accommodation party2.

Want of consideration cannot be interposedby the accommodation party3.An accommodation maker may seekreimbursement from a co-maker even in theabsence of any provision in the NIL; thedeficiency is supplied by the New Civil Code.4.He may do this even without first proceedingagainst the debtor provided:


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a.He paid by virtue of judicial demandb.Principal debtor is insolventPrudencio v. Court of Appeals, 143 SCRA 7To be entitled to recover from an accommodationparty, the holder of a negotiable instrument must be aholder in due course except for the notice of want of

consideration.Caneda v. Court of Appeals, 181 SCRA 762A party who signed a promissory note asaccommodation maker in favor of the payees, who

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then indorsed it to a financing company, cannot raisethe defense that he did not receive any value but isaccommodated.People v. Maniego, 148 SCRA 30entitled to reimbursement from the party

Where a party indorsed several checks asaccommodation endorser and the checks wereholder for the payment of the checks.dishonored for lack of funds, she is liable to the

WHEN AN INSTRUMENT IS NEGOTIATED

transferred from one person to another in such

Sec. 30. An instrument is negotiated when it ismanner as to constitute the transferee the holderthereof. If payable to bearer, it is negotiated bydelivery; if payable to order, it is negotiated by the

indorsement of the holder completed by delivery.Sec. 31. The indorsement must be written on theinstrument itself or upon a paper attached thereto.The signature of the indorser, without additionalwords, is a sufficient indorsement.REQUISITES OF A VALID INDORSEMENT

KINDS OF INDORSEMENTS

1. Special (Sec. 34)2. Blank (Sec. 35)3. Restrictive (Sec. 36)4. Qualified (Sec. 38)

5. Conditional (Sec. 39)EFFECTS OF INDORSING AN INSTRUMENTORIGINALLY PAYABLE TO BEARER

indorsed specially, it may nevertheless be furthernegotiated by delivery; but the person indorsingmake title through his indorsement.specially is liable as indorser to only such holders as

Sec. 40. Where an instrument, payable to bearer, isQuickTime and aTIFF (Uncompressed) decompressor

EFFECTS WHEN A HOLDER STRIKES OUT AN


INDORSEMENT, WHICH IS NOT NECESSARY TOHIS TITLE

indorsement, which is not necessary to his title. Theindorser whose indorsement is struck out, and allindorsers subsequent to him, are thereby relieved


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Sec. 48. The holder may at any time strike out anyfrom liability on the instrument.EFFECTS OF A TRANSFER WITHOUTENDORSEMENT:

to his order transfers it for value without indorsing it,the transfer vests in the transferee such title as the

Sec. 49. Where the holder of an instrument payabletransferor had therein, and the transferee acquires, inaddition, the right to have the indorsement of thetransferor. But for the purpose of determiningwhether the transferee is a holder in due course, thenegotiation takes effect as of the time when theindorsement is actually made.RIGHTS OF A HOLDER

Sec. 51. The holder of a negotiable instrument maysue thereon in his own name; and payment to him indue course discharges the instrument.REQUISITES FOR A HOLDER IN DUE COURSE(HDC)

Sec. 52. A holder in due course is a holder who hastaken the instrument under the following conditions:(a) That it is complete and regular upon its face;(b) That he became the holder of it before it wasoverdue, and without notice that it had beenpreviously dishonored, if such was the fact;(c) That he took it in good faith and for value;(d) That at the time it was negotiated to him he hadno notice of any infirmity in the instrument or defect inthe title of the person negotiating it.Notes:

1.Every holder is presumed to be a HDC (Sec.59)2.The person who questions such has theburden of proof to prove otherwise if one ofthe requisites are lacking, the holder is notHDC3.An instrument is considered complete andregular on its face if: a) the omission isimmaterial; b) the alteration on the instrumentwas not apparent on its face

4.An instrument is overdue after the date ofmaturity.5.On the date of maturity, the instrument is notoverdue and the holder is a HDC6.Acquisition of the transferee or indorsee mustbe in good faith7.


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Good faith means the lack of knowledge ornotice of defect or infirmityPage 16 of 124


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8.A holder is not a HDC where an instrumentpayable on demand is negotiated at anunreasonable length of time after its issue(Sec. 53)RIGHTS OF A HOLDER IN DUE COURSE

Sec. 57. A holder in due course holds the instrumentfree from any defect of title of prior parties, and freefrom defenses available to prior parties amongthemselves, and may enforce payment of theinstrument for the full amount thereof against allparties liable thereon.Notes:

1.Personal or equitable defenses are thosewhich grow out of the agreement or conduct

of a particular person in regard to theinstrument which renders it inequitable forhim through legal title to enforce it. Can beset up against holders not HDC2.Legal or real defenses are those whichattach to the instrument itself and can be setup against the whole world, including a HDC.Personal Defenses Real Defenses1. absence or failure ofconsiderationAlteration2. want of delivery of

complete instrumentWant of delivery ofincomplete instrument3. insertion of wrongdate where payable at afixed period after dateand issued undated; orat a fixed period aftersight and acceptance isundatedDuress amounting toforgery4. filling up the blanks

contrary to authoritygiven or not withinreasonable timeFraud in factum or inesse contractus5. fraud in inducement Minority6. acquisition of theinstrument by force,duress or fearMarriage in case of a wife


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are needed t7. acquisition of theinstrument by unlawfulmeanso see this picture. Insanity where the insaneperson has a guardianappointed by the court8. acquisition of theinstrument for an illegalconsiderationUltra vires acts of acorporation where itscharter or by statue, it isprohibited from issuingcommercial paper9. negotiation in breach Want of authority of agent

of faith10. negotiation undercircumstancesamounting to fraudExecution of instrumentbetween public enemies11. Mistake Illegality of contract madeby statue

12. intoxication Forgery13. ultra vires acts ofcorporations14. want of authority ofthe agent where he hasapparent authority15. illegality of contractwhere form orconsideration is illegal16. insanity where thereis no notice of insanity

WHEN SUBJECT TO ORIGINAL DEFENSES

holder in due course, a negotiable instrument issubject to the same defenses as if it were nonnegotiable.But a holder who derives his title througha holder in due course, and who is not himself a partyto any fraud or illegality affecting the instrument, hasparties prior to the latter.all the rights of such former holder in respect of all

Sec. 58 In the hands of any holder other than aRIGHTS OF A HOLDER NOT A HDC

1. may sue in his own name

2.may receive payment and if it is in duecourse, the instrument is discharged3.holds the instrument subject to the samedefenses as if it were non-negotiable4.if he derives his title through a HDC and isnot a party to any fraud or illegality thereto,has all the rights of such HDC


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WHO IS A HOLDER IN DUE COURSE

Sec. 59. Every holder is deemed prima facie to be aholder in due course; but when it is shown that thetitle of any person who has negotiated the instrumentwas defective, the burden is on the holder to provethat he or some person under whom he claimsacquired the title as holder in due course. But thelast-mentioned rule does not apply in favor of a partywho became bound on the instrument prior to theacquisition of such defective title.Page 17 of 124


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Yang vs. CA, 409 SCRA 159 (2003)Every holder is presumed to be a HDC. Also, aholder is not obliged to show that there was valuableconsideration, since the same is presumed. He doesnot also have to show that he made theaforementioned inquiry. Absence the showing of acircumstance that should have put the holder intoto bad faith.such an inquiry, the failure to inquire is no tantamountBanco Atlantico v. Auditor General, 81 SCRA 335

A collecting bank which allowed the depositor towithdraw the proceeds of a check although the checkhad not been cleared and was told by the depositornot to present the check for payment until a later datealthough the check was already due, is not a holderin due course and cannot recover from the drawer in

case the check is dishonored.State Investment House v. Intermediate AppellateCourt, 175 SCRA 310

Where the postdated checks issued by the drawer asa loan to the payee were crossed, were indorsed bythe payee to an investment house and weredishonored for lack of funds, the investment housecannot hold the drawer liable, because it is not aholder in due course. Since the checks were crossedand could only be deposited, it should haveascertained the title to the check and the nature ofthe possession by the payee. If it failed to do so, it is

not a holder in good faith. Hence, if the issuance ofthe check was subject to the condition that the payeethe drawer can raise this defense.State Investment House, Inc. v. Court of Appeals,would deposit funds for the check and failed to do so,

217 SCRA 32

A drawer who issued two checks as security forjewelry to be sold by the drawer is liable to anendorsee to whom the payee negotiated the checkseven if the drawer returned the pieces of jewelry to

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the payee, since the payee is presumed to be


holder in due course and the drawer cannot invokewant of consideration between the drawer and the


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payee as a defense.LIABILITIES OF A MAKER

Sec. 60. The maker of a negotiable instrument bymaking it engages that he will pay it according to itstenor, and admits the existence of the payee and his

then capacity to indorse.Notes:

1.A makers liability is primarily andunconditional2.One who has signed as such is presumed tohave acted with care and to have signed withfull knowledge of its contents, unless fraud isproved3.The payees interest is only to see to it thatthe note is paid according to its terms4.When two or more makers sign jointly, eachis individually liable for the full amount even if

one did not receive the value given5.The maker is precluded from setting up thedefense that a) the payee is fictional, b) thatthe payee was insane, a minor or acorporation acting ultra vires.LIABILITY OF A DRAWER

A drawer is secondarily liable. By drawing theinstrument, the drawer:

1.Admits the existence of the payee,

2.The capacity of such payee to indorse3.Engages that on due presentment, theinstrument will be accepted or paid or bothaccording to its tenor.Notes:

1.If the instrument is dishonored, and thenecessary proceedings on dishonor dulytakena.

The drawer will pay the amount thereofto the holderb.Will pay to any subsequent indorser whomay be compelled to pay it. (Sec. 61)2.A drawer may insert an express stipulation tonegative or limit his liabilityACCEPTOR - By accepting the instrument, anacceptor:


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1.Engages that he will pay according to thetenor of his acceptance2.Admits the existence of the drawer, thegenuineness of his signature and hiscapacity and authority to draw the instrument3.The existence of the payee and his thencapacity indorseIRREGULAR INDORSER -a person not otherwisea party to an instrument places his signature in blankbefore delivery is liable as an indorser in the followingmanner:

1.If payable to order of a third person liable tothe payee and to all subsequent partiesPage 18 of 124


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2.If payable to order of the maker or drawer liable to all parties subsequent to the makeror drawer3.If payable to bearer liable to all partiessubsequent to the maker or drawer4.If signs for an accommodation party liableto all parties subsequent to the payee (Sec.64)WARRANTIES AND ITS LIMITATIONSSec. 65. Every person negotiating an instrument bydelivery or by a qualified indorsement warrants

(a) That the instrument is genuine and in allrespects what it purports to be;(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;(d) That he has no knowledge of any fact whichwould impair the validity of the instrument or render itvalueless.But when the negotiation is by delivery only, thewarranty extends in favor of no holder other than theimmediate transferee.

The provisions of subdivision (c) of this section do notsecurities, other than bills and notes.apply to persons negotiating public or corporation

Notes:

1.A qualified indorser is one who indorseswithout recourse2.Recourse -resort to a person secondarilyliable after default of person primarily liable3.A qualified indorser cannot raise the defenseof a) forgery b) defect of his title or that it isvoid c) the incapacity of the maker, drawer orprevious indorsers.4.

A qualified indorsement makes the indorsermere assignor of title of instrument, relieveshim of general obligation to pay if instrumentis dishonored, but he is still liable for thewarranties arising from instrument only up toQuickTime and aTIFF (Uncompressed) decompressor

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5.The warranty is to the capacity of priorparties at the time the instrument wasnegotiated. Subsequent incapacity does notbreach the warranty.6.Lack of knowledge of the indorser as to anyfact that would impair the validity or the valueof the instrument must be subsisting allthroughout.7.A person Negotiating by Delivery warrantsthe same as those of qualified indorser andextends to immediate transferees onlyWARRANTIES OF A GENERAL INDORSERSec. 66. Every indorser who indorses withoutqualification warrants, to all subsequent holders indue course

(a) The matters and things mentioned in subdivisions(a), (b), and (c) of the next preceding section; and(b) That the instrument is at the time of his

indorsement valid and subsisting.And, in addition, he engages that on duepresentment, it shall be accepted or paid, or both, asthe case may be, according to its tenor, and that if itbe dishonored, and the necessary proceedings ondishonor be duly taken, he will pay the amountthereof to the holder, or to any subsequent indorser

who may be compelled to pay it.Notes:

1.The indorser under Section 66 warrants the

solvency of a prior party2.The indorser warrants that the instrument isvalid and subsisting regardless of whether heis ignorant of that fact or not.3.Warranties extend in favor of a) a HDC b)persons who derive their title from HDC c)immediate transferees even if not HDC4.The indorser does not warrant thegenuineness of the drawers signature5.

General indorser is only secondarily liablePRESENTMENT FOR PAYMENT

Presentment for payment is not necessary Sec. 70.in order to charge the person primarily liable on theinstrument; but if the instrument is, by its terms,payable at a special place, and he is able and willingto pay it there at maturity, such ability and willingnessare equivalent to a tender of payment upon his part.But, except as herein otherwise provided,


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charge the drawer and indorsers.presentment for payment is necessary in order to

Notes:PRESENMENT FOR PAYMENT production ofa BOE to the drawee for his acceptance, or to adrawee or acceptor for payment. Alsopresentment of a PN to the party liable forpayment of the same.

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1.It consists of: a) a personal demand forpayment at a proper place; and, b) the bill ornote must be ready to be exhibited if requiredand surrendered upon payment.2.Parties primarily liable persons by theterms of the instrument are absolutelyrequired to pay the same. E.g. maker andacceptors. They can be sued directly.3.If payable at the special place, and theperson liable is willing to pay there atmaturity, such willingness and ability isequivalent to tender of payment.4.Presentment is necessary to charge personssecondarily liable otherwise they are

discharged5.Acts needed to charge persons secondarilyliable: a) presentment forpayment/acceptance; b) dishonor by nonpayment/non-acceptance; c) notice ofdishonor to secondary parties6.Acts needed to charge persons secondarilyliable in other cases: a) protest for nonpaymentby the drawee; b) protest for nonpaymentby the acceptor for honorREQUISITES FOR PROPER PRESENTMENT

Sec. 72. Presentment for payment, to be sufficient,must be made (a) By the holder, or by some person authorized toreceive payment on his behalf;(b) At a reasonable hour on a business day;(c) At a proper place as herein defined;(d) To the person primarily liable on the instrument,or if he is absent or inaccessible, to any person foundat the place where the presentment is made.If the instrument is payable on demand:

1.

Presentment must be made withinreasonable time after issue (if a note)QuickTime and a

2.Presentment must be made withinTIFF (Uncompressed) decompressorare needed to see this picture.

reasonable time after last negotiation (if abill)


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Notes:

1.Presentment not required to charge thedrawer:a.He has no right to expectb.He has no right to requirec.That the drawee or acceptor will pay(Sec 79)2.Presentment not required to charge theindorser where:a.The instrument was made or acceptedfor his accommodationb.He has no reason to expect that theinstrument will be paid if presented (Sec.80)3.

Summary of rules as to presentment forpayment:a.Presentment not necessary to chargepersons primarily liableb.Necessary to charge persons secondarilyliableExcept:

i. The drawer under Sec. 79ii. The indorser under Sec. 80

4.When excused under Sec. 82a.After due diligence, presentment cannotbe madeb.Presentment is waivedc.The drawee is a fictitious persond.When the instrument has beendishonored by non-acceptance underSec. 83

5. How dishonored by non-acceptance:a.The instrument was duly presented butpayment is refused or cannot beobtainedb.Presentment is excused and theinstrument is overdue and unpaid (Sec.83)6. Effects of dishonor by non-payment:


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a.An immediate right of recourse to allparties secondarily liable accrues to theholder. (Sec. 84)REQUISITES OF A PAYMENT IN DUE COURSE

TO WHOM A NOTICE OF DISHONOR MAY BEGIVEN

Sec. 88. Payment is made in due course when it ismade at or after the maturity of the instrument to theholder thereof in good faith and without notice that histitle is defective.Sec. 90. The notice may be given by or on behalf ofthe holder, or by or on behalf of any party to theinstrument who might be compelled to pay it to theholder, and who, upon taking it up, would have a rightis given.to reimbursement from the party to whom the notice

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FORM OF A NOTICE

Sec. 95. A written notice need not be signed, and aninsufficient written notice may be supplemented andvalidated by verbal communication. A misdescriptionof the instrument does not vitiate the notice unless

the party to whom the notice is given is in fact misledthereby.Sec. 96. The notice may be in writing or merely oraland may be given in any terms which sufficientlyidentify the instrument and indicate that it has beendishonored by non-acceptance or non-payment. Itmay in all cases be given by delivering it personallyor through the mailsWHEN NOTICE CAN BE WAIVED

Sec. 109. Notice of dishonor may be waived, eitherbefore the time of giving notice has arrived or afterthe omission to give due notice, and the waiver maybe express or implied.Notes:

1.Protest may be waived. It is also deemed awaiver of presentment and notice of dishonor(Sec. 111)2.Where notice is waived, presentment is notwaived

3.Where presentment is waived, notice is alsowaived4.Where protest is waived, notice andpresentment is waivedNotice of Dishonor - given by the holder to theparties secondarily liable, drawer and each indorser,that the instrument was dishonored by nonacceptanceor non-payment by the drawee/maker

General rule: Any drawer or indorser to whom suchnotice is not given is discharged.

Exceptions:

1.Waiver (Sec. 109)QuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.

2.Notice is dispensed (Sec. 112)


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3.Not necessary to Drawer (Sec. 114)4.Not necessary to Indorser (Sec. 115)WHEN NOTICE OF DISHONOR IS NOTNECESSARY TO A DRAWER

Sec. 114. Notice of dishonor is not required to begiven to the drawer in either of the following cases:

person.(a) Where the drawer and drawee are the same(b) When the drawee is a fictitious person or aperson not having capacity to contract.

(c) When the drawer is the person to whom theinstrument is presented for payment.(d) Where the drawer has no right to expect orrequire that the drawee or acceptor will honor theinstrument.(e) Where the drawer has countermanded payment.WHEN NOTICE TO AN INDORSER IS NOTSec. 115. Notice of dishonor is not required to beREQUIRED

given to an indorser in either of the following cases:

(a) Where the drawee is a fictitious person or aperson not having capacity to contract, and theindorser was aware of the fact at the time heindorsed the instrument;(b) Where the indorser is the person to whom theinstrument is presented for payment;(c) Where the instrument was made or accepted forhis accommodationNote:

1.Omission to give notice of dishonor by nonacceptancedoes not prejudice a HDC (Sec. 117)2.Protest only necessary for a foreign bill ofexchange. Protest for other negotiableinstruments is optional. (Sec. 118)State Investment House, Inc. v. Court of Appeals,217 SCRA 32

The holder of two checks which were dishonoredbecause the drawer withdrew her funds from the

bank can hold the drawer liable even if no notice ofdishonor was given to the drawer, since the drawerhonor the checks.had no right to expect that the drawee bank would

A drawee bank is liable for damages to a drawerwhose checks were dishonored for lack of fundsdeposited in his account was dishonoredbecause, it did not give him notice that the check he


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Associate Bank v. Tan, 446 SCRA 282CAUSES OF DISCHARGE OF THE INSTRUMENT

Sec. 119. A negotiable instrument is discharged (a) By payment in due course by or on behalf of theprincipal debtor;(b) By payment in due course by the partyaccepted for accommodation;accommodated, where the instrument is made orPage 21 of 124


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(c) By the intentional cancellation thereof by theholder;(d) By any other act which will discharge a simplecontract for the payment of money;(e) When the principal debtor becomes the holder ofthe instrument at or after maturity in his own right.Notes:

1.Discharge of the instrument discharges allthe parties thereto2.Payment must be in due course, and by theprincipal debtor or on his behalf3.If payment is not made by the principaldebtor, payment only cancels the liability ofthe payor and those obligated after him but

does not discharge the instrument.4.Payment by an accommodation party doesnot discharge the instrument.HOW A SECONDARY PARTY IS DISCHARGED

instrument is discharged

Sec. 120. A person secondarily liable on the(a) By any act which discharges the instrument;(b) By the intentional cancellation of his signature bythe holder;(c) By the discharge of a prior party;

(d) By a valid tender of payment made by a priorparty;(e) By a release of the principal debtor, unless theholder's right of recourse against the partysecondarily liable is expressly reserved;(f) By any agreement binding upon the holder toextend the time of payment, or to postpone theholder's right to enforce the instrument, unless madewith the assent of the party secondarily liable, orunless the right of recourse against such party isexpressly reserved.RIGHTS OF A PARTY SECONDARILY LIABLEWHO ALREADY PERFORMED HIS OBLIGATION

TO PAY

1.The instrument is not dischargedQuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.

2.The party is remitted to his former rights as toall prior parties


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3.The party may strike out his own and allsubsequent indorsements4.The party may negotiate the instrument againEXCEPTIONS:

1.An instrument cannot be renegotiated whereit is payable to order of a 3rd person and hasbeen paid by the drawer2.Instrument cannot be renegotiated where itwas made or accepted for accommodationand it has been paid by the partyaccommodated.WHEN RENUNCIATION BY A HOLDERDISCHARGES AN INSTRUMENT

1. Made in favor of a person primarily liable2. Made at or after maturity of the instrument3.In writing or the instrument is delivered up to

the person primarily liable .Notes:

1. If renounced in favor of a party secondarily liable,only he is exonerated from liability and all partiessubsequent to him.2. Discharge by novation is allowed.General rule: When materially altered, withoutthe consent of all parties liable, the instrument isavoided

Except as against:

1.The party who has made thealteration2.The party who authorized orassented to the alteration.Subsequent indorsersException:

If in the hands of a HDC, may be enforcedaccording to its original tenor

Material Alteration - if it alters the effect of the

instrument.

(a) The date;Sec. 125 Any alteration, which changes (b) The sum payable, either for principal orinterest;(c) The time or place of payment;(d) The number or the relations of the parties;(e) The medium or currency in which payment isto be made;


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Or which adds a place of payment where no place ofpayment is specified, or any other change or additionwhich alters the effect of the instrument in anyrespect, is a material alteration.INSTANCES WHEN A BOE MAY BE TREATED ASA PN

1.The drawer and the drawee are one and thesame2.The drawee is a fictitious person3.The drawee has no capacity to contract.Page 22 of 124


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Acceptance -the signification by the drawee of hisassent to the order of the drawer. It is an act bywhich a person on whom the BOE is drawn assentsto the request of the drawer to pay it.

ACCEPTANCE MAY BE:

1.actual2.constructive3.general4.qualifiedREQUISITES OF AN ACTUAL ACCEPTANCE

1.

In writing2.Signed by the drawee3.Must not express that the drawee willperform his promise by any other means thanpayment of money4.Communicated or delivered to the holderNote:

A holder has a right to:

1.require that acceptance be written on the billand if refused, treat it as if dishonored (Sec.133)2.refuse to accept a qualified acceptance andmay treat it as dishonored (Sec. 142)CONSTRUCTIVE ACCEPTANCE

Sec. 137. Where a drawee to whom a bill is deliveredfor acceptance destroys the same, or refuses withintwenty-four hours after such delivery, or within suchother period as the holder may allow, to return the bill

accepted or non-accepted to the holder, he will bedeemed to have accepted the same.PRESENTMENT FOR ACCEPTANCE

1.If necessary to fix the maturity of the bill2.If it is expressly stipulated that it shall bepresented for acceptance3.


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If the bill is drawn payable elsewhere thanthe residence or place of business of thedrawee.QuickTime and aTIFF (Uncompressed) decompressorare needed to see this picture.

SUMMARY ON PRESENTMENT FORACCEPTANCE OF BILLS OF EXCHANGE:

1.To make the drawee primarily liable and forthe accrual of secondary liability (Sec. 144)2.Necessary to fix maturity date, where billexpressly stipulates presentment, bill payableother than place of drawee (Sec. 143)3.When presentment is excused:a.drawee is dead, hides, is fictitious,incapacitated person,b.after due diligence presentment cannotbe made,

c.presentment is refused on anotherground although presentment is irregular(Sec. 148)General rule: Protest is required only for foreign billsException: Inland bills and notes may also beprotested if desired

Where a foreign bill appearing on its face Sec. 152.WHEN PROTEST REQUIREDto be such is dishonored by non-acceptance, it mustbe duly protested for non-acceptance, and wheresuch bill which has not previously been dishonored

by non-acceptance is dishonored by non-payment, itmust be duly protested for non-payment. If it is not soprotested, the drawer and indorsers are discharged.Where a bill does not appear on its face to be aunnecessary.foreign bill, protest thereof in case of dishonor is

Notes:

1.Protest - formal statement in writing made bya notary under his seal of office at therequest of the holder, in which it is declared

that the same was presented for payment oracceptance (as the case may be) and suchwas refused2.It means all steps or acts accompanying thedishonor of a bill or note necessary to chargean indorser3.Required when the instrument is a foreign billof exchange.


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4.It must be made on the same date ofdishonor, by a notary/respectable citizen ofthe place in the presence of 2 crediblewitnesses so recourse to secondary partiesBill in Set -a bill of exchange drawn in several parts,each part of the set being numbered and containing areference to the other parts, the whole of the partsjust constituting one bill.

Lee v. CA, 375 SCRA 5579 (2002)Although drafts issued in connection with letters ofcredit are negotiable instruments.Page 23 of 124


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CONTRACT OF INSURANCE An agreementwhereby one undertakes for a consideration toindemnify another against loss, damage orliability arising from an unknown or contingentevent.

CONTRACT OF SURETYSHIP An agreementwhereby a party called the surety guarantees theperformance by another called the principal orobligor of an obligation or undertaking in favor ofa third party called the oblige. It shall be deemedto be an insurance contract if made by a suretywho or which, as such, is doing an insurancebusiness.

INSURANCE CODEDOING AN INSURANCE OR TRANSACTING ANINSURANCE BUSINESS: A person is doing or

transacting an insurance business if he performs anyof the following:

1.Making or proposing to make an insurer, anyinsurance contract;2.Making or proposing to make, as surety anycontract of suretyship as a vocation, not as amere incident to any other legitimatebusiness as a surety;3.Doing any insurance business like

reinsurance and similar acts; and,4.Doing or proposing to do any businessequivalent to the above.CHARACTERISTICS OF AN INSURANCECONTRACT:

1.Aleatory - it is an aleatory but not a wageringcontract. By an aleatory contract, one of theparties or both reciprocally bind themselvesto give or to do something in consideration ofwhat the other shall give or do upon the

happening of an event which is uncertain, orQuickTime and aTIFF (Uncompressed) decompressor

which is to occur at an indeterminate time.


2.Unilateral - A contract of insurance is wholly


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executed on the party of the insured by thepayment of the premium, and remainsexecutory on the part of the insurer, subjectto the condition of the happening of the eventinsured against.3.Personal - it is personal in the sense thateach party to it, in entering into the insurancecontract, takes into account the character,credit and conduct of the other.

4.Conditional - The insurers liability is basedon the happening of the event insuredagainst.5.Contract of Indemnity Indemnity is thebasis of all property insurance. It simplymeans that the insured who has insurableinterest over a property is only entitled torecover the amount of actual loss sustainedand the burden i