BILL OF EXCHANGE AND CHECKS

Negotiable Instrument
- It is a written contract for the payment of money which is intended as a substitute
for money and it 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.
- A document that promises payment to a specified person or the assignee.
Functions and Importance
- Although they do not constitute legal tender, they are used as a substitute for
money
- Negotiable papers, particularly checks, constitute, at the present, the media of
exchange for most commercial transactions.
Characteristics
1. NEGOTIABILITY – The right of transferee to hold the instrument and collect the sum
due. The note may pass from hand to hand similar to money as to give the holder in due
course the right to hold the instrument and collect the sum payable for himself free
from any infirmity in the instrument or defect in the title of any of the prior parties or
defenses available to them among themselves.
2. ACCUMULATION OF SECONDARY CONTRACTS – The instrument is negotiated from
person to person. Additional parties become involved as the instrument is transferred
from one person to another.

Kinds of Negotiable Instruments

Promissory note
An unconditional promise in writing made 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. Where a note is drawn to the maker's own order, it is not
complete until indorsed by him. (Negotiable Instruments Law, Sec.184)
Bill of exchange
A bill of exchange 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.
(Negotiable Instruments Law, Sec.126)
Check
A check is a bill of exchange drawn on a bank payable on demand. (Negotiable
Instruments Law, Sec.185)

FORM (Negotiable Instruments Law Sec.1)

Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to
the following requirements:
(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; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

PARTIES

Promissory Note: (1) Maker and (2) Payee

Bill of Exchange: (1) Drawer, (2) Payee, and (3) Drawee / Acceptor
Checks: (1) Drawer, (2) Payee, and (3) Drawee Bank

Definitions
Drawer – the maker of the bill of exchange. A seller/creditor who is entitled to receive money
from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer after writing
the bill of exchange has to sign it as the maker of the bill.
Drawee – the person upon whom the bill of exchange is drawn. The drawee has to accept the
bill. Once he accepts, he is now called an acceptor.
Payee – the person to whom the payment is made. The drawer of the bill himself will be the
payee if he keeps the bill with him until the date of its payment.
Sample Bill of Exchange

Php 50,000,000.00 Quezon City

August 20, 2019

One month after date, pay to Mr. Marcelo Del Pilar or his order the sum of Fifty Million Pesos
Only, for value received.

TO: (Signed)
Andres Bonifacio Jose Rizal
13 Main Ave 189 Province St
Quezon City Makati City

PROMISSORY NOTE VS. BILL OF EXCHANGE

Promissory Note Bill of Exchange

Promise to Pay Order to Pay
2 Parties – MAKER, PAYEE 3 Parties – DRAWER, DRAWEE, and PAYEE
No Acceptance Necessary. The maker is Acceptance by the DRAWEE is absolutely
absolutely liable to pay. necessary to make him liable to pay.
Liability of drawer – SECONDARY and
Liability of maker – PRIMARY and ABSOLUTE
CONDITIONAL
Written by the DEBTOR. Drawn by a CREDITOR
Maker and Payee are in IMMEDIATE Drawer of the bill stands in immediate
RELATION to each other. relationship with the DRAWEE/ACCEPTOR
and PAYEE
Drawee and Payee may be one and the same
Cannot be made payable to maker himself
person
Other Types of Bill of Exchange

1.) Draft: sometimes called a bill of exchange and normally refers to bills of exchange used in
documentary exchanges, like letters of credit transactions.

2.) Inland and Foreign Bill: inland bills are bills that are drawn and payable in the Philippines. If
the bill is drawn and payable elsewhere, it's a foreign bill.

3.) Time Draft: drafts payable at a fixed date.

4.) Sight/Demand Draft: draft payable when the holder presents is for payment.

5.) Trade Acceptance: bill used in sales contracts where the seller (as drawer) orders the buyer
(as drawee) to pay the seller a certain sum (as payee.)

6.) Banker's Acceptance: time draft where the drawee has written "accepted" on its face.

7.) Check: the most common negotiable instrument. Bill of exchange drawn on a bank and
payable on demand

CHECK VS. BILL OF EXCHANGE

Check Bill of Exchange

Always drawn upon a bank or banker May or may not be drawn against a bank

May be payable on demand or at a fixed or

Always payable on demand
determinable future time

Not necessary that it be presented for Necessary that it be presented for

acceptance acceptance

Drawn on a deposit Not drawn on a deposit

The death of a drawer of a check, with

The death of the drawer of the ordinary bill
knowledge by the banks, revokes the
of exchange does not
authority of the banker to pay

Must be presented for payment within a May be presented for payment within a
reasonable time after its issue (6 months) reasonable time after its last negotiation.
KINDS OF CHECKS

1. Open Check
-Pay to Bearer - When the words "or bearer" appearing on the face of the cheque are
not cancelled, the cheque is called a bearer cheque. The bearer cheque is payable to the
person specified therein or to any other else who presents it to the bank for payment.
However, such cheques are risky, this is because if such cheques are lost, the finder of
the cheque can collect payment from the bank.
-Pay to Order - Such a cheque is payable to the person specified therein as the payee,
or to any one else to whom it is endorsed (transferred).
2. Crossed Check - For issuers of checks who would want their financial transactions to be
limited between them and the payees, they avail of the safeguard of “crossing” their
checks. It is done by drawing two parallel lines or across its face or across the corner
thereof. Once a check is crossed, it produces the following effects: (1) the check cannot
be encashed with the drawee bank but can only be deposited in the bank; (2) the check
can be negotiated only once – to the payee who must have an account with the bank;
and (3) the act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose – that of being deposited in the account of the payee.
3. Certified Check - A certified check is a check for which payment has been guaranteed by
a bank. The bank only issues its guarantee after obtaining full payment from
the issuer of the check, thereby eliminating its risk. The bank provides this service for a
fee that is charged to the check issuer. A payee may require that a certified check be
issued to it when there is uncertainty about the creditworthiness of the check issuer.
4. Manager’s Check - A manager's check is a secure check that a bank issues for an
individual who has purchased it. The person who purchases the check pays the bank the
amount of money for which the check is issued either in cash or from his bank account.
He is then guaranteed acceptance of his check by the party receiving it. Paying by such a
check is preferable to paying with large sums of cash for both convenience and safety. If
the check is lost or stolen, the bank replaces it. The recipient of the check knows the
check is good for the amount written and does not waste time or money on a check
backed with insufficient funds. Another common name for a manager's check is a
cashier's check.
5. Overdraft Check - An overdraft usually refers to a checking account where the amount
of checks presented to the bank for payment exceeds the amount on deposit. When this
occurs we say that the checking account customer has overdrawn its account.
The overdraft means that the bank's records indicate a negative checking account
balance. There are several reasons why drawee banks dishonor checks upon
presentment for payment. Among these reasons are DAUD “Drawn Against Uncollected
Deposits,” and DAIF “Drawn Against Insufficient Funds.”. DAUD means that the account
has, on its face, sufficient funds but not yet available to the drawer because the deposit,
 usually a check, had not yet been cleared. DAIF, on the other hand, is a condition in
which a depositor’s balance is inadequate for the bank to pay a check.
6. Bouncing Check - Bouncing checks are checks which are returned by the bank because
their issuers do not have sufficient funds on deposit. In the Philippines, there are two
laws which criminalize and punish the issuance of bouncing checks. The first is under
Article 315 of the Revised Penal Code which punishes for estafa a person who issues a
check in payment of an obligation when he had no funds in the bank sufficient to cover
the amount of the check. The failure to deposit the amount to cover the check within
three days from receipt of notice of dishonor shall be prima facie evidence of deceit.
The other law is Batas Pambansa Blg. 22 which punishes the acts of: (1) issuing a check
to apply an account or for value, knowing at the time of issue that he does not have
sufficient funds in the bank, which check is subsequently dishonored by the bank; or (2)
having sufficient funds in the bank when he issues the check, by failing to keep sufficient
funds to cover the check for which reason it is dishonored by the bank.
7. Stale Check - A stale check is one which is not presented for payment within a
reasonable time after its issue. It is valueless and, therefore, should not be paid
(International Corporate Bank vs. Spouses Gueco, G.R. No. 141968, Feb. 12, 2001).
Based on jurisprudence, no hard and fast demarcation line can be drawn between what
may be considered as a reasonable or an unreasonable time because “reasonable time”
depends upon the peculiar facts and circumstances in each case. In a case, a check
payable on demand which was long overdue by about two and half years was
considered a stale check. Failure of a payee to encash a check for more than ten years
undoubtedly resulted in the check becoming stale. In addition, the right to collect on the
check may have already prescribed. In another case, the Supreme Court referred to the
banking practice which considers a check becoming stale after more than six (6) months
(Pacheco, et. al. vs. Court of Appeals, et al., G.R. No. 126670, Dec. 02, 1999). Thus,
holders of checks should make sure that these are presented within six (6) months from
their due date.
8. Post Dated Check - The post-dated check is the most common means of payment for a
loan. It is a check that is written and issued by the debtor for a date in the future and
may not be encashed or deposited until such time. Debtors use post-dated checks to
avoid missing payments on their loans.
BENJAMIN EVANGELISTA, PETITIONER,

V.

SCREENEX, INC., REPRESENTED BY ALEXANDER G, YU,

RESPONDENT.

FACTS: Evangelista obtained a loan from Screenex which issued 2 checks to the former. There
were also vouchers of Screenex that were signed by the accused evidencing that he received
the 2 checks in acceptance of the loan granted to him. As security for the payment, Evangelista
gave 2 open-dated checks, both pay to order of Screenex. From the time it was issued, they
were held in safekeeping together with the other documents and papers of the company by
Philip Gotuaco, Sr., father-in-law of respondent Alexander Yu, until the former’s death. Before
the checks were deposited, there was a personal demand from the family for Evangelista to
settle the loan and a demand letter was sent by the family lawyer.
Evangelista was charged with violation of BP 22 in a criminal case filed with the MeTC of
Makati. The MeTC found that the prosecution had indeed proved the first 2 elements of cases
involving BP 22 but failed to prove the 3rd element. Also, there was failure on the part of Yu to
prove that the demand letter had actually been received by the addressee and there was no
way to determine when the 5-day period should start to toll, there was failure to establish
prima facie evidence of knowledge of insufficiency of funds, hence, the court acquitted
Evangelista of the criminal charges. Ruling on the civil aspect, the court held that while
Evangelista admitted to having issued and delivered the checks to Gotuaco and having fully paid
the amount, no evidence of payment was presented. In the end, Evangelista was declared liable
for the civil obligation.
Timely appeal was made to the RTC raising two errors of the MeTC, to wit: 1) Lower court erred
in not appreciating the fact that the prosecution failed to prove the civil liability and 2) any civil
liability attributable to Evangelista had been extinguished by prescription. RTC held that the
checks should be taken as evidence of Evangelista’s indebtedness to prove that the obligation
subsisted. Also, the alleged payment by Evangelista was an affirmative defense that he had the
burden of proving but that he failed to discharge.
CA, upon petition for review, denied the same. It held that the reckoning time for the
prescriptive period began when the instrument was issued and the corresponding check
returned by the bank to its depositor; that the issue of prescription was raised for the first time
on appeal; and that the loan obligation was never denied by Evangelista, who claimed it was
already settled, but failed to show any proof of payment.
ISSUE: Whether or not Evangelista is still liable for the total amount indicated in the 2 checks?
HELD: NO. By definition, a check is a bill of exchange drawn on a bank payable on demand. It is
an undertaking that the drawer will pay the amount indicated thereon. Sec 119 of the NIL,
however, states that a negotiable instrument like a check may be discharged by any other act
which will discharge a simple contract for the payment of money. A check is therefore subject
to a 10-year prescription of actions upon a written contract. If the check is undated as in the
present case, the cause of action is reckoned from the issuance of the check. Assuming that Yu
had authority to insert the dates in the checks, the fact that he did so after the lapse of more
than 10 years cannot qualify as changes made within a reasonable period. The cause of action
on the checks has become stale, hence time-barred. Prescription has indeed set in.
Therefore there is no other recourse but to grant the petition on the ground of prescription.
Even if the defense was belatedly raised before the RTC for the first time on appeal from the
ruling of MeTC, the supreme court nonetheless dismissed the complaint seeking to enforce civil
liability of Evangelista based on the undated checks.
The acceptance of a check implies an undertaking of due diligence in presenting it for payment,
and if he from whom it is received sustains loss by want of such diligence, it will be held to
operate as actual payment of the debt or obligation for which it was given.
The SC held that the delivery of the checks, despite the subsequent failure to encash them
within a period of 10 years or more, had the effect of payment. Petitioner is considered
discharged from his obligation to pay and can no longer be pronounced civilly liable for the
amounts indicated thereon