Commerce
It is that branch of human activity, the purpose of which is to bring products to the consumer by means of exchanges or operations which tend to supply and extend to him, habitually, with intent to gain at the proper time and place in good quality and quantity.
“Commerce” and “trade” are used interchangeably although the former is more commonly used in international dealings and the latter in domestic ones. (Pandect of Commercial Law andjurisprudence, justice Jose Vitug, 1997 ed.)
Commercial Law
It is that branch of private law governing acts of commerce (Business intercourse) and/or the juridical relations arising from such commercial acts. (Pandect of commercial law and jurisprudence, justice Jose Vitug, 1997 ed.) Principal characteristics: 1. uniform 2. universal 3. equitable 4. customary 5. progressive
Law Merchant/Lex Mercatoria
An old international law of merchants and mariners growing out of their customary practices. It was a law practiced and enforced by businessman and ship owners in their own courts without professional judges or lawyers. (Tristan Catindig, Notes on Selected Commercial Laws)Commercial Laws in the Philippines
A. Code of Commerce (Portions still in force) 1. Merchants, Commercial registries, Book
of Merchants, General provisions on Commercial Contracts (Arts. 1-63) 2. Joint Accounts (Arts. 239-243)
3. Transfers of non- negotiable credits (Arts. 347- 348)
4. Commercial Contracts of Overland transportation (Arts. 349-379)
5. Letters of Credit(Arts. 567-572) 6. Maritime Commerce (Atrs.573-869) B. Special Laws
1. Corporation Code
2. Negotiable Instruments Law 3. Insurance Code
4. Insolvency Law
5. Securities Registration Code 6. Public Service Law
7. General Banking Law 8. Warehouse Receipts Law 9. Chattel Mortgage Law 10. Others
C. New Civil Code (repealed certain contracts in the Code of Commerce)
1. Sales 2. Partnership 3. Agency 4. Loan 5. Deposit 6. Guaranty Merchants A. Foreign Merchants
Those engaged in business in the Philippines
1. As to capacity to contract
- governed by the laws of their country 2. As to the creation of their
establishments, their mercantile operations and the jurisdiction of our courts
- governed by the Code of Commerce
Note: The Corporation Code applies to
corporations.
B. Filipino Merchants 1. Natural Person
Qualifications:
a. Legal capacity to engage in commerce (capacity)
i. of legal age (18years)
ii. has free disposition of property b. habitually engaged in commerce (habituality)
2. Juridical person
Qualifications:
a. industrial or commercial company
b. organized in accordance with existing legislation
Habituality 1. Series of acts:
the repetition and continuation of commercial acts in such manner that they are related to each other by reason of the commercial or end which they
tend to have, which is, the exchange or circulation of products.
2. Single acts:
Act which manifests the intention to engage habitually in commerce.
Examples: Throwing open to the public a shop or establishment; public announce; etc.
Presumption of habituality
Exists from the moment a person who intends to engage in commerce announces through circulars, newspapers, handbills, posters exhibited to the public, or in any other manner whatsoever, an establishment which has for its object some commercial operations. (Art. 3 of code of commerce)
Disqualifications from Engaging in Commerce
A. Absolute disqualifications:
1. those serving the penalty of civil interdiction;
2. those judicially declared insolvent; 3. those who are absolutely disqualified under special laws.
B. Relative Disqualifications:
1. Certain government officials, such as judicial officers, prosecutors, department heads, collectors, and custodian of government funds
2. Money and commercial brokers
3. those who are under relative disqualification under special laws 4. Members of Congress.
5. President, Vice President, members of the Cabinet and their deputies or assistants.
6. Members of the Constitutional Commission.
7. President, Vice President, Members of the Cabinet , Congress, Supreme Court and the Constitutional Commission, Ombudsman with respect to any loan, guaranty, or other form of financial accommodation for any business purpose by any government- owned or controlled bank to them.
ABSOLUTE
INCAPACITY INCAPACITYRELATIVE
Extends through out
the Philippines Extends only to the territory where the officer is exercising his functions
Effect of act is null and
void Effect is to subject the violator to disciplinary action or punishment
Acts of Commerce (Commercial Transactions)
1) Those acts contained in the Code of Commerce and 2) all others of analogous character.
The Code of Commerce does not attempt anywhere to define what commercial transactions are. It only specifies two general classes.
Moreover, an act need not be performed by the merchant in order that it may be considered an act of commerce. (Cia Agricola de Ultramar v. Reyes, 4 PHIL 2) Governing Law (in successive order): 1)
Code of Commerce; 2) commercial usage; and 3) Civil Code.
Commercial Registry
1. A book where entries are made of merchants and of documents affecting their commercial transactions; OR
2. An office established for the purpose of copying and recording verbatim certain classes of documents of commercial nature.
Nature of Registration
1. By individual merchants – optional; 2. By corporations – compulsory, as it is
the fact of registration which creates the Corporation;
3. Partnerships with a capital of P3,000 or more or where the contributions consist of real estate properties – Compulsory, as provided by Art.1772 of the Civil Code;
4. Philippine Vessels –
a. With more than 3 tons gross – compulsory
b. With gross tonnage of 3 tons or less – optional.
Effect of Failure to Register
An individual merchant who fails to register cannot request the inscription of any document in the mercantile registry, nor take advantage of its effects (Art. 18, Code of Commerce)
Failure to register the articles of incorporation of a corporation will not create the corporation.
Failure to register a partnership does not affect the existence of juridical personality, whether or not it has P3, 000 or more or real estate properties on contributions by the partners.(BarReview Materials in Commercial Law, J. Miravite, 2005 ed.)
Required Books of Merchants
1. Under the Code of Commerce
a. Book of inventories and balances b. Journal
c. ledger
d. Books for copies of letters and telegrams.
2. Under special laws; e.g stock and transfer book under the corporation Code
3. Under the National Internal Revenue Code.
Commercial Contracts
Those entered into by, merchants in the pursuit of their activities as such merchants, those involving articles of commerce, or those defined as such contract by certain special commercials laws.
An agreement between two or more merchants or non-merchants bonding themselves to give or to do something in commercial transactions. (Del Viso 88cited in Miravite Bar Review Materials in Commercial law.)
Governing Laws:
1. Code of Commerce- primary
2. Civil Code- suppletory (Art. 18, Civil Code) But in case of inconsistency. The lather
prevails except as to contracts explicitly governed by the former such as bottomry and respondentia.
Formalities:
General Rule: Need not be in any particular form Exception:
1. Contracts required by the code or special laws to be in writing or in a certain form.
2. Foreign contracts executed abroad, required by foreign law to be in a particular form.
Perfection:
General Rule: Commercial contracts are consensual as to perfection.
Exception: When the Code of commerce requires specific forms such as charter parties and loans on bottomry and respondentia.
Exact moment of perfection:
General Rule: All contracts, whether civil or commercial, are perfected from the moment the offeror has notice of the offeree’s acceptance. (Cognition Theory; Art.1319, Civil Code)
Exception: Under Art.54 of the Code of Commerce, commercial contracts entered into by correspondence are perfected from the moment an answer is made accepting the offer or the condition by which the latter may be modified. (Manifestation Theory)
However, Justice Vitug believes that Article 54 is applicable only to contracts still specially governed by the Code of Commerce.
Joint Account (cuentas en participacion)
A business arrangement of merchants where other merchants agree to contribute the amount of capital agreed upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine. (Art;239)
Distinctions between Joint Account and Partnership (2000 Bar Exam)
JOINT ACCOUNT PARTNERSHIP
No firm name Has a firm name No common fund Has common fund No juridical personality Has juridical
personality Only ostensible
partner manages All general partners liable to third persons Liquidation done by
ostensible partner All general partners manage Liquidation done by ostensible partner Liquidation entrusted to any partners. LETTER OF CREDIT ( LC) (2000, 2002, 2005 Bar Exams)
That issued by one merchant to another for the purpose of attending to a commercial transaction (Art. 567)
An instrument issued by a bank on behalf on one of its customers, authorizing an individual or firm to draw on the bank or one of its correspondents for its account under certain conditions of the credit. (Commercial Law Review, C Villanueva, 2004 ed.)
An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. (Prudential Banks vs. CA, 216 SCRA 257). Through it, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credits or commitment fees mutually agreed upon.
Letters of credit are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. (Metropolitan vs. Daway)
A letter of credit is a commercial transaction because it is one of the contracts provided for by the Code of Commerce not repealed by the Civil Code. (Bar Review Materials inCommercial Law, Miravite, 2005 ed.) Essential conditions :
1. Issued in favor of a definite person and not to order;
2. Amount fixed and specified. (Art. 568)
Note: If any of these essential conditions is not
present, the instrument is merely considered as a letter of recommendation.
Duration:
a. Upon the period fixed by the parties: or b. If none is fixed, 6 months from its date if
used in the Philippines, or 12 months if used abroad. (Art. 572)
Note: The LC becomes void if it is not used
within the period applicable.
Perfection: LC are perfected from the moment
the correspondent bank makes payment to persons in whose favor the LC has been opened. (Belman, Inc. vs. Central Bank, 104
Phil. 887) Parties
1. Applicant/buyer/importer – one who purchases the goods, procures the LC, and obliges himself to reimburse the issuing bank upon receipt of the documents of title.
2. Issuing/opening bank – one which issues the
LC, and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement; and
3. Seller/exporter/beneficiary – one who sells the
goods to the buyer, and who delivers the draft and documents to the issuing bank to recover payment.
The number of parties may be increased. Modern letters of credit are usually not made between natural persons. They involve bank- to bank transactions.
4.
Advertising/ Notifying Bank - the correspondent bank (agent)of the opening bank through which it advises the beneficiary of the LC.
5.
Confirming Bank – bankwhich, upon the request of the beneficiary, confirms the LC issued.
6.
Paying Bank – bank onwhich the drafts are to be drawn, which
may be the opening bank or another bank not in the city of the beneficiary.
7.
Negotiating Bank –bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary.
A mereadvertising or notifying bank is not liable for a breach of the letter of credit, while a confirming bank is liable in case of breach thereof. An advertising bank is bound only to check the apparent authenticity of the letter of credit. (Bank of America NT. & SA vs. CA, G.R. No. 105395, December 10, 1993)
Nature: The LC is the financial devise (mode of
payment) developed a s a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.
Stages:
1. Contract of sale
between the buyer and seller
2. Application for LC by the buyer with the bank
3. Issuance of LC by the bank
4. shipping of goods by the seller
5. Execution of draft and tender of documents by the seller
6. Redemption of draft (payment)and obtaining of documents by the issuing bank
7. reimbursement to the bank and obtaining of documents by the buyer
There are at least 3 distinct and independent contracts involved in a LC:
1. Contract of sale
between the buyer and the seller
2. Contract of the buyer with the issuing bank
3. LC roper in which bank
promises to pay the seller pursuant to the terms and conditions stated therein (with a pour autrui stipulation in favor of the seller).
How their respective relationships are governed
a. Issuing bank and
applicant/buyer/importer – governed by the terms of the application and agreement for the issuance of the letter of the credit by the bank.
b. Issuing bank and
Beneficiary/seller/exporter – governed by the terms of the letter of the credit issued by the bank.
c. Applicant and beneficiary – governed by the sales of contract (Bar Review Materials in Commercial Law, J. MIravite, 2005 ed.)
The opening of the letter of credit in favor of a vendor is only a mode of payment; it is not among the essential
requirements of a contract of sale enumerated in arts.1305 and 1474 of the Civil Code. Therefore it does not prevent the perfection of the contract between the parties. (Johannes vs. CA, 227 SCRA 717) Other contracts maybe involved especially where additional parties are present.
Independence Principle The 3 basic contract s are distinct and indepen dent, and the underta kings of the respecti ve parties in each are neither subject to claims and defense s nor affected by the breach in the others. A direct conseq uence of the indepen dence principl e is the rule that banks deal only which docume nts and not with goods, services or obligation to which they relate. By this so-called independence principle, the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. (Bank of America, NT. &
SA vs. CA, G.R. No. 105395, December 10, 1993)
Rule of strict compliance
It espouses that the documents tendered by the seller/beneficiary must strictly conform to terms of the LC. (Feati bank vs. CA 196 SCRA 576)
Thus, a correspondent bank which departs from what has been stipulated under the letter of credit acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank the money thus paid to the beneficiary.(Feati Bank vs. CA)Kinds of LC
CONFIRMED LC IRREVOCABLE LC
A LC issued by one bank confirmed by another , in which case both banks are obligated to honor drafts drawn in compliance with the credit
A definite
undertaking on the part of the issuing bank and constitutes the engagement of the bank to the beneficiary and bona fide holders of drafts drawn and or documents presented
thereunder, that the provisions for payment, acceptance and negotiation contained in the credit will be fully fulfilled, provided that all the terms and conditions of the credit are complied with.
The correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as to its own according to the terms and conditions of the credit.
The issuing bank may not without the consent of the beneficiary (seller) and the applicant ( buyer) revoke his understanding under the LC.
OTHER KINDS OF LC REVOLVING
LC BACK-TO-BACK LC STANDBY LC
A credit that provides for the renewed credit to become available as soon as the opening bank has advised the paying bank that the drafts already drawn by the A credit with identical documentary requirements and covering the same merchandise as another LC, except for a difference in the price. A security arrangement for the performance of certain obligations. It can be drawn against only if another business transaction is permitted. beneficiary have been reimbursed to the opening bank by the buyer Governing Law 1. Code of Commerce
2. Uniform Customs and Practice for Documentary Credits
Note: the Uniform Commercial Practice for
Documentary Credits allow Letters of Credit to be payable to order.
NEGOTIABLE INSTRUMENTS LAW (Act No. 2031)
I. General Concepts N
egotiable Instrument (2005 Bar Exam) - a
written contract for the payment of money which complies with the requirements of Sec. 1 of the 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 (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law,
Sundiang and Aquino)
Functions of Negotiable Instrument :
1. Substitute for money 2. Medium of exchange
3. Tool used in commercial transaction.
Two Distinctive Features/Characteristics of NI: (2005 Bar Exam)
1. Negotiability - it is that attribute or property
whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses.
Requisites of Negotiability: (1996Bar Exam)
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 or determinable future time;d.
Must be payable to order or to bearer; ande. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
2. Accumulation of Secondary Contracts -
secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder.
Distinctions between Negotiable Instruments and Non-Negotiable Instruments
NEGOTIABLE
INSTRUMENTS NON-NEGOTIABLEINSTRUMENTS
1. Must contain all
requisites of sec.1 1. Does not contain all requisites of sec.1 2. Transferable by negotiation and assignment. 2. Transferable by assignment only 3. HDC can have
rights better than his transferor
3. A transferee
acquires no better right than his transferor 4. Prior parties warrant
payment (secondary liability). 5. Governed by NIL 6. Transferee is a holder in due course. 7. Defenses generally not available.
4. Prior parties do not warrant payment but merely the legality of his title.
5. NIL only applies by analogy
6. Transferee is assignee only. 7. All defenses available against last transferee.
Classes of Negotiable Instruments : (2002 Bar Exam)
1.
Promissory Note (PN) - unconditionalpromise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer.
2.
Bill of Exchange (BE) -an unconditionalorder 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 or determinable future time a sum certain in money to order or to bearer.
3.
Check- a bill of exchange drawn on a bankpayable on demand.
Kinds:
•
Manager’s / Cashier’s Check – drawn by a bank on itself and therefore, it is a primary obligation of the bank.o It is accepted in advance by the act of its issuance and is not subject to countermand by the payor after indorsement.
o The bank’s manager signs manager’s check while cashier’s check is signed by the bank cashier.
•
Memorandum Check – it is like an ordinary check except that the word “memorandum,” “mem” or “memo” is written upon the face of the check, signifying that the drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment at maturity and if due notice of the presentment and non-payment should be given.•
Certified Check – one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment•
Traveler’s check – one upon which the holder’s signature must appear twice, one to be affixed by him at the time it is issued and the second o counter-signature, to be affixed by him in the presence of the payee before it is paid, otherwise it is incomplete•
Crossed check (1995,1996, 2004, 2005 Bar Exams) – when 2
parallel lines are drawn across its face or across a corner thereof. If the name of a bank appears between the parallel lines, the check is said to be specially
crossed, and payment should be made
only if presented by the named bank. If no name appears between the parallel lines, the check is said to be generally
crossed, and payment should be made
only upon presentment by some bank.
• Effects of crossing a check:
a. That the check may not be encashed but only be deposited in the bank;
b. That the check may be negotiated only once to one who has an account with a bank; and
c. That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire
if he has received the check pursuant to that purpose.
•
Stale check – one which has not been presented for payment within a reasonable time after its issueIron Clad Rule: Prohibits the countermanding of
payment of certified checks. (Republic of the
Philippines v. PNB. GR No. 16106. December 1, 1961)
Bills in Set: one composed of several parts,
each part numbered and containing a reference to the other parts, the whole of the parts constituting but one bill.
• Rights of holders where parts are negotiated separately:
1. If both are HDC,
the holder whose title first accrues is considered the true owner of the bill. 2. But the person who accepts or pays in due course shall not be prejudiced.
• Obligations of holder who indorses 2 or more parts of the Bill in Set:
1. The person shall be liable on every such part.
2. Every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills.
Distinctions between a Negotiable Instrument and a Negotiable Document of Title (2005 Bar Exam)
NEGOTIABLE
INSTRUMENT DOCUMENT OF NEGOTIABLE TITLE 1. The subject is Money 1. The subject is goods 2. Is itself the property with value 2. The document is a mere evidence of title – the things of value being the goods mentioned in the document 3. Has all the
requisites of Sec 1 of NIL
3. Does not have these requisites 4. A holder of NI may
run after the secondary parties for payment if dishonored by the party primarily liable 4. Intermediate parties are not secondarily liable if the document is dishonored
5. A holder, if HDC, may acquire rights
over the
instrument better
than his
predecessors
5. A holder can never acquire rights to the document better than his predecessors
PROMISSORY
NOTE EXCHANGEBILL OF
1.Unconditional promise
1.Unconditional order
2. Involves 2 parties 2.Involves 3 parties 3. Maker is primarily
liable 3.Drawer is only secondarily liable
4.Only one
presentment: for payment
4.Two presentments: for acceptance and for payment
Instances when BILL may be treated as a NOTE:
1. Drawer and drawee are the same person. 2. Drawee is a fictitious person.
3. Drawee has no capacity to contract.
4. When instrument is so ambiguous, the holder may treat it either as a BILL or a NOTE.
BILLOF EXCHANGE CHECK
1.Not necessarily drawn on a deposit. The drawee need not be a bank.
1.It is necessary that a check is drawn on a bank deposit. The drawee is always a bank.
2.Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay.
2.Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay.
3. May be presented for payment within a reasonable time after its last negotiation because it may be further negotiated.
3. Must be presented for payment within a reasonable time after its issue. 4.May be payable on demand or at a fixed or determinable future time 4. Always payable on demand
Other Forms of Negotiable Instruments
1. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes
4. Drafts, which are bills of exchange drawn by one bank upon another
All of these must comply with Sec. 1, NIL
Note: Letters of credit are not negotiable. Legal Tender
That kind of money that the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount.
Note: A negotiable instrument although intended
to be a substitute for money, is generally not a legal tender.
Incidents in “Life” of Negotiable Instrument
1. Issue 2. Delivery 3. Negotiation
4. Presentment for acceptance, in certain kinds of bills of exchange
5. Acceptance
6. Dishonor by non-acceptance 7. Presentment for payment 8. Dishonor by non-payment 9. Notice of dishonor
10. Discharge
I ssue - the first delivery of the instrument,
complete in form, to a person who takes it as a holder.
Delivery - transfer of possession, actual or
constructive, from one person to another
Holder – refers to the:
a. The payee or indorsee of a bill or note who is in possession of it, or
b.
The bearer thereof (sec.191)Bearer - the person in possession of a bill or
note which is payable to bearer.
Person - includes a body of persons, whether
incorporated or not.
II. Negotiability
Requisites of Negotiability (Sec. 1, NIL) (1996 Bar Exam)
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 or determinable future time;d.
Must be payable to order or to bearer; ande. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
1. Must be in writing, signed by the maker or drawer;
- Otherwise it cannot be a substitute for money.
2. Must contain an unconditional promise or order to pay a sum certain in money;
Certainty of sum payable.
The sum payable is a sum certain although it is to be paid:
a. With interest; or
b. By stated installments; or
c.
By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; ord.
With exchange, whether at a fixed rate or at the current rate; ore. With costs of collection or an attorney's fee, in case payment shall not be made at maturity. (sec. 2)
Acceleration clause - renders whole debt due
and demandable upon failure of obligor to comply with certain conditions.
When promise is unconditional
An unqualified order or promise to pay is unconditional though coupled with:
a.
An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; orb. A statement of the transaction which gives rise to the instrument.
An order or promise to pay out of a particular fund is not unconditional.
FUND FOR
REIMBURSEMENT PARTICULAR FUND FOR PAYMENT
1. Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated.
1. There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient.
2. Particular fund indicated is NOT the direct source of payment but only the
source of reimbursement. 2. Particular fund indicated is the direct source of payment. 3. Indication in the
instrument does not
affect the
unconditional nature of the promise or order.
3. Indication in the instrument makes the promise or order conditional.
3. Payable on demand or at a fixed determinable future time;
Certainty of time of payment
An instrument is payable at a determinable future time which is expressed to be payable:
a.
At a fixed period after date or sight; orb.
On or before a fixed or determinable future time specified therein; orc. On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (sec. 4) A promise to pay “when able,” “as soon as I
can”, etc., without specification of an absolute date is not negotiable. However, there is a difference of opinion as to whether it is a conditional promise or an absolute promise to pay at un unreasonable time:
a. Under the first view, negotiability is destroyed both by the condition and by want of a fixed time for payment;
b. Under the second view, by the general principle that a promise to pay within a reasonable time is not so certain as to render an instrument negotiable.
Aftersight Draft - payable only after the
expiration of the stipulated period from acceptance (legal sight).
When payable on demand:
a.
When it is so expressed to be payable on demand, or at sight, or on presentation; orb. In which no time for payment is expressed.
Note: Where an instrument is issued, accepted,
or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, payable on demand.
4. Payable to order or to bearer When payable to order
The instrument is drawn payable:
a. To the order of a specified person or b. To him or his order.
The payee must be named or otherwise indicated therein with reasonable certainty.
It may be drawn payable to the order of: a. A payee who is not maker, drawer, ordrawee; or
b.
The drawer or maker; orc.
The drawee; ord.
Two or more payees jointly; ore.
One or some of several payees; or f. The holder of an office for the timebeing.
When payable to bearer.
a.
When it is expressed to be so payable; orb.
When it is payable to a person named therein or bearer; orc.
When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; ord.
When the name of the payee does not purport to be the name of any person; or e. When the only or last indorsement is anindorsement in blank. (Sec. 9)
5. Identification of the drawee
Where the instrument is addressed to a drawee (meaning in a bill of exchange), he must be named or otherwise indicated with reasonable certainty. The holder must know to whom he should present it for acceptance and/or payment; otherwise, the purpose of negotiable instrument as a tool in commercial dealings will be greatly hampered. (Reviewer onCommercial Law, Sundiang and Aquino)
A bill may be addressed to more than one drawee jointly, whether they are partners or not; but not to two or more drawers in the alternative or in succession. (Sec. 128)Test of Negotiability : presence of requirements
in Section 1 of NIL.
1. The whole instrument itself
2. Only what appears on the face of the instrument
3. Provisions of the NIL, Sec.1
BAR QUESTION (Q): Which of the following stipulations or features of a promissory notes (PN) affect or do not affect its negotiability, assuming that the PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below and your corresponding answer, either ‘Affected” or “Not affected.” Explain.
(a)The date of the PN is “February 30, 2002.”
(b)The PN bears interest payable on the last day of each calendar quarter at a rate equal to 5% above the then prevailing 91-day Tbill rate as published at the beginning of such calendar quarter.
(c)The PN gives the maker the option to make payment either in money or in quantity of palay of equivalent value. (d) The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or escort of the holder for 0 days.
SUGGESTED ANSWER (SA):
(a) NOT AFFECTED. The date is not one of the requirements for negotiability. (b) NOT AFFECTED. The interest is to be computed at a particular time and is determinable. It does not make the sum uncertain or the promise conditional. (c) AFFECTED. Giving the maker an option renders the promise conditional. (d) NOT AFFECTED. Giving the holder an option does not make the promise conditional.
Additional provisions not affecting negotiability.
General Rule: the instrument is non-negotiable if it contains a promise or order to do any act in addition to the payment of money.
Exceptions:
a.
authorizes the sale of collateral securities in case the instrument be not paid at maturity; orb.
authorizes a confession of judgment if the instrument be not paid at maturity; orc.
waives the benefit of any law intended for the advantage or protection of the obligor; ord. gives the holder an election to require something to be done in lieu of payment of money.
Confession of judgment – a writtenstatement signed by the defendant, setting forth the basis of liability and authorizing the entry of judgment thereon.
Kinds of confession of judgmenta.
cognivit actiomen – literally means “he has confessed action”. It is a written confession of action by the defendant acknowledging is indebtedness to the plaintiff after the action has been filed. It is given after the action is brought to save expenses.b.
relicta verificationem – literally means “his pleadings being abandoned.” It is confession of judgment by withdrawal of the defense.Note: However, warrants of attorney to confess
judgment, are not authorized nor contemplated by our law. They are void as against public policy because they enlarge the field for fraud, because under these instruments, the promissory bargains away his right to a day in court. The NIL does not sanction nor validated any provision otherwise illegal.
Omissions and Provisions that do not affect Negotiability (Sec. 6)
The validity and negotiable character of an instrument are not affected by the fact that:
a.
it is not dated; orb.
does not specify the value given, or that any value had been given therefore; orc.
does not specify the place where it is drawn or the place where it is payable; ord.
bears a seal; ore. designates a particular kind of current money in which payment is to be made. if it is not dated, the instrument will be
considered to be dated as of the time it was issued.
consideration for the instrument is presumed. (art. 154 NCC & sec. 25 NIL) sec. 73 specifies where presentment forpayment should be made when the place of payment is not specified
Rules of construction:
a.
Where the sum payable is expressed in words and also in figures and there is adiscrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount;
b.
Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;c.
Where the instrument is not dated, it will be considered to be dated as of the time it was issued;d.
Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;e.
Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;f.
Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser;g.
Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. (sec. 17)Consideration
Presumption of consideration. - everynegotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
Value - any consideration sufficient tosupport a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.
Holder for value – one who has given avaluable consideration for the instrument issued or negotiated to him.
•
What constitutes holder for value :where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time.
•
where the holder has a lien on the instrument arising either from contract or by implication of law, he isdeemed a holder for value to the extent of his lien.
Effect of want of consideration : a matterof defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.
Absence of consideration – total lack of any
valid consideration for the contract is only a personal defense.
Failure of consideration – failure or refusal or
one party to do, perform or comply with the consideration agreed upon is also only a personal defense.
III. Transfer and Negotiation Types of transfers:
1.
Assignment - transfer of title to theinstrument, with the assignee generally taking only such title as his assignor has, subject to all defenses available against his assignor;
2.
Negotiation - transfer of a negotiableinstrument from one person to another made in such a manner as to constitute the transferee the holder thereof
3.
By Operation of Law – such as bysuccession, by insolvency.
Distinctions between Negotiation and Assignment NEGOTIATION ASSIGNMENT 1. Refers only to negotiable instruments; 2. The transferee is a holder; 3. A holder in due course is subject only to real defenses; 4. A holder in due
course may acquire a better right than that of a prior party 5. A general indorser
warrants the solvency of prior parties;
6. An indorser is not liable unless there be presentment and 1. Refers generally to an ordinary contract; 2. The transferee is an assignee; 3. An assignee is subject to both real and personal defenses;
4. Generally, an assignee merely steps into the shoes of the assignor; 5. An assignor does
not warrant the solvency of prior parties unless expressly stipulated or the insolvency is known to him; 6. An assignor is liable
even without notice of dishonor;
notice of dishonor; 7. Negotiation is
governed y the NIL.
7. Governed by Arts. 1624 to 1635 (on assignment of credits) of the Civil Code.
Methods of negotiation
1.
Order Instrument –Indorsement and Delivery.
2.
Bearer Instrument –Delivery only.
Indorsement - legal transaction effected by the
writing of one's own name at the: a. back of the instrument or
b.
upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid.
General Rule : indorsement must beof the entire instrument.
Exception: where instrument has been paid
in part, it may be indorsed as to the residue. Kinds of indorsement:
a.
Special - specifies the person to whomor to whose order, the instrument is to be payable (sec. 34)
b.
Blank - specifies no indorsee:• Instrument is payable to bearer and may be negotiated by delivery (sec. 34)
• May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement.
c.
Restrictive - when the indorsementeither:
i. Prohibits further negotiation of the instrument; or
ii. Constitutes the indorsee the agent of the indorser; or
iii. Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive.
•
A restrictive indorsement confers upon the indorsee the right:a.
To receive payment of the instrument;b.
To bring any action thereon that the indorser could bring;c. To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. (sec. 37)
Such indorsement destroys the negotiability of the instrument and bars further negotiation to a holder in due course.
d.
Qualified - constitutes the indorser amere assignor of the title to the instrument. (sec. 38)
• made by adding to the indorser's signature words like "sans recourse,” “without recourse", "indorser not holder", "at the indorser's own risk", etc.
• The purpose of this kind of indorsement is to transfer title without guaranteeing payment by the primary party.
• It does not mean, however, that the qualified indorser incurs no liability at all. The effect is merely to limit his liability. He is secondarily liable for breach of is warranties as an indorser under Sec. 65. Thus, he is liable if the instrument is dishonored by NON-ACCEPTANCE or NON-PAYMENT due to:
a. forgery;
b. lack of good title to the instrument indorsed; c. lack of capacity to contract on the part of prior parties; or
d. the fact that the instrument was valueless or not valid at the time of the indorsement which fact was known to him.
e.
Conditional - right of the indorsee ismade to depend on the happening of a contingent event
• Party required to pay may disregard the conditions.
• This kind of indorsement has no effect on the further negotiation of the instrument. The party required to pay, if he chooses, may make payment, disregarding the condition
without incurring any liability because he is expressly authorized to do so under Sec. 39. But the person who received payment will hold the proceeds subject to the right of the conditional indorser.
f.
Absolute - one by which indorser bindshimself to pay:
i. upon no other condition than failure of prior parties to do so; and
ii. upon due notice to him of such failure.
g.
Joint - indorsement of instrumentpayable to 2 or more persons; all must indorse in order for the transaction to operate as a negotiation.
• Exceptions to the rule requiring joint indorsement:
a. Where the payees or indorsees are partners; and b. Where the payee or indorsee indorsing has authority to indorse for the others.
h.
Irregular - a person who, not otherwise aparty to an instrument, places thereon his signature in blank before delivery.
Rules on Indorsements :•
Effect of transfer without indorsement :a.
transfer vests in the transferee such title as the transferor had therein(assignment), and
b. the right to have the indorsement of the transferor.
For the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Applicable only to order instruments
•
Indorsement of a bearer instrument: where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.Note: The rule only applies to originally
bearer instruments. If it is originally a BEARER instrument, it will always be a
BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specifically, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed.
•
Striking out indorsements : theholder may at any time strike out any indorsement, which is not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him, are thereby relieved from liability on the instrument.
If the instrument is payable to bearer on its face, then whether or not there are indorsements on the back of the instrument would be immaterial to the title of the bearer, who is presumptively the owner and holder by his mere possession of such instrument. None of the indorsement would be necessary to it’s title since mere delivery would have been sufficient to transfer title from one holder to another.
Where the instrument is payable toorder on its face, the situation is
different. First, the indorsement of a special indorsee is necessary for the further negotiation of the instrument. Second, the last indorsement controls the method of further negotiation.
•
When prior party (reacquirer) may negotiate:where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.
In the following cases, a prior party cannot further negotiate the instrument:1. Where it is payable to the order of a third person, and has been paid by the drawer;
2. Where it was made or accepted for accommodation and has been paid by the party accommodated; 3. In other cases, where the
instrument is discharged when acquired by a prior party.
Holders Classes of holders:
1. simple holder (sec. 51) 2. holder for value (sec. 26)
Holder in Due Course (1996, 1998, 2000 Bar Exams)
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.
When title defective - The title of aperson who negotiates an instrument is defective when he obtained the instrument or any signature thereto, by:
a. fraud,
b. duress, or force and fear, c. other unlawful means, d. illegal consideration,
e. negotiation in breach of faith, f. circumstances amounting to fraud. g.
What constitutes notice of defect . -The person to whom it is negotiated must have:
a. actual knowledge of the infirmity or defect, or
b. knowledge of such facts that his action in taking the instrument amounted to bad faith. (sec. 56)
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, he will be deemed a holder in due course only to the extent of the amount paid by him.
When person not deemed a holder in due course - where an instrument payableon demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course.
•
Reasonable time,what constitutes. - regard is to be had to
the
a. nature of the instrument, b. the usage of trade or business with respect to such instruments, and the
c. facts of the particular case.
•
Effect: in the handsof any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable.
General Rule : every holder isdeemed prima facie to be a holder in due course
Exception : 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 (shifting of burden of proof).
Limitation: 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. (sec. 59)
Rights of a holder in due course:
a. he may sue on the instrument in his own name;
b. he may receive payment and if payment is in due course, the instrument is discharged.
c. holds the instrument free from any defect of title of prior parties,
d. holds the instrument free from defenses available to prior parties among themselves, and
e. may enforce payment of the instrument for the full amount thereof against all parties liable thereon.
•
Payment in duecourse is payment made:
at or after the maturity of the instrument to the holder thereof
in good faith and without notice that his title is defective.
Shelter Rule:
a. derives his title through a holder in due course, and
b. 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 the instrument in his own name;
2. He may receive payment and if the payment is in due course, the instrument is discharged;
3. He is entitled to the instrument but holds it subject to the same defenses as if it were non-negotiable; and
4. He has all the rights of the holder in due course from whom he derived his title in respect of all parties prior to such holder, provided he is not himself a party to any fraud or illegality affecting the instrument.
V. Liabilities of Parties
Persons primarily liable on instrument: the
person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable.
Classification of parties according to liability Persons liable:
In a Promissory Note MakerIndorser
3. Persons negotiating by delivery
In a Bill of Exchange: Drawer Acceptor Indorsers
4. Persons negotiating by delivery
1. Parties Primarily Liable a. Maker (Sec. 60)
• engages to pay
according to the tenor of the instrument; and
• admits the
existence of the payee and his then capacity to indorse at the time of the making of the note.
• A person placing his name on the face of a note is prima facie a maker and liable as such; and he is presumed to have acted with care and to have signed the instrument with full knowledge of its contents.
b. Acceptor or Drawee (Sec. 62)
• engages to pay
according to the tenor of his acceptance;
• admits:
1. the existence of the drawer, 2. the genuineness of his
signature and
3. his capacity and authority to draw the instrument; and 4. the existence of the payee
and his then capacity to indorse.
Note: the drawee is not liable until he
accepts the instrument
• Where a check is certified by a bank, it is equivalent to an acceptance. Since certification is equivalent to acceptance, a bank which has certified a check whether at the request of the holder or of a drawer, has the same liabilities and makes the same warranties as an acceptor. It cannot, after certification, question the genuineness of the drawer’s signature. If it discovers that such signature is forged subsequent to certification but prior to payment, it cannot refuse to pay on the check. If its discovery comes after it has paid the check, it cannot recover back what it paid on the ground of mistaken payment unless the holder is guilty of fraud or negligence.
• If a drawee-bank accepts or pays a check despite a stop payment order from the drawer, through oversight or otherwise, it cannot refuse to pay the holder or recover what has been paid; neither may it debit the drawer’s account unless the acceptance nor payment was made prior to the receipt of the order.
2. Parties Secondarily Liable a. Drawer (Sec. 61)
• admits the existence of the payee and his capacity to indorse;
• engages that the instrument will be accepted or paid by the party primarily liable; and
• engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid.
b. General Indorser (Sec. 66)
• Warrants:
1. genuineness of the instrument;
2. his good title to it;
3. capacity to contract of prior parties; and
4. instrument is valid and subsisting.
• engages that the instrument will be accepted or paid by the party primarily liable; and
• engages that if the instrument is dishonored and proper proceedings are taken, he will pay to the party entitled to be paid.
c. Irregular Indorser – a person, not otherwise a party to an instrument, places his signature thereon in blank before delivery.
Rules:
• If instrument payable to the order of a 3rd person, he is liable to the payee and subsequent parties.
• If instrument payable to order of maker or drawer, he is liable to all parties subsequent to the maker or drawer.
• If he signs for accommodation of the payee, he is liable to all parties subsequent to the payee.
Distinctions:
Primary Party Secondary Party
1. Unconditionally Bound;
2.Absolutely required to pay upon the maturity of the instrument.
1. Conditionally bound;
2. Undertakes to pay only after certain conditions have been fulfilled: a. due presentment for payment or acceptance to primary party; b. dishonor by such party; and c. the taking of proceedings required by law after dishonor. Indorser Drawer 1. A party to either a note or a bill;
2. Does not make any admission regarding the existence of the payee and his capacity to indorse; and
3. Has warranties.
1. A party only to a bill; 2. The drawer makes such admission;
3. Makes no
warranties, but he engages to pay after certain conditions are complied with.
(2005 Bar Exam) GENERAL
INDORSER IRREGULAR INDORSER
1. Makes either a blank or special indorsement;
1. Always makes a blank indorsement; 2. Indorses before its
2. Indorses the instrument after its delivery to the payee; and
3. Liable only to parties subsequent to him
delivery;
3. Liable to the payee and subsequent parties unless he signs for the accommodation of the payee in which case he is liable only to all parties subsequent to the payee.
3. Parties with Limited Liability (sec. 65;
Metropol Financing v. Sambok, 120 SCRA 864)
a. Qualified Indorser - warrants
that:
instrument is genuine and in all respects what it purports to be; he has good title to it;
all prior parties had capacity to contract;
he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.
b. Persons Negotiating by Delivery
warranties same as those of qualified indorsers; and
warranties extend to immediate transferee only. Liability Warranty 1. To pay a sum certain. 2. Requires Notice of Dishonor. 3. Action can be brought only on maturity of instrument. 1. No obligation to pay. 2. Notice of Dishonor is not a requirement. 3. Action may be brought anytime. Negotiating by Mere delivery or by Qualified
Indorsement General Indorser
1. No secondary liability; 1. With secondary liability;
2. Warrants that he has no knowledge of any fact, which would impair the validity of the instrument or render it valueless.
2. Warrants that the instrument is, at the time of his indorsement, valid and subsisting. 4. Other parties who may be liable:
General Rule : One whose signature does not
appear on the instrument shall not be liable thereon.
Exceptions:
1. The principal who signs through an agent is liable;
2. The forger is liable;
3. One who indorses in a separate instrument (allonge) is liable;
4. One who signs his assumed or trade name is liable; and
5. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee.
Requisites for an Agent to escape liability :
1. must be duly authorized;
2. add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or in a representative capacity; and
3. disclose his principal.
A signature by “procuration” operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. (sec. 21)
Indorsement or assignment of the NI by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. (sec. 22)
Accomodation Party (1996, 1998, 2005 Bar Exams)
One who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person
Liability: such a person isliable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.
Effects:
1.
accommodation party is generally regarded as a surety for the party accommodated;2. When accommodation party makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement.
Rights of accommodation parties as against each other: the other maydemand contribution from his
co-accommodation party without first directing his action against the principal debtor provided:
1. he made the payment by virtue of judicial demand; or
2. the principal debtor is insolvent.
Note: A corporation cannot act as an
accommodation party. The issuance or indorsement of negotiable instrument by a corporation without consideration and for the accommodation of another is ultra vires. (Crisologo v. CA, 117 SCRA 594).
Order of liability of indorsers:
1.
among themselves – indorsers are liableprima facie in the order in which they
indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise (sec. 68)
2. to the holder – indorsers are liable in any order
Defenses (1996, 1998, 2004, 2005 Bar Exams)
Kinds:
1. Real/Absolute Defenses - those that attach to the instrument itself and are available against all holders, whether in due course or not.
Examples:
1. Alteration;
2. Non-delivery of incomplete instrument;
3. Duress amounting to forgery; 4. Fraud in factum or fraud in esse contractus;
5. Minority;
6. Marriage in the case of a wife; 7. Insanity where the insane person has a guardian appointed by the court;
8. Ultra vires acts of a corporation, where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances;
9. Want of authority of agent; 10. Execution of instrument between public enemies;
11. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute; and 12. Forgery.
