commercial law notes (atty. rondez)

7/24/2019 Commercial Law Notes (Atty. Rondez)

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UNIVERSITY OF THE CORDILLERAS BAR OPERATIONS 2011

Commercial law

Prepared by:

ATTY. RENATO S. RONDEZ

BAR OPERATIONS 2011 Page 1

NEGOTIABLE INSTRUMENTS

LAW(Act No. 2031, June 2, 1911)

Written contracts for thepayment of money; by its form,intended as a substitute formoney and intended to pass fromhand to hand, to give the holder indue course the right to hold thesame and collect the sum due.

Negotiable instrumentsproduce the effect of paymentonly when they have beenencashed or through the fault of

the creditor have been impaired.(Article 1249, NCC)

Principal Features andCharacteristics

a. negotiability - right oftransferee to hold theinstrument and collect the

sum dueb. accumulation of secondary

contracts - instrument isnegotiated from person toperson

Requisites of Negotiability

An instrument to be negotiablemust conform to the followingrequirements:

a. It must be in writing andsigned by maker or drawer;

b. Must contain anunconditional promise or orderto pay a sum certain in money;c.Must be payable on demand,or at a fixed or determinablefuture time;d.Must be payable to the orderor to bearer; ande. Where the instrument isaddressed to a drawee, he mustbe named or otherwiseindicated therein withreasonable certainty.

*For a Promissory Note to benegotiable, requisites a,b,c and, d

must be met.

*For a bill of exchange to benegotiable, all the aboverequisites must be met.

Purpose of Negotiability. To allowbills and notes the effect which

money, in the form of governmentbills or notes, supplies in thecommercial world.

The validity and negotiablecharacter of a negotiable

instrument are NOT affected by

the fact that:

1. It is not dated;2. It does not specify the place

where it is drawn or where it ispayable;

3. It bears a seal;


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GREEN NOTES IN COMMERCIAL LAW

Prepared by: ATTY. RENATO S. RONDEZ


4. It designates a particularkind of current money in which

payment is to be made (Sec. 6)

Kinds of Negotiable

Instruments:

A. PROMISSORY NOTE -unconditional promise to payin writing made by one person

to another, signed by themaker, engaging to pay ondemand or a fixeddeterminable future time asum certain in money to orderor bearer. When the note isdrawn to makers own order, it

is not complete until indorse byhim. (Sec. 184 NIL)

Parties:

a. Maker one who makes apromise and sign theinstrumentb. Payee one to whom thepromise is made or theinstrument is payable.

FORMS OF PROMISSORY

NOTE1. Due bill, an instrumentwhereby one personacknowledges his indebtednessto another and promises to pay

a sum certain in money.2. Bonds, which are in thenature of PN.

3. Certificate of Depositissued by banks payable todepositor or his order, or tobearer

B. BILL OF EXCHANGE -

unconditional order in writingaddressed by one person toanother, signed by the persongiving it, requiring the personto whom it is addressed to payon demand or at a fixed ordeterminable future time asum certain in money to order

or to bearer. (Sec. 126 NIL)

Parties:

a.Drawerone who gives theorder to pay money tothird party.

b.Payee one to whom thebill is drawn or ispayable

c. Drawee/ acceptorpersonto whom the bill isaddressed and who isordered to pay.

Forms of bill of exchange:

1. Trade Acceptance, A BOE

drawn by seller on the buyerfor the purchase price of goods.2. Clean Bill of Exchange, ABOE wherein no document isattached upon presentment foracceptance or payment.3. Documentary Bill ofExchange, A BOE wherein

documents are attached uponpresentment for acceptance orpayment.4. Bank Acceptance- A draftdrawn and accepted by a bank.


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5. Drafts, which are BOEdrawn by one bank upon

another.

C. CHECK- bill of exchange drawnon a bank and payable ondemand. (Sec. 185 NIL)

FORMS OF CHECK

1.Ordinary Check2.Cashiers Check, A Check

payable to third personwhich is drawn by the bankupon itself. (2003 BEQ)

3.Certified check, A personalcheck with guaranteed fundsto cover the payment of thecheck.

4.Voucher Check

5.Travelers Check6.Managers Check , A check

drawn by the manager of thebank. (2003 BEQ)

7.Crossed Check ( 2004, 2005BEQ)

8.Memorandum Check.

Other forms of negotiable

instruments:

a. Certificate of deposit issued bybanks, payable to the depositor orhis order, or to bearer (CALTEX v.CA, 212 SCRA 471)

b. Trade Acceptance;

c. Bonds, which are in the natureof a promissory notes;d. Drafts which are bills ofexchange drawn by one bankupon another;

All of these comply with

Sec. 1 NIL.

Letters of Credit are not

negotiable.

DISTINCTIONS:(2005 BEQ)

Negotiable

Instruments

Non-

negotiable

Instruments

Contains all therequisites ofSec. 1 of theNIL

Does notcontain all therequisites ofSec. 1 of theNIL

Transferred bynegotiation

Transferred byassignment

Holder in due

course mayhave betterrights thantransferor

Transferee

acquires rightsonly of histransferor

Prior partieswarrantpayment

Prior partiesmerelywarrantlegality of title

Transferee hasright ofrecourseagainstintermediateparties

Transferee hasno right ofrecourse

Negotiable

Instruments

Negotiable

Documents of

Title

Have requisitesof Sec. 1 of theNIL

Does notcontainrequisites ofSec. 1 of NIL


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Have right ofrecourse

againstintermediateparties who aresecondarilyliable

No secondaryliability ofintermediateparties

Holder in duecourse mayhave rights

better thantransferor

Transfereemerely stepsinto the shoes

of thetransferorSubject ismoney

Subject isgoods

Instrumentitself is

property ofvalue

Instrument ismerelyevidence oftitle; thing of

value are thegoodsmentioned inthe document

Promissory

Note

Bill of

Exchange

Unconditionalpromise

Unconditionalorder

Involves 2parties

Involves 3parties

Makerprimarily liable

Drawer onlysecondarilyliable

Only 1presentment -for payment

Generally 2presentments- foracceptanceand forpayment PN CHECK

- There are two - There are three

Check BOE

- Always

drawnupon abank orbanker

- May or may not be

drawn against abank

- Alwayspayable ondemand

- May be payable ondemand or at a fixedor determinablefuture time

- Notnecessarythat it bepresentedforacceptance

- Necessary that it bepresented foracceptance

- Drawn ona deposit

- Not drawn on adeposit

- The deathof a drawerof a check,withknowledgeby thebanks,revokes the

authority ofthe bankerpay

- The death of thedrawer of theordinary bill ofexchange does not

- Must bepresentedforpaymentwithin a

reasonabletime afterits issue (6months)

- May be presentedfor payment within areasonable timeafter its lastnegotiation.


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(2) parties, themaker and the

payee

(3) parties, thedrawer, the

drawee bankand the payee

- May be drawnagainst anyperson, notnecessarily abank

- Always drawnagainst a bank

- May be payable

on demand or ata fixed ordeterminablefuture time

-Always payable

on demand

- A promise topay

- An order to pay

*Note: PN, BOE and Check-definitions (2002 BEQ)

However, these instruments

are non-negotiable:

1. Treasury warrant are non-negotiable because there is anindication of the fund as thesource of payment of thedisbursement.(Metrobank v. CA,194 SCRA 169)2. Since a postal money orderi

ssubject to restrictions andlimitations under postal laws andissued by the Government whichis not engaged in commercialtransactions, it is not governed byNIL. (Phil. Educ. Co., Inc. vs.Soriano, 39 SCRA 587)

3. Letters of credit4. Warehouse receipts- Non-Negotiable for the same as Bill oflading it merely represents goods,not money.

Factors that affect thedetermination of negotiability ofinstruments:

a.Whole instrument;b.What appears on the face of

the instrument;c. Requisites enumerated in

Sec.1 of NIL; and

d.Should contain words orterms of negotiability.

(Gopenco, Commercial law BarReviewer, cited in Aquino p. 23)

In determining thenegotiability of aninstrument, the instrumentin its entirety and whatappears on its face must beconsidered. It must complywith the requirements ofSec.1 of NIL. ( Caltex Phils. V.CA, 212 SCRA 448)

The acceptance of a bill ofexchange is not important inthe determination of itsnegotiability. The nature ofacceptance is important onlyon the determination of thekind of liabilities of theparties involved. (PBCOM v.Aruego, 102 SCRA 530)

Notes on Section 1:- In order to be negotiable,

there must be a writing ofsome kind, else there wouldbe nothing to be negotiatedor passed from hand tohand. The writing may be in


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ink, print or pencil. It maybe upon parchment, cloth,

leather or any othersubstitute of paper.

- It must be signed by themaker or drawer. It mayconsist of mere initials oreven numbers, but theholder must prove that whatis written is intended as a

signature of the personsought to be charged.- The Bill must contain an

order, something more thanthe mere asking of a favor.

- Sum payable must be inmoney only. It cannot bemade payable in goods,wares, or merchandise or inproperty.

- A drawees name may be

filled in under Section 14 ofthe NIL.

MEANING OF PARTICULAR

REQUISITES:

a. UNCONDITIONAL PROMISE

OR ORDER

- Where the promise ororder is made to depend on acontingent event, it is conditional,and makes the instrument non-negotiable.

The conditional nature of thepromise or order is not effected

by:

a.An indication of a particularfund from which the acceptorreimburses himself afterpaying the holder;

b.A statement of thetransaction which gives rise

to the instrument.

b. CERTAINTY OF SUM- The sum is certain if the amountfixed.- The certainty is HOWEVER NOTaffected although to be paid:

1.with interests;

2.by stated installments;3.by stated installments withacceleration clause;

4.with exchange;5.with cost of collection or

attorneys fees.

Escalation Clause anagreement pertaining to a loan or

increased in the event that theapplicable maximum rate ofinterest is increased by law or bythe Monetary Board.

De-escalation Clause anagreement pertaining to a loan orforbearance of money, goods or

credits may stipulate that the rateof interest agreed upon may bereduced in the event that theapplicable maximum rate ofinterest is decreased by law or bythe Monetary Board.

The presence of an

escalation clause or a de-escalation clause or both in theinstrument does not affect thenegotiable character of theinstrument.


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Acceleration clause - it is aprovision that upon default in

payment of any installment or ofinterest, the whole shall becomedue.

c. PAYABLE IN MONEY

General Rule: If some otheract besides payment of moneyis promised or ordered, the

instrument becomes non-negotiable.

Exceptions:a.Authorizes the sale of

collateral securities ondefault;

b.Authorizes confession ofjudgment on default;

c.

Waives the benefit of lawintended to protect thedebtor;

d.Allows the creditor theoption to require somethingto be done in lieu of money.

d. PAYABLE ON DEMAND

An instrument is payable ondemand:

a.Where it is expressed to bepayable on demand, at sightor on presentation;

b.Where no period of paymentis stated;

c. Where the instrument has

been issued, accepted orindorsed after maturity.

e. DETERMINABLE FUTURE

TIME

- Future time is determinable inthe following cases:

a.At a fixed period after dateor sight;

b.On or before a specifiedfixed or determinable futuretime;

c. On or at a fixed period afterthe occurrence of a specifiedevent, certain to happen,although the exact date isnot certain.

f. PAYABLE TO ORDER

- The instrument is payable toorder where drawn payable to theorder of a specified person, or tohim or his order.- The payee must be named orotherwise indicated therein withreasonable certainty.

g. PAYABLE TO BEARERa.Where it is expressed to be

so payable;b.When payable to a person

named therein or bearer;c. When payable to the order

of a fictitious or non-existingperson, and such fact wasknown to the drawer ormaker;

d.When the name of the payeeis not the name of a person;

e.When the only and lastindorsement is anindorsement in blank.

An original bearer instrumentremains to be a bearerinstrument even if indorsedspecially and thus can benegotiated by mere delivery.


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When the payee is vaguely

designated, the loss will be

borne by the party who causedit the drawer. (Equitable

Bank v. IAC, 161 SCRA 518).

RULES AS TO DATESThere are several importantprinciples as to dates in

negotiable instruments. Theseare:1.Where the instrument, its

acceptance, or indorsement isdated, such date is presumed tobe the corresponding true date;Date is important -

2.Where the instrument is

payable within a specifiedperiod after date, or afteracceptance, in which case thedate of the instrument and thedate of maturity of theinstrument; in these cases, theholder may insert the truedate;

a.when the instrument ispayable on demand, thedate is necessary todetermine whether theinstrument was presentedwithin a reasonable timefrom issue in the case ofnotes or from lastnegotiation in the case of

bills, as these factors willshow whether the lastholder is a holder in duecourse or not; and

b.when the instrument is aninterest-bearing one, to

determine when theinterest starts to run.

3.Antedating or postdating aninstrument does not affectvalidity or negotiability, unlessdone for an illegal orfraudulent purpose.

REAL DEFENSES Those thatattach to the instrument itself and

are available against all holders,whether in due course or not.(WAD FIMMU WIFE)

1.Want of delivery ofincomplete instrument;

2.Alteration;3.Duress amounting to

forgery;4.Fraud in factum or fraud

in esse contractus;5.Insanity where the insane

person has a guardianappointed by the court;

6.Minority;7.Marriage in the case of a

wife;8.Ultra vires acts of a

corporation; where thecorporation is absolutelyprohibited by its charteror statute from issuingany commercial paperunder any circumstances;

9.Want of authority ofagent;

10. Illegality of contractwhere it is the contract orinstrument itself which isexpressly made illegal bystatute;

11. Forgery;


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12. Execution ofinstrument between

public enemies

PERSONAL DEFENSES/

EQUITABLE DEFENSES Thosewhich are available only against aperson not a holder in due courseor a subsequent holder whostands in privity with him.

(W2

A4

F2

I4

N2

MU)1.Want of delivery ofcomplete instrument;

2.Want of authority ofagent where he hasapparent authority.

3.Absence or failure ofconsideration, partial ortotal;

4.Acquisition of theinstrument by force,duress or fear;

5.Acquisition of theinstrument by unlawfulmeans;

6.Acquisition of theinstrument for an illegalconsideration;

7.Filling up of blankcontrary to authoritygiven or not withinreasonable time, wherethe instrument isdelivered;

8.Fraud in inducement;

9.Insertion of wrong date inan instrument, where it ispayable at a fixed periodafter date and it is issuedundated or where it ispayable at a fixed period

after sight and theacceptance is undated;

10. Intoxication;11. Insanity where there is

no notice of insanity onthe part of the onecontracting with theinsane person;

12. Illegality of contractwhere the form or

consideration is illegal;13. Negotiation in breachof faith;

14. Negotiation undercircumstances thatamount to fraud;

15. Mistake;16. Ultra vires acts of

corporations where thecorporation has thepower to issue negotiablepaper but the issuancewas not authorized forthe particular purpose forwhich it was issued.

INSERTION OF DATE(Sec.13)

Rule: If there is a date and it ischanged, apply Sec.124 onALTERATION OF ANINSTRUMENT.

The date may be inserted in an

instrument when:a.An instrument expressed to

be payable at a fixed periodafter date is issued undated

b.Where acceptance of aninstrument payable at a


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fixed period after sight isundated (Sec. 13 NIL)

Effects:- Any holder may insert the

true date of issuance oracceptance

- The insertion of a wrongdate does not avoid theinstrument in the hands of a

subsequent holder in duecourse- As to the holder in due

course, the date inserted(even if it be the wrong date)is regarded as the true date.

As to a holder in due course- thedate inserted is the true date.

Subsequent Holder in Due

Course not affected by the

following deficiencies:

a. Incomplete but deliveredinstrument (Sec. 14)

b. Complete but undelivered(Sec. 16)

c. Complete and deliveredissued withoutconsideration or aconsideration consisting of apromise which was notfulfilled (Sec 28)

Holder in Due Course Affected

by Abnormality/Deficiency:

a. Incomplete and undeliveredinstrument (Sec. 15)

b. Maker/drawers signature

forged (Sec. 23)

Incomplete but Delivered

Instrument: (Sec.14)

(2004 & 2005 Bar Exam)

1. Where an instrument iswanting in any materialparticular:a. Holder has prima facie

authority to fill up the blankstherein.

b.

It must be filled up strictly inaccordance with theauthority given and within areasonable time.

c. If negotiated to a holder indue course, it is valid andeffectual for all purpose asthough it was filled upstrictly in accordance withthe authority given andwithin reasonable time. (Sec.14 NIL)

2. Where only a signature on ablank paper was delivered:

a. It was delivered by theperson making it in orderthat it may be converted intoa negotiable instrument

b.The holder has prima facieauthority to fill it up as suchfor any amount. (Sec. 14NIL)

Notes on Section 14

Rule:Sec. 14 applies if there is asignature on the instrument forthe purpose of giving effectthereto.Rule:If no signature, refer to Sec.15 or 23.


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Rule: Sec. 14 is merely aPERSONAL DEFENSE.

If the instrument is wanting inmaterial particular, merepossession of the instrument isenough to presume prima facieauthority to fill it up.

Material particular may be anomission which will render the

instrument non-negotiable (e.g.name of payee), an omissionwhich will not render theinstrument non-negotiable (e.g.date)

In the case of the signature inblank, delivery with intent toconvert it into a negotiableinstrument is required. Merepossession is not enough.

Incomplete and Undelivered

Instrument: (Sec.15)

There are two steps in theexecution of a NI:

1.The act of writing theinstrument comion of givingeffect pletely and inaccordance with Sec. 1 ofNIL; and

2.The delivery of theinstrument with theintention of giving effect

thereto If Completed and negotiated

without authority, not avalid contract against aperson who has signedbefore delivery of thecontract against a person

who has signed beforedelivery of the contract even

in the hands of a HDC butsubsequent indorsers areliable.

REASON: The law does not makeany distinction between a HDCand one who is not a HDC.

Notes on Section 15 It is a real defense. It can be

interposed against a holder indue course. Where an INCOMLETE and

UNDELIVERED instrumentis in the hands of a HDC,there is PRIMA FACIE

PRESUMPTION of delivery. Defense of the maker is to

prove non-delivery of theincomplete instrument.

Complete but Undelivered:

(Sec.16)General Rule: Every contract on

a negotiable instrument isincomplete and revocableuntil delivery for thepurpose of giving effectthereto. .

a. If between immediate partiesand remote parties not holderin due course, to be effectual

there must be authorizeddelivery by the party making,drawing, accepting orindorsing. Delivery may beshown to be conditional or fora special purpose only


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b. If the holder is a holder in duecourse, all prior deliveries

conclusively presumed validc. If instrument not in hands of

drawer/maker, valid andintentional delivery ispresumed until the contrary isproven (Sec. 16 NIL)

Rules on delivery of negotiableinstruments:

1)Delivery is essential to thevalidity of any negotiableinstrument

2)As between immediate partiesor those is like cases, deliverymust be with intention ofpassing title

3)An instrument signed but notcompleted by the drawer ormaker and retained by him isinvalid as to him for want ofdelivery even in the hands of aholder in due course

4)But there is prima faciepresumption of delivery of aninstrument signed but notcompleted by the drawer o

rmaker and retained by him if itis in the hands of a holder indue course. This may berebutted by proof of non-delivery.

5)An instrument entrusted toanother who wrongfullycompletes it and negotiates itto a holder in due course,delivery to the agent orcustodian is sufficient deliveryto bind the maker or drawer.

6)If an instrument is completedand is found in the possession

of another, there is prima facieevidence of delivery and if it bea holder in due course, there isconclusive presumption ofdelivery.

7)Delivery may be conditional orfor a special purpose but suchdo not affect the rights of a

holder in due course.

Rules on Interpretation of

Instruments:

1. Discrepancy between theAmount in Figures and that in

Words

- the words prevail, but if thewords are ambiguous,reference will be made tothe figures to fix the amount.

2.Instrument NOT dated- considered dated on the

date of issue

3.Conflict between Written andPrinted Provisions- written provisions prevail

4. Interest provided for, but Nostarting Date was specified

- starting date is the date ofthe instrument, in the

absence of said date, fromdate of issue5.Instrument Ambiguous

- if the instrument isambiguous such that there isdoubt whether it is a bill ornote, the holder may treat it


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as a note or a bill at hisoption.

6. Signature on Instrumentdoes not Indicate Capacity in

Which Made- Where it cannot bedetermined in what capacitya person affixed hissignature to a negotiableinstrument, he is deemed to

have signed as an indorser.As indorser, his liabilityunder the instrument issecondary, meaning that ifthe party primarily liablecannot pay, the indorser canbe made to pay by theholder of the instrument.

7. Where Promissory Noteworded Promise to Pay is

signed by two (2) makers

- Under Section 17 (g) of theNIL and Article 1216 of theCivil Code, where thepromissory note wasexecuted jointly andseverally by two or morepersons, the payee of thepromissory note had theright to hold any one of thetwo (2) signers of thepromissory note responsiblefor the payment of the wholeamount of the note.(Philippine National Bank

vs. Concepcion Milling Co.,5 SCRA 745).

RULE ON SIGNATURES

General Rule: A person whosesignature does not appear

on the instrument in notliable.

Exception:a.One who signs in a trade or

assumed name (Sec. 18)b.A duly authorized agent

(Sec. 19)c. A forger (Sec. 23)

LIABILITY of a person SIGNINGAS AGENT:

An agent is exempt from personal

liability, provided he:

1. Acts within the scope of hisauthority;2. Discloses the name of hisprincipal; and3. Discloses that he is acting in arepresentative capacity (Sec. 20)

Notes on Section 20

General rule: An agent is notliable on the instrument if hewere duly authorized to signfor or on behalf of aprincipal.

If an agent does not disclose hisprincipal, the agent ispersonally liable on theinstrument.

Per Procuration - operates as

notice that the agent has a limitedauthority to sign.

Effects:

- The principal in only boundif the agent acted within thelimits of the authority given


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Persons PRECLUDED from

setting up the defense of

forgery:1. Those who admit/warrant thegenuineness of the signature inquestion: indorsers, personsnegotiating by delivery andacceptors;2. Those who by their acts,silence, or negligence, are

estopped from claiming forgery;3. Holder of a bearer instrument

Forged signature isnot necessary to the title of theholder.

Notes on Section 23

Section 23 applies only to

forged signatures or signaturesmade without authorityAlterations such as to amounts

or like fall under section 124Forms of forgery are a) fraud in

factum b) duress amounting tofraud c) fraudulentimpersonation

Only the signature forged ormade without authority isinoperative, the instrument orother signatures which aregenuine are affected

The instrument can beenforced by holders to whosetitle the forged signature is notnecessary

drawee bank is conclusivelypresumed to know thesignature of its drawer

if endorsers signature is

forged, loss will be borne bythe forger and partiessubsequent thereto

drawee bank is notconclusively presumed to

know the signature of theindorser. The responsibilityfalls on the bank which lastguaranteed the indorsementand not the drawee bank.

Where the payees signature is

forged, payments made by thedrawee bank to collecting bank

is ineffective. Nodebtor/creditor relationship iscreated. An agency to collect iscreated between the persondepositing and the collectingbank. Drawee bank mayrecover from collecting bankwho may in turn recover fromthe person depositing.

Rules on liabilities of parties on

a forged instrument:

In a PN- A party whose indorsement

is forged on a note payableto order and all parties priorto him including the makercannot be held liable by anyholder

- A party whose indorsementis forged on a note originallypayable to bearer and allparties prior to himincluding the maker may be

held liable by a holder in duecourse provided that it wasmechanically completebefore the forgery

- A maker whose signaturewas forged cannot be heldliable by any holder


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In a BOE

- The drawers account cannot

be charged by the draweewhere the drawee paid

- The drawer has no right torecover from the collectingbank

- The drawee bank canrecover from the collectingbank

-

The payee can recover fromthe drawer- The payee can recover from

the recipient of the payment,such as the collecting bank

- The payee cannot collectfrom the drawee bank

- The collecting bank bearsthe loss but can recoverfrom the person to whom itpaid

- If payable to bearer, therules are the same as in PN.

- If the drawee has acceptedthe bill, the drawee bearsthe loss and his remedy is togo after the forger

- If the drawee has notaccepted the bill but haspaid it, the drawee cannotrecover from the drawer orthe recipient of theproceeds, absence any act ofnegligence on their part.

Every negotiable instrument isdeemed prima facie to have beenissued for a valuableconsideration. (Sec. 24)

Effects:

- Every person whosesignature appears thereon is

a party for value- Presumption is disputable

Where value has at any time beengiven for the instrument, theholder is deemed a holder forvaluein respect to all parties who

become such prior to that time.(Sec. 26)

Absence of Consideration:

(1995 and 1996 BarExam)

Effect of want of consideration:a.Personal defense to the

prejudice of a party andavailable against any personnot holder in due course.

b.Partial failure ofconsideration is a defensepro tanto, whether thefailure is an asceratainedand liquidated amountotherwise. (Sec 29)

Notes on Section 28

Absence of consideration iswhere no consideration wasintended to pass.

Failure of considerationimplies that consideration wasintended by that it failed topass

The defense of want ofconsideration is ineffectiveagainst a holder in due course


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A drawee who accepts the billcannot allege want of

consideration against thedrawer

Accommodation

Legal arrangement under which aperson called the accommodationparty lends his name and credit to

another called the accommodatedparty,without consideration.

Effect: A person to whom theinstrument thus executed issubsequently negotiated, has aright of recourse against theaccommodation party inspite ofthe formers knowledge that no

consideration passed between theaccommodation andaccommodated parties.

Requisites of Accommodation:1.The accommodation party

must sign as maker, drawer,acceptor or indorser;

2.No value is received by theaccommodation party fromthe accommodation party;and

3.The purpose is to lend thename. (Crisologo-Jose v. CA,177 SCRA 594).

Accommodation Party Is onewho has signed the instrument asmaker, drawer, acceptor, orindorser, without receiving valuetherefore, and for the purpose oflending his name to anotherperson. (2003 and 2005 BEQ)

A corporation cannot act as an

accommodation party. Such isan ultra vires act. (Crisologo-Jose v CA, 117SCRA594)

Liability of the Accommodation

Party:

- The accommodation partyis liable on the instrument to a

holder for value notwithstandingthat such holder at the time oftaking the instrument knew himto be only an accommodationparty. It is a valid defense that theaccommodation party did notreceive any valuableconsideration when he executed

the instrument. He is liable to aholder for value by virtue of hisbeing an accommodation party.

*An accommodation party toa negotiable instrument, inspite ofthe lack of consideration betweenhim and the accommodated party,is liable to any other holder NOTto the accommodated party.(Travel-On, Inc. v. CA, et al, 210

SCRA 351).

*An accommodation partys

liability as a solidarily party isunconditional party isunconditional and is not affected

by an extension of paymentgranted by the creditor to thedebtor. HOWEVER, where theholder allowed payments by thedrawer direct to the contractorwithout availing of the deed ofassignment in its favor, said


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holder is a bad faith holder, NOT aholder in due course against

whom an extension to paygranted by the drawer is adefense by the accommodationparty. (Prudencio v. CA, 143 SCRA6).

*The liability of anaccommodation party does not

extend to corporateaccommodation because the actof the corporate officers is ultravires. However, these officers arepersonally liable. (Crisologo-Josev. CA, 177 SCRA 594).

*A promissory note, with anaccommodation co-maker, usedto settle an estafa case, has anillegality of cause, and does notmake the accommodation co-maker liable. (United GeneralIndustries v. Paler, 112 SCRA 404)

*A promissory note with anaccommodation maker, utilized tosettle an estafa case, has an illegalconsideration, and does not makethe co-maker liable. (UnitedIndustries v. Paler, 112 SCRA 404)

RIGHTS OF ANACCOMMODATION PARTY

1.Against the Accommodated

Party- the accommodation party, ifobliged to pay to a holder ofvalue, can seek reimbursementfrom the accommodated party.

2.Against the Co-

accommodation Party to the

use of some other persons- where a solidaryaccommodation maker paid tothe bank the balance due on apromissory note, he may seekcontribution from the othersolidary accommodationmaker, in the absence of a

contrary agreement betweenthem. This rights springs froman implied promise betweenthe accommodation makers toshare equally the burdensresulting from their executionof the note. They are jointguarantors of the principaldebtor. (Sadaya v. Sevilla).

A solidary accommodation makermay:a.demand from the principal

debtor reimbursement of theamount which he paid on thepromissory note and

b.c. demand contribution from his

co-accommodation maker,without first directing hisaction against the principaldebtor, PROVIDED that:

b.1. he made the paymentby virtue of a judicialdemand, or

b.2. the principal debtor isinsolvent.

NEGOTIATION

An instrument is negotiatedwhen:


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a. It is transferred from one

person to another

b.That the transfer must be in amanner as to constitute thetransferee a holder

Modes of Negotiation:1. If payable to bearer, it is

negotiated by delivery.Negotiation of negotiableinstrument may be effectedby the delivery alone of theinstrument to the transfereein those negotiableinstruments which are:

-originally payable tobearer, or-originally payable toorder instrumentswhere the lastindorsement is anindorsement in blank.

2. If payable to order, itnegotiated by the indorsement ofthe holder completed by delivery.

A negotiableinstrument payable to theorder of a specified person,or to him or his order, maybe negotiated by the payeeby indorsement followed bydelivery of the instrument to

the indorsee. Subsequentnegotiation may be made inthis manner if the holderwho indorses acquired theinstrument under a specialindorsement.

The payee of the negotiableinstrument acquires no

interest with respect theretountil its delivery to him.(Development Bank of Rizal

v. Sima Wei)

3. Another method of transfer isby assignment which generallyrefers to ordinary contracts, and

by operation of law, where title toa note or bill passes upon thedeath of the holder to hispersonal representative.

Indorsement to be valid must

be:

a.Writtenb.On the instrument itself or

upon a piece of paperattached (Sec. 31 NIL)

Notes on Section 31

The paper attached with theindorsement is an allonge

An allonge must be attached so

that it becomes a part of theinstrument, it cannot be simplypinned or clipped to it.

Kinds of Indorsements:

a. Special (Sec. 34)b.Blank (Sec. 35)c. Restrictive (Sec. 36)

d.Qualified (Sec. 38)e.Conditional (Sec. 39)

A.SPECIAL- specifies theperson to whom or to whoseorder, the instrument is tobe payable. (Sec. 34)


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B.BLANK- Specifies no person

to whom or to whose orderthe instrument is to bepayable.1.Instrument becomes

payable to bearer andmay be negotiated bydelivery (Sec. 34)

2.May be converted to a

special indorsement bywriting over the signatureof the indorser in blankany contract consistentwith character ofindorsement. (Sec. 35)

C.ABSOLUTE- One by whichindorser binds himself topay:a.Upon No order condition

than failure of priorparties to do so; and

b.Upon due notice to him ofsuch failure.

D.CONDITIONAL- right of theindorsee is made to dependon the happening of acontingent event. Partyrequired to pay maydisregard the conditions.(Sec. 39)

E.RESTRICTIVE- Anindorsement is restrictive,when it either:

a.Prohibits further

negotiation of theinstrument; or

b.Constitutes theindorsee the agent ofthe indorser; or

c. Vests the title in theindorsee in trust for or

to the use of someother persons.

But mere absence ofwords implying power tonegotiate does not makean indorsementrestrictive. (Sec. 36)

EFFECT of Restrictive

indorsement:

Confers upon the indorsee theright-a.Receive payment of the

instrument;b.Bring any action thereon

that the indorser couldbring;

c. To transfer his rights as suchindorsee, when the form ofthe instrument authorizeshim to do so.

F.QUALIFIED- Constitutes theindorser a mere assignor ofthe title to the instrument. (Sec38) It is made by adding to

the indorsers signature

words like sans

recourse, without

recourse, indorser not

holder, at the indorsers

own risk, other terms of

similar import.

* Hence, it has been held that oral

testimony is not admissible toestablish that an unqualifiedindorsement is in fact qualified. (Velasco v. Tan Liuan & Co., March17,1922)


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A Qualified indorser haslimited liability, i. e. he is

liable for breach ofwarranty if theinstrument is dishonoredby non-acceptance ornon- payment due to:

1.Forgery; or2.Lack of good title on the

part of the indorser; or

3.Lack of capacity toindorse on the part of theprior parties; or

4.The fact that at the time ofthe endorsement, theinstrument was valuelessor nit valid, and he knewof the fact.

A Qualified indorsementdoes not impair thenegotiable character ofthe instrument.

As mentioned earlier,Negotiation is the transfer of anegotiable instrument from oneperson to another as to constitutethe transferee the holder thereof.

To be valid, negotiation mustinvolve the entire instrument.

Effects of indorsing an instrumentoriginally payable to bearer:

- It may further be negotiated

by delivery- The person indorsing is

liable as indorser to suchpersons as to make titlethrough his indorsement(Sec. 40)

Notes on Section 40

Section 40 applies only to

instruments originally payableto bearer

It cannot apply where theinstrument is payable to bearerbecause the only or lastindorsement is in blank

A holder may strike out any

indorsement which is notnecessary to his title. (Sec. 48)Effects:-An indorser whose

indorsement is struck out isdischarged

-All indorsers subsequent tosuch indorser who has beendischarged are likewiserelieved

Effects of a transfer withoutendorsement:

-The transferee acquires suchtitle as the transferor had

-The transferee acquires theright to have the indorsementof the transferor

-Negotiation takes effect as ofthe time the indorsement isactually made (Sec. 49)

WHO IS A HOLDER IN DUE

COURSE?

Every holder is deemedprima facie to be a holder in duecourse; but when it is shown thatthe title of any person who hasnegotiated the instrument wasdefective, the burden is on the


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holder to prove that he or someperson under whom he claims

acquired the title as holder in duecourse. But the last-mentionedrule does not apply in favor of aparty who became bound on theinstrument prior to theacquisition of such defective title.(Sec. 59)

RIGHTS OF A HOLDER

-A holder may sue in his ownname

-A holder may receivepayment.

Effects:(Sec. 51 NIL)- If in due course it discharges

the instrument

*Note: Holder in due Course(Secs. 52,57&59)

Personal and Real Defenses( 2000 & 2009 BEQ)

Requisites for a Holder in DueCourse (HDC):

a. Receives the instrumentcomplete and regular on itsface

b. Became a holder before itwas overdue and had nonotice that it had beenpreviously dishonored if

such was the factc. Takes the instrument for

value and in good faithd. At time he took the

instrument, no notice ofinfirmity in instrument ordefect in the title of the

person negotiating it (Sec.52 NIL)

*Note: Under the "SHELTERPRINCIPLE," the holder-in-duecourse, by negotiating theinstrument, to a party not aholder-in-due course, transfers allhis rights as such holder to thelatter, who thus acquires the right

to enforce the instrument as if hewas a holder-in-due course.However, this principlepresupposes that the "sheltered"holder is not a party to any fraudor illegality impairing thevalidity of the instrument. (2008BEQ)

Notes on Section 52

Every holder is presumed tobe a HDC (Sec. 59) If one of the requisites are

lacking, the holder is not a HDC An instrument is considered

complete and regular on its faceif a) the omission is immaterial

b) the alteration on theinstrument was not apparent onits face An instrument is overdue

after the date of maturity. On the date of maturity, the

instrument is not overdue andthe holder is a HDC

Acquisition of the transfereeor indorsee must be in goodfaith Good faith means lack of

knowledge or notice of defect orinfirmity


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A holder is not a HDC where aninstrument payable on demand is

negotiated at an unreasonablelength of time after its issue (Sec.53 NIL)Rights of a Holder in Due

Course:

-Holds the instrument free fromany defect of title of prior

parties-Free from defenses available toprior parties amongthemselves (personal/equitable defenses)

-May enforce payment of theinstrument for the full amountagainst all parties liable(Sec. 57NIL)

Notes on Section 57

Personal or equitabledefenses are those which growout of the agreement or conductof a particular person in regardto the instrument which rendersit inequitable for him through

legal title to enforce it. Can beset up against holders not HDC

Legal or real defenses arethose which attach to theinstrument itself and can be setup against the whole world,including a HDC.

An instrument not in thehands of a HDC is subject to thesame defenses as if it were non-negotiable.

Exception:

- A holder, who derives histitle through a HDC and is

not a party to any fraud orillegality affecting theinstrument, has all the rightsof such HDC in respect to allparties prior. (Sec. 58 NIL)

Rights of a holder not a HDC

- May sue in his own name- May receive payment and if

it is in due course, theinstrument is discharged

- Holds the instrument subjectto the same defenses as if itwere non-negotiable

- If he derives his title througha HDC and is not a party toany fraud or illegalitythereto, has all the rights ofsuch HDC

General rule: Every holder isdeemed prima facie to be aholder in due course.

Exception:

- Where it is shown that thetitle of any person who hasnegotiated the instrument isdefective, the burden is onthe holder to prove that he isa HDC or that a personunder whom he claims is aHDC (Sec. 59 NIL)

DEFENSES OF PRIOR PARTIES

AGAINST THE HOLDER

Classes of Defenses:

1. Real or Absolute Defenses- a real or absolute defenseis a defense which attaches


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to the instrumentirrespective of the parties

and is predicated on theprinciple that the rightsought to be enforced hasnever existed or has ceasedto exist.

- A real defense is availableagainst ALL HOLDERS,

whether in due course ornot.

2. Personal or Equitable

Defenses

- a personal or equitable is adefense growing out of anagreement or conduct of aparticular person in regardto an instrument whichrenders it inequitable forhim although owner of it, toenforce it against thedefendant.

Personal

Defenses

Real Defenses

1. Absence orfailure ofconsideration

Alteration

2. Want ofdelivery ofcompleteinstrument

Want ofdelivery ofincompleteinstrument

3. Insertion ofwrong datewhere payableat a fixed periodafter date andissued undated;or at a fixed

Duressamounting toforgery

period aftersight and

acceptance isundated4. Filling up theblanks contraryto authoritygiven or notwithinreasonable time

Fraud in factumor in essecontractus

5. Fraud ininducement Minority

6. Acquisitionof theinstrument byforce, duress orfear

Marriage incase of a wife

7. Acquisitionof theinstrument byunlawful means

Insanity where

the insaneperson has aguardianappointed bythe court

8. Acquisition of

the instrumentfor an illegalconsideration

Ultra vires actsof a corporationwhere its

charter or bystatue, it isprohibited fromissuingcommercialpaper

9. Negotiationin breach offaith

Want ofauthority ofagent

10. Negotiationundercircumstancesamounting tofraud

Execution ofinstrumentbetween publicenemies

11. MistakeIllegality ofcontract made


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by statue12. Intoxication Forgery

13. Ultra viresacts ofcorporations14. Want ofauthority of theagent where hehas apparentauthority

15. Illegality ofcontract whereform orconsideration isillegal16. Insanitywhere there isno notice of

insanity

LIABILITIES OF PARTIES:

1. A maker is primarily liable:

Effects of making the

instrument, the maker:a. Engages to pay according totenor of instrument

b. Admits existence of payeeand his capacity to indorse(Sec. 60 NIL)

Notes on Section 60

A makers liability is

primarily and unconditional One who has signed as such

is presumed to have acted withcare and to have signed with fullknowledge of its contents,unless fraud is proved

The payees interest is only

to see to it that the note is paid

according to its terms When two or more makers

sign jointly, each is individuallyliable for the full amount even ifone did not receive the valuegiven The maker is precluded from

setting up the defense of:

a)The payee is fictional,b)That the payee was insane, aminor or a corporationacting ultra vires

2. A drawer is secondarilyliable

Effects of drawing theinstrument, the drawer:a.Admits the existence of the

payee,b.The capacity of such payee

to indorsec. Engages that on due

presentment, the instrumentwill be accepted or paid orboth according to its tenor.

If the instrument is

dishonored, and the necessaryproceedings on dishonor dulytakena.The drawer will pay the

amount thereof to the holderb.Will pay to any subsequent

indorser who may becompelled to pay it. (Sec. 61NIL)


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Notes on Section 61

A drawer may insert an

express stipulation to negativeor limit his liability

3. An acceptor is primarilyliable

By accepting the instrument, anacceptor:- Engages that he will pay

according to the tenor of hisacceptance

- Admits the existence of thedrawer, the genuineness ofhis signature and hiscapacity and authority todraw the instrument

- The existence of the payeeand his then capacityindorse

4.IRREGULAR INDORSER - a personnot otherwise a party to aninstrument places his signaturein blank before delivery isliable as an indorser in thefollowing manner:

a. If payable to order of a thirdperson liable to the payeeand to all subsequent parties

b.If payable to order of themaker or drawer liable toall parties subsequent to themaker or drawer

c. If payable to bearer liable

to all parties subsequent tothe maker or drawer

d.If signs for anaccommodation party liable to all partiessubsequent to the payee(Sec. 64)

*Note: Irregular Indorser v.General Indorser (2005 BEQ)

Irregular Indorser, is not a partyto the instrument but he placeshis signature in blank beforedelivery. He is not a party but hebecomes one because of hissignature in the instrument.Because his signature he isconsidered an indorser and he is

liable to the parties in theinstrument. While, a GeneralIndorser warrants that theinstrument is genuine, that he hasa good title to it, that all priorparties had capacity to contract;that the instrument at the time ofthe indorsement is valid andsubsisting; and that on duepresentment, the instrument willbe accepted or paid or bothaccepted and paid according to itstenor, and that if it is dishonored,he will pay if the necessaryproceedings for dishonor aremade.

5.Warranties where negotiatingby delivery or qualifiedendorsement:

a.The instrument is genuineand in all respect what itpurports to be

b.The indorser has good title

to itc. All prior parties had thecapacity to contract

d.Indorser has no knowledgeof any fact that would impairthe validity or the value ofthe instrument.


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Limitations of warranties:

- If by delivery extends onlyto immediatetransferee

- Warranty of capacity tocontract does not applyto persons negotiatingpublic or corporatesecurities (Sec. 65 NIL)

Notes on Section 65 A qualified indorser is one

who indorses without recourseor sans recourse Recourse - resort to a person

secondarily liable after default ofperson primarily liable A qualified indorser cannot

raise the defense of a) forgery b)defect of his title or that it is voidc) the incapacity of the maker,drawer or previous indorsers. A qualified Indorsement

makes the indorser mereassignor of title of instrument,relieves him of general

obligation to pay if instrument isdishonored, but he is still liablefor the warranties arising frominstrument only up towarranties of general indorser The warranty is to the

capacity of prior parties at thetime the instrument was

negotiated. Subsequentincapacity does not breach thewarranty. lack of knowledge of the

indorser as to any fact thatwould impair the validity or the

value of the instrument must besubsisting all throughout

A person Negotiating byDelivery warrants same as thoseof qualified indorser andextends to immediatetransferees only

Warranties of a general

indorser:

a.The instrument is genuineand in all respect what itpurports to be

b.The he has good title to itc. All prior parties had the

capacity to contractd.That the instrument at the

time of his indorsement wasvalid and subsisting (Sec.66)

In addition:- Engages that the instrument

will be accepted or paid orboth according to its tenoron due presentment

- Engages to pay the amountthereof if it be dishonoredand the necessaryproceedings on dishonor aretaken

Notes on Section 66

The indorser under Section

66 warrants the solvency of aprior party The indorser warrants that

the instrument is valid andsubsisting regardless of whetherhe is ignorant of that fact or not.


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Warranties extend in favorof a) a HDC b) persons who

derive their title from HDC c)immediate transferees even ifnot HDC The indorser does not

warrant the genuineness of thedrawers signature General indorser is only

secondarily liable

PRESENTMENT FOR PAYMENT

General rule: Presentment forpayment is not necessary tocharge persons primarilyliable on the instrument.Presentment for payment is

necessary to charge the

drawer and indorsers. (Sec70 NIL)

Presentment is necessary to

charge persons secondarily

liable otherwise they are

discharged

Notes on Section 70 Presentation for payment

production of a BOE to thedrawee for his acceptance, or toa drawee or acceptor forpayment. Also presentment of aPN to the party liable forpayment of the same.

Consists of a) a personaldemand for payment at a properplace b)the bill or note must beready to be exhibited if requiredand surrendered upon payment.

Parties primarily liable persons by the terms of the

instrument are absolutelyrequired to pay the same. E.gmaker and acceptors. They canbe sued directly.

If payable at the special place,and the person liable is willingto pay there at maturity, such

willingness and ability isequivalent to tender of payment.

Acts needed to charge personssecondarily liable:

a)Presentment forpayment/acceptance

b)Dishonor by non-payment/non-acceptance

c)Notice of dishonor tosecondary parties

Acts needed to charge personssecondarily liable in other cases:

a)Protest for non-payment bythe drawee

b)Protest for non-payment bythe acceptor for honor

Proper presentment:

a.By the holder or anauthorized person

b.At a reasonable hour on abusiness day

c. At a proper place

d.To the person primarilyliable or if absent to anyperson found at the placewhere presentment is made(sec. 72 NIL)


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Presentment for payment is

made to the maker, or acceptor.

Not to the person secondarilyliable.

Notes on Section 72 Only the holder or one

authorized by him has the rightto make presentment forpayment

Presentment cannot be madeon a Sunday or holiday If the instrument is payable on

demand a) if it is a note presentment must be madewithin reasonable time afterissue b) if it is a bill -presentment must be madewithin reasonable time after lastnegotiation.

General rule: Presentment forpayment is necessary tocharge persons secondarilyliable otherwise they aredischarged:

Exception:

1. Presentment not required tocharge the drawer:

a.He has no right to expectb.He has no right to require

that the drawee or

acceptor will pay (Sec 79)

2. Presentment not required tocharge the indorser where:

a.The instrument was madeor accepted for hisaccommodation

b.He has no reason toexpect that the

instrument will be paid ifpresented (Sec. 80)

Notes on Section 79 and 80

Only the drawer or indorserare not discharged. All otherparties secondarily liable aredischarged.

Presentment for payment isdispensed with if:

a. After due diligence,presentment cannot bemade

b. Presentment is waivedc. The drawee is a fictitious

person (Sec 82)

Notes on Section 82

What is excused is thefailure to make presentment.There is no need to make anypresentment versus undersection 81 (delay inpresentment) presentment forpayment is still required afterthe cause of delay has ceased.

Other instances where

presentment for payment is not

required:

1. in order to charge thedrawer, where he has no rightto expect or require that the

drawee or acceptor will pay theinstrument;2. in order to charge anindorser, where the instrumentwas made or accepted for hisaccommodation and he has noright to expect that the


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instrument will be paid ifpresented; and

3. when a bill is dishonored bynon-acceptance, an immediateright of recourse against thedrawer and indorsers accruesto the holder and presentmentfor payment is necessary

Summary of rules as to

presentment for payment:a.Presentment not necessary tocharge persons primarily liable

b.Necessary to charge personssecondarily liable except:- The drawer under Sec. 79- The indorser under Sec. 80- When excused under Sec. 82- When the instrument has

been dishonored by non-acceptance under Sec. 83

When instrument dishonored

by non-payment

The instrument is dishonored bynon-payment when:

a. it is duly presented forpayment and payment isrefused or cannot beobtained; or

b. presentment is excusedand the instrument isoverdue and unpaid.

Effects of dishonor by no

n-payment:

-An immediate right ofrecourse to all partiessecondarily liable accrues tothe holder (Sec. 84)

-An immediate right ofrecourse means that the

holder, after the instrument isdishonored by non-payment

and notice of dishonor givento the persons secondarilyliable, may sue any of thelatter without suing first thepersons primarily liable.

Notes on Section 84

Parties cease to besecondarily liable and become

principal debtors. Liability becomes the same

as that of the original obligors.

NOTICE OF DISHONOR

When a negotiableinstrument has been dishonored

by non-acceptance non-payment,notice of dishonor must be givento the drawer and to eachindorsers.

Any drawer or indorser to whomsuch notice is not given isdischarged.

Exceptions:a.Waiver (Sec. 109)b.Notice is dispensed (Sec.

112)c. Not necessary to Drawer

(Sec. 114)d.Not necessary to Indorser

(Sec. 115)

- If notice is delayed, delay may

be excused (Sec. 113)


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Notice of Dishonor may be

given:

a.By or on behalf or the holderb.By or on behalf of any party

who:-Is a party to the

instrument and might becompelled to pay the

instrument.-To a holder who having

taken it up would have aright of reimbursement fromthe party to whom notice isgiven. (Sec. 90)

Notes on Section 111

Where notice is waived,presentment is not waived Where presentment is

waived, notice is also waived Where protest is waived,

notice and presentment iswaived

Effects of notice:

a. Where notice is given byor on behalf of the holder, itinures for the benefit of allsubsequent holders and all priorparties who have a right ofrecourse against the party towhom it is given.

b. Where notice is given by

or on behalf of a party entitled togive notice, it inures for thebenefit of the holder and allparties subsequent to the party towhom it is given.

Forms of notice:

a.May be written or oralb.Written notice need not be

signed or may besupplemented by verbalcommunication

c. May be by personal deliveryor by mail

Notice may be waived either

expressly or implied:

a.Before the time of givingnotice has arrived

b.After the omission to givedue notice

Dispensation with Notice:

Notice of dishonor isdispensed with when, after theexercise of reasonable diligence, itcannot be given to or does notreach the parties sought to becharged.

Effects of failure to give notice:An omission to give notice of

dishonor by non-acceptance doesnot preclude the rights of a holderin due course subsequent to theomission.

Instances when Notice Not

Required to Indorser

a. Drawee was afictitious/incapacitatedperson and the indorser was

aware of such at the time ofindorsement

b. Indorser is the person towhom instrument waspresented for payment

c. Instrument made/acceptedfor his accommodation


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Discharge of the Instrument

A negotiable instrument isdischarged:

a. By payment in due courseby or on behalf of theprincipal debtor;

b. Payment by in due courseby party accommodated,where the instrument ismade or accepted foraccommodation;

c. Intentional cancellation byholder of instrument;

d. Any other act discharging asimple contract for thepayment of money;

e. When the principal debtorbecomes the holder of theinstrument at or aftermaturity in his own right.

NOTES ON SECTION 119

Discharge of the instrumentdischarges all the parties thereto Payment must be in due

course, and by the principaldebtor or on his behalf If payment is not made by

the principal debtor, paymentonly cancels the liability of thepayor and those obligated afterhim but does not discharge theinstrument.

Payment by anaccommodation party does notdischarge the instrument.

Discharge of Secondary Parties:

a. Any act discharging theinstrument

b. Cancellation of indorsers

signature by indorsers

c. Discharge of prior partyd. Tender of payment by prior

partye. Release of principal debtorf. Extension of payment by the

holder/postponement of rightto enforce without assent ofsecondary parties and without

reservation of right of recourseagainst secondary parties (Sec120 NIL)

RIGHT OF PARTY WHO

DISCHARGES INSTRUMENT (Sec.

121)

A party secondarily liablewho pays the instrument does notdischarge it , but instead acquirescertain rights ;1.Collect from prior parties ; or2. Negotiate the instrument tonew parties- but not tosubsequent parties.

However , Under the exceptionsprovided in Sec.121, theinstrument is considereddischarged when ;1.The BOE is payable to the orderof a third person and paid by thedrawer himself, or2. Where it was made or accepted

for accommodation , and has beenpaid by the party accommodated.

RENUNCIATION BY HOLDER.

(Sec 122)


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Renunciation- The act of givingup or abandoning a right without

transferring the right to another.

As a Rule ,the holder mayexpressly renounce his rightsagainst any party to theinstrument before , or after itsmaturity. An absolute andunconditional renunciation of his

rights against the principal debtorat or after maturity of theinstrument discharges theinstrument.However , A renunciation doesnot affect the rights of a holder indue course without notice of therenunciation.

Notes on Section 122 if renounced in favor of a

party secondarily liable, only heis exonerated from liability andall parties subsequent to him discharge by novation is

allowed

MATERIAL ALTERATION

General rule: When materiallyaltered, without the consentof all parties liable, theinstrument is avoided exceptas against:

a.The party who has made thealterationb.The party who authorized or

assented to the alteration.c. Subsequent indorsersException:

- If in the hands of a HDC, maybe enforced according to its

original tenorMATERIAL ALTERATION- Any change in the instrumentwhich affects or changes theliability of the parties in anyway.

There is no distinction

between fraudulent andinnocent alteration

The EFFECTS of materialalteration:

1.Alteration by a PARTYMaterial alteration by the holderdischarged the instrument and all

prior parties thereto who did notgive their consent to suchalteration.

Whether the alteration made isfavorable or unfavorable to theparty making the alteration, nodistinction as to the effect is

made. The intent of the law is topreserve the integrity of thenegotiable instrument.

2. Alteration by a STRANGER (SPOLIATION )

If subsequently negotiated to anon-Holder in Due CourseA

material alteration avoids theinstrument as against any priorparty who has not assented to thealteration.

If subsequently negotiated to aHolder in Due CourseHe may


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enforce payment thereofaccording to its original tenor

regardless of whether thealteration was innocent orfraudulent.

CHANGES that constitute

MATERIAL ALTERATIONS1. The date;2. The sum payable, either for

principal or interest;3. The time or place of payment;4. The number or the relations ofthe parties;5. The medium or currency inwhich payment is to be made;6. Or which adds a place ofpayment where no place ofpayment is specified; or7. Any other change or additionwhich alters the effect of theinstrument in any respect. (Sec.125)

A serial number is an itemwhich is not an essentialrequisite for negotiabilityunder Sec. 1 of NIL, andwhich does not affect theright of the parties, henceits alteration is notmaterial. (PNB v. CA, 256SCRA 491) (199 BEQ)

Instances where a BOE may be

treated as a PN:a.Where the drawer and the

drawee are one and thesame

b.Where the drawee is afictitious person

c. Where the drawee has nocapacity to contract (Sec.

130)The holder has the option to treatit as a BOE or a PN

ACCEPTANCE

The signification by the drawee of

his assent to the order of thedrawer. It is an act by which aperson on whom the Bill ofExchange is drawn assents to therequest of the drawer to pay it.

As a general rule, acceptance, inorder to be valid must be:1. Written;2. Signed by the drawee; and3. Must contain an express orimplied to pay in money.

A holder of a bill has the right:a.Require that acceptance be

written on the bill and ifrefused, treat it as ifdishonored (Sec. 133)

b.Refuse to accept a qualifiedacceptance and may treat it asdishonored

Acceptance may be:

a.Actualb.Constructive

c. General (Sec. 140)d.Qualified (Sec. 141)

Kind of acceptance:

A. Constructive Acceptance:


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a.Where the drawee to whomthe bill has been delivered

destroys itb.The drawee refuses within

24 hrs after such delivery orwithin such time as is given,to return the bill accepted ornot


Drawee becomesprimarily liable as anacceptor.

Mere retention isequivalent to acceptance

B. General Acceptance:An acceptance to pay at a

particular place is a generalacceptance unless it is expresslystates that the bill is to be paidthere only and not elsewhere.

C. Qualified Acceptance if inexpress terms varies the effect ofthe bill as drawn.

Kinds of QualifiedAcceptance:

a.Conditional onewhich makes paymentby the acceptordependent on thefulfillment of acondition therein

stated;b.Partial an acceptance

to pay part only of theamount for which thebill is drawn;

c. Local an acceptanceto pay only at a

particular place;d.Qualified as to time

e.The acceptance of

some or moredrawees but NOT

ALL.

- The holder of the bill

has the right torequire GENERAL

ACCEPTANCE thus he

may REFUSE to takequalified acceptanceand if he DOES NOTobtain an unqualifiedacceptance he maytreat the bill asDISHONORED BY NON-ACCEPTANCE accordingly the holdermust give notice ofdishonor.

- Effect of taking

qualified acceptance:

- Where a qualifiedacceptance is taken THE DRAWER andINDORSERS aredischarged fromliability on the billunless they have

expressly or impliedlyauthorized the holderto take qualifiedacceptance orsubsequently assentsthereto.


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* When the drawer orindorser receives notice

of qualified acceptance he must within aREASONABLE TIME express his dissent to theholder or he will bedeemed to have assentedthereto.

Time for acceptance:The drawee is allowedtwenty-four hours afterpresentment in which to decidewhether or not he will accept thebill; the acceptance, if given, datesas of the day of presentation.

Rules governing acceptance:When an acceptance is

written on a paper other than abill itself, it does not bind theacceptor except in favor of aperson to whom it is shown andwho, on the faith thereof, receivethe bill for value.

An unconditional promise inwriting to accept a bill before itis drawn is deemed an actualacceptance in favor of everyperson who, upon the faiththereof, receives the bill for value.

Where a drawee to whom abill is delivered for acceptancedestroys the same, or refuseswithin twenty-four hours aftersuch delivery, or within suchother period as the holder mayallow, to return the bill accepted

or non-accepted to the holder, hewill be deemed to have accepted

the same.

A bill may be acceptedbefore it has been signed by thedrawer, or while otherwiseincomplete, or when it is overdue,or after is has been dishonored bya previous refusal to accept, or by

non-payment. But when a billpayable after sight is dishonoredby non-acceptance and thedrawee subsequently accepts it,the holder, in the absence of anydifferent agreement, is entitled tohave the bill accepted as of thedate of the first presentment.

PRESENTMENT FOR

ACCEPTANCE

When presentment for

acceptance is necessary:

a. If necessary to fix the

maturity of the billb.If it is expressly stipulatedthat it shall be presented foracceptance

c. If the bill is drawn payableelsewhere than theresidence or place ofbusiness of the drawee (Sec.

143 NIL)


PRESENTMENT is theproduction of a bill of exchangeto the drawee for his acceptance.


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PRESENTMENT

For Acceptance (Sec. 143)For Payment ( Sec. 70)

( 2000 & 2003 BEQ)

PURPOSE: To get acceptance ofthe drawer for purpose ofmaking him primarily liable asan acceptor. Presentment is also

prerequisite to the accrual ofsecondary liability against thedrawerand the indorsers.

On what days presentment

must be made:

A bill may be presented foracceptance on any day on whichnegotiable instruments may bepresented for payment. WhenSaturday is not otherwise aholiday, presentment foracceptance may be made beforetwelve oclock noon, on that day.

Presentment for acceptance

must be made:

1. Where the bill is payableafter sight; or in any other case,where presentment foracceptance is necessary in orderto fix the maturity of theinstrument.

2. Where the bill expresslystipulates that it shall bepresented for acceptance.

3. Where the bill is drawnpayable elsewhere than theresidence or place of business ofthe drawee.

Presentment, How made:

Presentment for acceptancemust be made by or on behalf ofthe holder at a reasonable hour,on a business day and before thebill is overdue, to the drawee orsome person authorized to acceptor refuse acceptance on his

behalf; and(a.) Where a bill is addressedto two or more drawees who arenot partners, presentment mustbe made to them all, unless onehas authority to accept or refuseacceptance for all, in which casepresentment may be made to himalone;

(b.) Where the drawee hasbeen dead, presentment may bemade to his personalrepresentatives;

(c.) Where the drawee hasbeen adjudged a bankrupt or aninsolvent, or has made aninstrument for the benefit ofcreditors, presentment may bemade to him or to his trustee orassignee.

WHERE PRESENTMENT IS

EXCUSED. (Sec. 148.)

Presentment for acceptance is

excused , and a bill may be treatedas dishonored by non acceptance ,in either of the following cases:

1. Where the drawee is dead ,or has absconded , or is afictitious person or a person nothaving capacity to contract.


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2. Where, after the exercise ofreasonable diligence ,

presentment cannot be made.3. Where, although

presentment has been irregular ,acceptance has been refused onsome other ground.

When bill is dishonored by non-

acceptance

A bill is dishonored by non-acceptance:a. When it is duly presented foracceptance and such anacceptance as is refused or cannotbe obtained;b. When presentment for

acceptance is excused, and the billis not accepted.

Duty of the holder where bill is

not accepted.

Where a bill is duly presentedfor acceptance and is not acceptedwithin the prescribed time, the

person presenting it must treatthe bill as dishonored by non-acceptance or he loses the right ofrecourse against the drawer andindorsers.

HOW? By giving NOTICE OFDISHONOR or by making a

PROTEST when required.

Rights of holder where bill is

NOT accepted:

An immediate right ofrecourse against the drawer andindorsers accrues to the holder

and NO PRESENTMENT forpayment is necessary.

PROMISSORY NOTES AND

CHECKS

Promissory Note is anunconditional promise in writingmade by one person to another,

signed by the maker, engaging topay on demand, or at a fixed ordeterminable future time, a sumcertain in money to order orbearer.

NOTE: Where a note is drawn tothe makers own order, it is NOT

complete until indorsed by him.

Special types of promissory

notes:1.Certificate of deposit

- is a writtenacknowledgment by abank of the receipt ofmoney on depositwhich the bankpromises to pay to thedepositor, bearer, or tosome other person ororder.

- It is NOT ipso factonegotiable it mustfirst comply with the

requirements providedunder Section 1, NIL.

2.Bonds

- A promise, under seal, topay money.

- The bond certifies that theissuing company is indebted


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to the bondholder for theamount specified on the face

of the bond, and contains anagreement of the companyto pay the sum at a specifiedtime in the future, andmeanwhile to pay a specifiedinterest on the principalamount at regular intervals,generally six months apart.

They are negotiable if it therequisites in Section 1, NILare complied with.

Classes of Bonds:

1.Mortgage bonds;2.Equipment Bonds;3.Collateral trust bonds;4.Guaranteed bonds;5.Debentures; and6.Income bonds;7.Convertible bonds;8.Redeemable Bonds;9.Registered Bonds; and

- Coupon Bonds thosewhich are attached asheet of dated, numberedand similarly printedcoupons which thebondholder may cut offwhen due or thereafter.Such coupons may beserved and deposited in abank, negotiated beforethe maturity of the

interest they represent,and transferred just likeany commercial paper.They are negotiable if itthe requisites in Section 1,NIL are complied with.

10. Bank Notes- Are promissory notes of

the issuing bank payableto bearer on demand andintended to circulate asmoney. They are regardedas cash and pass fromhand to hand without anyevidence of titled in theholder than that which

arises form possession.However, they are notmoney.

11. Due Bills- is an instrumentwhereby one personacknowledges hisindebtedness to another.

CHECKS - a bill of exchangedrawn on a bank payable ondemand. (Sec. 185)

CONCEPTS:Certification of Checks- An

agreement whereby the bankagainst whom a check is drawn,undertakes to pay at any futuretime when presented forpayment.

EFFECTS:

a. Equivalent to acceptance

(Sec 187) and is theoperative act that makesthe bank liable.

b. Assignment of the fundsof the drawer in the handsof the drawee (Sec 189)


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c. If obtained by the holder,discharges the persons

secondarily liable thereon( Sec 188)

A check must be presented forpayment within reasonable timeafter its issue or the drawer willbe discharged from liabilitythereon to the extent of the loss

caused by the delay. (Sec. 186)

Reasonable Time:(Sec. 193)a. Nature of the instrumentb. Usage of business or tradec. The facts of the particular

case

CROSSED CHECK: (2004 & 2005BEQ)

- A check which in addition to theusual contents of an ordinarycheck contains also the name of acertain banker or business entitythrough whom it must bepresented for payment.- A Crossed Check under acceptedbanking practice, crossing a checkis done by writing two parallellines diagonally on the left topportion of the checks. Thecrossing is special where thename of the bank or a businessinstitution is written between the

two parallel lines, which meanthat the drawee should pay onlywith the intervention of thatcompany.

EFFECTS:

a. That the check may not beencashed; it may only be

deposited with the bank;b. That the check may be

negotiated only once to aperson who has an accountwith the bank; and

c. That it serves as a warningto the holder that the checkhas been issued for a

definite purpose. (BataanCigar v. CA 280 SCRA 643)

*Note: Crossed Checks vs.Cancelled Checks (2004 BEQ)A crossed checkis one with twoparallel lines drawn diagonallyacross its face or across a cornerthereof. On the other hand, acancelled checkis one markedor stamped "paid" and/or"cancelled" by or on behalf of adrawee bank to indicate paymentthereof.

*State Investment House v IAC (GR

72764 13Jul1989), the SCconsidered a crossed check assubjecting a subsequent holderthereof to the contractualcovenants of the payor and thepayee.

2 KINDS:

1. CROSSSED SPECIALLY- The

same name of a particularbank or company is writtenor appears between thev.Tan parallel lines in whichcase the drawee-bank mustpay the check only uponpresentment by such bank


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or company (Chan Wan v.tan Kim 109 Phil 706) on

penalty of being made to payagin by the rightful ownershould the first paymentprove to have beenerroneous.

2. CROSSED GENERALLY-only the words and Co. are

written between the parallel

lines or when none at all iswritten at all between saidlines.

* This Court has taken judicialcognizance of the practice that acheck with 2 parallel lines in theupper left hand corner means thatit could only be deposited and notconverted into cash.

IRON CLAD RULEprohibits thecountermanding of payment ofcertified checks. (Rep. v. PNB, Dec.1, 1961)

*Note: The holder must be aholder in due course before thestop payment order may not besuccessfully invoked against him.(Mesina v. IAC, 146 SCRA 497,505)

TYPES OF CHECKS(CesarVillanueva, Commercial LawReview, 2004 ed.)

a.Cashiers Check- Onedrawn by the cashier of abank, in the name of thebank against the bank itselfpayable to a third person. Itis a primary obligation of theissuing bank and accepted in

advance upon issuance. (Tanv. CA 239 SCRA 310)

b.Managers Check- A checkdrawn by the manager of abank in the name of the bankitself payable to a thirdperson. It is similar to thecashiers check as to the

effect and use.c. Memorandum Check- A

check given by a borrowerto a lender for the amount ofa short loan, with theunderstanding that it is notto be presented at the bank,but will be redeemed by themaker himself when theloan falls due and whichunderstanding is evidencedby writing the wordmemorandum, memo or

mem on the check.d.Certified Check- An

agreement whereby thebank against whom a checkis drawn undertakes to payit at any future time whenpresented for payment. (Sec.187)

e.Travelers Check- It is oneupon the holders signature

must appear twice; one to beaffixed by him at the time itis issued and the second, forcounter-signature, to be

affixed by him in thepresence of the payee beforeit is paid, otherwise it isincomplete.

CORPORATION LAW


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(Batas Pambansa Bilang 68)

A.

CORPORATION, DEFINEDAn artificial being created byoperation of law having the rightof succession, and the powers,attributes and propertiesexpressly authorized by law andincident to its existence. (Sec. 2).It has a separate and distinct

personality from itsincorporators. (2000 BarExamination)

Attributes of a Corporation

1.It is an artificial being.2.It is created by operation of

law.3.It enjoys the right of

succession.4.It has the powers, attributes

and properties expresslyauthorized by law or incidentto its existence.

Theories on Formation of a

Corporation:

1.Concession Theory acorporation is an artificialcreature without any existenc

euntil it has received theimprimatur of the state actingaccording to law, through the SEC.(Tayag vs. Benguet Consolidated,Inc., 26 SCRA 242)

2.Theory of corporate enterpriseor economic unit the corporationis not merely an artificial being,but more of an aggregation ofpersons doing business, or anunderlying business unit.

(Philippine Corporate Law, Cesar

Villanueva, 2001 ed.)

B.CLASSIFICATION:1.AS TO ORGANIZERS

a. public by State only; andb. private by private persons

alone or with the State.

2.AS TO FUNCTIONS

a.public government of aportion of the territory; and

b.private usually for profit-making

3.AS TO GOVERNING LAWa.public Special Laws; andb.private Law on Private

Corporations

4.AS TO LEGAL STATUSa. De jure corporation

organized in accordancewith the requirements oflaw.

b. De facto corporation organized with a colorablecompliance with therequirements of a valid law.Its existence cannot beinquired collaterally. Suchinquiry may be made by theSolicitor General in a quowarranto proceeding. (Sec.20)

Requisites:1.The existence of a valid

law under which it maybe incorporated;

2.A bona fide attempt ingood faith to incorporateunder such law;


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3.Actual use or exercise ingood faith of corporate

powers; and4.Issuance of a certificate of

incorporation by the SECas a minimumrequirement of continuedgood faith.

The only difference between a

de facto corporation and a dejure corporation is that a de

jure corporation can

successfully resist a suit by a

state brought to challenge its

existence; a de facto

corporation cannot sustain its

right to exist.

c. Corporation by estoppel group of persons thatassumes to act as acorporation knowing it to bewithout authority to do so,and enters into a transactionwith a third person on thestrength of such appearance.It cannot be permitted todeny its existence in anaction under saidtransaction. (Sec. 21) It isneither de jure nor de facto.

d. Corporation byprescription one whichhas exercised corporate

powers for an indefiniteperiod without interferenceon the part of the sovereignpower, e.g. Roman CatholicChurch.

5.AS TO EXISTENCE OF SHARESOF STOCK

a. Stock corporation acorporation (1) whosecapital stock is divided intoshares and (2) which isauthorized to distribute toshareholders dividends or

allotments of the surplusprofits on the basis of the

shares held.(Sec. 3)b. Non-stock corporation does not issue stocks nordistribute dividends to theirmembers.

6.AS TO RELATIONSHIP OFCONTROL AND MANAGEMENTa. Holding Corporation - it is

one which controls anotheras a subsidiary by the powerto elect management. It isone that holds stocks inother companies forpurposes of control ratherthan for mere investment.

b. Subsidiary Corporation -one which is so related toanother corporation that themajority of its directors canbe elected directly orindirectly by such othercorporation. (TheCorporation Code of the

Philippines Annotated,

Hector de Leon, 2002 ed.)

c. Affiliates - company which issubject to common controlof a mother holdingcompany and operated aspart of the system.


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d. Parent and SubsidiaryCorporation - separate

entities with power tocontract with each other.The board of directors of theparent company determinesits representatives to attendand vote in