What is the independence principle?

The relationship of the buyer and the bank is separate and distinct from the relationship
of the buyer and seller in the main contract; the bank is not  required to investigate if the
contract underlying the LC has been fulfilled or not because in transactions involving
LC, banks deal only with documents and not goods (BPI v. De Reny Fabric Industries,
Inc., L-‐2481, Oct. 16, 1970). In effect, the buyer has no course of action against the
issuing bank.
What is the doctrine of strict compliance?

The documents tendered by the seller/beneficiary must strictly conform to the terms of the letter of
credit. The tender of documents must include all documents required by the letter. Thus, a
correspondent bank which departs from what has been stipulated under the LC acts on its own risk and
may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary. (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30,
1991)

TERMS  THAT  CANNOT  BE  INCLUDED  IN  THE 

WAREHOUSE RECEIPT
1.   Those contrary to any provision of the law 
2.   In  any  wise  impair  the  warehouseman’s  obligation  to exercise  that  degree  of 
care  in  the  safekeeping  of  the goods  entrusted  to  him  which  a  reasonably 
careful  man would exercise with regard to similar goods of his own 
 

NON-NEGOTIABLE WAREHOUSE RECEIPT

> Receipt in which it is stated that the goods received will be delivered to the depositor
or to any specified person  
 

NEGOTIABLE WAREHOUSE RECEIPT

> Receipt in which it is stated that the goods received will be delivered  to  the  bearer 
or  to  the  order  of  any  person named in such receipt 
> No provision shall be inserted in a negotiable receipt that it is non-negotiable.  Such
provision if inserted shall be void. 
 
DUPLICATE RECEIPTS MUST BE MARKED
> When  more  than  one  is  issued  for  the  same  goods,  the word  “duplicate”  shall 
be  plainly  placed  upon  the  face  of every such receipt, except the first one issued

> A  warehouseman  shall  be  held  liable  for  damages  for failure to do so to anyone
who purchased the subsequent receipt  for  value  supposing  it  to  be  original,  even 
though the  purchaser  be  after  the  delivery  of  the  goods  by  the warehouseman to
the holder of the original receipt 
 
OBLIGATIONS  AND   RIGHTS  OF  WAREHOUSEMAN  UPON THEIR RECEIPTS 
 

PRINCIPAL OBLIGATIONS OF THE WAREHOUSEMAN

1.   To take care of the goods entrusted to his safekeeping

2.   To  deliver  them  to  the  holder  of  the  receipt  or  the depositor  provided  the 
following  conditions  are  fulfilled—there is demand by the depositor accompanied by
either 
a.    An offer to satisfy the warehouseman’s lien 
b.   An offer to surrender the receipt, if negotiable with such  indorsements  as  would 
be  necessary  for  the negotiation of the receipts 
c.    A  readiness  and  willingness  to  sign,  when  the goods  are  delivered,  an 
acknowledgement  that 
they  have  been  delivered,  if  such  signature  is requested by the warehouseman 
 

WHAT SHOULD ACCOMPANY THE DEMAND FOR THE

RETURN OF THE GOODS?
1.   An offer to satisfy the warehouseman’s lien 
2.   An  offer  to  surrender  the  receipt,  if  negotiable  with  such indorsements as
would be necessary for the negotiation of the receipts 
3.   A  readiness  and  willingness  to  sign,  when  the  goods  are delivered,   an 
acknowledgement  that  they   have  been delivered,   if   such   signature   is  
requested   by   the warehouseman 
 

A  WAREHOUSEMAN  IS  JUSTIFIED  IN  DELIVERING  THE

GOODS TO ONE WHO IS—
1.   Person lawfully entitled to the possession of the goods, or his agent 
2.   Person who either himself entitled to delivery by the terms of the non-negotiable
receipt issued for the goods, or who has  written  authority  from  the  person  so 
entitled  either endorsed upon the receipt or written on another paper 
3.   Person in possession  of  a  negotiable receipt  by the  terms of  which  the  goods 
are  deliverable  to  him  or  order,  or  to bearer,  or which  has been indorsed to  him or
in blank by the person to whom delivery was promised by the terms of the receipt or by
his mediate or immediate indorser 
 

WAREHOUSEMAN’S LIABILITY FOR MISDELIVERY

> Where  a  warehouseman  delivers the goods to  one  who is not in fact lawfully
entitled to the possession of them, the warehouseman  shall  be  liable  for 
conversion/estafa  to  all having a right of property or possession in the goods if he
delivered the goods otherwise than as authorized 
> And though he delivered the goods as authorized he shall be so liable if prior to such
delivery he had either—

o     Been  requested,  by  or  on  behalf  of  the  person lawfully   entitled   to   a   right  
of   property   or 
possession in the goods, not to make such delivery

o     Had  information  that  the  delivery  about  to  be made  was  to  one  not  lawfully 
entitled  to  the 
possession of the goods  
 

WHAT IS CONVERSION?
> Unauthorized  assumption  and  exercise  of  the  right  of ownership  over  goods 
belonging  to  another  through  the alteration of their condition or the exclusion of the
owner’s right  
 

NEGOTIABLE  RECEIPTS  MUST  BE  CANCELLED  OR 

MARKED WHEN   GOODS   DELIVERED   OR   WHEN  
PART   OF   IT   IS DELIVERED.      FAILURE   TO   DO   SO  
WILL   MAKE   THE WAREHOUSEMAN LIABLE—
> The warehouseman is liable to any one who purchases for value  in  good  faith  such 
receipt,  for  failure  to  deliver  the goods to him, whether such purchaser acquired title
to the  receipt  before  or  after  the  delivery  of  the  goods  by  the warehouseman 
 

EFFECT OF ALTERATION ON LIABILITY OF

WAREHOUSEMAN
1.   Alteration immaterial—whether fraudulent or  not, whether authorized  or  not,  the 
warehouseman  is  liable  on  the altered receipt according to its original tenor

2.   Alteration   material—if   the   alteration   is   material,   but authorized,  the 
warehouseman  is  liable  according  to  the terms of the receipt as altered

3.   Material alteration innocently made—the warehouseman is liable on the altered

receipt according to its original receipt

4.   Material  alteration  fraudulently  made—warehouseman  is liable  according  to  the 

original  tenor  of  the  receipt  to  a purchaser of the receipt for value without notice, and
even to  the  alterer  and  subsequent  purchasers  with  notice except    that    as   
regards    to    the    last    two,    the 
warehouseman’s liability is limited only to delivery as he is excused from any liability  
NOTA BENE:  it is  clear that even a fraudulent alteration cannot divest   the   title   of  
the   owner   of   stored   goods   and   the warehouseman  is,  therefore,  liable  to 
return  them  to  the  owner.  
But  a  bona  fide  holder  acquires  no  right  to  the  goods  under  a negotiable  receipt 
which  has  been  lost  or  stolen  or  to  which  the endorsement of the depositor has
been forged. 
 

LOST OR DESTROYED RECEIPTS

> The  court  may  order  the  delivery  of  the  goods  upon satisfactory proof of such
loss or destruction and upon the giving of a bond with sufficient sureties to be approved
by the court to protect the warehouseman from any liability or expense, which he or any
person injured by such delivery 
may  incur  by  reason  of  the  original  receipt  remaining outstanding 
> The  court may also in its discretion order the payment of the warehouseman’s
reasonable costs and counsel fees 
> The order of the court shall not relieve the warehouseman from  liability  to  a  person 
to  whom  the  negotiable  receipt as been or shall be negotiated for value without notice
of the proceedings or of the delivery of the goods 
 

LIABILITY OF WAREHOUSEMAN AS TO DUPLICATE—HE

WARRANTS
1.   That  the  duplicate  is  an  accurate  copy  of  the  original receipt 
2.   Such original receipt is uncancelled at the date of the issue of the duplicate 
 

WAREHOUSEMAN CANNOT SET UP TITLE IN HIMSELF

> The  warehouseman cannot refuse to deliver the goods on the  ground  that  he  has 
acquired  title  or  right  to  the possession  of  the  same  unless  such  title  or  right  is
derived— 
o     Directly  or  indirectly  from  a  transfer  made  by  the depositor at the time of the
deposit for storage or subsequent thereto 
o     From the warehouseman’s lien 
 

INTERPLEADER OF ADVERSE CLAIMANTS

> If  more  than  one  person  claims  the  title  or  possession  of the goods, the
warehouseman may, either as a defense to an  action  brought  against  him  for  non-
delivery  of  the goods,  or  as  an  original  suit,  whichever  is  appropriate, require all
known claimants to interplead 
 

WAREHOUSEMAN  HAS  REASONABLE  TIME  TO 

DETERMINE VALIDITY OF CLAIMS
> If  someone  other  than  the  depositor  or  person  claiming under him has a claim to
the title or possession of goods, and the warehouseman has information of such claim,
the warehouseman  shall be excused from  liability for refusing to  deliver  the  goods, 
either  to  the  depositor  or  person 
claiming  under  him  or  to  the  adverse  claimant,  until  the warehouseman has had a
reasonable time to ascertain the validity of the adverse claim or to bring legal
proceedings to compel all claimants to interplead

LIABILITY  OF  WAREHOUSEMAN  FOR  NON-EXISTENCE 

OR MISDESCRIPTION OF GOODS
> As a general rule, the warehouseman is under obligation to deliver the identical
property stored with him and if he fails to do so, he is liable directly to the owner 
> As against a bona fide holder of  a warehouse receipt, the warehouseman   is  
estopped   whether   the   receipt   is negotiable or not, to deny that he has received the
goods described in it 
 

LIABILITY OF WAREHOUSEMAN FOR LOSS DUE TO LACK

OF CARE
> The  warehouseman  is  required  to  exercise  ordinary  or reasonable  care  in  the 
custody  of  the  goods,  that  is,  the care  is  reasonably  careful  owner  would 
exercise  over similar goods of his own. 
> The warehouseman isn’t liable for any loss or injury to the goods,  which  couldn’t 
have  been  avoided  by  the  exercise of  such  care.    Of  course,  what  constitutes 
ordinary  or reasonable  care  depends  upon  the  circumstances  such  as the
character and value of the property and the character 
and location of the warehouse. 
 

COMMINGLING OF DEPOSITED GOODS

> As a general rule, a warehouseman may not mingle goods belonging to depositors 
> In case of fungible goods, the warehouseman may mingle them with the goods of the
same kind and grade provided that he authorized by agreement or custom 
> Commingling    is    intended    for    the    benefit    of    the warehouseman.    It 
would,  indeed  be  strange  if  the warehouseman  could  escape  his  liability  to  the 
owner  of the  goods  by  the  simple  process  of  commingling  them without
authorization 
 

ATTACHMENT OR LEVY OF A NEGOTIABLE RECEIPT

> The  warehouseman  has  the  direct  obligation  to  hold possession  of  the  goods 
for  the  original  owner  or  for  the person known the negotiable receipt of title has been
duly negotiated.  
> While  in  possession  of  such  warehouseman,  the  goods cannot  be  attached  or 
levied  upon  under  an  execution unless— 
o     The document is first surrendered 
o     Its negotiation is enjoined 
o     The document is impounded by the court  
> This  shall  not  apply  if  the  person  depositing  is  not  the owner of the goods or
one who has no right to convey title to the goods binding upon the owner.   
> Neither  shall  it  apply  to  actions  for  recovery  or  manual delivery of goods by the
real owner nor to cases where the attachment is made before the issuance of the 
negotiable receipt of title 
 

CREDITOR’S REMEDIES TO REACH NEGOTIABLE

RECEIPTS
> A creditor whose debtor is the owner of negotiable receipt shall  be  entitled  to  such 
aid  from  courts  of  appropriate jurisdiction, by injunction and otherwise, in attaching
such receipt  or  in  satisfying  the  claim  by  means  thereof  as  is allowed  by  law  or 
in  equity  in  regard  to  property  which cannot  be  readily  be  attached  or  levied 
upon  by  ordinary legal process

REQUISITES AS TO A NEGOTIABLE NOTE

1. It must be in writing and signed by the maker  
2. It must contain an unconditional promise to pay a sum certain in money 
3. It  must  be  payable  on  demand,  or  at  a  fixed  or  determinable future time 
4. It must be payable to order or to bearer 
 

REQUISITES AS TO A NEGOTIABLE BILL

1. It must be in writing and signed by the maker 
2. It  must  contain  an  unconditional  order  to  pay  a  sum  certain  in money 
3. It  must  be  payable  on  demand,  or  at  a  fixed  or  determinable future time 
4. It must be payable to order or to bearer 
5. The  drawee  must  be  named  or  otherwise  indicated  therein  with reasonable
certainty

Sec. 23. Forged signature; effect of. - When a signature is forged or made  without  the  authority  of 
the  person  whose  signature  it purports to be, it is  wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof  against  any  party 
thereto,  can  be  acquired  through  or under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up the forgery or want of authority.
FORGERY, DEFINED AND EXPLAINED

      Counterfeit  making  or  fraudulent  alteration  of  any  writing,  and  may consist  in  the  signing  of 
another’s  name,  or  the  alteration  of  an instrument,  in  the  name,  amount,  description  of  the 
person  and  the like, with the intent to defraud 
      Section  23  only  applies  to  forged  signatures  or  signatures  made without the authority of the
person whose signature purports it to be 
 

FRAUD AMOUNTING TO FORGERY

      Fraud in factum or fraud in esse contractus 

      There is no intention to issue an instrument 

FRAUDULENT IMPERSONATION

•      Suppose X represents himself as Juan Cruz when he is not to Y.  Due to such misrepresentation, he
obtained from Y a note payable to the order of Juan Cruz.  If Y intends that the proceeds of the note will
go to the real Juan Cruz and not X, but to whom Y issued the note on the belief that X was Juan Cruz,
would be a forgery. 
 

DOUBLE INTENT IN FRAUDULENT IMPERSONATION

1.    He intends to make the instrument payable to the person before him or  to  the  person  writing  at 
the  other  end  of  the  line,  in  case  the negotiation is by correspondence 
2.    He  intends  to  make  the  instrument  payable  to  the  person  whom  he believes the stranger to
be 
 

GENERAL RULE IN FRAUDULENT IMPERSONATION

•      The  first  one  is  the  controlling  intent  except  where  the  name  of  the payee was already
known to the maker or drawer or was particularly identified in some manner 
 

REASON FOR RULE: THEORY OF ACTUAL INTENT

•      Throws the loss on the drawer 

•      In the absence of anything to show that the drawer had any doubt as to  the  identity  of  the 
person  to  whom  he  delivered  the  paper  as payee—the  drawee,  in  paying  the  paper,  or  the 
holder,  in  taking  it upon the indorsement of the impostor in the name of which the payee was
described, carries out the intention that the drawer entertained at the  time  of  delivery  of  the  paper 
to  the  impostor,  although  that intention was conceived in consequence of the fraud of the impostor
as 
to  his  identity  and  ownership  of  the  property  which  represented  the consideration 

ANOTHER REASON FOR THE RULE: THEORY OF ESTOPPEL

•      As between two innocent persons, the one whose act was the cause of the loss should bear the
consequences 
•      It  was  the  drawer’s  duty  to  use  diligence  to  ascertain  the  identity  of the party with whom he
has dealt.  Failing to make this discovery, he became the victim of the fraud.  The impostor having
succeeded in this first  and  essential  step  in  the  practice  of  the  fraud,  the  next  was comparatively
an easy one. 
 

RULE  IS  QUALIFIED  WHERE  IMPOSTOR  REPRESENTS  HIMSELF  AS  AGENT OF PAYEE

•      There  is  a  distinction  between  cases  where  the  paper  is  delivered  to the impostor as payee, in
the belief that he is the person to whom the instrument it would be paid, and cases where the paper is
delivered to the impostor upon his representation, in the belief that he is agent of the person named as
payee 
•      The loss falls on the drawee or purchaser, as the case may be, rather than on the drawer where the
impostor upon whose indorsement the paper was purchased or paid, represented himself to be the
agent of 
the payee and not the payee himself 
 

ADMISSION OF GENUINENESS AND DUE EXECUTION

•      When an action or defense is founded upon a written instrument such as a negotiable instrument,
copied in or attached to the corresponding pleading,  the  genuineness  and  due  execution  of  the 
instrument  shall be  deemed  admitted  unless  specifically  denied  under  oath  by  the adverse party 
•      Consequently,  the  genuineness  and  due  execution  of  the  written instrument  or  document 
copied  in  or  attached  to  the  opponent’s pleading  as  the  basis  of  his  claim  or  defense,  should  be 
denied specifically under oath, otherwise they are deemed admitted. 
 

MEANING OF ADMISSION OF GENUINENESS AND DUE EXECUTION

1.    That he signed it or that it was signed by another for him and with his authority 
2.    That at the time it was signed, it was in words and figures exactly as set out in the pleading of the
party relying upon it, 
3.    That  any  formal  requisites  required  by  law,  such  as  swearing  and acknowledgment,  or 
revenue  stamp  which  it  requires,  are  waived  by him 
 

DEFENSES CUT OFF BY ADMISSION OF GENUINENESS, ETC.

1.    The defense that the signature is a forgery 

2.    That  it  was  unauthorized,  as  in  the  case  of  an  agent  signing  for  his principal,  or  one  signing 
on  behalf  of  a  partnership  or  corporation  or that  in  case  of  the  latter,  that  the  corporation  was 
not  authorized under its charter to sign the instrument 
3.    That the party charged signed the instrument in some other capacity than that alleged in the
pleading setting it out 
 
FAILURE  TO  IDENTIFY  PROMISSORY  NOTE  WILL  NOT  NECESSARILY DEFEAT CLAIM 
 

EFFECT OF FORGERY IN GENERAL

1.    That  the  signature  forged  or  made  without  authority  is  wholly inoperative 
2.    That no right to retain the instrument, or to give discharge thereof, or to enforce payment thereof
against any party thereto, can be acquired through or under such a signature forged or made without
authority 
3.    That  nevertheless,  as  against  a  party  precluded  from  setting  up  the forgery  or  want  of 
authority,  the  signature  forged  or  made  without authority  is  operative,  and  rights  to  retain  the 
instrument,  to  give discharge  therefore,  or  to  enforce  payment  thereof,  can  be  acquired through
or under the signature forged or made without authority 
 

EXTENT OF THE EFFECT OF THE FORGERY

1.    Only the signature forged or made without authority is stated by the law  to  be  inoperative  but 
neither  the  instrument  itself  is,  nor  the genuine signatures are, rendered inoperative 
2.    The  instrument  can  be  enforced  by  holders  to  whose  title  over  the instrument  the  forged 
signature  is  not  necessary,  such  as,  the indorsement of an instrument which on its face is payable to
bearer 
3.    The instrument can be enforced against those who are precluded from setting up the defense of
forgery, even against those whose signatures have been forged 
 

PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY

1.    Those  who  warrant  or  admit  to  the  genuineness  of  the  signature  in question—indorsers,
persons negotiating by delivery, and acceptors 
2.    Those  who,  by  their  acts,  silence  or  negligence,  are  estopped  from setting up the defense of
forgery 
 

INDORSERS AS WARRANTORS

•      Whether general or qualified 

•      Warrant  that  the  instrument  indorsed  by  them  is  genuine  in  all respects what it purports it to
be 

PERSONS NEGOTIATING BY DELIVERY AS WARRANTORS

•      Persons negotiating by mere delivery also warrant that the instrument negotiated by them is
genuine and in all respects what it purports to be 
•      They  are  consequently  precluded  from  setting  up  the  defense  of forgery 
 

ACCEPTORS AS WARRANTORS

•      A  drawee,  by  accepting  the  bill,  admits  the  genuineness  off  the signature of the drawer 
 
PRECLUDED 
•      Includes  those  cases  where  they  are  estoppels  against  the  party desiring to set up the forgery 
 

ESTOPPEL AS TO FORGERY OF INSTRUMENTS

•      Whenever  a  party  has,  by  his  own  declaration,  act,  or  omission, intentionally  and 
deliberately  led  another  to  believe  that  his  or another’s signature in an instrument is genuine, and to
act upon such 
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to set up
the forgery of such signature/s 
•      Estoppel may arise from a declaration, act or omission/negligence 
 

UNREASONABLE DELAY

•      Unreasonable delay, after his discovery of the forgery, on the part of one having the opportunity
and duty to speak, in disclosing the forgery upon commercial paper to the one who ought to be apprised
thereof, estops the former from thereafter asserting the forgery as against the latter where the latter is
prejudiced by such delay or failure 
•      Requisites: 
o      That the delay be unreasonable 
o      That  the  one  who  ought  to  be  apprised  of  the  forgery  has been prejudiced 
 

REASONABLY PROMPT NOTICE

•      Depends upon the circumstances of the case, and the situation of the parties  with  reference  to 
the  remedies  against  any  party  is  a  proper element to enter into the estimate of the reasonableness
of the notice 
 

WHEN PREJUDICED AND WHEN NOT PREJUDICED

•      A  bank  is  prejudiced—at  the  time  one  discovered  that  his  attorney forged  his  indorsement 
to  a  draft  in  his  favor,  it  had  assets  of  the attorney  in  its  possession  to  protect  itself  but  at  the 
time  it  was notified of the forgery, it has parted with such assets 
•      It is not prejudiced by the delay where at no time after the discovery of  the  forgery  did  the 
cashier  have  any  property  with  which  to indemnify the bank 
 

ESTOPPEL BY NEGLIGENCE IN DELIVERY

•      A  drawer  may  be  precluded  from  defense  of  forgery  of  the  payee’s indorsement if delivery by
him to the payee is negligent 
 

CASES OF FORGERY IN GENERAL

1.    Forgery  of  promissory  notes  which  may  be  further  subdivided  into—forgery of indorsement in
the note; forgery of the maker’s signature 
2.    Forgery  of  bills  of  exchange  which  may  be  further  classified  into—forgery  of  an  indorsement 
on  the  bill;  forgery  of  the  drawer’s signature,  either  with  acceptance  by  the  drawee,  or  without 
such acceptance but the bill is paid by the drawee 
 

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN NOT PAYABLE TO ORDER

Where  the  indorsement  is  forged  and  the  note  is  payable  to  order,  the party  whose 
indorsement  is  forged  and  parties  prior  to  him  including  the maker cannot be held liable by the
holder, whether that holder is a holder in due course or not: 
1.    The  reason  is  that,  inasmuch  as  the  indorsement  is  forged,  it  is inoperative.    But  since  the 
note  is  payable  to  order,  it  can  be negotiated only by indorsement completed by delivery, and
therefore, the forged instrument is the only means one could acquire any rights to it or its proceeds 
2.    The  law  further  provides  that  no  right  to  retain  the  note,  give discharge  thereof,  or  enforce 
payment  thereof,  could  be  acquired through  and  under  the  forged  signature.    Hence  the  holder 
didn’t acquire  at  least  those  rights  as  against  the  party  whose  signature  is forged and parties prior
to him, including the maker 
3.    The  forger  usually  obtains  possession  of  the  note  by  fraudulent  or other unlawful means and
therefore, he has no right whatsoever in the note 
 

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN A NOTE PAYABLE TO BEARER

•      May be held liable by a holder in due course but not by the one who is not a holder in due course 
•      Provided that the note was mechanically complete before the forgery 
•      Forged  instrument  is  not  necessary  to  the  title  of  a  holder  since instruments payable by
bearer can be negotiated by mere delivery 

RIGHTS OF PARTIES IN FORGERY OF MAKER’S SIGNATURE

•      Where the maker’s signature is forged, he cannot be held liable by any holder, whether the holder
is in due course or not 
•      Purported  maker  is  not  a  party  to  the  instrument  as  his  forged signature  is  inoperative  and 
no  right  to  retain,  enforce,  or  discharge the note, may be acquired against him 
 

DRAWEE CANNOT CHARGE ACCOUNT OF DRAWER

•      In an action by the drawee against the drawer for the amount charged by  the  drawee  against  the 
account  of  the  drawer  where  the  drawee paid  a  check  on  a  forged  indorsement,  the  drawee 
has  no  defense against the drawer and the drawer may recover from  the  drawee for an instrument
paid on a forged indorsement 
•      Depository owes to the depositor an absolute and contractual duty to pay the check only to the
person to whom it is made payable or upon his genuine indorsement 
 

DRAWER CANNOT RECOVER FROM THE COLLECTING BANK

•      Drawer  has  no  right  to  recover  the  amount  paid  from  the  collecting bank as the duty of the
collecting to exercise care in collection is due only  to  the  payee,  and  as  the  drawer  suffers  no  loss 
since  it  can recover the amount paid from the drawee bank which has no right to charge the drawer’s
account 
 

DRAWEE CAN RECOVER FROM COLLECTING BANK

•      The  drawee  may  recover  from  the  recipient  of payment,  such  as  the collecting bank, under a
forged indorsement 
•      Rule allowing the payee to recover from the recipient of the payment under a forged indorsement 
 

PAYEE CAN RECOVER FROM RECEIPT OF PAYMENT

•      According  to  the  general  rule,  a  bank  or  other  corporation  or  an individual,   who   has  
obtained   possession   of   a   check,   upon   an unauthorized or forged indorsement of the payee’s
signature and who collects  the  amount  of  the  check  from  the  drawee,  is  liable  for  the proceeds 
thereof  to  the  payee  or  other  owner,  notwithstanding  that they have been paid to the person
whom the check was obtained 
•      The possession of the check on the forged indorsement is wrongful and when the money had been
collected on the check, the bank or other person or corporation, can be held as far as moneys had and
received and the proceeds are held for the rightful owners of the payment and may be recovered by
them 
 
COLLECTING BANK BOUND TO SCRUTINIZE CHECKS DEPOSITED WITH IT TO DETERMINE GENUINENESS
AND REGULARITY 
 

CONVERSION

•      An  unauthorized  assumption  and  exercise  of  the  right  of  ownership over goods or personal
chattels belonging to another, to the alteration of their condition or exclusion of the owner’s right 
 

AS AFFECTED BY QUESTION OF DELIVERY TO PAYEE

•      The checks didn’t reach the hands of the payee.  The bearing of such absence  of  delivery  is 
considered  in  some  cases  and  held  not  to  be material 
•      Where there is no delivery to the payee and no title vests upon him, he  ought  not  to  be  allowed 
to  recover  on  the  ground  that  he  lost nothing because he never became owner of the check and still
retained his claim against the drawer 
 

PAYEE CANNOT RECOVER FROM THE DRAWEE

•      An  action  cannot  be  maintained  by  a  payee  of  a  check  against  the bank  on  which  it  is 
drawn  unless  the  check  has  been  certified  or accepted  by  the  bank  on  which  it  is  drawn, 
without  acceptance  or certification, as provided by the statute, there is no privity of contract between
the drawee bank and the payee, or holder of the check 
 

RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN BILL PAYABLE TO BEARER

•      Holder may recover if he is a holder in due course 

 

RIGHTS  OF  PARTIES  IN  FORGERY  OF  DRAWER’S  SIGNATURE  WHERE DRAWEE HASN’T ACCEPTED
BILL BUT PAID IT

•      In  the  case  of  the  payment  of  a  forged  check  even  without  former acceptance,  the  drawee 
cannot  recover  from  a  holder  in  due  course not chargeable with any act or negligence or disregard
of duty 
•      As between equally innocent parties, the drawee who pays money on a check the signature to
which is forged, cannot recover the money from the one who received it 
 

BUT PAYMENT NOT EQUIVALENT TO ACCEPTANCE OR CERTIFICATION

•      The payment of a forged check doesn’t include or imply its acceptance in the sense that this word is
used in Section 62 of NIL 
•      Basis  of  the  general  rule  is  not  that  the  drawee  is  precluded  from setting up forgery because,
by paying the check, it has accepted the check  and  therefore  admitted  the  genuineness  of  the 
drawer’s signature 

•      By  paying  the  check  the  drawer  is  presumed  negligent  or  deemed constructively negligent 
 

NEGLIGENCE IN FORGERY OF INDORSEMENTS IN BILL

•      It  presupposes  that  the  drawer  himself  wasn’t  negligent  or  guilty  of such conduct as would
estop him from asserting the forged character of  the  indorsement  as  against  the  depository  and 
that  if  he  was negligent or guilty of such conduct, the loss must fall on him 
 
WHERE  A  DEPOSITOR  IS  USING  ITS  OWN  PERSONALIZED  CHECKS,  ITS FAILURE  TO  PROVIDE 
ADEQUATE  SECURITY  MEASURES  TO  PREVENT FORGERIES  OF  ITS  CHECKS  CONSTITUTES  GROSS 
NEGLIGENCE  AND BARS IT FROM SETTING UP THE DEFENSE OF FORGERY 
 
BUT FAILURE OF DEPOSITOR TO MAKE PROMPT RECONCILIATION OF THE MONTHLY  BANK 
STATEMENTS  FURNISHED  BY  THE  BANK  CONSTITUTES NEGLIGENCE  FOR  WHICH  THE  BANK 
CANNOT  BE  BLAMED  IN  CASE DEPOSITOR’S CASE ARE FORGED 
 
BUT DRAWER NOT GENERALLY NEGLIGENT WHERE HIS CHECK IS STOLEN 
 

PAYEE’S NEGLIGENCE IN FORGERY OF DRAWER’S SIGNATURE

•      The  payee  in  a  check  may  be  supposed  to  have  knowledge  of  the circumstances  under 
which  it  is  drawn  and  generally,  of  the  person drawing it, and is in a better position to judge the
genuineness of the paper than are indorsees.   
•      And there is a tendency to place greater responsibility upon him and he  is  much  more  likely  to 
be  required  to  return  the  proceeds  of  the paper than are the indorsees 
 

INDORSER’S NEGLIGENCE

•      After  a  draft  or  check  has  once  been  negotiated  so  that  it  is  in circulation,  there  is  little 
opportunity  for  negligence  on  the  part  of those through whose hands it passes; but as to them, in
most cases, the rule will apply that, as between innocent parties, the loss must fall on the drawee 
 

DUTY OF PURCHASER OF CHECK OR BILL

•      One who purchases a bill or check is bound to satisfy himself that the paper is genuine; and that by
indorsing or presenting it for payment or putting  it  in  circulation  before  presentation,  he  impliedly 
asserts  that he  has  performed  his  duty  and  the  drawee  who  has  without  actual negligence  on 
his  part,  paid  the  forged  demand,  may  recover  the money paid from such negligent purchaser 
 

PAPER FORWARDED FOR COLLECTION

•      The fact that the paper wasn’t cashed and indorsed with unrestricted indorsement  but  was  taken 
for  collection  and  forwarded  for  that purpose under an indrosement giving notice of that fact, may
place a greater burden upon the drawee than it would otherwise bear 
 
FORGERY  OF  SIGNATURE  IN  INSTRUMENT  IS  FALSIFACTION  OF  PRIVATE DOCUMENT 
 

FORGER NEED NOT IMITATE GENUINE SIGNATURE

•      One who signs in the name of another without the latter’s authority, as drawer  in  a  check,  and 
thereby  makes  it  appear  falsely  that  the alleged drawer of the check was a real party thereto, when
as a matter of fact he didn’t participate in the transaction, is guilty of falsification 
 

COMMERCIAL DOCUMENTS

•      Documents   or   instruments   which   are   used   by   businessmen   or merchants to promote or
facilitate trade or credit transactions 

Sec.  125.  What  constitutes  a  material  alteration.  -  Any  alteration which

changes: 
 
      (a) The date; 
        
      (b) The sum payable, either for principal or interest; 
        
      (c) The time or place of payment: 
        
      (d) The number or the relations of the parties; 
        
      (e) The medium or currency in which payment is to be made;

      (f)  Or  which  adds  a  place  of  payment  where  no  place  of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration. 

Holder in Due Course - Negotiable Instruments 

Sec. 52. What constitutes a holder in due course. - A holder in due course  is  a 
holder  who  has  taken  the  instrument  under  the following conditions: 
 
      (a) That it is complete and regular upon its face; 
        
      (b) That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact; 
        
      (c) That he took it in good faith and for value; 
        
      (d) That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.  
 

PRESUMPTION HOLDER IN DUE COURSE

•      Generally, every holder is prima facie a holder in due course 
•      Any one, therefore, who claims otherwise must prove that the holder in question
acquired the instrument with one or more of the conditions lacking 
•      Any  holder  proved  to  have  taken  an  instrument  with  one  of  the conditions
enumerated lacking is not a holder in due course 
 

ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE

•      The holder of the instrument must have become the holder before the instrument
has become overude 
•      Illustrations— 
o      One  who  has  purchased  2  promissory  notes  without  the necessary 
indorsement  on  the  part  of  the  holder  after payment  thereof  had  already  been 
one  year  overdue  and without  having  made  inquiries  about  the  solvency  of  the
makers cannot be considered as a holder in due course 
o      One  taking  past  due  paper  is  chargeable  with  notice  of  all equities  between 
the  original  parties  but  nbt  with  equities between intermediate indorsers 
o      If  the  instrument  is  overdue,  it  is  also  a  notice  that  it  has been dishonored 
 

WHEN INSTRUMENT IS OVERDUE

•      When it after the date of maturity 
•      On  the  date  of  maturity,  the  instrument  is  not  overdue  and  a  holder who
acquires the instrument on that date is a holder in due course  
•      If the instrument is overdue, there might be something wrong with the instrument 
 

AS TO ACCELERATED INSTRUMENTS
•      When  the  instrument  contains  an  acceleration  clause,  knowledge  of the 
holder  at  the  time  of  acquisition  thereof  that  one  installment  or interest,  or  both, 
as  the  case  may  be,  is  unpaid,  is  notice  that  the instrument is overdue 
 

AS TO INTEREST
•      One  who  purchases  in  good  faith  an  instrument  upon  which  the interest is
overdue is a holder in due course 
•      But where by the terms of the instrument, the principal was to become due  upon 
default  of  the payment  of  instrument,  then  one  who  takes the  instrument  upon 
which  the  interest  is  overdue  is  not  a  holder  in due course 
 

WHAT IS AN ACQUISITION IN GOOD FAITH?

•      Good faith refers to the indorsee or transferee and not to the seller of the paper

•      Taking in good faith means that he doesn't have any knowledge of fact which 
would  render  it  dishonest  for  him  to  take  a  particular  piece  of negotiable paper 
 

MEANING OF HOLDER IN GOOD FAITH

•      Holder without knowledge or notice of equities of any sort which could be set up
against a prior holder of an instrument 
 

EFFECT OF FAILURE TO MAKE INQUIRY

•      Ordinarily,  failure  to  inquire  after  notice  merely  sufficient  to  cause  a person 
of  ordinary  prudence  to  make  inquiry  as  to  an  infirmity  in  a negotiable instrument
and defect in the holder’s title, is not evidence of purchaser’s bad faith so as to bar him
from recovery 
•      TEST OF HONESTY—whether or not his purpose is dishonest? 
 

WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD

FAITH?
•      Failure  to  make  inquiry  when  circumstances  strongly  indicate  defect, renders
the holder not a holder in due course 
 

ACQUISITION FOR VALUE

•      Where the holder gave no valuable consideration for the transfer of the instrument
to him,  he cannot be a holder in due course 
•      Discounting of a negotiable instrument is still considered to be taking for value 
 

EFFECT OF INADEQUACY OF INSTRUMENT

•      Generally, lesion or inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence 
•      It may be an evidence of fraud  
•      An amount paid for an instrument if a trifling sum should be a red flag and may by
itself establish notice  
 

ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR

OF INFIRMITY
•      The   following   may   be   chargeable   with   notice—one   taking   an instrument 
which  is  overdue;  and  one  acquiring  an  instrument  for  a grossly inadequate
consideration 
 
GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY 
 

DEFECTS OF TITLE
•      All  those  situations  which  at  common  law  were  known  as  equitable defenses 
and  also  to  cover  those  equities  of  ownership  where  there was breach of faith in
negotiation 
•      Examples? 
o      Acquisition of the instrument by fraud 
o      Acquisition of the instrument by force, duress or fear 
o      Acquisition of the instrument by unlawful means 
o      Acquisition of the instrument by for an illegal consideration 
o      Negotiation of the instrument in breach of faith 
o      Negotiation  of  the  instrument  under  circumstances  which amount to fraud 
 

DEFENSES
•      Include those common law defenses outside those covered in Section 55 
•      These include mistake, absence and failure of consideration covered in Section 28,
minority and other forms of incapacity, lack of authority of an agent 
 

INFIRMITIES
•      Things that are wrong with the instrument itself 
•      What are these? 
o      Wrong date inserted where the instrument is expressed to be payable at a fixed
period after sight is undated 
o      Filling  up  a  blank  instrument  not  strictly  in  accordance  with the authority given
or not within authority given or not within the  reasonable  time,  where  it  was 
delivered  wanting  in  a material alteration 
o      Filling  up  without  authority  an  incomplete  and  undelivered instrument 
o      Lack of valid and intentional delivery 
o      Forgery 
o      Material alteration 
 

MAY A PAYEE BE A HOLDER IN DUE COURSE?

•      Yes, if he satisfies the requirements as set forth in Section 52 
 

MAY A DRAWEE BE A HOLDER IN DUE COURSE?

•      A holder refers to one who has taken the instrument as it passes along in the
course of negotiation towards the drawee and not the drawee, who, on the acceptance
and payment of the instrument, thereby strips the instrument of all negotiability and
reduces it to a mere voucher or proof of payment 
 
Sec. 53. When person not deemed holder in due course. - Where an instrument 
payable  on  demand  is  negotiated  on  an  unreasonable length of time after its
issue, the holder is not deemed a holder in due course. 

WHAT CONSTITUTES UNREASONABLE LENGTH OF

TIME?
•      Jurisprudence  doesn't  state  an  exact  period,  nonetheless,  there  is practically
no authorities hold that a reasonable time for negotiating a demand note could be
extended beyond a year 
  
Sec. 54. Notice  before full amount is paid. -  Where the transferee receives notice
of any infirmity  in the instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent of the amount therefore paid by
him. 
  
Sec. 55. When title defective. - The title of a person who negotiates an instrument
is defective within the meaning of this Act when he obtained  the  instrument,  or 
any  signature  thereto,  by  fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith,
or under such circumstances as amount to a fraud. 
 

DEFECTIVE TITLE IN GENERAL

•      In the acquisition or negotiation thereof 
 
Sec. 56. What constitutes notice of defect. - To constitutes notice of an  infirmity 
in  the  instrument  or  defect  in  the  title  of  the  person negotiating  the  same, 
the  person  to  whom  it  is  negotiated  must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounted to bad faith. 
 

NOTICE OF DEFECT IN GENERAL

To  constitute  a  notice  of  defect  or  infirmity,  the  holder  must  have  actual
knowledge either: 
1.    Of the defect or infirmity 
2.    Or of facts that his action in taking the instrument amounts to bad faith 
 

ACTUAL KNOWLEDGE
•      Actual knowledge is required and not mere suspicion, surmise or fear 
 

TAKING AMOUNTING TO BAD FAITH

•      Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious or evil
mind 
•      While  mere  suspicion  is  not  enough,  where  there  is  knowledge  of suspicious 
circumstances,  coupled  with  means  of  verifying  them, taking the instrument may
amount to bad faith 
 
Sec.  57.  Rights  of  holder  in  due  course.  -  A  holder  in  due  course holds the
instrument free from  any defect of  title of prior parties, and   free   from  
defenses   available   to   prior   parties   among themselves, and may enforce
payment of the instrument for the full amount thereof against all parties liable
thereon.  
 

RIGHTS OF A HOLDER IN DUE COURSE

1.    He may sue on the instrument in his won name 
2.    He may receive payment and if the payment is in due course, the instrument is
discharged 
3.    He  holds  the  instrument  free  from  any  defect  of  title  of  prior parties  and 
free  from  defenses  available  to  prior  parties  among themselves 
4.    And  he  may  enforce  payment  of  the  instrument  for  the  full amount thereof
against all parties liable thereto  
 

LEGAL AND EQUITABLE DEFENSES

•      The holder in due course is free from equitable defenses only 
 
AN ALTERATION MAY BE A REAL OR PERSONAL
DEFENSE.  WHY?
•      An alteration irrespective of original tenor, it can be enforced—real 
•      Irrespective  of  difference  between  original  and  altered  tenor,  can collect only
limited amount—personal 
 

EQUITABLE OR PERSONAL DEFENSES

•      Those  which  grow  out  of  the  agreement  or  conduct  of  a  particular person  in 
regard  to  the  instrument  which  renders  it  inequitable  for him, though holding legal
title, to enforce it against the defendant, but which are not available against bona fide
purchasers for value without notice 
 

LEGAL OR REAL DEFENSE

•      Attach  to  the  instrument  itself  and  can  be  set  up  against  the  whole world,
including a holder in due course 
•      The right sought to be enforced has never existed or ceased to exist 
•      Defense against everybody 
 
THE   INSTRUMENT   SUBJECT   TO   A   REAL   DEFENSE   CAN   STILL   BE
ENFORCED.    IT  CANNOT  BE  ENFORCED  WITH  REGARD  THE  PERSON  TO
WHOM THE LEGAL DEFENSE IS AVAILABLE.   

BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES

•      In  general,  the  defense  of  want  of  consideration  may  only  be  raised between
immediate parties 
•      But this could be raised in the instance that the holder has notice  of the want in
consideration 
 

BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS

•      The  want  or  failure  of  consideration  may  be  interposed  in  an  action brought 
by  the  payee  against  the  drawer  or  by  the  indorsee  against the payee indorsing,
or by the drawer against the acceptor, but not in an action between the payee and
acceptor 
•      In  the  latter  case,  the  defense  is  available  only  if  there  is  no consideration 
received  by  the  defendant  for  his  liability  and  plaintiff must have given no
consideration for his title 
 

WANT OF DELIVERY OF COMPLETE INSTRUMENT

•      Where the instrument is mechanically complete and is not wanting in any material
particular, want of delivery is an equitable defense 
•      As against holders not in due course, it can be shown that no delivery was made,
or that the delivery was conditional or for a special purpose 
•      Where the instrument is stolen, the defense is also equitable 
•      But where the instrument is payable to order, it is a real defense—for the person
would have to commit forgery on the instrument  
 

FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE

DEFENSE
•      Relates to the quantity, quality, value or character of the consideration of the
instrument 
 

FOR MISTAKE TO INVALIDATE CONSENT

•      It should refer to the substance of the thing which is the object of the contract, or
those conditions which have principally moved one or both parties to enter into the
contract 
 

FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS

A LEGAL DEFENSE
•      This fraud exists in those cases which a person without negligence has signed  an 
instrument  which  was  in  fact  a  negotiable  instrument  but was  deceived  as  to  the 
character  of  the  instrument  and  without knowledge of it 
•      Essential element is that the maker or indorser, as the case may be, must have
exercised ordinary diligence and in no manner contributed negligently to the imposition 
 
MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR 
 
WHERE  THE  CORPORATION  IS  ABSOLUTELY  PROHIBITED  FROM  ISSUING
ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN BY
A HOLDER IN DUE COURSE 
 
WHERE  THE  CONTRACT  OR  INSTRUMENT  ITSELF  IS  MADE  VOID  BY
STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE 
 
Sec.  58.  When  subject  to  original  defense.  -  In  the  hands  of  any holder
other than a holder in due course, a negotiable instrument is subject  to  the 
same  defenses  as  if  it  were  non-negotiable.  But  a holder  who  derives  his 
title  through  a  holder  in  due  course,  and who  is  not  himself  a  party  to 
any  fraud  or  illegality  affecting  the instrument, has all the rights of such former
holder in respect of all 
parties prior to the latter. 
 

RIGHTS OF A HOLDER NOT IN DUE COURSE

1.    He may sue on his own name 
2.    He may receive payment and if the payment is in due course, the instrument is
discharged 
3.    He holds the instrument subject to the same defenses as if it were non-negotiable  
4.    But a holder not in due course who derives his title from a holder in  due  course 
and  who  isn’t  a  party  himself  to  any  fraud  or illegality affecting the instrument, has
all the rights of such former holder in respect of parties prior to the latter 
 
THE  HOLDER  ACQUIRING  FROM  A  HOLDER  IN  DUE  COURSE  HAS  THE
BURDEN  OF  PROOF  TO  SHOW  PREDECESSOR  IS  INDEED  A  HOLDER  IN
DUE COURSE 
 
Sec.  59.  Who  is  deemed  holder  in  due  course.  -  Every  holder  is deemed 
prima  facie  to  be  a  holder  in  due  course;  but  when  it  is shown  that  the 
title  of  any  person  who  has  negotiated  the instrument was defective, the
burden is on the holder to prove that he  or  some  person  under  whom  he 
claims  acquired  the  title  as holder in due course. But the last-mentioned rule
does not apply in favor of a party who became bound on the instrument prior to
the acquisition of such defective title. 
 
IN WHOSE FAVOR PRESUMPTION ARISES
•      In order to be a holder, he must be in possession  of the note or the bearer thereof 

WHEN PRESUMPTION ACCRUES

•      It  is  presumed  that  the  holder  acquired  the  note  under  all  the circumstances
required under Section 52 
•      Before the presumption arises, he must prove that he is the holder of the 
instrument,  that  is,  that  he  is  the  indorsee  in  possession  of  the instrument, as it is
payable to order 
 

WHEN BURDEN IS SHIFTED

•      When it is shown that the title of any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or  some  under  whom  he 
claims,  acquired  the  title  as  holder  in  due course 
 
THE PRESUMPTION IS NOT APPLICABLE WHEN  THE HOLDER’S TITLE WAS
DEFECTIVE OR SUSPICIOUS

Holder in Due Course - Negotiable Instruments 

Sec. 52. What constitutes a holder in due course. - A holder in due course  is  a 
holder  who  has  taken  the  instrument  under  the following conditions: 
 
      (a) That it is complete and regular upon its face; 
        
      (b) That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact; 
        
      (c) That he took it in good faith and for value; 
        
      (d) That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.  
 

PRESUMPTION HOLDER IN DUE COURSE

•      Generally, every holder is prima facie a holder in due course 
•      Any one, therefore, who claims otherwise must prove that the holder in question
acquired the instrument with one or more of the conditions lacking 
•      Any  holder  proved  to  have  taken  an  instrument  with  one  of  the conditions
enumerated lacking is not a holder in due course 
 

ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE

•      The holder of the instrument must have become the holder before the instrument
has become overude 
•      Illustrations— 
o      One  who  has  purchased  2  promissory  notes  without  the necessary 
indorsement  on  the  part  of  the  holder  after payment  thereof  had  already  been 
one  year  overdue  and without  having  made  inquiries  about  the  solvency  of  the
makers cannot be considered as a holder in due course 
o      One  taking  past  due  paper  is  chargeable  with  notice  of  all equities  between 
the  original  parties  but  nbt  with  equities between intermediate indorsers 
o      If  the  instrument  is  overdue,  it  is  also  a  notice  that  it  has been dishonored 
 

WHEN INSTRUMENT IS OVERDUE

•      When it after the date of maturity 
•      On  the  date  of  maturity,  the  instrument  is  not  overdue  and  a  holder who
acquires the instrument on that date is a holder in due course  
•      If the instrument is overdue, there might be something wrong with the instrument 
 

AS TO ACCELERATED INSTRUMENTS
•      When  the  instrument  contains  an  acceleration  clause,  knowledge  of the 
holder  at  the  time  of  acquisition  thereof  that  one  installment  or interest,  or  both, 
as  the  case  may  be,  is  unpaid,  is  notice  that  the instrument is overdue 
 

AS TO INTEREST
•      One  who  purchases  in  good  faith  an  instrument  upon  which  the interest is
overdue is a holder in due course 
•      But where by the terms of the instrument, the principal was to become due  upon 
default  of  the payment  of  instrument,  then  one  who  takes the  instrument  upon 
which  the  interest  is  overdue  is  not  a  holder  in due course 
 

WHAT IS AN ACQUISITION IN GOOD FAITH?

•      Good faith refers to the indorsee or transferee and not to the seller of the paper

•      Taking in good faith means that he doesn't have any knowledge of fact which 
would  render  it  dishonest  for  him  to  take  a  particular  piece  of negotiable paper 
 

MEANING OF HOLDER IN GOOD FAITH

•      Holder without knowledge or notice of equities of any sort which could be set up
against a prior holder of an instrument 
 

EFFECT OF FAILURE TO MAKE INQUIRY

•      Ordinarily,  failure  to  inquire  after  notice  merely  sufficient  to  cause  a person 
of  ordinary  prudence  to  make  inquiry  as  to  an  infirmity  in  a negotiable instrument
and defect in the holder’s title, is not evidence of purchaser’s bad faith so as to bar him
from recovery 
•      TEST OF HONESTY—whether or not his purpose is dishonest? 
 

WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD

FAITH?
•      Failure  to  make  inquiry  when  circumstances  strongly  indicate  defect, renders
the holder not a holder in due course 
 

ACQUISITION FOR VALUE

•      Where the holder gave no valuable consideration for the transfer of the instrument
to him,  he cannot be a holder in due course 
•      Discounting of a negotiable instrument is still considered to be taking for value 
 

EFFECT OF INADEQUACY OF INSTRUMENT

•      Generally, lesion or inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence 
•      It may be an evidence of fraud  
•      An amount paid for an instrument if a trifling sum should be a red flag and may by
itself establish notice  
 

ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR

OF INFIRMITY
•      The   following   may   be   chargeable   with   notice—one   taking   an instrument 
which  is  overdue;  and  one  acquiring  an  instrument  for  a grossly inadequate
consideration 
 
GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY 
 

DEFECTS OF TITLE
•      All  those  situations  which  at  common  law  were  known  as  equitable defenses 
and  also  to  cover  those  equities  of  ownership  where  there was breach of faith in
negotiation 
•      Examples? 
o      Acquisition of the instrument by fraud 
o      Acquisition of the instrument by force, duress or fear 
o      Acquisition of the instrument by unlawful means 
o      Acquisition of the instrument by for an illegal consideration 
o      Negotiation of the instrument in breach of faith 
o      Negotiation  of  the  instrument  under  circumstances  which amount to fraud 
 

DEFENSES
•      Include those common law defenses outside those covered in Section 55 
•      These include mistake, absence and failure of consideration covered in Section 28,
minority and other forms of incapacity, lack of authority of an agent 
 

INFIRMITIES
•      Things that are wrong with the instrument itself 
•      What are these? 
o      Wrong date inserted where the instrument is expressed to be payable at a fixed
period after sight is undated 
o      Filling  up  a  blank  instrument  not  strictly  in  accordance  with the authority given
or not within authority given or not within the  reasonable  time,  where  it  was 
delivered  wanting  in  a material alteration 
o      Filling  up  without  authority  an  incomplete  and  undelivered instrument 
o      Lack of valid and intentional delivery 
o      Forgery 
o      Material alteration 
 

MAY A PAYEE BE A HOLDER IN DUE COURSE?

•      Yes, if he satisfies the requirements as set forth in Section 52 
 

MAY A DRAWEE BE A HOLDER IN DUE COURSE?

•      A holder refers to one who has taken the instrument as it passes along in the
course of negotiation towards the drawee and not the drawee, who, on the acceptance
and payment of the instrument, thereby strips the instrument of all negotiability and
reduces it to a mere voucher or proof of payment 
 
Sec. 53. When person not deemed holder in due course. - Where an instrument 
payable  on  demand  is  negotiated  on  an  unreasonable length of time after its
issue, the holder is not deemed a holder in due course. 

WHAT CONSTITUTES UNREASONABLE LENGTH OF

TIME?
•      Jurisprudence  doesn't  state  an  exact  period,  nonetheless,  there  is practically
no authorities hold that a reasonable time for negotiating a demand note could be
extended beyond a year 
  
Sec. 54. Notice  before full amount is paid. -  Where the transferee receives notice
of any infirmity  in the instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent of the amount therefore paid by
him. 
  
Sec. 55. When title defective. - The title of a person who negotiates an instrument
is defective within the meaning of this Act when he obtained  the  instrument,  or 
any  signature  thereto,  by  fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith,
or under such circumstances as amount to a fraud. 
 

DEFECTIVE TITLE IN GENERAL

•      In the acquisition or negotiation thereof 
 
Sec. 56. What constitutes notice of defect. - To constitutes notice of an  infirmity 
in  the  instrument  or  defect  in  the  title  of  the  person negotiating  the  same, 
the  person  to  whom  it  is  negotiated  must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounted to bad faith. 
 

NOTICE OF DEFECT IN GENERAL

To  constitute  a  notice  of  defect  or  infirmity,  the  holder  must  have  actual
knowledge either: 
1.    Of the defect or infirmity 
2.    Or of facts that his action in taking the instrument amounts to bad faith 
 

ACTUAL KNOWLEDGE
•      Actual knowledge is required and not mere suspicion, surmise or fear 
 

TAKING AMOUNTING TO BAD FAITH

•      Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious or evil
mind 
•      While  mere  suspicion  is  not  enough,  where  there  is  knowledge  of suspicious 
circumstances,  coupled  with  means  of  verifying  them, taking the instrument may
amount to bad faith 
 
Sec.  57.  Rights  of  holder  in  due  course.  -  A  holder  in  due  course holds the
instrument free from  any defect of  title of prior parties, and   free   from  
defenses   available   to   prior   parties   among themselves, and may enforce
payment of the instrument for the full amount thereof against all parties liable
thereon.  
 

RIGHTS OF A HOLDER IN DUE COURSE

1.    He may sue on the instrument in his won name 
2.    He may receive payment and if the payment is in due course, the instrument is
discharged 
3.    He  holds  the  instrument  free  from  any  defect  of  title  of  prior parties  and 
free  from  defenses  available  to  prior  parties  among themselves 
4.    And  he  may  enforce  payment  of  the  instrument  for  the  full amount thereof
against all parties liable thereto  
 

LEGAL AND EQUITABLE DEFENSES

•      The holder in due course is free from equitable defenses only 
 

AN ALTERATION MAY BE A REAL OR PERSONAL

DEFENSE.  WHY?
•      An alteration irrespective of original tenor, it can be enforced—real 
•      Irrespective  of  difference  between  original  and  altered  tenor,  can collect only
limited amount—personal 
 

EQUITABLE OR PERSONAL DEFENSES

•      Those  which  grow  out  of  the  agreement  or  conduct  of  a  particular person  in 
regard  to  the  instrument  which  renders  it  inequitable  for him, though holding legal
title, to enforce it against the defendant, but which are not available against bona fide
purchasers for value without notice 
 

LEGAL OR REAL DEFENSE

•      Attach  to  the  instrument  itself  and  can  be  set  up  against  the  whole world,
including a holder in due course 
•      The right sought to be enforced has never existed or ceased to exist 
•      Defense against everybody 
 
THE   INSTRUMENT   SUBJECT   TO   A   REAL   DEFENSE   CAN   STILL   BE
ENFORCED.    IT  CANNOT  BE  ENFORCED  WITH  REGARD  THE  PERSON  TO
WHOM THE LEGAL DEFENSE IS AVAILABLE.   

BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES

•      In  general,  the  defense  of  want  of  consideration  may  only  be  raised between
immediate parties 
•      But this could be raised in the instance that the holder has notice  of the want in
consideration 
 

BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS

•      The  want  or  failure  of  consideration  may  be  interposed  in  an  action brought 
by  the  payee  against  the  drawer  or  by  the  indorsee  against the payee indorsing,
or by the drawer against the acceptor, but not in an action between the payee and
acceptor 
•      In  the  latter  case,  the  defense  is  available  only  if  there  is  no consideration 
received  by  the  defendant  for  his  liability  and  plaintiff must have given no
consideration for his title 
 

WANT OF DELIVERY OF COMPLETE INSTRUMENT

•      Where the instrument is mechanically complete and is not wanting in any material
particular, want of delivery is an equitable defense 
•      As against holders not in due course, it can be shown that no delivery was made,
or that the delivery was conditional or for a special purpose 
•      Where the instrument is stolen, the defense is also equitable 
•      But where the instrument is payable to order, it is a real defense—for the person
would have to commit forgery on the instrument  
 

FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE

DEFENSE
•      Relates to the quantity, quality, value or character of the consideration of the
instrument 
 

FOR MISTAKE TO INVALIDATE CONSENT

•      It should refer to the substance of the thing which is the object of the contract, or
those conditions which have principally moved one or both parties to enter into the
contract 
 

FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS

A LEGAL DEFENSE
•      This fraud exists in those cases which a person without negligence has signed  an 
instrument  which  was  in  fact  a  negotiable  instrument  but was  deceived  as  to  the 
character  of  the  instrument  and  without knowledge of it 
•      Essential element is that the maker or indorser, as the case may be, must have
exercised ordinary diligence and in no manner contributed negligently to the imposition 
 
MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR 
 
WHERE  THE  CORPORATION  IS  ABSOLUTELY  PROHIBITED  FROM  ISSUING
ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN BY
A HOLDER IN DUE COURSE 
 
WHERE  THE  CONTRACT  OR  INSTRUMENT  ITSELF  IS  MADE  VOID  BY
STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE 
 
Sec.  58.  When  subject  to  original  defense.  -  In  the  hands  of  any holder
other than a holder in due course, a negotiable instrument is subject  to  the 
same  defenses  as  if  it  were  non-negotiable.  But  a holder  who  derives  his 
title  through  a  holder  in  due  course,  and who  is  not  himself  a  party  to 
any  fraud  or  illegality  affecting  the instrument, has all the rights of such former
holder in respect of all 
parties prior to the latter. 
 

RIGHTS OF A HOLDER NOT IN DUE COURSE

1.    He may sue on his own name 
2.    He may receive payment and if the payment is in due course, the instrument is
discharged 
3.    He holds the instrument subject to the same defenses as if it were non-negotiable  
4.    But a holder not in due course who derives his title from a holder in  due  course 
and  who  isn’t  a  party  himself  to  any  fraud  or illegality affecting the instrument, has
all the rights of such former holder in respect of parties prior to the latter 
 
THE  HOLDER  ACQUIRING  FROM  A  HOLDER  IN  DUE  COURSE  HAS  THE
BURDEN  OF  PROOF  TO  SHOW  PREDECESSOR  IS  INDEED  A  HOLDER  IN
DUE COURSE 
 
Sec.  59.  Who  is  deemed  holder  in  due  course.  -  Every  holder  is deemed 
prima  facie  to  be  a  holder  in  due  course;  but  when  it  is shown  that  the 
title  of  any  person  who  has  negotiated  the instrument was defective, the
burden is on the holder to prove that he  or  some  person  under  whom  he 
claims  acquired  the  title  as holder in due course. But the last-mentioned rule
does not apply in favor of a party who became bound on the instrument prior to
the acquisition of such defective title. 
 

IN WHOSE FAVOR PRESUMPTION ARISES

•      In order to be a holder, he must be in possession  of the note or the bearer thereof 

WHEN PRESUMPTION ACCRUES

•      It  is  presumed  that  the  holder  acquired  the  note  under  all  the circumstances
required under Section 52 
•      Before the presumption arises, he must prove that he is the holder of the 
instrument,  that  is,  that  he  is  the  indorsee  in  possession  of  the instrument, as it is
payable to order 
 

WHEN BURDEN IS SHIFTED

•      When it is shown that the title of any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or  some  under  whom  he 
claims,  acquired  the  title  as  holder  in  due course
Perils or Risks That May Be Insured

The following risks may be insured:

1. Any contingent or unknown event whether past or future which may cause
damage to a person having an insurable interest; or
2. Any contingent or unknown event, whether past or future, which may create
liability against the person insured.

May a married woman take out an insurance?  If so, on what?

Yes.  A married woman may take out an insurance on her life or that of her children
even without the consent of her husband.  She may likewise take out an insurance on
the life of her husband, her paraphernal property, or on property given to her by her
husband.

May a minor take out an insurance?

Third par of Sec. 3 is no longer applicable, since the age of majority is now 18 years old
(RA 8809, Dec. 13, 1989).

Section 3 Insurance Code:

Any contingent or unknown event, whether past or future, which may damnify a person
having an insurable interest, or create a liability against him, may be insured against,
subject to the provisions of this chapter.

The consent of the husband is not necessary for the validity of an insurance policy
taken out by the married woman on her life or that of her children.

Any minor of the age of eighteen years or more, may notwithstanding such minority,
contract for life, health and accident insurance, with any insurance company duly
authorized to do business in the Philippines, provided the insurance is taken on his own
life and the beneficiary appointed is the minor’s estate or the minor’s father, mother,
husband, wife, child, brother or sister.

The married woman or the minor herein allowed to take out an insurance policy may
exercise all the rights and privileges of an owner under a policy.

All rights, title and interest in the policy of insurance taken out by an original owner on
the life or health of a minor shall automatically vest in the minor upon the death of the
original owner, unless otherwise provided in the policy.

Related Provisions:

Art. 1174 (NCC).  Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the assumption of
risk, no person shall be responsible for those events which, could not be foreseen, or
which, though foreseen, were inevitable.

Art. 110 (FC).  The spouses retain the ownership, possession, administration and
enjoyment of their exclusive properties.

Either spouse may during the marriage, transfer the administration of his or her
exclusive property to the other by means of a public instrument, which shall be recorded
in the registry of property of the place where the property is located.

Art. 1327 (NCC).  The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not know how to write.

Art. 1390 (NCC). The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court.  They
are susceptible of ratification.

Problem:

A, wanted to open a medicinal herb shop.  He placed a long distance phone call to
Taiwan and talked to an exporter who willingly agreed to consign several tons of
ginsengs with him on the condition that he will come and pick the goods up.  A then
sent 5 of his cargo vessels to Taiwan.  The ships left on August 9.  On August 14, A
insured the 5 vessels against perils of the South China Sea “Lost or Not Lost” with B
Insurance Co.  Without the knowledge of both parties, the ships had already sunk on
Aug. 14.  Is B Insurance Co. liable for the ships?

Yes.  This is an example of a past unknown event because the sinking of the ship is a
past event at the time that the policy took effect.  The contract is valid and B Insurance
Co. is liable because he agreed to pay even though the ship be already lost.  An
insurance against an unknown past event is peculiar only to marine insurance. 
However, Atty. Quimson said in class that nowadays, most if not all insurance
companies no longer insure a past event since technology has progressed in such a
manner that a ship’s current status can easily be known while the application is being
processed.

INSURABLE INTEREST

Section 10. Every person has an insurable interest in the life and health:

(a) Of himself, of his spouse and of his children;

(b) Of any person on whom he depends wholly in part for education or support, or in
whom he has a pecuniary interest;

(c) Of any person under a legal obligation to him for the payment of money, or
respecting property or services, Of which death or illness might delay or prevent the
performance; and

(d) Of any person upon whose life any estate or interest vested in him depends.
What is insurable interest?

Insurable interest is one the most basic of all requirements in insurance.  In general, a
person is deemed to have insurable interest in the subject matter insured where he ha a
relation or connection with or concern in it that he will derive pecuniary benefit or
advantage from its preservation and will suffer pecuniary loss or damage from its
destruction, termination or injury by the happening of the event insured against.

Why must there be an insurable interest?

It is essential for validity and enforceability of the contract or policy.  A policy issued to a
person without interest in the subject matter is a mere wager policy or contract.

When is there insurable interest in life insurance?

In life insurance, Insurable interest exists where there is reasonable ground founded on
the relations of the parties whether pecuniary, contractual or by blood or affinity, and to
expect some benefit or advantage from the continuance of the life of the insured.

Problem:

A takes an insurance policy on his life and names his friend X as beneficiary, and
another insurance on the life of Y in consideration of “love and affection”  with A as a
beneficiary.  Which of the two insurances, if any, is valid and which, if any, is void?

The Insurance taken on A on his life is VALID, because the beneficiary need not have
an insurable interest in the life of the insured.  It must be the one insuring who has an
insurable interest in the life of the person he is insuring, and of course, it goes without
saying that one has an insurable interest in his own life and health.

ON the other hand, the insurance taken by A on the life of Y is VOID because “love and
affection for the insured” n the part of the person insuring is NOT sufficient ground to
quali fy as insurable interest.

When is the insurance contract perfected?

 

When the assent or consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. Mere
offer or proposal is not contemplated. (De Lim v. Sun Life Assurance Co., G.R. No. L-
15774, Nov. 29, 1920)

Right to Rescind a Contract of Insurance

Section 48.  Whenever a right to rescind a contract of insurance is given to the insurer
by any provision of this chapter, such right must be exercised previous to the
commencement of an action on the contract.

After a policy of life insurance made payable on the death of the insured shall have
been in force during the lifetime of the insured for a period of two years from the date of
its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab
initio or is rescindable by reason of the fraudulent concealment or misrepresentation of
the insured or his agent.

When must the insurer exercise his right to rescind?

In a non-life insurance policy, the insurer may rescind a contract of insurance prior to

the commencement of an action on the contract.

In a life insurance policy, the insurer may rescind the contract of insurance during the
first two years when the policy was in force during the lifetime of the insured from the
date of its issue or of its last reinstatement.

What are the requisites in order that the insurer may rescind a life insurance
policy?

1)       There must be a basis for the rescission (breach of warranty, concealment,
misrepresentation, etc.)

2)       The rescission must be coupled with a check for the amount of premiums already
paid. (without this, the rescission is not effective)
3)       The rescission must be exercised within the two years that the insurance is in
force during the lifetime of the insured.

Common Carriers
Common Carriers are persons, corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods or both, by land water air, for
compensation, offering their service to the public.

Elements of a common carrier:

a. persons' corporations, firms or associations

b. engaged  in the businessof carrying or transportingpassengers, goods or both

c. means of carriage is by land, water or air

d. the carrying of passengers , goods or both is for compensation

e. the service is offered to the public without distinction.

-Engaged in the business is deemed to cover operations whether regular or scheduled,

occasional, episodic or unscheduled.

- One is a common carrier even if he has no fixed and publicly known route, maintains
no terminals and issues no ticket.

- The true test of whether the character of the use is whether the public may enjoy it by
right or by permission. Note that the contract of transportation is a consensual contract.
Hence, a common carrier engages in a continuous offer. If you flag a common carrier
down, the contract becomes perfected and is consistent with the idea that entering with
a contract with the common carrier is a matter of right and not permission. You would
know when the carrier you are going to flag down  is a common carrier because it
should hold itself out principally as such.

- Recovery from a contract of private carriage, requires a contract, that there was
negligence, and that the goods are lost. On the other hand, recovery from a contract
with a common carrier, only requires the contract and that the goods were lost. This is
so because of the presumption of negligence.

- Regardless of whether the object are goods or passengers,a common carrier mus
observe extra-ordinary diligence.
- If loss, destruction or deterioration of the goods occurs or death or physical injuries is
suffered by a passenger, there is a presumption of negligence that arises. The
presumption may only be overcome by a showing that the required degree of diligence
has been observed or that Article 1735 applies in the case of goods. In case of
passengers, only the former.

- The following or similar stipulations shall be considered unreasonable, unjust and

contrary to public policy:

a. that the common carrier shall not be responsible for the acts or omissions of its or his
employees

b. that the common carrier's  liability for acts committed by thieves, or of robbers who do
not act with grave or irresistible threat, violence or force, is dispensed with or
diminished.

 c. that the common carrier is not responsible for the loss, destruction, or deterioration of
goods on account of the defective condition of the car, vehicle, ship, airplane or other
equipment used in the contract of carriage.

Scope of Data Privacy Act The Act applies to the processing of personal data, in and outside of the
Philippines when the data subject is a citizen or resident of the Philippines, or when the processing of
personal data is being done in the Philippines.66 When the processing is done outside the Philippines,
and personal data relates to a citizen and resident of another country, Philippine laws would apply when
the processing is being done by a person or entity with links to the Philippines, such as when the natural
or juridical person involved in the processing of personal data is found or established in the
Philippines.67 For these kinds of cases, whether Philippine law would apply would depend on the
particular circumstances of the case, taking into account international law and comity.