Notes on Negotiable Instruments Law.

What is a check?

Section 185 provides that, a check is a bill of exchange drawn on a bank, payable
upon demand.

When should the check be presented for payment?

Section 186 provides that a check should be presented for payment, within a
reasonable time upon its issue.

Is a drawee liable upon the issuance of the check?

Section 189 provides that, the drawee is no liable just because he happened to be
the drawee. A check does not operate as an assignment, of any part of the funds to the
credit of the drawer, with the bank. The bank is not liable to the holder, until and unless
the bank accepts the check. In this case, the drawee becomes an acceptor.

What is a certified check?

A certified check, is one drawn by the depositor upon funds to his credit, in bank,
which a proper officer of the bank certifies will be paid, when duly presented for
payment.

Is certification completely similar to acceptance?

No, according to Section 187, the certification is equivalent to acceptance, but

they differ in the sense that:

1. A certification done at the instance of the holder, results in a discharge,

while ordinary acceptance does not discharge;
2. In certification, the bank debits the drawers account at the time of
certification, not after, as in ordinary acceptance.
How does certification operate?

Upon certification, the bank debits the drawers account, in effect setting aside
the funds to meet the check, if and when it is presented for payment. The funds that
were set apart, are no longer within the control of the drawer, but have been segregated
precisely for the purpose of paying the check.

This is why the certification procured by the holder discharges the parties
secondarily liable. The certified checks operates as an assignment of part of the funds of
the credit of the drawer.

The theory is that, the holder, by requesting certification instead of payment,

enters into a new contract with the bank, not within the contemplation of the drawer, or
a prior endorser. The drawer and the endorsers, are expecting that the check will be
presented for payment only, and not for certification. Hence, they are discharged.

What is a crossed check?

A crossed check is a check which bears two parallel lines, drawn diagonally on
the top-left portion. If the crossing of the check is special, the name of a bank or
institution, is written in between the parallel lines. A special crossed check means that
payment must only be made, upon the intervention of the bank or institution written on
the lines. If the crossing of the check is general, the words, and company or for
payees account only are written along the lines.

Does the Negotiable Instruments Law cover crossed checks?

No, crossed checks are covered by Section 541 of the Code of Commerce.

What is the effect of crossing a check?

The general effect of a crossed check, puts the holder on inquiry and requires him
to ascertain the title of the endorser. Failure to do so renders the holder guilty of gross
negligence. Thus, the holder of a crossed check, who has made no inquiry upon the
endorsers title, is not a holder in due course.
 The specific effects of a crossed check are:

1. The check may not be encashed, but only deposited in a bank.

2. The crossed check may only be negotiated once, to a person who is an
account holder of the same bank.
3. The act of crossing a check, serves as a warning to the holder that the
has been issued for a definite purpose; thus requiring the holder to
inquire if he has received the crossed check for the same purpose.

What are the relationships between the drawer, drawee and the payee of a check?

The drawer of the check has privity of contract with the payee. He has privity of
contract with the drawee bank. The drawer has a right of recourse against the drawee
and the payee.

The drawee has privity of contract with the drawer. This is the contract of
deposit. The drawee has the right of recourse, in certain instances against the drawer.
There is no relationship between the drawee and the payee. Thus, there is no
relationship between the bank, and the person who wishes to convert a check to cash.

The payee has privity of contract with the drawer. He has the right of recourse
against the drawer, should the check be insufficiently funded. There is no privity of
contract between the payee and the bank.

The exception is when the payee has a right of recourse against the drawee bank,
under Article 19 of the New Civil Code. He has a right to proceed against the bank
when:

1. The drawee has a legal right, or duty towards him.

2. The right or duty was exercised in bad faith;
3. The sole intent of the bank is to prejudice or injure the payee.

What is a collecting bank?

The collecting bank, is the bank with which the holder or payee of a check,
deposits his check. The payee, in this case, usually has an account with the collecting
bank. The collecting bank is also known as depositary bank.
What is the relationship of the payee, and the collecting bank?

The relationship of the payee and collecting bank, is one of principal and agent.
The collecting bank acts as the payees agent, when it sends the check for clearing. The
collecting bank, thus collects for and on behalf of its account holder.

Check clearing is done through a clearinghouse. It is an association of banks or

other payors, for the purpose of settling account with each other on a daily basis. Each
member of the clearinghouse, forwards all deposited checks drawn on other members,
and receives from the clearinghouse, all checks drawn against it. Balances are adjusted
and settled on a daily basis.

Does the collecting bank become the owner of the check deposited with it?

No, the collecting bank does not become the owner of the check deposited with
it. It merely collects for and on behalf of its principal the account holder.

If a check is forged prior to the deposit with the collecting bank, and the check is
subsequently paid, is the collecting bank liable?

Yes, the collecting bank is liable for payment of forged checks. The collecting
bank is the last endorser of the check. It endorsed the check for clearing with the drawee
bank, and the drawee bank relied on the collecting banks warranty, given upon
endorsement, that the check is genuine in all respects, what it purports to be. The
liabilities of the collecting bank, are the same as those of the general endorser.

What is the right of recourse of a collecting bank, who was forced to reimburse the
drawee for a forged check?

The collecting bank may proceed against its client, the depositor. Remember that
privity of contract exists only between the depositor and the collecting bank. The payee-
depositor of the forged check is liable as a general endorser.

Is the drawer allowed to countermand the payment of a check?

 It depends. If the drawer has a valid defense against the holder of the check, that
is if the payee failed to deliver the goods, the drawer is allowed to countermand or
revoke payment.

If the drawer has no valid defense, the drawer is criminally liable under BP 22,
which penalizes the maker, drawing or issuing of checks, for value, knowing that at the
time of issue, the check is not sufficiently funded.

What is the iron-clad rule?

The iron-clad rule prohibits the countermanding of payment of certified checks,

managers checks and cashiers checks. Because of the nature of these checks, they are
considered to be as good as the money they represent. They may not be countermanded
by the payee, or by the bank.

What is the Philippine Clearing House Corporation?

The Philippine Clearing House Corporation is the government instrumentality

that governs drawee banks. It enforces the 24-hour rule. This rule states that the drawee
bank, must return checks or items cleared through the PCHC to the collecting bank.
This prevents the perpetuation and circulation of forged checks. Failure to return the
checks renders the drawee liable for negligence. It also absolves the collecting bank of
liability.