Document Text Contents
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1 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
RECITATIONS AND LECTURE NOTES
FROM THE CLASSES OF DEAN JOSE R. SUNDIANG
SAN BEDA COLLEGE OF LAW
MENDIOLA, MANILA
I. GENERAL CONSIDERATIONS
Q: What is a negotiable instrument?
A negotiable instrument is a written contract for the payment of
money which complies with the requirements of Section 1, NIL; which by its
form and on its face is intended as a substitute for money and passes from
hand to hand as money so as to give the holder in due course the right to
hold the instrument free from personal defenses available to prior parties.
Q: What are the stages in the life of a negotiable instrument?
BILL OF EXCHANGE PROMISSORY NOTE
1. the mechanical act of writing
2. issuance, first delivery to the payee
3. negotiation, transfer from one
person to another so as to constitute
the transferee a holder
4. presentment for acceptance,
applicable only to CERTAIN TYPES of
bills of exchange, presentment to the
drawee in order for him to signify his
assent to the order of the drawer
5. acceptance or dishonor by non-
acceptance
*drawee either accepts or dishonors
the bill
1. preparation and signing (writing)
2. issuance, first delivery to the payee
3. negotiation
4. presentment for payment or
dishonor by non-payment
5. notice of dishonor
6. discharge
**presentment for acceptance is not
necessary in promissory notes because
the drawer already knows that he is
liable to pay, and his liability is primary
in character.
6. presentment for payment or
dishonor by non-payment
*drawee either pays the bill or refuses
to pay it
7. notice of dishonor
*in case of dishonor, notice of
dishonor is required to be given to
persons secondarily liable, informing
them that the maker or
drawer/acceptor refused to pay or
accept the instrument
8. protest (required only for FOREIGN
bills of exchange)
9. discharge
Q: What are the primary kinds of negotiable instruments?
1. Promissory Notes
2. Bills of Exchange
3. Checks
PROMISSORY NOTE BILL OF EXCHANGE CHECK
An unconditional
promise in writing made
by one person to
another, signed by the
maker, engaging to pay
on demand or at a fixed
determinable future
time a sum certain in
money to order or to
bearer
An unconditional order
in writing addressed by
one person to another,
signed by the person
giving it, requiring the
person to whom it is
addressed to pay on
demand or at a fixed
determinable future
time, a sum certain in
money to order or to
bearer
A bill of exchange drawn
on a bank, payable on
demand
Q: Are negotiable instruments legal tender?
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2 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
used for the payment of debts, as required by sec.52 of the new central
bank act. Also, art.1249, NCC specifically states that negotiable papers
and other mercantile documents do not produce the effect of payment
until they are encashed or when through the fault of the creditor, they
have been impaired. (art.1249, NCC; sec.52,NCBA)
Q: What is the difference between a bill of exchange and a promissory
note?
BILL OF EXCHANGE PROMISSORY NOTE
- is in the nature of an unconditional
ORDER
- signed by the DRAWER
- requires ACCEPTANCE before
presentment for payment
- in the nature of an unconditional
PROMISE
- signed by the MAKER
- acceptance prior to presentment for
payment is not necessary
Q: Differentiate a bill of exchange from a check?
BILL OF EXCHANGE CHECK
-may or may not be drawn on a bank
-payable on demand or at a fixed
determinable future time
-requires presentment for acceptance
-may or may not be drawn on a deposit
of funds
-death of the drawer does not revoke
-always drawn on a bank
-always payable on demand
-presentment for acceptance is not
necessary in the case of checks
-drawn on a deposit of funds in the
custody of the bank
-
authority to pay
-must be presented for payment within
a reasonable time AFTER ITS LAST
NEGOTIATION
-must be presented for payment within
a reasonable time AFTER ITS ISSUE
II. NEGOTIABILITY vs. NON-NEGOTIABILITY
Q: What are the essential requisites of a negotiable instrument?
An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing, and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named therein with reasonable certainty
(sec.1, NIL)
Q: How is negotiability determined?
1. By considering only what appears on the face of the
instrument
2. By ascertaining the presence/absence of the requisites
under sec.1, NIL
3. By considering the whole of the instrument
*NB: if what appears on the face of the instrument is
ambiguous, the provisions of Sec.17, NIL should be followed
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16 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
- -off rule operates to bar
recovery from the parties prior to the forged endorsement. A
subsequent holder may not therefore enforce payment against the
drawee, the drawer, or the payee because parties prior to the forgery
may set it up as a defense (unless of course they are precluded from
doing just that)
-Obviously then, where the facts of any problem do not present a case
the short-cut rule is not advisable.
VI. DEFENSES
Q: What is a personal defense?
One which involves the relationships of the parties between
and amongst themselves, wherein there is a true and valid underlying
contract but where, for various reasons (i.e.: fraud, duress, mistake,
prior breach of contract by the holder, etc.), the defendant is excused
from his obligation to perform.
Q: What is a real defense?
One which involves the instrument or the underlying contract
itself, wherein there is an absence of one or more of the essential
elements of a contract or where the admitted contract is vitiated
Q: What defenses may be raised against a HDC?
Only real defenses those which call into question the
instrument or the underlying contract.
REAL DEFENSES PERSONAL DEFENSES
1. Minority (available only to the
minor)
2. Forgery
3. Non-delivery of an incomplete
1. Failure or Absence of consideration
2. Illegal consideration
3. Non-delivery of a complete
instrument
instrument
4. Material Alteration
5. Ultra Vires act of a corporation
6. Fraud in Fact
7. Illegality
8. Vicious force or violence
9. Lack of authority
10. Prescription
11. Discharge in insolvency
4. Conditional delivery of a complete
instrument
5. Fraud in inducement
6. Filling up blanks without authority
to do so
7. Duress of intimidation
8. Filling up blanks beyond a
reasonable time
9. Transfer in breach of faith
10. Mistake
11. Ante-dating or post-dating for
illegal or fraudulent purposes
Q: Does negotiation by a minor operate to pass title to the holder?
Yes
*NB: although the defense is a real one, the negotiation still
passes title to the holder, the same rule also applies to corporations
with regards to an ultra vires act the corporation may raise it as a
defense but the negotiation still transfers title
Q: What is delivery?
The transfer of possession of the negotiable instrument by one
person to another with the intention to transfer title to the instrument
Q: What is the effect if an instrument which is not complete was
delivered?
The delivery will not effect a valid contract in the hands of any
holder as against any person whose signature was placed thereon prior
to delivery (sec.15)
Q: When may delivery be deemed valid?
When it is made either by or under authority of the person
making, drawing, accepting or endorsing the instrument (sec.16)
Q: What are the rules involving delivery?
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17 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
1. A negotiable instrument must be delivered
2. Delivery must either be by or under authority of the person
making, drawing, accepting or endorsing the instrument
3. Delivery is presumed to have been made if the instrument is
no longer in the hands of the maker or drawer for the
purpose of issuing it, or the endorser for the purpose of
transferring title
4. As between immediate parties and remote parties who are
not holders in due course, the delivery of a complete
instrument may be established to be conditional or for a
special purpose, and not for transferring title
5. As between immediate parties and remote parties who are
not holders in due course, it may be established that there
was no delivery at all of the complete instrument
6. As to holders in due course, it cannot be established that
there was no delivery because delivery as to the HDC is
conclusive upon his possession of the instrument
7. As to a HDC, it cannot be established that the delivery was
only conditional or for a special purpose
(sec.16)
Q: What are the rules with regard to filling up blanks in a negotiable
instrument?
1. A person in possession of such an instrument has prima
facie authority to complete the instrument by filling it up
strictly in accordance with the authority given and within a
reasonable time
2. If a person delivers a blank paper which contains his
signature and which he intends to convert into a negotiable
instrument, the person to whom it is delivered has prima
facie authority to fill it up for any amount in accordance
with the authority given and within a reasonable time;
3. If the holder of the instrument, after it was filled up, is a
HDC, the holder may enforce the instrument as if it were
filled up with the proper authority and within a reasonable
time
(sec.14)
Q: when is fraud a real defense? When is it merely a personal one?
FRAUD IN EXECUTION/
FRAUD IN FACTUM
FRAUD IN INDUCEMENT
-person is induced to sign an
instrument without knowing its
character as a note or bill
-a REAL defense
-persons who signs the same is aware
that he is signing a negotiable
instrument, and intends to sign it, but
was only induced to do so through
fraud, his consent having been vitiated
by it
-a PERSONAL defense
Q: When may an alteration become a defense?
When it is material (sec.1, 125)
Q: Is material alteration a complete defense?
No, only a partial one. A HDC who is in possession of a
materially altered instrument and who is not a party to the alteration
may enforce payment thereof according to its original tenor (sec.124)
Q: What is the effect of ante-dating or post-dating a negotiable
instrument?
Ante- or post-dating does not per se affect the instrument. A
personal defense only arises when the ante-dating or post-dating was
done for a fraudulent or illegal purpose
Q: what is the effect of forgery?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
beneficiary, and the buyer reciprocally promises to
reimburse the issuing bank
3. The letter of credit proper
*Other contracts include the contract of carriage between the seller and
the carrier for the goods, the contract of surety between the seller and
the warehouseman or bailee for the keeping of the goods, and the
various credit agreements between intermediary banks regarding the
negotiation of the drafts drawn against the letter of credit
Independence Principle’?
The independence principle is a doctrine embodied in the
Uniform Customs and Practice for Documentary Credits (UCP) adopted
by the International Chamber of Commerce, which essentially holds that
the contracts involved in a letter of credit arrangement are to be
maintained in a state of perpetual separation.
*The parties to these different transactions may not co-opt the rights of
recourse or remedies found in each transaction, nor are they obligated
to go beyond the respective responsibilities of each of the transactions
in order to determine the propriety or validity of the others.
*This is what differentiates a LOC from other accessory contracts.
*A direct consequence of this principle is that banks deal only in paper,
and not in goods. ‘The banker’s issuing agent should be able to sit with a
necktie and a white shirt at a desk in a bank and by looking at the papers
presented to him determine whether the bank is obligated to make
payment or not. He is not obligated, and indeed, is foreclosed from
donning his overalls and going into the field to determine whether the
underlying contract has been performed.’ (White and Summers, cited in
Bank of America v. CA, 228 SCRA 357)
Q: Is the issuing bank the only party who may invoke the independence
principle?
No, other parties (i.e.: even the beneficiary, in proper cases)
may invoke the principle
Q: What is the Fraud Exception?
An exception to the independence principle, which holds that
when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents documents to the confirming or paying bank
which contain material representations of fact that are untrue, and
which the beneficiary was aware of, the buyer may seek an injunction
against payment. (Transfield Phils., Inc. v. Luzon Hydro Corp., GR No.
146717, November 22, 2004)
*Requisites:
1. There is clear proof of fraud
2. It is an abuse of the independent purpose of the LOC and not
merely fraud under the main agreement
3. Irreparable injury might follow if injunction is not granted or the
recovery of damages would be severely impaired
XI. TRUST RECEIPTS
Q: What is a trust receipt transaction?
Under the Trust Receipts Law (TRL), a trust receipt transaction
is any transaction by and between an entruster and an entrustee where
the former releases possession of goods to the latter upon the
execution of the entrustee of a trust receipt. By the receipt, the
entrustee binds himself to hold the goods in trust for the entruster and
to sell or otherwise dispose of them, with the obligation to remit the
proceeds thereof to the entruster (sec.4, TRL)
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32 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
Q: What are the obligations of the entrustee?
1. Hold the goods, documents or instruments in trust for the
entruster and dispose of them strictly in accordance with
the terms and conditions of the trust receipt
2. Receive the proceeds in trust for the entruster and turn
them over to the extent of the amount owing to the
entruster as appears on the trust receipt
3. Insure the goods for their total value against loss from fire,
theft, pilferage, or other casualties
4. Keep the goods or proceeds thereof separate and capable
of identification as property of the entruster
5. Return the goods, documents or instruments in the event
of non-sale or upon demand of the entruster
6. Observe all other lawful terms and conditions of the trust
receipt
(sec.9, TRL)
Q: What are the rights of the entruster?
1. To receive the proceeds from the sale of the goods, etc.
released under a trust receipt to the extent of the amount
owing to him as appears in the receipt
2. To receive the goods, etc. upon the return of the same by
the entrustee in case of non-sale
3. To enforce all other rights conferred upon him in the trust
receipt
(sec.7, TRL)
Q: What is the right of a purchaser for value and in good faith upon
buying the goods sold by the entrustee?
The purchaser for value and in good faith acquires the goods,
security interest
(sec.11, TRL)
Q: Who bears the risk of loss of the goods?
The entrustee, even though he is not the owner of the goods.
Loss of goods pending their disposition, does not extinguish the
to the fault or
negligence of the entrustee (sec.10, TRL)
1 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
RECITATIONS AND LECTURE NOTES
FROM THE CLASSES OF DEAN JOSE R. SUNDIANG
SAN BEDA COLLEGE OF LAW
MENDIOLA, MANILA
I. GENERAL CONSIDERATIONS
Q: What is a negotiable instrument?
A negotiable instrument is a written contract for the payment of
money which complies with the requirements of Section 1, NIL; which by its
form and on its face is intended as a substitute for money and passes from
hand to hand as money so as to give the holder in due course the right to
hold the instrument free from personal defenses available to prior parties.
Q: What are the stages in the life of a negotiable instrument?
BILL OF EXCHANGE PROMISSORY NOTE
1. the mechanical act of writing
2. issuance, first delivery to the payee
3. negotiation, transfer from one
person to another so as to constitute
the transferee a holder
4. presentment for acceptance,
applicable only to CERTAIN TYPES of
bills of exchange, presentment to the
drawee in order for him to signify his
assent to the order of the drawer
5. acceptance or dishonor by non-
acceptance
*drawee either accepts or dishonors
the bill
1. preparation and signing (writing)
2. issuance, first delivery to the payee
3. negotiation
4. presentment for payment or
dishonor by non-payment
5. notice of dishonor
6. discharge
**presentment for acceptance is not
necessary in promissory notes because
the drawer already knows that he is
liable to pay, and his liability is primary
in character.
6. presentment for payment or
dishonor by non-payment
*drawee either pays the bill or refuses
to pay it
7. notice of dishonor
*in case of dishonor, notice of
dishonor is required to be given to
persons secondarily liable, informing
them that the maker or
drawer/acceptor refused to pay or
accept the instrument
8. protest (required only for FOREIGN
bills of exchange)
9. discharge
Q: What are the primary kinds of negotiable instruments?
1. Promissory Notes
2. Bills of Exchange
3. Checks
PROMISSORY NOTE BILL OF EXCHANGE CHECK
An unconditional
promise in writing made
by one person to
another, signed by the
maker, engaging to pay
on demand or at a fixed
determinable future
time a sum certain in
money to order or to
bearer
An unconditional order
in writing addressed by
one person to another,
signed by the person
giving it, requiring the
person to whom it is
addressed to pay on
demand or at a fixed
determinable future
time, a sum certain in
money to order or to
bearer
A bill of exchange drawn
on a bank, payable on
demand
Q: Are negotiable instruments legal tender?
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2 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
used for the payment of debts, as required by sec.52 of the new central
bank act. Also, art.1249, NCC specifically states that negotiable papers
and other mercantile documents do not produce the effect of payment
until they are encashed or when through the fault of the creditor, they
have been impaired. (art.1249, NCC; sec.52,NCBA)
Q: What is the difference between a bill of exchange and a promissory
note?
BILL OF EXCHANGE PROMISSORY NOTE
- is in the nature of an unconditional
ORDER
- signed by the DRAWER
- requires ACCEPTANCE before
presentment for payment
- in the nature of an unconditional
PROMISE
- signed by the MAKER
- acceptance prior to presentment for
payment is not necessary
Q: Differentiate a bill of exchange from a check?
BILL OF EXCHANGE CHECK
-may or may not be drawn on a bank
-payable on demand or at a fixed
determinable future time
-requires presentment for acceptance
-may or may not be drawn on a deposit
of funds
-death of the drawer does not revoke
-always drawn on a bank
-always payable on demand
-presentment for acceptance is not
necessary in the case of checks
-drawn on a deposit of funds in the
custody of the bank
-
authority to pay
-must be presented for payment within
a reasonable time AFTER ITS LAST
NEGOTIATION
-must be presented for payment within
a reasonable time AFTER ITS ISSUE
II. NEGOTIABILITY vs. NON-NEGOTIABILITY
Q: What are the essential requisites of a negotiable instrument?
An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing, and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed determinable
future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named therein with reasonable certainty
(sec.1, NIL)
Q: How is negotiability determined?
1. By considering only what appears on the face of the
instrument
2. By ascertaining the presence/absence of the requisites
under sec.1, NIL
3. By considering the whole of the instrument
*NB: if what appears on the face of the instrument is
ambiguous, the provisions of Sec.17, NIL should be followed
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16 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
- -off rule operates to bar
recovery from the parties prior to the forged endorsement. A
subsequent holder may not therefore enforce payment against the
drawee, the drawer, or the payee because parties prior to the forgery
may set it up as a defense (unless of course they are precluded from
doing just that)
-Obviously then, where the facts of any problem do not present a case
the short-cut rule is not advisable.
VI. DEFENSES
Q: What is a personal defense?
One which involves the relationships of the parties between
and amongst themselves, wherein there is a true and valid underlying
contract but where, for various reasons (i.e.: fraud, duress, mistake,
prior breach of contract by the holder, etc.), the defendant is excused
from his obligation to perform.
Q: What is a real defense?
One which involves the instrument or the underlying contract
itself, wherein there is an absence of one or more of the essential
elements of a contract or where the admitted contract is vitiated
Q: What defenses may be raised against a HDC?
Only real defenses those which call into question the
instrument or the underlying contract.
REAL DEFENSES PERSONAL DEFENSES
1. Minority (available only to the
minor)
2. Forgery
3. Non-delivery of an incomplete
1. Failure or Absence of consideration
2. Illegal consideration
3. Non-delivery of a complete
instrument
instrument
4. Material Alteration
5. Ultra Vires act of a corporation
6. Fraud in Fact
7. Illegality
8. Vicious force or violence
9. Lack of authority
10. Prescription
11. Discharge in insolvency
4. Conditional delivery of a complete
instrument
5. Fraud in inducement
6. Filling up blanks without authority
to do so
7. Duress of intimidation
8. Filling up blanks beyond a
reasonable time
9. Transfer in breach of faith
10. Mistake
11. Ante-dating or post-dating for
illegal or fraudulent purposes
Q: Does negotiation by a minor operate to pass title to the holder?
Yes
*NB: although the defense is a real one, the negotiation still
passes title to the holder, the same rule also applies to corporations
with regards to an ultra vires act the corporation may raise it as a
defense but the negotiation still transfers title
Q: What is delivery?
The transfer of possession of the negotiable instrument by one
person to another with the intention to transfer title to the instrument
Q: What is the effect if an instrument which is not complete was
delivered?
The delivery will not effect a valid contract in the hands of any
holder as against any person whose signature was placed thereon prior
to delivery (sec.15)
Q: When may delivery be deemed valid?
When it is made either by or under authority of the person
making, drawing, accepting or endorsing the instrument (sec.16)
Q: What are the rules involving delivery?
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17 | N E G O T I A B L E I N S T R U M E N T S – S U N D I A N G N O T E S 2 K A Y 2 0 1 2 - 2 0 1 3 h i r y u k i m i k o
‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
1. A negotiable instrument must be delivered
2. Delivery must either be by or under authority of the person
making, drawing, accepting or endorsing the instrument
3. Delivery is presumed to have been made if the instrument is
no longer in the hands of the maker or drawer for the
purpose of issuing it, or the endorser for the purpose of
transferring title
4. As between immediate parties and remote parties who are
not holders in due course, the delivery of a complete
instrument may be established to be conditional or for a
special purpose, and not for transferring title
5. As between immediate parties and remote parties who are
not holders in due course, it may be established that there
was no delivery at all of the complete instrument
6. As to holders in due course, it cannot be established that
there was no delivery because delivery as to the HDC is
conclusive upon his possession of the instrument
7. As to a HDC, it cannot be established that the delivery was
only conditional or for a special purpose
(sec.16)
Q: What are the rules with regard to filling up blanks in a negotiable
instrument?
1. A person in possession of such an instrument has prima
facie authority to complete the instrument by filling it up
strictly in accordance with the authority given and within a
reasonable time
2. If a person delivers a blank paper which contains his
signature and which he intends to convert into a negotiable
instrument, the person to whom it is delivered has prima
facie authority to fill it up for any amount in accordance
with the authority given and within a reasonable time;
3. If the holder of the instrument, after it was filled up, is a
HDC, the holder may enforce the instrument as if it were
filled up with the proper authority and within a reasonable
time
(sec.14)
Q: when is fraud a real defense? When is it merely a personal one?
FRAUD IN EXECUTION/
FRAUD IN FACTUM
FRAUD IN INDUCEMENT
-person is induced to sign an
instrument without knowing its
character as a note or bill
-a REAL defense
-persons who signs the same is aware
that he is signing a negotiable
instrument, and intends to sign it, but
was only induced to do so through
fraud, his consent having been vitiated
by it
-a PERSONAL defense
Q: When may an alteration become a defense?
When it is material (sec.1, 125)
Q: Is material alteration a complete defense?
No, only a partial one. A HDC who is in possession of a
materially altered instrument and who is not a party to the alteration
may enforce payment thereof according to its original tenor (sec.124)
Q: What is the effect of ante-dating or post-dating a negotiable
instrument?
Ante- or post-dating does not per se affect the instrument. A
personal defense only arises when the ante-dating or post-dating was
done for a fraudulent or illegal purpose
Q: what is the effect of forgery?
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
beneficiary, and the buyer reciprocally promises to
reimburse the issuing bank
3. The letter of credit proper
*Other contracts include the contract of carriage between the seller and
the carrier for the goods, the contract of surety between the seller and
the warehouseman or bailee for the keeping of the goods, and the
various credit agreements between intermediary banks regarding the
negotiation of the drafts drawn against the letter of credit
Independence Principle’?
The independence principle is a doctrine embodied in the
Uniform Customs and Practice for Documentary Credits (UCP) adopted
by the International Chamber of Commerce, which essentially holds that
the contracts involved in a letter of credit arrangement are to be
maintained in a state of perpetual separation.
*The parties to these different transactions may not co-opt the rights of
recourse or remedies found in each transaction, nor are they obligated
to go beyond the respective responsibilities of each of the transactions
in order to determine the propriety or validity of the others.
*This is what differentiates a LOC from other accessory contracts.
*A direct consequence of this principle is that banks deal only in paper,
and not in goods. ‘The banker’s issuing agent should be able to sit with a
necktie and a white shirt at a desk in a bank and by looking at the papers
presented to him determine whether the bank is obligated to make
payment or not. He is not obligated, and indeed, is foreclosed from
donning his overalls and going into the field to determine whether the
underlying contract has been performed.’ (White and Summers, cited in
Bank of America v. CA, 228 SCRA 357)
Q: Is the issuing bank the only party who may invoke the independence
principle?
No, other parties (i.e.: even the beneficiary, in proper cases)
may invoke the principle
Q: What is the Fraud Exception?
An exception to the independence principle, which holds that
when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents documents to the confirming or paying bank
which contain material representations of fact that are untrue, and
which the beneficiary was aware of, the buyer may seek an injunction
against payment. (Transfield Phils., Inc. v. Luzon Hydro Corp., GR No.
146717, November 22, 2004)
*Requisites:
1. There is clear proof of fraud
2. It is an abuse of the independent purpose of the LOC and not
merely fraud under the main agreement
3. Irreparable injury might follow if injunction is not granted or the
recovery of damages would be severely impaired
XI. TRUST RECEIPTS
Q: What is a trust receipt transaction?
Under the Trust Receipts Law (TRL), a trust receipt transaction
is any transaction by and between an entruster and an entrustee where
the former releases possession of goods to the latter upon the
execution of the entrustee of a trust receipt. By the receipt, the
entrustee binds himself to hold the goods in trust for the entruster and
to sell or otherwise dispose of them, with the obligation to remit the
proceeds thereof to the entruster (sec.4, TRL)
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‘But this is the world we live in… and justice does NOT always triumph. This isn’t the wild west
where you can clean up the streets with a gun… even though that’s exactly what’s needed.’
~Point of Impact
Q: What are the obligations of the entrustee?
1. Hold the goods, documents or instruments in trust for the
entruster and dispose of them strictly in accordance with
the terms and conditions of the trust receipt
2. Receive the proceeds in trust for the entruster and turn
them over to the extent of the amount owing to the
entruster as appears on the trust receipt
3. Insure the goods for their total value against loss from fire,
theft, pilferage, or other casualties
4. Keep the goods or proceeds thereof separate and capable
of identification as property of the entruster
5. Return the goods, documents or instruments in the event
of non-sale or upon demand of the entruster
6. Observe all other lawful terms and conditions of the trust
receipt
(sec.9, TRL)
Q: What are the rights of the entruster?
1. To receive the proceeds from the sale of the goods, etc.
released under a trust receipt to the extent of the amount
owing to him as appears in the receipt
2. To receive the goods, etc. upon the return of the same by
the entrustee in case of non-sale
3. To enforce all other rights conferred upon him in the trust
receipt
(sec.7, TRL)
Q: What is the right of a purchaser for value and in good faith upon
buying the goods sold by the entrustee?
The purchaser for value and in good faith acquires the goods,
security interest
(sec.11, TRL)
Q: Who bears the risk of loss of the goods?
The entrustee, even though he is not the owner of the goods.
Loss of goods pending their disposition, does not extinguish the
to the fault or
negligence of the entrustee (sec.10, TRL)
