Negotiable Instruments

FORM AND INTERPRETATION

:D ;-;
Applicability of the NIL.

The provisions of the NIL can be applied only to negotiable instruments. It

the instrument is not negotiable-as it does not conform to Section 1 of the
NIL, the Civil Code or other special laws shall apply. It can only be applied,
by analogy, to non-negotiable instruments if there is no single law that
applies.

What is a negotiable instrument?

It is a written contract for the payment of money which is intended as a

substitute for money and passes from one person to another as money, in
such a manner as to give a holder in due course the right to hold the
instrument free from defenses available to prior parties. To be considered
negotiable, an instrument must comply with Section 1 of the NIL.

What are the functions of a NI?

1. It operates as a substitute for money.

2. It’s a means to of creating and transferring credit
3. It facilitates the sale of goods.
4. It increases the purchasing medium in circulation

What are the features of a NI?

1. Negotiability

The instrument-bill, note, check, may pass from hand to hand similar
to money which gives a holder in due course the right to hold the
instrument and to collect the sum of money payable for himself free
from defenses.

2. Accumulation of Secondary contracts

As the instrument is negotiated from one person to another, a series of

juridical ties between the parties arise.

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What are the kinds of Negotiable Instruments?

1. Bill of Exchange (BOE)

It is an unconditional order in writing addressed by one person to

another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer.

2. Promissory Note (PN)

It is an unconditional promise in writing made by one person to another,

signed by the maker, engaging to pay on demand, or at a fixed
determinable future time, a sum certain in money to order or to bearer.
Where a note is drawn to the maker’s own order, it is not complete until
indorsed by him.

What are the kinds of a BOE?

1. Draft
2. Inland and foreign bill
3. Time draft
4. Sight or demand draft
5. Trade acceptance
6. Banker’s acceptance
7. Check

What are kinds of PN?

1. Certificate of deposit
2. Bonds
3. Debenture

When can a BOE be treated as PN?

1. The drawer and the drawee are the same person

2. Drawee is fictitious person
3. Drawee has no capacity to contract

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 4. Instrument is so ambiguous that there is doubt whether it is a bill or a
note.

Negotiable PN vs Negotiable BOE:

PROMISSORY NOTE BILL OF EXCHANGE

Unconditional promise Unconditional order
Involves 2 parties 3 parties
Maker is primarily liable to the Drawer is secondarily liable
instrument
Only one presentment Generally, 2 presentments:
acceptance and for payment

Ordinary BOE vs Check:

Ordinary BOE Check

Not drawn on deposit. It is not It is necessary that a check is drawn
necessary that a drawer of a BOE on a deposit. Otherwise, there would
should have funds in the hands of be fraud.
the drawee.
Death of the drawer of a BOE with Death of the drawer of a check, with
the knowledge of the bank, does not the knowledge by the bank, revokes
revoke the authority of the banker to the authority of the banket to pay.
pay.
May be presented for payment Must be presented for payment
within a reasonable time after its last within a reasonable time after its
negotiation. issue.

Are the following negotiable instruments?

1. Crossed check
2. Trade acceptance
3. Money order
4. Warehouse receipt
5. Pawn ticket
6. Treasury warrant
7. Bill of lading
8. Trust receipt

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A Letter of Credit is not a negotiable instrument.

It is not in itself a negotiable instrument, because it is not payable to order or

bearer and is generally conditional, yet draft presented under it is often
negotiable. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, G.R.
No. 146717, 22 November 2004)

Who are the parties involved in a negotiable instrument?

1. Maker- makes the PN and pomises to pay the amount stated therein
2. Payee (obligee) – the person who, by the terms of the note or the bill,
is to receive the payment.
3. Drawer – draws the BOE and orders the drawee to pay a sum certain
of money.
4. Drawee – person to whom the order to pay is addressed in a BOE
5. Acceptor – drawee who accepts the order to pay made by the drawer
6. Holder – person who is in possession of a bearer instrument or an
indorsee of an order instrument who is in possession thereof; a person
who can enforce payment of the instrument.
7. Referee in case of need – person who may be designated in the
instrument as the person who may be resorted to by the parties in case
of dispute.

Negotiable Instruments vs Non-Negotiable Instruments

Negotiable Instruments Non-Negotiable Instruments

Governed by the NIL NIL does not apply;only by analogy
Can be transferred by negotiation or Can only be transferred by
by assignment assignment
Transferee of a NI can be a holder in Transferee of a Non-NI can never be
due course if requirements are a holder in due course.
complied

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What are the requisites for an instrument to be negotiable?

Section 1 of Act No. 2031, otherwise known as the Negotiable Instruments

Law, enumerates the requisites for and instrument to become negotiable,
viz: “

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain and 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; and

(e) Where the instrument is addressed to a drawee, he must be named

or otherwise indicated therein with reasonable certainty.

City of San Fernando, La Union

September 15, 2020

For the value received, I promise to pay to the order of Lana Santos the
sum of Three thousand Pesos (P3,000.00) on or before December 31, 2020
at her house in Lingsat, City of San Fernando, La Union.
(Sgd.) Van Lopez

City 0f San Fernando, La Union

September 15, 2020

Pay to the order of Lana Santos the sum of Three thousand Pesos
(P3,000.00) on or before December 31, 2020 at her house in Lingsat, City of
San Fernando, La Union.
(Sgd.) Van Lopez

To: John Smith

Bldng. 87, Quezon Boulevard, Quezon City

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An instrument which begins with “I”, “We” or “Either of us” promise to
pay, when signed by two or more persons, make them solidarily liable.

Where an instrument containing the words “I promise to pay” is signed by

two or more persons, they are deemed to be jointly and severally liable
thereon.

An instrument which begins with “I”, “We” or “Either of us” promise to pay,
when signed by two or more persons, make them solidarily liable.

The fact that the singular pronoun is used indicates that the promise is
individual as to each other; meaning that each other; meaning that each of
the co-signers is deemed to have made and independent singular promise
to pay the notes in full. (Republic Planters Bank vs. Court of Appeals, G.R
No. 93073, 21 December 1992)

When is a NI payable on demand?

1. When it is so expressed to be payable on demand, or at sight or on

presentation or
2. When no time for payment is expressed or
3. When an instrument is issued, accepted or indorsed when overdue, it
is as regards the person issuing, accepting or indorsing it, it is payable
on demand

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What is an Acceleration clause? Insecurity clause? Extension clause?

Acceleration clause states that upon default in payment of any installment

or of interest, the whole shall become due. This does not affect the
negotiability of the instrument.

Insecurity clause allows the holder to accelerate payment if he deemed

himself insecure. This affects negotiability.

Extension clause allows to extend to a further definite time at the option of

the maker or acceptor or automatically upon or after a specified act or event.
This does not affect negotiability.

Distinguish between bearer and order instruments.

The distinction between bearer and order instruments lies in the manner of
negotiation. Under Section 30 of the NIL:

A bearer instrument does not require and indorsement to be validly

negotiated.

An order instrument requires an indorsement from the payee or holder

before it may be validly negotiated.

When is a NI payable to bearer?

The instrument is payable to bearer:

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or
(c) 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; or
(d) 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 an indorsement in blank.

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Explain the “fictitious payee” rule.

As a rule, when the payee is fictitious or not intended to be the true recipient
of the proceeds, the check is considered as a bearer instrument. An actual,
existing, and living payee may also be “fictitious” if the maker or the check
did not intend for the payee to in fact receive the proceeds of the check. This
usually occurs when the maker places a name of an existing payee on the
check for convenience or to cover up an illegal activity. (Philippine National
Bank vs. Rodriguez, G.R. No. 17032, 26 September 2007)

Under Section 9 (c) of the NIL, a check payable to a specified payee

may nevertheless be considered as a bearer instrument if it is payable
to the order of a fictitious or non-existing person, and such fact is
known to the person making it so payable.

Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda”

who are well-known characters in Philippine mythology, are bearer
instruments because the named payees are fictitious and non-existent (Id.)

The fictitious-payee rule, to be available as a defense, must be shown

that the makers did not intend for the named payees to be a part of the
transaction involving the checks.

The lack of knowledge on the part of the payees of the existence of checks,
however, was not the tantamount to a lack of intention on the part of
respondents-spouses that the payees would not receive the checks’
proceeds. Considering that respondents-spouses were transacting with
PEMSLA and not the individual payees, it is understandable that they replied
on the information given by the officers of PEMSLA that the payees would
be receiving the checks. Verily, the subject checks are presumed order
instruments. (Id.)

When faced with a check payable to a fictitious payee, it is treated as a

bearer instrument that can be negotiated by delivery.

In a fictitious-payee situation, the drawee bank is absolved from liability and

the drawer bears the loss. The underlying theory is that one cannot expect a
fictitious payee to negotiate the check by placing his indorsement thereon.
And since the maker knew this limitation, he must have intended for the
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instrument to be negotiated by mere delivery. Thus, in case of controversy,
the drawer of the check will bear the loss. This rule is justified for otherwise,
it will be most convenient for the maker who desires to escape payment of
the check to always deny the validity of the indorsement. This despite the
fact that the fictitious payee was purposely named without any intention that
the payee should receive the proceeds of the check. (Id.)

When is a NI payable to order?

There are only 2 ways by which an instrument can be made payable to order.
It can either be:

1. Payable to the order of a specified person (pay to the order of JT) or

2. Payable to a specified person or his order (pay to JT or order)

Who can be designated as payees in an order instrument?

1. Payee who is not the maker, drawer or drawee

2. Drawer or maker
3. Drawee
4. Two or more payees jointly
5. One or some of several payees
6. Holder of an office for the time being

Note: Where the instrument is addressed to a drawee, he must be named

or otherwise indicated therein with reasonable certainty. The holder must
know to whom he should present the instrument for acceptance and or for
payment, otherwise, the purpose of NI as a tool in commercial dealings will
be greatly hampered.

A bill may be addressed to more than one drawee jointly, whether they are
partners or not BUT not two or more drawees in the alternative or in
succession.

What are the omissions and provisions that do not affect negotiability?

The validity and negotiable character of an instrument are not affected by

the fact that:

(a) it is not dated; or

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(b) does not specify the value given, or that any value had been given
therefor; or

(c) does not specify the place where it is drawn or the place where it is
payable; or

(d) bears a seal; or

(e) designates a particular kind of current money in which payment is to be

made.

When date may be inserted by holder.

When the date is necessary in order to determine the maturity date of the
instrument.

- When instrument is payable at a fixed period after date is issued

undated
- Where acceptance of an instrument payable at a fixed period after
sight is undated

Electronic Messages

The electronic messages are not signed by the investor-clients as supposed

drawers of a bill of exchange; they do not contain an unconditional order to
pay a sum certain in money as the payment is supposed to come from a
specific fund or account of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of
exchange or order for the payment drawn abroad and made payable here in
the Philippines, there could have been no acceptance or payment that will
trigger the imposition of the DST under Section 181 of the Tax Code. (The
Hongkong and Shanghai Banking Corporation Limited – Philippine Branches
vs. CIR G.R. No. 166018, 4 June 2014)

How is negotiability of an instrument determined?

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 The accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the
instrument itself. In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. While the writing may be
read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such case is to ascertain, not
what the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. (Id.)

When Negotiability ends.

A negotiable instrument continues to be negotiable until:

1. It has been restrictively indorsed or

2. Discharged by payment

NEGOTATION

What does negotiation mean?

The transfer of an instrument from one person to another in such a manner

as to constitute the transferee a holder thereof.

A holder is the payee or indorsee of a bill or note who is in possession of it,

or the bearer thereof.

Note: If the instrument is negotiable, transfer thereof can be effected either

through negotiation or assignment.

Issue

First delivery of the instrument complete in form to a person who takes it as

a holder.

How are instruments negotiated?

IF payable to bearer, it is negotiated by deliver

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IF payable to order, it is negotiated by indorsement of the holder completed
by delivery.

Delivery of a negotiable instrument, as the term is used in Section 16

of the Negotiable Instruments Law, means that the party delivering did
so for the purpose of giving effect thereto.

Otherwise, it cannot be said that there has been delivery of the negotiable
instrument. Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably.

If the subject check was given by Puzon to SMC in payment of the

obligation, the purpose of giving effect to the instrument is evident thus title
to or ownership of the check was transferred upon delivery. However, if the
check was not given as payment, there being no intent to give effect to the
instrument, then ownership of the check was not transferred to SMC.

The evidence of SMC failed to establish that the check was given in payment
of the obligation of Puzon. There was no provisional receipt or official receipt
issued for the amount of the check. What was issued was a receipt for the
document a “Postdated Check Slip. (San Miguel Corporation vs. Puzon, Jr.,
G.R. No. 167567, 22 September 2007)

What is Indorsement?

The act of placing a signature on the back of a negotiable instrument in

order to assign it to an indorsee. The signature itself.

It could be placed on the instrument itself or on an allonge.

It must be of the entire instrument.

Cannot be done to 2 or more indorsees severally.

What are the kinds of Indorsements?

1. Blank indorsement
2. Special indorsement
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 3. Qualified indorsement
4. Conditional indorsement
5. Restrictive indorsement
o Prohibits further negotiation of the instrument
o Constitutes the indorsee the agent of the indorser
o Vest the title in the indorsee in trust for or to the use of some
other persons

HOLDERS OF NEGOTIABLE INSTRUMENTS

Who is a holder of a negotiable instrument?

“Holder” means the payee or indorsee of a bill or a note, or the person who
is in possession of it, or the bearer thereof. (Sec. 191, NIL; Hi-Cement
Corporation vs. Insular Bank of Asia and America, G.R. No. 132403¸28
September 2007)

Who is 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 had 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 person negotiating it.
(Sec. 52, NIL: Bank of the Philippine Islands vs. Roxas, G.R. No. 157833.
15 October 2007)

Legal presumption regarding holders

As a general rule, every holder is presumed prima facie to be a holder in

due course. One who claims otherwise has the onus probandi to prove that
one or more of the conditions required to constitute a holder in due course

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are lacking. In this case, petitioner contends that the element of “value” is
not present, therefore, respondent could not be a holder in due course. (Id.)

To be a holder in due course, the law requires that a party must have
acquired the instrument in good faith and/or value.

Good faith means that the person taking the instrument has acted with due
honesty with regard to the rights of the parties liable on the instrument and
that at the time he took the instrument, the holder has no knowledge of any
defect or infirmity of the instrument. To constitute 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 would amount to bad faith. Value, on the other hand, is defined
as any consideration sufficient to support a simple contract. (RCBC Savings
Bank vs. Odrada, G.R. No. 219037, 19 October 2016)

What are the rights of a holder 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 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

A Holder is due course is free from personal defenses but not from real
defenses.

A Holder not in due course is subject to both personal and real defenses
with exception --

Shelter Rule

A holder who is not a holder in due course but derives his title through a
holder in due course, and who is not himself a party to any fraud or illegality
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affecting the instrument, has all the rights of such former holder in respect of
all parties prior to the latter. (Sec. 58, NIL)

DEFENSES

Personal Defenses vs Real Defenses.

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.

What are the Real and Personal Defenses?

REAL DEFENSES PERSONAL DEFENSES

Minority Failure or absence of consideration
Forgery Illegal consideration
Non-delivery of incomplete instrument Non-delivery of complete instrument
Material alteration Conditional delivery of complete
instrument
Ultra vires acts of corporations Fraud in inducement
Fraud in factum or in Esse Contractus Filling up blank not within authority
Illegality Duress or intimidation
Viscious force or violence Filling up blank beyond reasonable
time
Want of authority Transfer in breach of faith
Prescription Mistake
Discharge in insolvency Insertion of wrong date
Ante-dating or post- dating for illegal or
fraudulent purpose

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What are the effects of Forgery?

General Rule:
It does NOT render the instrument void. The signature is wholly inoperative,
and no right to retain the instrument, or to give a discharge thereof, or to
enforce payment thereof against any party to it, is acquired through or under
such signature. (Cut‐off rule)

Exception:
1. If the party against whom it is sought to enforce such right is precluded
from setting up forgery or want of authority. (Sec. 23)

2. Where the forged signature is not necessary to the holder’s title, in which
case, the forgery may be disregarded (Sec. 48)

Whare the effects of the following: Incomplete but delivered

Instruments, Complete but undelivered instruments, Incomplete
undelivered instruments?

A. Incomplete but delivered Instruments (Real Defense)

Where an incomplete instrument has not been delivered, it will not,

if completed and negotiated without authority, be a valid contract in the
hands of any holder, as against any person whose signature was
placed thereon before delivery.

Instrument not valid against party before delivery.

Problem:

X signs a blank check, which was subsequently stolen by Y and fills up

the amount and a fictitious name as payee. He then indorses the
same to C, C to D, D to E, and E to F. Can F enforce the instrument
against X?

Answer: NO, because against X, whose signature was placed on the

check prior to delivery, the instrument is not valid.
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 The answer would still be the same in case F was a holder in due
course. Why? The law doesn’t discriminate on what kind of holder.

However, the invalidity of the instrument is only with reference to

parties whose signature appears in the same prior to delivery. As to
parties whose signature appears after delivery, it may be valid.

B. Complete but undelivered instruments (Personal defense)

1.Between immediate parties and a remote party not a HDC, delivery

to be effectual must be authorized.
2. As to HDC, all prior deliveries are conclusively presumed valid; and
3. If instrument is not in the hands of drawer/maker, valid and
intentional delivery is disputably presumed.

This is a personal defense.

C. Incomplete undelivered instruments (Real defense)

Where an incomplete instrument has not been delivered, it will not, if

completed and negotiated without authority, be a valid contract in the
hands of any holder, as against any person whose signature was
placed thereon before delivery.

Post-dating and ante dating of instruments

The instrument is not invalid for the reason only that it is antedated or
postdated, provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the title thereto
as of the date of delivery.

Fraud in Execution ( Fraud in factum or fraud in esse contractus) vs

Fraud in Inducement.

In fraud in factum, the person signing does not know that he is signing a
negotiable instrument. In fraud in inducement, the person knows that he is
signing a negotiable instrument but his consent to issue the instrument is
vitiated by fraud.
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Minority.

The defense of minority is personal to the minor only. It is a real defense as

to him BUT not to the parties who are capacitated, in fact, they cannot invoke
it.

Prescription.

The prescriptive period for the filing for a claim based on negotiable
instruments is 10years from the time the cause of action accrued.

What constitutes material alteration?

A material alteration is which changes the date, the sum payable, the time
or place of payment, the number or relations of the parties, the currency in
which payment is to be made or one 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.

Section 124 of the NIL states that a material alteration avoids an instrument
except as against an assenting party and subsequent indorsers, but a holder
in due course may enforce payment according to its original tenor.

The acceptor/drawee, despite the tenor of his acceptance, is liable only to

the extent of the bill prior to alteration. Thus, when the drawee bank pays a
materially altered check, it violates the terms of the check, as well as its duty
to charge its client’s account only for bona fide disbursements he had made.
If the drawee did not pay according to the general tenor of the instrument, as
directed by the drawer, then, it has no right to claim reimbursement from the
drawer, much less, the right to deduct the erroneous payment it made from
the drawer’s account which it was expected to treat with utmost fidelity. The
drawee, however, still has recourse to recover its loss. It may pass the
liability back to the collecting bank.

The alterations on the serial numbers in a check do not constitute

material alteration within the contemplation of the NIL.

An alteration is said to be material if it alters the effect of the instrument. It

means an unauthorized change in the instrument that purports to modify in
any respect the obligation of a party or an unauthorized addition of words or
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numbers or other change to an incomplete instrument relating to the
obligation of a party. In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the
NIL.

When the drawee bank pays a materially altered check, can it claim
reimbursement from the drawer?

No. when the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge the client’s account only for
bona fide disbursements he had made. Since the drawee bank did not pay
according to the original tenor of the instrument, as directed by the drawer,
then it has no right to deduct the erroneous payment it made from the
drawer’s account which it was expected to treat with utmost fidelity.

Exception: when the drawer was the one who made or authorized the
alteration or when he failed to exercise reasonable diligence to avoid it.

Note: Effective 4 January 2016, any check that shows or indicates on its face
any erasure or alteration of the date, name of the payee, amount in figures,
amount in words, signature, account name, account number, check number,
or MICR characters regardless of any signature or initials that appear to
indicate authorization of the alteration or erasure or does not indicate the
date, payee, amount payable in figures, amount payable in words, or
signature shall no longer be eligible or acceptable for clearing, except post-
dated checks bearing the required bank stamp.

LIABILITY OF PARTIES

Who is an accommodation party? What is the nature of his liability?

An accommodation part is one who meets all the requisites, viz: (1) he must
be a party to the instrument, signing as maker, drawer, acceptor, or indorser;
(2) he must not receive value therefor; and (3) he must sign for the purpose
of lending his name or credit to some other person.

A surety is bound equally and absolutely with the principal and is deemed
and original promisor and debtor from the beginning. The liability is
immediate, direct, primary, and unconditional. It is not a valid defense that
the accommodation party did not receive any valuable consideration
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when he executed the instrument; nor is it correct to say that the holder
for value is not a holder in due course merely because at that time he
acquired the instrument, he knew that the indorser was only an
accommodation party. (Aglibot vs. Santia, G.R. No. 185945, 5 December
2012; The Philippine Bank of Commerce vs. Aruego, G.R. Nos. L-25836-37,
31 January 1981; Ang Tiong vs. Ting, G.R. No. L-26767, 22 February 1968)

The accommodation party is liable on the instrument to a holder for a value

even though the holder for value even though the holder, at the time of taking
the instrument, knew him or her to be merely an accommodation party, as if
the contract was not for accommodation. The relation between an
accommodation party and accommodated party is one of principal and
surety – the accommodation party for being the surety. (Virata vs. Alejandro
Ng Wee, G.R. No. 220926, 5 July 2017; Tomas Ang vs. Associated Bank,
G.R. No. 146511, 5 September 2007)

The accommodated party was allowed extension of payment without

the consent of the accommodation party. Is the accommodation party
still liable?

Yes. Since the liability of an accommodation part remains not only primary
but also unconditional to a holder for a value, even if the accommodated
party receives an extension of the period for the payment without the consent
of the accommodation party, the latter is still liable for the whole obligation
and such extension does not release him because as far as the holder for
value is concerned, he is a solidary co-debtor.

The acceptor, by accepting the instrument, engages that he will pay it

according to the tenor of his acceptance.

The acceptor is a drawee who accepts the bill. Thus, as a general rule, the
drawee bank is not liable until it accepts. Once he accepts, the drawee
admits the following: (a) existence of the drawer; (b) genuineness of the
drawer’s signature; (c) capacity and authority of the drawer to draw the
instrument; and (d) existence of the payee and his then capacity to endorse.
The payment of the amount of a check implies not only acceptance but also
compliance with the drawee’s obligation.

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Indorsement vs Guaranty/Surety

A contract of indorsement is primarily that of transfer, while a contract of

guaranty is that of personal security. The liability of a guarantor/surety is
broader than that of an indorser. Thus, unless the bill is promptly presented
for payment at maturity and due notice of dishonor given to the indorser
within a reasonable time, he will be discharged from liability thereon. On the
other hand, except where required by the provisions of the contract of
suretyship, a demand or notice of default is not required to fix the surety’s
liability. He cannot complain that the creditor has not notified him in the
contract of suretyship.

What are the legal consequences of transferring a negotiable

instrument for value without indorsing it?

Section 49 of the NIL contemplates a situation whereby the payee or

indorsee delivers a negotiable instrument for value without indorsing it.
Where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the right to
have the indorsement of the transferor. But 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.

It bears stressing that the above transaction is an equitable assignment and

the transferee acquires the instrument subject to defenses and equities
available among prior parties. Thus, if the transferor had legal title, the
transferee acquires such title and, in addition, the right to have the
indorsement of the transferor and also the right, as holder of the legal title,
to maintain legal action against the maker or acceptor or other party liable to
the transferor. The underlying premise of this provision, is that a valid transfer
of ownership of the negotiable instrument in question has taken place.
Transferees in this situation do not enjoy the presumption of ownership in
favor of holders since they are neither payees nor indorsees of such
instruments.

The weight od authority is that the mere possession of a negotiable

instrument does not in itself conclusively establish either the right of the
possessor to receive payment or the right of one of the possessors to receive
payment or the right of one who has made payment to be discharged from
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liability. Thus, something more than mere possession by person who are not
payees or indorsers of the instrument is necessary to authorize payment to
them in the absence of any other acts from which the authority to receive
payment may be inferred.

What does acceptance of a bill mean? How is it made?

The NIL provides:

Sec. 132. Acceptance; how made, by and so forth.- The acceptance of a bill
is the signification by the drawee of his assent to the order of the drawer.
The acceptance must be in writing and signed by the drawee. It must not
express that the drawee will perform his promise by any other means than
the payment of money.

When is acceptance of a bill qualified?

The NIL provides:

Sec. 141. Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by the acceptor

dependent on the fulfillment of a condition therein stated
(b) Partial; that is to say, an acceptance to pay part only of the amount
for which the bill is drawn
(c) Local; that is to say, an acceptance to pay only at a particular place
(d) Qualified as to time
(e) The acceptance of some, one or more of the drawees but not of all

What are the effects of forgery? What is the exception, if any?

No right to retain the instrument, or to give a discharge therefor, or to enforce

payment thereof against any party, can be acquired through or under such
forged signature.

Exception: Unless the party against whom it is sought to enforce such right
is preluded from setting up the forgery or want of authority.

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i.e. One is precluded from setting up a forgery, assuming there is forgery,
due to his own negligence in entrusting to his secretary his credit cards and
checkbook including the verification of his statements of account.

If the drawee pays a check with the forged signature of the drawer, who
will suffer the loss?

General rule: the drawee who has paid upon the forged signature bears the
loss.

Exception: when negligence can be traced on the part of the drawer whose
signature was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to determine who should
bear the burden of loss.

Example: The mere fact that the depositor leaves his check book lying
around does not constitute such negligence as will free the bank from liability
to him, where the clerk of the depositor or other persons, taking advantage
of the opportunity, abstracts some of the check blanks, forges the depositor’s
signature and collect on the checks from the bank. The drawer cannot be
considered negligent if he reported the forgery immediately upon discovery.

Persons who cannot set up forgery

a. Persons who warrant or admit the genuineness of the signature in

question
b. Those who by their acts, silence, or negligence are estopped from
setting up the defense of forgery
c. Persons who are negligent

Cut-off Rule

Parties prior to the forged signature are cut-off from the parties after the
forgery in the sense that prior parties cannot be held liable and can raise the
defense of forgery. The holder can only enforce the instrument against
parties who became such after the forgery.

Drawer is precluded from raising the defense of forgery if his

negligence contributed to it.
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A drawer or a depositor of the bank is precluded from asserting the forgery
if the drawee bank can prove his failure to exercise ordinary care and if its
negligence substantially contributed to the forgery or the perpetration of the
fraud.

Example: A check, payable to the order of Y and C was depositied to a bank

(collecting bank) with the lone indorsement of Y. Y was able to withdraw from
the bank the proceeds of the check. Discuss legal implications.

Where an instrument is payable to the order of two or more payees or

indorsees who are not partners, all must indorse unless the one indorsing
hay authority to indorse for the others. The payment of an instrument over a
missing indorsement is the equivalent of payment on a forged indorsement
or an unauthorized indorsement in itself in the case of joint payees.

A collecting bank, where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an indorser. This is because in
indorsing a check to the drawee bank, a collecting bank stamps the back of
the check with the phrase – “all prior indorsementss and/or lack of
indorsement guaranteed” and, for all intents and purposes, treats the check
as a negotiable instrument, hence, assumes the warranty of an indorser.
Without the collecting bank’s warranty, the drawee bank would not have paid
the value of the subject check.

The collecting bank or last indorser, generally suffers the loss because it has
the duty to ascertain the genuineness of all prior indorsements considering
that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the
genuineness of prior indorsements.

Persons with Secondary and Primary liability.

What are the liabilities of a :

Maker- primary liability:

1. Engages to pay according to the tenor of the instrument
2. Admits the existence of the payee and his capacity to indorse

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Acceptor (and drawee who pays without accepting the instrument)- primary
liability.
1. Engages to pay according to the tenor of his acceptance
2. Admits the existence of the drawer, genuineness of his signature and
his capacity and authority to draw the instrument
3. Admits the existence of the payee and his capacity to indorse

Drawer – secondary liability.

1. Admits the existence of the payee and his capacity to indorse
2. Engages that the instrument will be accepted or paid by the party
primarily liable
3. Engages that if the instrument is dishonored and proper proceedings
are brought, he will pay to the party entitled to be paid.

What are the warranties of Indorsers?

General Indorsers
1. That the instrument is genuine and in all respects what it purports to be
2. That he has a good title to it
3. That all prior parties had capacity to contract
4. And that the instrument is, at the time of his indorsement, valid and
subsisting

He engages that, on due presentment, it shall be accepted or paid, or

both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings of dishonor be duly taken,
he will pay the amount to the holder, or to any subsequent indorser
who may be compelled to pay it.

Qualified Indorsers and Persons negotiating by delivery

1. That the instrument is genuine and in all respects what it purports to
be
2. That all prior parties had capacity to contract
3. That he has no knowledge of any fact which would impair the validity
of the instrument or render it valueless.

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How to enforce liability?

Primarily liable.

Maker is liable the moment he makes the instrument.

Drawee becomes liable the moment he accepts the instrument.

Secondary liable.

Steps to charge secondary parties in Promissory Note:

1. Presentment for payment must be made within the required period to

the maker
2. Notice of Dishonor should be given, if promissory note is dishonored
by non-payment by the maker.

Steps to charge secondary parties in BOE:

1. Presentment for acceptance or negotiation within a reasonable time

after it was acquired—should be made only in the instances required
in Section 143.

2. If dishonored by non-acceptance:
a. Notice of dishonor should be given to the indorsers and drawer
b. If the bill is a foreign bill, there must be protest for dishonor by non-
acceptance

3. If the bill is accepted:

a. Presentment of payment to the acceptor should be made --
i. If the bill is dishonored upon presentment for payment
ii. Notice of dishonor must be given to person secondarily liable.
b. If the bill is a foreign bill, protest for dishonor, must be made.

Presentment

Presentment is a demand by which the holder of a negotiable instrument is

required to do something as per the directives of the instrument. It is the
showing of the instrument to the drawee, acceptor or maker for acceptance,
sight or payment.
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 1. Presentment for Payment

Presentment for payment is not necessary in order to charge the

person primarily liable on the instrument; but if the instrument is, by its
terms, payable at a special place, and he is able and willing to pay it
there at maturity, such ability and willingness are equivalent to a
tender of payment upon his part. But except as herein otherwise
provided, presentment for payment is necessary in order to charge the
drawer and indorsers.

Requisites:
Presentment for payment, to be sufficient, must be made:

i. By the holder, or by some person authorized to

receive payment on his behalf;

ii. At a reasonable hour on a business day;

iii. At a proper place as herein defined;

iv. To the person primarily liable on the instrument, or if he is

absent or inaccessible, to any person found at the place
where the presentment is made.

2. Presentment for Acceptance.

When mandatory:

(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of
the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or
place of business of the drawee.

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 In no other case is presentment for acceptance necessary in order to
render any party to the bill liable.
Note: It is not necessary to present a check for acceptance because it
is not one of those required to be presented for acceptance under
Section 143.

When excused:

Presentment for acceptance is excused and a bill may be treated as

dishonored by non-acceptance in either of the following cases:

a. Where the drawee is dead, or has absconded, or is a fictitious

person or a person not having capacity to contract by bill.
b. Where, after the exercise of reasonable diligence, presentment can
not be made.
c. Where, although presentment has been irregular, acceptance has
been refused on some other ground.

What is Acceptance?

It is the signification by the drawee of his assent to the order of the drawer.
The acceptance must be:
a. in writing
b. signed by the drawee
c. drawee must assent to the promise to pay a sum certain in money and
not by any other means.

When is a NI deemed accepted?

The drawee is deemed to have accepted the instrument when:

1. the NI was delievered to the drawee and the latter destroys the same
2. the bill was delivered to the drawee but the drawee refuse within 24
hour or within such other period as the holder may allow to return the
bill accepted or non-accepted.

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What is a Notice of Dishonor?

It is bringing either verbally or by writing, to the knowledge of the drawer or

indorser of an instrument, the fact that a specified negotiable instrument,
upon proper proceedings taken, has not been accepted or hasn't been paid,
and that the party notified is expected to paid it.

Necessity and purpose of notice

When an instrument is dishonored by NON-ACCEPTANCE or NON-
PAYMENT, notice of such dishonor must be given to persons
secondarily liable, as the case may be. Otherwise, such parties are
discharged

What is the effect of a notice of dishonor?

Upon valid notice of dishonor, immediate right of recourse against the
indorser arises. It is as if the indorser becomes primarily liable in the sense
that the holder need not claim payment from the person primarily liable.

In what cases is the drawer not excused from payment despite lack of
notice of dishonor?

The NIL provides:

Se. 114. When notice need not be given to the drawer.- Notice of dishonor
is not required to be given to the drawer in either of the following cases:

a. Where the drawer and drawee are the same person

b. When the drawee is fictitious person or a person not having capacity
to contract
c. When the drawer is the person to whom the instrument is presented
for payment
d. Where the drawer has no right to expect or require that the drawee or
acceptor will honor the instrument, and
e. Where the drawer has countermanded payment

Thus, where A’s bank account was already closed even before the issuance
of the check, he had no right to expect or require the drawee bank to honor
his check. By virtue of the aforementioned provision of the NIL, A is not
entitled to be given a notice of dishonor.
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In what instances is a general indorser liable despite lack of notice of
dishonor?

The NIL provides:

Sec. 115. When notice need not be given to indorser. — Notice of dishonor
is not required to be given to an indorser in either of the following cases:

(a) When the drawee is a fictitious person or person not having capacity to
contract, and the indorser was aware of that fact at the time he indorsed the
instrument;

(b) Where the indorser is the person to whom the instrument is presented for
payment;

(c) Where the instrument was made or accepted for his accommodation.

What is Protest?

It is a formal declaration, drawn and signed by a notary public, that the

foreign bill has been presented for acceptance or payment and that the
acceptance or payment is refused.

When is a Protest necessary?

1. If a foreign bill has been dishonored by non-acceptance

2. If a foreign bill which was not previously presented for acceptance has
been dishonored by non-payment
3. If a stranger to a bill will accept the instrument for honor
4. If the bill will be presented for payment to acceptor for honor or referee
in case of need, and
5. When the bill is dishonored by the acceptor for honor

Note: Without protest of a dishonored foreign bill, the drawer and indorser
are not liable based on the instrument. However, the drawer may still be
liable based on contract.

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Will the discharge of a drawer from liability due to lack of protest
operate to discharge him from his letter of undertaking which he signed
as additional security for the draft (bill of exchange)?

No. The drawer can still be made liable under the letter of undertaking even
if he is discharged due to failure to protest the non-acceptance of the drafts.
It bears stressing that it is a separate contract from the sight draft. The liability
of the drawer under the letter of undertaking is direct and primary. It is
independent from his liability under the sight draft. Liability subsists on it even
if the sight draft was dishonored for non-acceptance or non-payment.

Is the drawer an indispensable party to a suit against the indorsers in case

of dishonor of the instrument by nonpayment?

No. After an instrument is dishonored by nonpayment, indorsers cease to be

merely secondarily liable; they become principal debtors whose liability
becomes identical to that of the original obligor. The holder of a negotiable
instrument need not even proceed against the maker before suing the
indorser. Hence, the drawer is not an indispensable party in an action against
the indorser of the checks.

What is an acceptance for honor?

Undertaking by a third party to accept and pay (in part or in full) a bill of
exchange that was dishonored, either by non-acceptance or by non-payment
by the party on whom it was drawn. Also called acceptance supra protest.

What is Payment for Honor?

When a bill of exchange has been noted or protested for non-payment, any
person may pay the same for the honor of any party liable to pay the same

What discharges a negotiable instrument?

The NIL provides:

Sec. 119. Instrument; how discharged. - A negotiable instrument is

discharged:

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 (a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the

instrument is made or accepted for his accommodation;

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple contract for the
payment of money;

(e) When the principal debtor becomes the holder of the instrument
at or after maturity in his own right.

CHECKS

A check is not a legal tender.

Settled is the rule that payment must be made in legal tender. A check is not
a legal tender and, therefore, cannot constitute a valid tender of payment.
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment.
Mere delivery of checks does not discharge the obligation under a
judgement. The obligation is not extinguished and remains suspended until
the payment by commercial document is actually realized.

The check was presented to the drawee bank 120 days from the date
thereof. Determine if the drawer has been discharged from the duty to
maintain sufficient funds therefor.

No. According to current banking practice, the reasonable period within

which to present a check to the drawee bank is six months. Thereafter, the
check becomes stale and the drawer is discharged from liability thereon to
the extent of the loss caused by the delay. Thus, presentment of the check
to the drawee bank 4 months after its issue was still within the allowable
period. The drawer was freed neither from the obligation to keep sufficient
funds in his account nor from liability resulting from the dishonor of the check.

Can a holder sue the drawee bank if the latter refuses payment of a
check notwithstanding sufficiency of funds?

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No. A check of itself does not operate as not assignment of any part of the
funds to the credit of the drawer with the bank, and the bank is not liable to
the holder, unless and until it accepts or certifies the check.

Thus, if a bank refuses to pay a check, notwithstanding the sufficiency of of

funds, the payee-holder cannot sue the bank. The payee-holder should
instead sue the drawer who might in turn sue the bank. No privity of contract
exists between the drawee-bank and the payee.

In cases of unauthorized payment of checks to a person other than the

payee named therein, the drawee bank may be held liable to the drawer.
The drawee bank, in turn, may seek reimbursement from the collecting
bank for the amount of the check.

The liability of the drawee bank is based on its contract with the drawer and
its duty to charge to the latter’s account only those payables authorized by
him. A drawee bank is under strict liability to pay the check only to the payee
or to the payee’s order. When the drawee bank pays a person other than the
payee named in the check, it does not comply with the terms of the check
and violates its duty to charge the drawer’s account only for properly payable
items.

A depositary/collecting bank where a check is deposited, and which

indorses the check upon presentment with the drawee bank, is an
indorser. Its liability is anchored on its guarantees as the last indorser
of the check.

Under Section 66 of the NIL, an endorser warrants “that the instrument is

genuine and in all respects what it urports to e; that he has good ttle toit; that
all prior parties had capacity to contract; and that the instrument is at the ime
of his endorsement valid and subsisting.’

The collecting bank generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act
of presenting the check for payment to the drawee is an assertion that the
party making the presentment has done its duty to ascertain the genuineness
of the endorsements. If any of the warranties made by the collecting bank
turns out to be false, then the drawee bank may recover from it up to the
amount of the check.

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There may be exceptional circumstances where the aggrieved party
may be allowed to recover directly from the person which caused the
loss when circumstances warrant.

In a recent case, the payee of the illegally encashed checks should be

allowed to recover directly from the bank responsible for such encashment
regardless of whether or not the checks were actually delivered to the payee.

Manager’s check

A manager’s check is one drawn by the bank’s manager upon the bank itself.
It is similar to a cashier’s check both as to effect and use. A cashier’s check
is a check of the bank’s cashier on his own or another check. In effect, it is a
bill of exchange drawn by the cashier of a bank upon the bank itself, and
accepted in advance by the act of its issuance. It is really the bank’s own
check and may be treated as a promissory note with the bank as a maker.
The check becomes the primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. The mere issuance of it
is considered an acceptance thereof.

Why is a manager’s check considered as good as cash?

A manager’s check stands on the same footing as a certified check, which

is deemed to have been accepted by the bank that certified it, as it is an
order of the bank to pay, drawn upon itself, committing in effect its total
resources, integrity and honor behind its nuisance. By its peculiar character
and general use in commerce, a manager’s check is regarded substantially
to be as good as the money it represents.

Manager’s and cashier’s checks are still the subject of clearing to

ensure that the same have not been materially altered or otherwise
completely counterfeited.

While manager’s and cashier’s checks are pre-accepted by the mere

issuance thereof by the bank, which is both its drawer and drawee, they are
still subject to clearing. Nevertheless, while they are subject to clearing,
they cannot be countermanded for being drawn against a closed account,
for being drawn against insufficient funds, or for similar reasons such as a
condition not appearing on the face of the check.
34 | P a g e
The drawee bank of a manager’s check may interpose personal
defenses of the purchaser of the manager’s check if the holder is not
a holder in due course.

The purchaser of a manager’s check may validly countermand payment to

a holder who is not a holder in due course. Accordingly, the drawee bank
may refuse to pay the manager’s check by interposing a personal defense
of the purchaser.

Iron Clad Rule

A cashier’s check (having legal effects of a certified check) is not subject to

countermand by the payee after indorsement.

Effects of certifying a check

a. It is equivalent to acceptance and is the operative act that makes the

bank liable
b. It amounts to the assignment of the funds of the drawer in the hands
of the drawee.
c. If obtained by the holder, persons secondarily liable are discharged.

Check Kiting

It is the wrongful practice of taking advantage of the float, the time that
elapses between the deposit of the check in one bank and its collection at
another. In anticipation of the dishonor of the check that was deposited, the
original check will be replaced with another worthless check.

Checks with the notation “account payee only” payable to the order of
X Company was allowed by Pigi Bank to be deposited in the account of
one of the officers of X Company. What are the legal implications?

The notation “account payee only” creates a reasonable expectation that the
payee alone would receive the proceeds of the checks and that diversion of
the checks would be averted. This exception arises from the banking practice
35 | P a g e
that crossed checks are intended for deposit in the named payee’s account
only and no other. The nature of crossed checks should place a bank notice
that it should exercise more caution or expend more than a cursory inquiry,
to ascertain whether the payee on the check has authorized the holder to
deposit the same in a different account. The fact that the person, other than
the named payee of the crossed check, was representing it for deposit
should have put the bank on guard. It should have verified if the payee
authorized the holder (officer) to present the same in its behalf, or indorsed
it to him. Such misplaced reliance on empty words is tantamount to gross
negligence, which is the “absence of or failure to exercise even slight care of
diligence, or the entire absence of care, evincing a thoughtless disregard of
consequences without exerting any effort to avoid them.

To satisfy their obligation with X Company, a manager’s check was

obtained by Z. The check was obtained from Pigi Bank. However, the
check remained in the possession of Z but X Company was advised
that it is available for withdrawal. Since more than 10 years passed
without the amount of the check being withdrawn, Pigi Bank reported
it to the Bureau of Treasury as among its “unclaimed balances.”

Should the amount corresponding to the check be considered part of

Pigi Bank’s unclaimed balances and, therefore, could be the subject of
escheat proceedings?

The mere issuance of a manager’s check does not ipso facto work as an
automatic transfer of funds to the account of the payee. In case the procurer
of the manager’s or cahier’s check retains custody of the instrument, does
not tender it to the intended payee, or fails to make an effective delivery, it
cannot be said that delivery of the check has taken place. Since there is no
delivery, presentment of the check to the bank for payment did not occur. As
a result, the assigned fund is deemed to remain part of the account of Z who
procured the manager’s check. The doctrine that the deposit represented by
a manager’s check automatically passes to the payee is inapplicable,
because the instrument-although accepted in advance- remained
undelivered. Z should have been informed that the deposit had been left
inactive for more than 10 years, and that it may be subjected to escheat
proceedings.

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24- hour Clearing Rule; Not applicable to altered checks

Under this rule, any check which should be refused by the drawee bank in
accordance with bank practices shall be returned through the PCHC/local
clearing office not later than the next regular clearing (24-hour). Else, the
drawee bank will not be able to recover from the collecting bank.

Items involving material alteration or bearing forged endorsement may be

returned even beyond 24 hours so long as it is returned within the
prescriptive period (i.e. 10 years because a check or the endorsement
thereon is a written contract.)

The bank should suffer the loss occasioned by its clearing of a fake
check.

The genuine check remained in X’s possession the entire time and Landbank
admits that the check it cleared was a fake. When Landbank forwarded the
deposited check to its Araneta Branch for inspection, its officers had every
opportunity to recognize the forgery of their signatures or the falsity of the
check. However, whether by error or neglect, the bank failed to do so, which
led to the withdrawal and eventual loss of 25 million. This the proximate
cause of the loss. Landbank breached its duty of diligence and assumed the
risk of incurring a loss on account of a forged or counterfeit check. Hence, it
should bear the loss.

Distinguish between inland and foreign bill of exchange

Inland bill of exchange- a bill which is or on its face purports to be, both drawn
and payable within the Philippines.

Foreign bill of exchange- maybe drawn outside the Philippines, payable

outside the Philippines or both drawn and payable outside of the Philippines.
Further, a foreign bill of exchange must be protested in case of dishonor to
charge the drawer and the indorsers while an inland bill of exchange need
not be protested.

Effect of failure to protest a sight draft

37 | P a g e
A sight draft made payable outside the Philippines is a foreign bill of
exchange, when a foreign bill is dishonored by non-acceptance or
nonpayment, protest is necessary to hold the drawer and indorser liable.

Crossed check

It is one where two parallel lines are drawn across its face or across the
corner thereof. A check may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or

company is written between the parallel lines drawn.

A check is crossed generally when only the words “and company” are
written at all between the parallel lines.

Effects of crossing a check

a. The check may not be encashed but only deposited in the bank
b. The check may be negotiated only once – to one who has an account
with a bank
c. 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.

The crossing of the check relates to the mode of payment, meaning

that the drawer had intended the check for deposit only by the rightful
person, the payee named therein.

Can the drawer order the drawee to stop payment of a check?

Yes. This right flows from the rule that the issuance of a check by itself is
not an assignment of funds by the drawee. If a bank pays a check after it
has been notified to stop payment, it pays on its own responsibility and will
not be permitted to charge the account.

Drawer may countermand payment if he has a valid defense against the

holder of the check.
//jesse

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