MERC FAQS

Negotiable Instruments Law

Requisites of Negotiability
1.a. Acknowledgement receipt
-is a promissory note
-may become a promise by the addition of words by which a promise of payment is
naturally implied e.g. payable, payable on a given day, payable on demand, paid
when called for
To constitute a good promissory note
-no precise words of contract are necessary provided they amount in legal effect to a
promise to pay
b.Bill of exchange
-is negotiable and governed by the Negotiable Instruments Law
Foreign bill of exchange
-payable in the Phils
-although the amount payable is expressed in dollars, not the current money here, it
is still negotiable, for it may be discharged with pesos of equivalent amount
Bill of exchange
-is a real bill of exchange and not a mere piece of evidence of indebtedness
-as long as the commercial paper conforms with the definition of a bill of exchange,
that paper is considered a bill of exchange
-the nature of acceptance is important only in the determination of the kind of
liabilities of the parties involved BUT NOT in the determination of whether a
commercial paper is a bill of exchange or not
2.a. Postal Money orders
-not negotiable
-not engaged in the commercial transactions but merely exercises a govt power for
public benefit
-restrictions are inconsistent with the character of negotiable instruments
-usually provide for not more than one endorsement, payment of money orders may
be withheld under a variety of reasons
b.Withdrawal slips
-not negotiable
-essence of negotiability which characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for money which is
lacking
3.Letter of credit and trust receipt are not negotiable
Negotiable Instruments, requisites:
a.it must be in writing
b.it must be signed by the maker or drawer
c.it must contain an unconditional promise or order to pay a sum certain in money
d.it must be payable on demand or at a fixed or determinable future time
e.it must be payable to order or bearer
f.where it is a bill of exchange, the drawee must be named or otherwise indicated
with reasonable certainty
-negotiable instruments include promissory notes, bills of exchange and checks
-drafts issued in connection with letters of credit are negotiable instruments

Accomodation Party
4.When a married couple signed a promissory note in favor of a bank to enable the
sister of the husband to obtain a loan, they are considered as accommodation
parties who are liable for the payment of said loan.
Accomodation Party
-is liable according to the face of his undertaking, the same as if he were himself
financially interested in the transaction
Sec 29 of the Negotiable Instruments Law
-the accommodation party liable on the instrument to a holder for value,
notwithstanding that such holder at the time of taking the instrument knew him to
be only an accommodation party
-not a valid defense that the accommodation party did not receive any valuable
consideration when he executed the instrument
-not correct to say that the holder for value is not a holder in due course merely
because at the time he acquired the instrument, he knew that the indorser was only
an accommodation party
b.Nature of Accomodation Party’s Liability
-is a surety of the accommodated party
-by lending his name, the accommodation party cannot make the holder recover
directly from the accommodated party
-his only recourse is to seek reimbursement from the accommodated party
-however, while he is in effect a surety of the accommodated party, the
accommodation party is not exactly a surety in a contract of suretyship in all
respects
-unlike a contract of suretyship, the liability of the accommodation party remains
not only primary but also unconditional to a holder for valie
c.Rules regarding the accommodation party’s right to reimbursement from an
accommodated party:
A solidary accommodation party may seek reimbursement from the accommodated
party or other accommodation parties subject to the following rules:
a.joint and several accommodation party such as accommodation maker may
demand from the principal debtor reimbursement for the amount that he paid to the
payee
b.joint and several accommodation maker who pays on the said promissory note
may directly demand reimbursement from his co-accomodation maker without first
directing his action against the principal debtor provided that he made the payment
by virtue of a judicial demand or the principal debtor is insolvent

Holder in Due Course

5.a. Holder in Due Course
-having taken the instrument in the following conditions:
a.it is complete and regular upon its face
b.he became the holder before it was overdue and without notice that it had
previously been dishonored
c.it took the same in good faith and for value
d.when it was negotiated, the latter had no notice of any infirmity in the instrument
or defect in the title
b.Not a holder in due course
-no oblgn or liability
-amount of the check do not correspond exactly to the oblgn
-check had two parallel lines in the upper left hand corner (check could only be
deposited but may not be converted into cash)
It was the payee’s duty to ascertain from the holder what the nature of the latter’s
title to the check was or the nature of his possession
-having failed in this respect, he is guilty of gross neglect in not finding out the
nature of the title and possession, amounting to legal absence of good faith and may
not be considered as a holder of the check in good faith
c.Instead of the presumption that the payee was a holder in good faith, the fact is
that he acquired possession of the instrument under the circumstances that should
have put him to inquiry as to the title of the holder who negotiated the check to him
-the burden was, therefore, placed upon him to show that notwithstanding the
suspicious circumstances, he acquired the check in actual good faith.
d. Crossed Check
-is one where two parallel lines are drawn across its fact or across its corner
-effects:
1.the check may not be encashed but only deposited in the bank
2.the check may be negotiated only once, to the one who has an account with the
bank
3.the act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose and he must inquire if he received the check
pursuant to this purpose, otherwise, he is not a holder in due course
-is a warning that the check should be deposited only in the account of the payee

Checks
6a. Payment by check does not extinguish the liability of the partnership for
damages
Check
-only a substitute for money and not money
-delivery of such an instrument does not, by itself, operate as payment esp a post-
dated check
-not comply with the cardholder’s oblgn to pay his liability
b.Drawee bank can dishonor the check
-a check must be presented for payment within a reasonable time after its issue and
in determining what is reasonable time, regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such instruments and the
facts of the particular case
-test: whether the payee employed such diligence as a prudent man exercises in his
own affairs
-by current bank practice, a check becomes stale after more than 6 months or
180days
c.Remedy when bank dishonors a check due to lack of sufficient funds
-notice of dishonor in writing
-criminally liable for violation of BP 22

Material Alteration
7.While a promissory note is evidence of an indebtedness, it is not the only evidence
because the existence of the obligation can be proven by other documentary
evidence such as a written memorandum signed by the parties
-a check may be considered as an evidence of indebtedness and is a veritable proof
of an obligation, it can be used is lieu of and for the same purpose as a promissory
note and can therefore be presented to establish the existence of indebtedness

Incomplete but delivered instrument

8.a. Biboy cannot be held liable, Kent exceeded his authority to fill up the blanks and
use the check was limited to the use of the checks for the operation of their business
and on the condition that Biboy’s approval be first secured
-while Kent had a prima facie authority to complete the check, such prima facie
authority does not extend to its use such as its subsequent transfer or negotiation,
once the check is completed
-only authority to complete the check is presumed
-Kent never secured the approval of Biboy to fill up the blank or use the check
b.Not a holder in due course
-knew that Biboy is not a party to the contract of loan and that he has no liability
thereby making her dishonest and in bad faith
-as such, Boboy can set up the personal defense that the blanks were not filled up in
accordance with the authority he gave
-Biboy is not liable for the dishonored check

Altered Checks
9.a.Mediola Bank does not have the right to debit the amount of the checks from
Karla’s account
-When Karla deposited the checks with Mendiola Bank, she was designating the
latter as the collecting bank.
-As such, after receiving the deposit, Mediola Bank shall credit the amount in Karla’s
account or infuse value thereon only after the ABC Bank shall have paid the amount
of the check or the check has been cleared for deposit
-the fact of material alteration of the check is undisputed since before the alteration
was discovered, the checks were already cleared by ABC Bank
b.ABC Bank is only liable to the extent of the check prior to alteration
-Since ABC Bank paid the altered amount of the check, it may pass the liability back
to the collecting bank XYZ Bank
-the collecting banks are liable for the amount of the materially altered check, it
cannot pass the liability back to Karla absent any showing of negligence on her part
Forgery
10.If the drawee has paid a forged check, it is liable for the loss since it authorized
the discharge of the forged check
-such liability attaches even if the bank exerts due diligence and care in preventing
such faulty discharge
-the fact that the forgery was committed by an employee of the drawer whose
signature was forged cannot necessarily imply that such party’s negligence was the
cause for the forgery provided that he is not precluded from setting up the defense
of forgery

Incomplete and Undeliverd Instruments

Doctrine of Last Clear Chance and Contributory Negligence
11a. The practice of pre-signing blank checks should be deemed a negligent
behavior.
However, the presence of irregularities in each check should have alerted the bank
to be cautious before proceeding to encash them which it failed to do.
Banks
-engaged in the business impressed with public interest and it is their duty to
protect their clients and depositors who transact business with them
-have the obligation to treat their client’s account meticulously and with the highest
degree of care considering the fiduciary nature of their relationship
-diligence required is ore than a good father of the family
Doctrine of Last Clear Chance
-states that an antecedent negligence of a person does not preclude recovery of
damages for the supervening negligence of or bar a defense against liability sought
by another, if the person sought to be made liable had the last fair chance of
avoiding the injury
-in cases where both parties are at fault, the doctrine of last clear chance must be
applied in order to assign liability
c.Contributory negligence of one mitigates the contributory negligence of another.

Insurance Law
Perfection of an Insurance Contract
12. a.Insurance Contract, being a consensual contract, is perfected upon the meeting
of the offer and the acceptance upon the thing and the cause which are to constitute
the contract pursuant to Art 1319 NCC.
b.Adhering to the Cognition Theory, an insurance contact is perfected upon the
knowledge of the insured of the insurer’s acceptance.
-here, the insured had no knowledge of the Insurance Company’s acceptance before
he died, hence, the contract was never perfected and the obligation of the insurer
which was supposed to be covered by the premium did not materialize
c.There being no perfected contract, the insurer’s liability did not attach.
However, the insurer is bound to return the consideration that it received from the
insured
-the heirs may recover the premium
Delay in Approval of Policy
13a. The insurance company is liable.
-the receipt of the list of all new lot purchasers of the insurer has the effect of
acknowledging receipt of the same together with the attachments
-such receipt is an admission of the insurer against his own interest
-the burden of evidence has shifted to the insurer, which must prove that the letter
did not contain the insured’s application
-failure to do so, the insurer is deemed to have received the insured’s insurance
application
b.Rule on interpretation of Insurance Contracts:
-terms of the insurance contract which are ambiguous are to be construed liberally
in favor of the insured and strictly against the insurer
-insurance contracts, being contracts of adhesion are presented to the insured
already in its printed form, so that he either takes it or leaves it
-if the terms are clear, there is no room for interpretation

Insurable Interest in Property