Negotiable Instruments Law Session 1 Page |1
situation, for obvious reasons, mere delivery of the bearer CTDs would
Caltex (Philippines), Inc. vs. Court of Appeals
G.R. No. 97753. August 10, 1992.*
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS
and SECURITY BANK AND TRUST COMPANY, respondents.
Commercial Law; Negotiable Instruments Law; Requisites for an
instrument to become negotiable.—Section 1 of Act No. 2031, otherwise
known as the Negotiable Instruments Law, enumerates the requisites for
an instrument to become negotiable, viz: “(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.”
Same; Same; Same; The negotiability or non-negotiability of an
instrument is determined from the writing that is from the face of the
instrument itself.—On this score, 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 of the parties, yet as they have constituted the writing to be the
only outward and visible expression of their 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.
Same; Same; Same; An instrument is negotiated when it is transferred
from one person to another in such a manner as to constitute the
transferee the holder thereof and a holder may be the payee or indorsee of
a bill or note who is in possession of it or the bearer thereof.—Under the
Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute
the transferee the holder thereof, and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.
In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which
have sufficed. Here, the delivery thereof only as security for the purchases
of Angel de la Cruz (and we even disregard the fact that the amount
involved was not disclosed) could at the most constitute petitioner only as
a holder for value by reason of his lien. Accordingly, a negotiation for such
purpose cannot be effected by mere delivery of the instrument since,
necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be
contractually provided for.
Same; Same; Same; Where the holder has a lien on the instrument arising
from contract, he is deemed a holder for value to the extent of his lien.—
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. As such holder of collateral security, he would be a
pledgee but the requirements there-for and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights.
Civil Law; Estoppel; Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it and
cannot be denied or disproved as against the person relying thereon.—In a
letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: “x x x These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his
purchases of fuel products” (Italics ours.) This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon. A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them.
In the law of evidence, whenever a party has, by his own declaration, act,
or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to
falsify it.
Same; Same; An issue raised for the first time on appeal and not raised
timely in the proceedings in the lower court is barred by estoppel.—As
respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue
of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court
is barred by estoppel. Questions raised on appeal must be within the
 Negotiable Instruments Law Session 1 Page |2

issues framed by the parties and, consequently, issues not raised in the 5 Mar. 82 74797 to 94800 4 16,000
trial court cannot be raised for the first time on appeal. 5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
Remedial Law; Pre-trial; The determination of issues at a pretrial 8 Mar. 82 90001 to 90020 20 80,000
conference bars the consideration of other questions on appeal.—Pre-trial 9 Mar. 82 90023 to 90050 28 112,000
is primarily intended to make certain that all issues necessary to the 9 Mar. 82 89991 to 90000 10 40,000
disposition of a case are properly raised. Thus, to obviate the element of 9 Mar. 82 90251 to 90272 22 88,000
surprise, parties are expected to disclose at a pre-trial conference all Total 280 P1,120,000
issues of law and fact which they intend to raise at the trial, except such
as may involve privileged or impeaching matters. The determination of
issues at a pre-trial conference bars the consideration of other questions “2. Angel dela Cruz delivered the said certificates of time deposit (CTDs) to
on appeal. herein plaintiff in connection with his purchase of fuel products from the
latter (Original Record, p. 208).
PETITION for review on certiorari of the decision of the Court of Appeals.
Chua, J. “3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo
Tiangco, the Sucat Branch Manager, that he lost all the certificates of time
The facts are stated in the opinion of the Court. deposit in dispute. Mr. Tiangco advised said depositor to execute and
submit a notarized Affidavit of Loss, as required by defendant bank’s
Bito, Lozada, Ortega & Castillo for petitioners.
procedure, if he desired replacement of said lost CTDs (TSN, February 9,
Nepomuceno, Hofileña & Guingona for private. 1987, pp. 48-50).

REGALADO, J.: “4. On March 18, 1982, Angel dela Cruz executed and delivered to
defendant bank the required Affidavit of Loss (Defendant’s Exhibit 281).
This petition for review on certiorari impugns and seeks the reversal of the On the basis of said affidavit of loss, 280 replacement CTDs were issued in
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV favor of said depositor (Defendant’s Exhibits 282-561).
No. 236151 affirming, with modifications, the earlier decision of the
Regional Trial Court of Manila, Branch XLII,2 which dismissed the “5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan
complaint filed therein by herein petitioner against private respondent from defendant bank in the amount of Eight Hundred Seventy Five
bank. Thousand Pesos (P875,000.00). On the same date, said depositor
executed a notarized Deed of Assignment of Time Deposit (Exhibit 562)
The undisputed background of this case, as found by the court a quo and which stated, among others, that he (dela Cruz) surrenders to defendant
adopted by respondent court, appears of record: bank ‘full control of the indicated time deposits from and after date’ of the
assignment and further authorizes said bank to pre-terminate, set-off and
“1. On various dates, defendant, a commercial banking institution, through
‘apply the said time deposits to the payment of whatever amount or
its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of
amounts may be due’ on the loan upon its maturity (TSN, February 9,
one Angel dela Cruz who deposited with herein defendant the aggregate
1987, pp. 60-62).
amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and
Statement of Issues, Original Records, p. 207; Defendant’s Exhibits 1 to “6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff
280); Caltex (Phils.) Inc., went to the defendant bank’s Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz
C T D Dates C T D Serial Nos. Quantity Amount alleging that the same were delivered to herein plaintiff ‘as security for
22 Feb. 82 90101 to 90120 20 P80,000 purchases made with Caltex Philippines, Inc.’ by said depositor (TSN,
26 Feb. 82 74602 to 74691 90 360,000 February 9, 1987, pp. 54-68).
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 829 0127 to 90146 20 80,000
 Negotiable Instruments Law Session 1 Page |3

“7. On November 26, 1982, defendant received a letter (Defendant’s

Exhibit 563) from herein plaintiff formally informing it of its possession of
the CTDs in question and of its decision to pre-terminate the same.

“8. On December 8, 1982, plaintiff was requested by herein defendant to

furnish the former ‘a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz’ as well as ‘the details of Mr. Angel
dela Cruz’ obligations against which’ plaintiff proposed to apply the time
deposits (Defendant’s Exhibit 564).

“9. No copy of the requested documents was furnished herein defendant.

“10. Accordingly, defendant bank rejected the plaintiff’s demand and claim
for payment of the value of the CTDs in a letter dated February 7, 1983
(Defendant’s Exhibit 566).

“11. In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and applied
the time deposits in question to the payment of the matured loan (TSN,
February 9, 1987, pp. 130-131).

“12. In view of the foregoing, plaintiff filed the instant complaint, praying
that defendant bank be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus accrued interest and
compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney’s fees.

“After trial, the court a quo rendered its decision dismissing the instant
complaint.”3
On appeal, as earlier stated, respondent court affirmed the lower court’s
dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are
non-negotiable despite being clearly negotiable instruments; (2) that
petitioner did not become a holder in due course of the said certificates of
deposit; and (3) in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer.4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to
provide a better understanding of the issues involved in this recourse.
Respondent court ruled that the CTDs in question are non-negotiable
instruments, rationalizing as follows:
“x x x While it may be true that the word ‘bearer’ appears rather boldly in
the CTDs issued, it is important to note that after the word ‘BEARER’
stamped on the space provided supposedly for the name of the depositor,
the words ‘has deposited’ a certain amount follows. The document further
provides that the amount deposited shall be ‘repayable to said depositor’
on the period indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are payable, not to whoever
purports to be the ‘bearer’ but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its
depositor Angel dela Cruz as the person who made the deposit and further
engages itself to pay said depositor the amount indicated thereon at the
stipulated date.”6

We disagree with these findings and conclusions, and hereby hold that the
CTDs in question are negotiable instruments. Section 1 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
“(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.”
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties’ bone of contention is with regard to requisite (d)
set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank’s
Branch Manager way back in 1982, testified in open court that the
depositor referred to in the CTDs is no other than Mr. Angel dela Cruz.
xxx
“Atty. Calida:
Q In other words Mr. Witness, you are saying that per books of the bank,
the depositor referred (sic) in these certificates states that it was Angel
dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz
was the one who cause (sic) the amount.
Atty. Calida:
Q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor.”7
xxx
“Atty. Calida:
Negotiable Instruments Law Session 1 Page |4
Q Mr. Witness, who is the depositor identified in all of these certificates of
time deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor.”8
xxx
On this score, 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.9 In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained.10
While the writing may be read in the light of surrounding circumstances in
order to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and visible
expression of their 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.11
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the “bearer.” The documents do not say that the depositor
is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer
of the documents or, for that matter, whosoever may be the bearer at the
time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
“BEARER” stamped on the space provided for the name of the depositor in
each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner’s aforesaid witness merely declared that Angel de la Cruz is the
depositor “insofar as the bank is concerned,” but obviously other parties
not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic

evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.12
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of its
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz’ purchases of its fuel products.
Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the
latter by petitioner’s own authorized and responsible representative
himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: “x x x These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products” (Italics ours.)13 This admission
is conclusive upon petitioner, its protestations notwithstanding. Under the
doctrine of estoppel, an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against
the person relying thereon.14 A party may not go back on his own acts
and representations to the prejudice of the other party who relied upon
them.15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in
any litigation arising out of such declaration, act, or omission, be permitted
to falsify it.16
If it were true that the CTDs were delivered as payment and not as
security, petitioner’s credit manager could have easily said so, instead of
using the words “to guarantee” in the letter aforequoted. Besides, when
respondent bank, as defendant in the court below, moved for a bill of
particularity therein17 praying, among others, that petitioner, as plaintiff,
be required to aver with sufficient definiteness or particularity (a) the due
date or dates of payment of the alleged indebtedness of Angel de la Cruz
to plaintiff and (b) whether or not it issued a receipt showing that the
CTDs were delivered to it by De la Cruz as payment of the latter’s alleged
Negotiable Instruments Law Session 1 Page |5
indebtedness to it, plaintiff corporation opposed the motion.18 Had it
produced the receipt prayed for, it could have proved, if such truly was the
fact, that the CTDs were delivered as payment and not as security. Having
opposed the motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced.19
Under the foregoing circumstances, this disquisition in Integrated Realty
Corporation, et al. vs. Philippine National Bank, et al.20 is apropos:
“x x x Adverting again to the Court’s pronouncements in Lopez, supra, we
quote therefrom:
‘The character of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the form
of the transfer was. If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some other intention, it is
not a pledge. However, even though a transfer, if regarded by itself,
appears to have been absolute, its object and character might still be
qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that
a transfer of property by the debtor to a creditor, even if sufficient on its
face to make an absolute conveyance, should be treated as a pledge if the
debt continues in existence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of
absolute ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and therefore do
not unqualifiedly indicate a transfer of absolute ownership, in the absence
of clear and unambiguous language or other circumstances excluding an
intent to pledge.’ ”
Petitioner’s insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof,21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof.22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz (and we even disregard the
fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the

subsequent disposition of such security, in the event of non-payment of
the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien.23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights,24 which inceptively
provide:
“Art. 2095. Incorporeal rights, evidenced by negotiable instruments, x x x
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.”
“Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear
in a public instrument.”
Aside from the fact that the CTDs were only delivered but not indorsed,
the factual findings of respondent court quoted at the start of this opinion
show that petitioner failed to produce any document evidencing any
contract of pledge or guarantee agreement between it and Angel de la
Cruz.25 Consequently, the mere delivery of the CTDs did not legally vest
in petitioner any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the
date of a pledge contract, but a rule of substantive law prescribing a
condition without which the execution of a pledge contract cannot affect
third persons adversely.26
On the other hand, the assignment of the CTDs made by Angel de la Cruz
in favor of respondent bank was embodied in a public instrument.27 With
regard to this other mode of transfer, the Civil Code specifically declares:
“Art. 1625. An assignment of credit, right or action shall produce no effect
as against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.”
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lienholder of the
CTDs, neither proved the amount of its credit or the extent of its lien nor
the execution of any public instrument which could affect or bind private
Negotiable Instruments Law Session 1 Page |6
respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the
question of whether or not private respondent observed the requirements
of the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to
raise that issue in the lower court.28
On this matter, we uphold respondent court’s finding that the aspect of
alleged negligence of private respondent was not included in the
stipulation of the parties and in the statement of issues submitted by them
to the trial court.29 The issues agreed upon by them for resolution in this
case are:
“1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by
the CTDs against the depositor’s loan by virtue of the assignment (Annex
‘C’).
3. Whether or not there was legal compensation or set off involving the
amount covered by the CTDs and the depositor’s outstanding account with
defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the
CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney’s fees and
litigation expenses from each other.”
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue
of negligence on the part of respondent bank. An issue raised for the first
time on appeal and not raised timely in the proceedings in the lower court
is barred by estoppel.30 Questions raised on appeal must be within the
issues framed by the parties and, consequently, issues not raised in the
trial court cannot be raised for the first time on appeal.31
Pre-trial is primarily intended to make certain that all issues necessary to
the disposition of a case are properly raised. Thus, to obviate the element
of surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such
as may involve privileged or impeaching matters. The determination of
 Negotiable Instruments Law Session 1 Page |7

issues at a pre-trial conference bars the consideration of other questions sans compliance with the procedure outlined therein, and none establishes
on appeal.32 a mandatory precedent requirement therefor.

To accept petitioner’s suggestion that respondent bank’s supposed WHEREFORE, on the modified premises above set forth, the petition is
negligence may be considered encompassed by the issues on its right to DENIED and the appealed decision is hereby AFFIRMED.
preterminate and receive the proceeds of the CTDs would be tantamount
to saying that petitioner could raise on appeal any issue. We agree with SO ORDERED.
private respondent that the broad ultimate issue of petitioner’s entitlement Narvasa (C.J., Chairman), Padilla and Nocon, JJ., concur.
to the proceeds of the questioned certificates can be premised on a
multitude of other legal reasons and causes of action, of which respondent Petition denied, decision affirmed with modification.
bank’s supposed negligence is only one. Hence, petitioner’s submission, if
accepted, would render a pre-trial delimitation of issues a useless Note.—The instrument in order to be considered negotiable must contain
exercise.33 the so-called “words of negotiability___i.e. Must be payable to “order” or
“bearer” (Salas vs. Court of Appeals, 181 SCRA 296).
Still, even assuming arguendo that said issue of negligence was raised in
the court below, petitioner still cannot have the odds in its favor. A close
scrutiny of the provisions of the Code of Commerce laying down the rules
to be followed in case of lost instruments payable to bearer, which it
invokes, will reveal that said provisions, even assuming their applicability
to the CTDs in the case at bar, are merely permissive and not mandatory.
The very first article cited by petitioner speaks for itself.

“Art. 548. The dispossessed owner, no matter for what cause it may be,
may apply to the judge or court of competent jurisdiction, asking that the
principal, interest or dividends due or about to become due, be not paid a
third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him.” (Empha-

The use of the word “may” in said provision shows that it is not mandatory
but discretionary on the part of the “dispossessed owner” to apply to the
judge or court of competent jurisdiction for the issuance of a duplicate of
the lost instrument. Where the provision reads “may,” this word shows
that it is not mandatory but discretional.34 The word “may” is usually
permissive, not mandatory.35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility.36

Moreover, as correctly analyzed by private respondent,37 Articles 548 to

558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank’s supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on
the other, an option in favor of the party liable thereon who, for some valid
ground, may elect to refuse to issue a replacement of the instrument.
Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement instrument

No. L-72593. April 30, 1987.*
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners, vs. IFC LEASING AND
ACCEPTANCE CORPORATION, respondent.
Negotiable Instruments Law; Promissory Note must he payable to order or
bearer to be negotiable.—"The instrument in order to be considered
negotiable must contain the so called 'words of negotiability'-ie., must be
payable to 'order' or 'bearer.' These words serve as an expression of
consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risks under a negotiable
instrument than under a non-negotiable one.
Same; Same; When instrument is payable to order.—The instrument is
payable to order where it is drawn payable to the order of a specified
person or to him or his order . . . "These are the only two ways by which
an instrument may be made payable to order. There must be always be a
specified person named in the instrument. It means that the bill or note is
to be paid to the person designated in the instrument or to any person to
whom he has indorsed and delivered the same. Without the words 'or
order' or 'to the order of,' the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument, but will merely 'step into the shoes' of the person
designated in the instrument and will thus be open to all defenses
available against the latter."
Same; Same; Effect if promissory note is non-negotiable.—Therefore,
considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as
against the seller-assignor, Industrial Products Marketing.
PETITION for certiorari to review the decision of the Intermediate
Appellate Court.
The facts are stated in the opinion of the Court.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
Negotiable Instruments Law Session 1 Page |8
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court
in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution
dated October 17, 1985, denying the motion f or reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for
its program of logging activities for the year 1978 the opening of additional
roads, and simultaneous logging operations along the route of said roads,
in its logging concession area at Baganga, Manay, and Caraga, Davao
Oriental For this purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a corporation dealing
in tractors and other heavy equipment business, offered to sell to
petitionercorporation two (2) "Used" Allis Crawler Tractors, one (1) an HD-
21-B and the other an HD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of
the "Used" tractors being offered, petitioner-corporation requested the
seller-assignor to inspect the jobsite. After conducting said inspection, the
sellerassignor assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance of the machines
and availability of parts. (t.s.n., May 28,1980, pp. 59-66).
With said assurance and warranty, and relying on the sellerassignor's skill
and judgment, petitioner-corporation through petitioners Wee and
Vergara, president and vice-president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid
the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two
(2) units of tractors (Exh. "3-A"). At the same time, the deed of sale with
chattel mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel
mortgage with promissory note, the seller-assignor, by means of a deed of
assignment (Exh. "1"), assigned its rights and interest in the chattel
mortgage in favor of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of
"Used" tractors to the petitioner-corporation's jobsite and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of
the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and af ter another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69),
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the
seller-assignor of the fact that the tractors broke down and requested for
the seller-assignor's usual prompt attention under the warranty (Exh, "5").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit
"5," the seller-assignor sent to the jobsite its mechanics to conduct the
necessary repairs (Exhs. "6," "6-A," "6-B," 6-C," "6-C-1," "6-D," and "6-
E"), but the tractors did not come out to be what they should be after the
repairs were undertaken because the units were no longer serviceable
(t.s.n., May 28, 1980, p.78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitionercorporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed
until the seller-assignor completely fulfills its obligation under its warranty
(t.s.n, May 28,1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner
Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered to bear one-
half (1/2) of the reconditioning cost (Exh. "7").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was
filed by the respondent against the petitioners, the corporation, Wee, and
Vergara.
The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the
Negotiable Instruments Law Session 1 Page |9
rate of twelve (12%) percent per annum, attorney's fees of Two Hundred
Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.71) and costs
of suit
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just under the
premises.
In a decision dated April 20, 1981, the trial court rendered the f ollowing
judgment:
"WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and
personal capacities the principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as
of August 15, 1979 and accruing interest thereafter at the rate of 12% per
annum;
"2) ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the costs of
the suit.
"Defendants' counterclaim is disallowed." (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion f or
reconsideration f iled by the petitioners,
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND
SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent
portions of the decision are as follows:
xxx xxx xxx
"From the evidence presented by the parties on the issue of warranty, We
are of the considered opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of Sale of the tractors and
even admitting that in a contract of sale unless a contrary intention
appears, there is an implied warranty, the defense of breach of warranty,
if there is any, as in this case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee of the promissory note
and a holder of the same in due course. Warranty lies in this case only
between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiffappellant herein upon application by appellant
corporation granted financing for the purchase of the questioned units of
Fiat-Allis Crawler Tractors.
xxx xxx xxx
"Holding that breach of warranty if any, is not a defense available to
appellants either to withdraw from the contract and/or demand a
proportionate reduction of the price with damages in either case (Art.
1567, New Civil Code). We now come to the issue as to whether the
plaintiff-appellee is a holder in due course of the promissory note.
'To begin with, it is beyond arguments that the plaintiffappellee is a
financing corporation engaged in financing and receivable discounting
extending credit facilities to consumers and industrial, commercial or
agricultural enterprises by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to R.A. 5980 otherwise
known as the Financing Act.
"A study of the questioned promissory note reveals that it is a negotiable
instrument which was discounted or sold to the IFC Leasing and
Acceptance Corporation for P800,000.00 (Exh. "A") considering the
following: it is in writing and signed by the maker; it contains an
unconditional promise to pay a certain sum of money payable at a fixed or
determinable future time; it is payable to order (Sec. 1, NIL); the
promissory note was negotiated when it was transferred and delivered by
IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 10
taken in the conditions that the note was complete and regular upon its
face before the same was overdue and without
notice, that it had been previously dishonored and that the note is in good
faith and for value without notice of any infirmity or defect in the title of
IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the
instrument free from any defect of title of prior parties and free from
defenses available to prior parties among themselves and may enforce
payment of the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of the payee IPM
and its capacity to endorse (Sec. 60, NIL).
"In view of the essential elements found in the questioned promissory
note, We opine that the same is legally and conclusively enforceable
against the defendants-appellants.
"WHEREFORE, finding the decision appealed from according to law and
evidence, We find the appeal without merit and thus affirm the decision in
toto. With costs against the appellants." (pp. 5055, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW
SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.
II. THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT
BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY
NOTE.
III. SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH
A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST
THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT
AS AGAINST THE SELLER-ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
a. THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF
WARRANTY UNDER THE LAW;

b. IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM
THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE
SELLER-ASSIGNOR IN FAVOR OF THE RESPONDENT DOES
NOT CHANGE THE NATURE OF THE TRANSACTION FROM
BEING A SALE ON INSTALLMENTS TO A PURE LOAN.
VI. THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON
OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the
decision dated July 17, 1985, as well as the resolution dated October 17,
1985 and dismissing the complaint but granting petitioners' counterclaims
before the court of origin.
On the other hand, the respondent corporation in its comment to the
petition filed on February 20,1986, contended that the petition was filed
out of time; that the promissory note is a negotiable instrument and
respondent a holder in due course; that respondent is not liable for any
breach of warranty; and finally, that the promissory note is admissible in
evidence.
The core issue herein is whether or not the promissory note in question is
a negotiable instrument so as to bar completely all the available defenses
of the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the
instant petition to have been filed on time because the petitioners' motion
for reconsideration actually raised new issues. It cannot, therefore, be
considered pro-forma.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-
day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became inoperable"
are sustained by the records. The petitioner was clearly a victim of a
warranty not honored by the maker.
The Civil Code provides that:
"ART. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it unfit
for the use for which it is intended, or should they diminish its fitness for
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 11
such use to such an extent that, had the vendee been aware thereof, he
would not have acquired it or would have given a lower price for it; but
said vendor shall not be answerable for patent defects or those which may
be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.
"ART. 1562. In a sale of goods, there is an implied warranty or condition
as to the quality or fitness of the goods, as follows:
"(1) Where the buyer, expressly or by implication, makes known to the
seller the particular purpose for which the goods are acquired, and it
appears that the buyer relies on the seller's skill or judg-ment (whether he
be the grower or manufacturer or not), there is an implied warranty that
the goods shall be reasonably fit for such purpose;
xxx xxx xxx
"ART. 1564. An implied warranty or condition as to the quality or fitness
for a particular purpose may be annexed by the usage of trade.
xxx xxx xxx
"ART. 1566. The vendor is responsible to the vendee for any hidden faults
or defects in the thing sold, even though he was not aware thereof.
"This provision shall not apply if the contrary has been stipulated, and the
vendor was not aware of the hidden faults or defects in the thing sold."
(Italics supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the
assignee is a holder in due course of the promissory note in question,
assuming the note is negotiable, in which case the latter's rights are based
on the negotiable instrument and assuming further that the petitioner's
defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke
down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure to
comply with its warranty, the tractors became totally unserviceable and
useless for the purpose f or which they were purchased

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
"ART. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon
him.
"The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
xxx xxx xxx
"ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the
vendee may elect between withdrawing from the contract and demanding
a proportionate reduction of the price, with damages in either case."
(Italics supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with
the seller-assignor, necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor sues it because of the
rescission.
In the case of the University of the Philippines v De los Angeles (35 SCRA
102) we held:
"In other words, the party who deems the contract violated may consider
it resolved or rescinded, and act accordingly, without previous court
action, but it proceeds at its own risk. For it is only the final judgment of
the corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file
suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of
the suit until the final judgment of rescission is rendered when the law
itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203)." (Italics supplied)
Going back to the core issue, we rule that the promissory note in question
is not a negotiable instrument
The pertinent portion of the note is as f ollows:
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 12
"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only
(P1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and every 15th
of the month thereafter until fully paid. x x x."
Considering that paragraph (d), Section 1 of the Negotiable Instruments
Law requires that a promissory note "must be payable to order or bearer,"
it cannot be denied that the promissory note in question is not a
negotiable instrument.
"The instrument in order to be considered negotiable must contain the so-
called 'words of negotiability'—i.e., must be payable to 'order' or 'bearer'.
These words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater
risk under a negotiable instrument than under a non-negotiable one. x x x.
xxx xxx xxx
"When instrument is payable to order.—
"SEC. 8. WHEN PAYABLE TO ORDER.—The instrument is payable to order
where it is drawn payable to the order of a specified person or to him or
his order. . . .
xxx xxx xxx
"These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named in the
instrument. It means that the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has indorsed
and delivered the same. Without the words 'or order' or 'to the order of,'
the instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but will
merely 'step into the shoes' of the person designated in the instrument
and will thus be open to all defenses available against the latter." (Campos
and Campos, Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, page 38). (Italics supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the

petitioner may raise against the respondent all defenses available to it as
against the sellerassignor, Industrial Products Marketing.
This being so, there was no need for the petitioner to implead the seller-
assignor when it was sued by the respondentassignee because the
petitioner's defenses apply to both or either of them.
Actually, the records show that even the respondent itself admitted to
being a mere assignee of the promissory note in question, to wit:
"ATTY. PALACA:
"Did we get it right from the counsel that what is being assigned is the
Deed of Sale with Chattel Mortgage with the promissory note which is as
testified to by the witness was indorsed? (Counsel for Plaintiff nodding his
head.) Then we have no further questions on cross.
"COURT:
"You confirm his manifestation? You are nodding your head? Do you
confirm that?
"ATTY. ILAGAN:
"The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance Corporation.
"COURT:
"He puts it in a simple way,—as one—deed of sale and chattel mortgage
were assigned;. . . you want to make a distinction, one is an assignment
of mortgage right and the other one is indorsement of the promissory
note. What counsel for defendants wants is that you stipulate that it is
contained in one single transaction?
"ATTY. ILAGAN:
"We stipulate it is one single transaction." (pp. 27-29, TSN., February 13,
1980).
Secondly, even conceding for purposes of discussion that the promissory
note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 13
assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the
sellerassignor, in turn, would assign its rights to the respondent which
acquired the right to collect the price from the buyer, herein petitioner
Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit
Transaction shows that said documents evidencing the sale on installment
of the tractors were all executed on the same day by and among the
buyer, which is herein petitioner Consolidated Plywood Industries, Inc.;
the sellerassignor which is the Industrial Products Marketing; and the
assignee-financing company, which is the respondent. Therefore, the
respondent had actual knowledge of the fact that the seller-assignor's right
to collect the purchase price was not unconditional and that it was subject
to the condition that the tractors sold were not defective. The respondent
knew that when the tractors turned out to be defective, it would be subject
to the defense of failure of consideration and cannot recover the purchase
price from the petitioners. Even assuming for the sake of argument that
the promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course. As such,
the respondent is subject to all defenses which the petitioners may raise
against the seller-assignor. Any other interpretation would be most
inequitous to the unfortunate buyer who is not only saddled with two
useless tractors but must also face a lawsuit from the assignee for the
entire purchase price and all its incidents without being able to raise valid
defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had
no knowledge of any fact, which would justify its act of taking the
promissory note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE.—A holder in
due course is a holder who has taken the instrument under the following
conditions:
xxx xxx xxx
xxx xxx xxx
"(c) That he took it in good faith and for value;

"(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it
xxx xxx xxx
"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT.—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 amounts to bad faith." (Italics supplied)
We subscribe to the view of Campos and Campos that a financing company
is not a holder in good faith as to the buyer, to wit:
"In installment sales, the buyer usually issues a note payable to the seller
to cover the purchase price. Many times, in pursuance of a previous
arrangement with the seller, a finance company pays the full price and the
note is indorsed to it, subrogating it to the right to collect the price from
the buyer, with interest. With the increasing frequency of installment
buying in this country, it is most probable that the tendency of the courts
in the United States to protect the buyer against the finance company will
find judicial approval here. Where the goods sold turn out to be defective,
the finance company will be subject to the defense of failure of
consideration and cannot recover the purchase price from the buyer. As
against the argument that such a rule would seriously affect 'a certain
mode of transacting business adopted throughout the State,' a court in
one case stated:
" 'lt may be that our holding here will require some changes in business
methods and will impose a greater burden on the finance companies. We
think the buyer—Mr. & Mrs. General Public—should have some protection
somewhere along the line. We believe the finance company is better able
to bear the risk of the dealer's insolvency than the buyer and in a far
better position to protect his interests against unscrupulous and insolvent
dealers. . . .
" 'lf this opinion imposes great burdens on finance companies it is a potent
argument in favor of a rule which will afford public protection to the
general buying public against unscrupulous dealers in personal property. .
. .' (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])"
(Campos and Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, p. 128).' "
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 14
real sense, the finance company was a moving force in the transaction
from its very inception and acted as a party to it. When a finance company
actively participates in a transaction of this type from its inception, it
cannot be regarded as a holder in due course of the note given in the
transaction.
In like manner, therefore, even assuming that the subject promissory note
is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in
this case are subject to all defenses that the petitioners have against the
seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder
other than a holder in due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable. x x x."
Prescinding from the foregoing and setting aside other peripheral issues,
we find that both the trial and respondent appellate court erred in holding
the promissory note in question to be negotiable, Such a ruling does not
only violate the law and applicable jurisprudence, but would result in
unjust enrichment on the part of both the seller-assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the
respondent to file a civil suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires.
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against
the petitioner before the trial court is DISMISSED.
SO ORDERED.
Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.
Decision annulled and set aside.
——o0o—— Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation, 149 SCRA 448, No. L-72593 April 30, 1987

G.R. No. 154127. December 8, 2003.*
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS,
respondent.
Civil Law; Obligations; Extinguishment; Novation; Definition.—Novation is
a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. Article 1293 of the
Civil Code defines novation.
Same; Same; Same; Same; Kinds; In general, there are two (2) modes of
substituting the person of the debtor: (1) expromision and (2)
delegacion.—In general, there are two modes of substituting the person of
the debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from—and may even be made
without the knowledge of—the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require the consent of
the creditor.
Same; Same; Same; Same; Same; Novation may also be extinctive and
modificatory.—Novation may also be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new
one that takes the place of the former. It is merely modificatory when the
old obligation subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or modificatory, novation is
made either by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of the debtor
or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation.
Same; Same; Same; Same; Same; Elements; For novation to take place,
the following requisites must concur.—For novation to take place, the
following requisites must concur: 1) There must be a previous valid
obligation. 2) The parties concerned must agree to a new contract. 3) The
old contract must be extinguished. 4) There must be a valid new contract.
Same; Same; Same; Same; Same; Novation may also be express or
implied.—Novation may also be express or implied. It is express when the
new obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 15
the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence.
Same; Same; Same; Same; Proof; Well-settled is the rule that nova-tion
is never presumed.—Well-settled is the rule that novation is never
presumed. Consequently, that which arises from a purported change in the
person of the debtor must be clear and express.
Commercial Law; Negotiable Instruments Law; Promissory Notes; As the
note was made payable to a specific person, it is covered by the general
provisions of the Civil Code, not the NIL.—By its terms, the note was made
payable to a specific person rather than to bearer or to order—a requisite
for negotiability under Act 2031, the Negotiable Instruments Law (NIL).
Hence, petitioner cannot avail himself of the NIL’s provisions on the
liabilities and defenses of an accommodation party. Besides, a non-
negotiable note is merely a simple contract in writing and is evidence of
such intangible rights as may have been created by the assent of the
parties. The promissory note is thus covered by the general provisions of
the Civil Code, not by the NIL.
Same; Same; Same; Accommodation Party; Under Article 29 of Act 2031,
an accommodation party is liable for the instrument to a holder for
value.—Under Article 29 of Act 2031, an accommodation party is liable for
the instrument to a holder for value even if, at the time of its taking, the
latter knew the former to be only an accommodation party. The relation
between an accommodation party and the party accommodated is, in
effect, one of principal and surety—the accommodation party being the
surety. It is a settled rule that a surety is bound equally and absolutely
with the principal and is deemed an original promissor and debtor from the
beginning. The liability is immediate and direct.
Actions; Pleadings and Practice; Summary Judgment; A summary
judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue
regarding any material fact.—Under Section 3 of Rule 35 of the Rules of
Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file
show that (1) except as to the amount of damages, there is no genuine
issue regarding any material fact; and (2) the moving party is entitled to a
judgment as a matter of law. A summary judgment is a procedural device
designed for the prompt disposition of actions in which the pleadings raise
only a legal, not a genuine, issue regarding any material fact.
Consequently, facts are asserted in the complaint regarding which there is

yet no admission, disavowal or qualification; or specific denials or
affirmative defenses are set forth in the answer, but the issues are
fictitious as shown by the pleadings, depositions or admissions. A
summary judgment may be applied for by either a claimant or a defending
party.
Same; Same; Judgment on the Pleadings; A judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the
material allegations of the adverse party’s pleading.—On the other hand,
under Section 1 of Rule 34 of the Rules of Court, a judgment on the
pleadings is proper when an answer fails to render an issue or otherwise
admits the material allegations of the adverse party’s pleading. The
essential question is whether there are issues generated by the pleadings.
A judgment on the pleadings may be sought only by a claimant, who is the
party seeking to recover upon a claim, counterclaim or cross-claim; or to
obtain a declaratory relief.
PETITION for review on certiorari of the decision and resolution of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Carlos G. Nery, Jr. for petitioner.
Felipe N. Egargo, Jr. for respondent.
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the
express assent of the parties or by the complete incompatibility between
the old and the new agreements. Petitioner herein fails to show either
requirement convincingly; hence, the summary judgment holding him
liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
seeking to nullify the November 26, 2001 Decision2 and the June 26, 2002
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 60521. The
appellate court disposed as follows:
“UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed
from, insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it
hereby is, AFFIRMED, subject to the modification that the award for
attorney’s fees and cost of suit is DELETED. The portion of the judgment
that pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED.
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 16
Accordingly, the case against x x x Eduardo de Jesus is REMANDED to the
court of origin for purposes of receiving ex parte [Respondent] Dionisio
Llamas’ evidence against x x x Eduardo de Jesus.”4
The challenged Resolution, on the other hand, denied petitioner’s Motion
for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
“This case started out as a complaint for sum of money and damages by x
x x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia
and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the
complaint alleged that on 23 December 1996[,] [petitioner and de Jesus]
borrowed P400,000.00 from [respondent]; that, on the same day, [they]
executed a promissory note wherein they bound themselves jointly and
severally to pay the loan on or before 23 January 1997 with a 5% interest
per month; that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay it; and
that, by reason of the[ir] unjustified refusal, [respondent] was compelled
to engage the services of counsel to whom he agreed to pay 25% of the
sum to be recovered from [petitioner and de Jesus], plus P2,000.00 for
every appearance in court. Annexed to the complaint were the promissory
note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
“Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that
he assumed no liability under the promissory note because he signed it
merely as an accommodation party for x x x de Jesus; and, alternatively,
that he is relieved from any liability arising from the note inasmuch as the
loan had been paid by x x x de Jesus by means of a check dated 17 April
1997; and that, in any event, the issuance of the check and [respondent’s]
acceptance thereof novated or superseded the note.
“[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder
asserting that the loan remained unpaid for the reason that the check
issued by x x x de Jesus bounced, and that [Petitioner] Garcia’s answer
was not even accompanied by a certificate of non-forum shopping.
Annexed to the reply were the face of the check and the reverse side
thereof.
“For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim
that out of the supposed P400,000.00 loan, he received only P360,000.00,
the P40,000.00 having been advance interest thereon for two months, that

is, for January and February 1997; that[,] in fact[,] he paid the sum of
P120,000.00 by way of interests; that this was made when [respondent’s]
daughter, one Nits Llamas-Quijencio, received from the Central Police
District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of P40,000.00, representing the peso equivalent of his
accumulated leave credits, another P40,000.00 as advance interest, and
still another P40,000.00 as interest for the months of March and April
1997; that he had difficulty in paying the loan and had asked [respondent]
for an extension of time; that [respondent] acted in bad faith in instituting
the case, [respondent] having agreed to accept the benefits he (de Jesus)
would receive for his retirement, but [respondent] nonetheless filed the
instant case while his retirement was being processed; and that, in
defense of his rights, he agreed to pay his counsel P20,000.00 [as]
attorney’s fees, plus P1,000.00 for every court appearance.
“During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia
file a pre-trial brief, and his counsel even manifested that he would no
[longer] present evidence. Given this development, the trial court gave
[respondent] permission to present his evidence ex parte against x x x de
Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
“Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in
default and to allow him to present his evidence ex parte. Meanwhile,
[Petitioner] Garcia filed a [M]anifestation submitting his defense to a
judgment on the pleadings. Subsequently, [respondent] filed a
[M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he
asserted that [petitioner’s and de Jesus’] solidary liability under the
promissory note cannot be any clearer, and that the check issued by de
Jesus did not discharge the loan since the check bounced.”5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch
222) disposed of the case as follows:
“WHEREFORE, premises considered, judgment on the pleadings is hereby
rendered in favor of [respondent] and against [petitioner and De Jesus],
who are hereby ordered to pay, jointly and severally, the [respondent] the
following sums, to wit:
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 17
‘1) P400,000.00 representing the principal amount plus 5% interest
thereon per month from January 23, 1997 until the same shall have been
fully paid, less the amount of P120,000.00 representing interests already
paid by x x x de Jesus;
‘2) P100,000.00 as attorney’s fees plus appearance fee of P2,000.00 for
each day of [c]ourt appearance, and;
‘3) Cost of this suit.’ ”6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on
the pleadings against De Jesus. According to the appellate court, his
Answer raised genuinely contentious issues. Moreover, he was still
required to present his evidence ex parte. Thus, respondent was not ipso
facto entitled to the RTC judgment, even though De Jesus had been
declared in default. The case against the latter was therefore remanded by
the CA to the trial court for the ex parte reception of the former’s
evidence.
As to petitioner, the CA treated his case as a summary judgment, because
his Answer had failed to raise even a single genuine issue regarding any
material fact.
The appellate court ruled that no novation—express or implied—had taken
place when respondent accepted the check from De Jesus. According to
the CA, the check was issued precisely to pay for the loan that was
covered by the promissory note jointly and severally undertaken by
petitioner and De Jesus. Respondent’s acceptance of the check did not
serve to make De Jesus the sole debtor because, first, the obligation
incurred by him and petitioner was joint and several; and, second, the
check—which had been intended to extinguish the obligation—bounced
upon its presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
“I Whether or not the Honorable Court of Appeals gravely erred in not
holding that novation applies in the instant case as x x x Eduardo de Jesus
had expressly assumed sole and exclusive liability for the loan obligation
he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced
by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of
the loan of P400,000.00 in favor of Respondent Llamas, although the
check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in
[the] substitution by x x x de Jesus or [the superseding of] the promissory
note;
c) x x x de Jesus having paid interests on the loan in the total amount of
P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de
Jesus that due to financial difficulties, he be given an extension of time to
pay his loan obligation and that his retirement benefits from the Philippine
National Police will answer for said obligation.
“II Whether or not the Honorable Court of Appeals seriously erred in not
holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note provided
for a joint and solidary liability, should have been given weight and
credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the
foregoing circumstances showing his assumption of sole liability over the
loan obligation.
III Whether or not judgment on the pleadings or summary judgment was
properly availed of by Respondent Llamas, despite the fact that there are
genuine issues of fact, which the Honorable Court of Appeals itself
admitted in its Decision, which call for the presentation of evidence in a
fullblown trial.”8
Simply put, the issues are the following: 1) whether there was novation of
the obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment against
him—be it a judgment on the pleadings or a summary judgment—was
proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and
solidary debtor by insisting that novation took place, either through the
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 18
substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-
obligor, “paid” the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law,9 the delivery of a check produces the effect of
payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor.10
Article 1293 of the Civil Code defines novation as follows:
“Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him rights mentioned in articles 1236
and 1237.”
In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion. In expromision, the initiative for the
change does not come from—and may even be made without the
knowledge of—the debtor, since it consists of a third person’s assumption
of the obligation. As such, it logically requires the consent of the third
person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.11 Both
modes of substitution by the debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the
place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory
agreement.13 Whether extinctive or modificatory, novation is made either
by changing the object or the principal conditions, referred to as objective
or real novation; or by substituting the person of the debtor or subrogating
a third person to the rights of the creditor, an act known as subjective or
personal novation.14 For novation to take place, the following requisites
must concur:
1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
the old one on every point.16 The test of incompatibility is whether the
two obligations can stand together, each one with its own independent
existence.17
Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the
check would take the place of the note. There is no incompatibility
between the promissory note and the check. As the CA correctly observed,
the check had been issued precisely to answer for the obligation. On the
one hand, the note evidences the loan obligation; and on the other, the
check answers for it. Verily, the two can stand together.
Neither could the payment of interests—which, in petitioner’s view, also
constitutes novation18—change the terms and conditions of the obligation.
Such payment was already provided for in the promissory note and, like
the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was
novated by the substitution of debtors. In order to change the person of
the debtor, the old one must be expressly released from the obligation,
and the third person or new debtor must assume the former’s place in the
relation.19 Well-settled is the rule that novation is never presumed.20
Consequently, that which arises from a purported change in the person of
the debtor must be clear and express.21 It is thus incumbent on petitioner
to show clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in his
place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 19
“x x x. Plaintiff ’s acceptance of the bum check did not result in
substitution by de Jesus either, the nature of the obligation being solidary
due to the fact that the promissory note expressly declared that the
liability of appellants thereunder is joint and [solidary.] Reason: under the
law, a creditor may demand payment or performance from one of the
solidary debtors or some or all of them simultaneously, and payment made
by one of them extinguishes the obligation. It therefore follows that in
case the creditor fails to collect from one of the solidary debtors, he may
still proceed against the other or others. x x x”22
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor.23 Since novation implies a waiver of the right the creditor had
before the novation, such waiver must be express.24 It cannot be
supposed, without clear proof, that the present respondent has done away
with his right to exact fulfillment from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From
the beginning, he was a joint and solidary obligor of the P400,000 loan;
thus, he can be released from it only upon its extinguishment.
Respondent’s acceptance of his check did not change the person of the
debtor, because a joint and solidary obligor is required to pay the entirety
of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.26 It is up to the former to determine against whom to enforce
collection.27 Having made himself jointly and severally liable with De
Jesus, petitioner is therefore liable28 for the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor when
respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:
“PROMISSORY NOTE
“P400,000.00

“RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine Currency payable on or before January 23,
1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of
5% per month or fraction thereof.
“It is understood that our liability under this loan is jointly and severally
[sic].
“Done at Quezon City, Metro Manila this 23rd day of December, 1996.”30
By its terms, the note was made payable to a specific person rather than
to bearer or to order31—a requisite for negotiability under Act 2031, the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself
of the NIL’s provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the
assent of the parties.32 The promissory note is thus covered by the
general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would
be liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value even
if, at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and
the party accommodated is, in effect, one of principal and surety—the
accommodation party being the surety.33 It is a settled rule that a surety
is bound equally and absolutely with the principal and is deemed an
original promissor and debtor from the beginning. The liability is
immediate and direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the
Rules of Court, a summary judgment may be rendered after a summary
hearing if the pleadings, supporting affidavits, depositions and admissions
on file show that (1) except as to the amount of damages, there is no
genuine issue regarding any material fact; and (2) the moving party is
entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 20
genuine, issue regarding any material fact.35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses are
set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be
applied for by either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a
judgment on the pleadings is proper when an answer fails to render an
issue or otherwise admits the material allegations of the adverse party’s
pleading. The essential question is whether there are issues generated by
the pleadings.38 A judgment on the pleadings may be sought only by a
claimant, who is the party seeking to recover upon a claim, counterclaim
or cross-claim; or to obtain a declaratory relief.39
Apropos thereto, it must be stressed that the trial court’s judgment against
petitioner was correctly treated by the appellate court as a summary
judgment, rather than as a judgment on the pleadings. His Answer40
apparently raised several issues—that he signed the promissory note
allegedly as a mere accommodation party, and that the obligation was
extinguished by either payment or novation. However, these are not
factual issues requiring trial. We quote with approval the CA’s
observations:
“Although Garcia’s [A]nswer tendered some issues, by way of affirmative
defenses, the documents submitted by [respondent] nevertheless clearly
showed that the issues so tendered were not valid issues. Firstly, Garcia’s
claim that he was merely an accommodation party is belied by the
promissory note that he signed. Nothing in the note indicates that he was
only an accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: ‘It is understood that our liability
under this loan is jointly and severally [sic].’ Secondly, his claim that his
co-defendant de Jesus already paid the loan by means of a check collapses
in view of the dishonor thereof as shown at the dorsal side of said
check.”41
From the records, it also appears that petitioner himself moved to submit
the case for judgment on the basis of the pleadings and documents. In a
written Manifestation,42 he stated that “judgment on the pleadings may
now be rendered without further evidence, considering the allegations and
admissions of the parties.”43
 N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 21

In view of the foregoing, the CA correctly considered as a summary

judgment that which the trial court had issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed Decision

AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Ynares-Santiago, Carpio and Azcuna, JJ.,

concur.

Petition denied, assailed decision affirmed.

Note.—It is not proper to consider an obligation novated by unimportant

modifications which do not alter its essence. (Idolor vs. Court of Appeals,
351 SCRA 399 [2001])

——o0o—— Garcia vs. Llamas, 417 SCRA 292, G.R. No. 154127 December
8, 2003

G.R. No. 166018. June 4, 2014.*
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, respondent.
G.R. No. 167728. June 4, 2014.*
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, respondent.
Mercantile Law; Negotiable Instruments Law; Bills of Exchange;
Documentary Stamp Tax (DST); Taxation; The Documentary Stamp Tax
under Section 181 of the Tax Code is levied on the acceptance or payment
of “a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines.”—The Court agrees with the CTA that the DST
under Section 181 of the Tax Code is levied on the acceptance or payment
of “a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines” and that “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.” A bill of exchange is one of two general forms of negotiable
instruments under the Negotiable Instruments Law.
Same; Same; Same; Same; Electronic Messages; The instructions given
through electronic messages that are subjected to Documentary Stamp
Tax (DST) in these cases are not negotiable instruments as they do not
comply with the requisites of negotiability under Section 1 of the
Negotiable Instruments Law.—The instructions given through electronic
messages that are subjected to DST in these cases are not negotiable
instruments as they do not comply with the requisites of negotiability
under Section 1 of the Negotiable Instruments Law, which provides: Sec.
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.
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;
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 22
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.
Same; Same; Same; Same; Under Section 173 of the 1997 Tax Code, the
persons primarily liable for the payment of the Documentary Stamp Tax
(DST) are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5)
transferring the taxable documents, instruments or papers.—DST is an
excise tax on the exercise of a right or privilege to transfer obligations,
rights or properties incident thereto. Under Section 173 of the 1997 Tax
Code, the persons primarily liable for the payment of the DST are those
(1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the
taxable documents, instruments or papers. In general, DST is levied on
the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the
execution of specific instruments. Examples of such privileges, the exercise
of which, as effected through the issuance of particular documents, are
subject to the payment of DST are leases of lands, mortgages, pledges
and trusts, and conveyances of real property. As stated above, Section
230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax
Code, levies DST on either (a) the acceptance or (b) the payment of a
foreign bill of exchange or order for the payment of money that was drawn
abroad but payable in the Philippines. In other words, it levies DST as an
excise tax on the privilege of the drawee to accept or pay a bill of
exchange or order for the payment of money, which has been drawn
abroad but payable in the Philippines, and on the corresponding privilege
of the drawer to have acceptance of or payment for the bill of exchange or
order for the payment of money which it has drawn abroad but payable in
the Philippines.
Same; Same; Same; Same; Once the drawee accepts, he becomes an
acceptor. As acceptor, he engages to pay the bill of exchange according to
the tenor of his acceptance.—Under the law, therefore, what is accepted is
a bill of exchange, and the acceptance of a bill of exchange is both the
manifestation of the drawee’s consent to the drawer’s order to pay money
and the expression of the drawee’s promise to pay. It is “the act by which
the drawee manifests his consent to comply with the request contained in
the bill of exchange directed to him and it contemplates an engagement or
promise to pay.” Once the drawee accepts, he becomes an acceptor. As
acceptor, he engages to pay the bill of exchange according to the tenor of
his acceptance. Acceptance is made upon presentment of the bill of
exchange, or within 24 hours after such presentment. Presentment for
acceptance is the production or exhibition of the bill of exchange 502 to

the drawee for the purpose of obtaining his acceptance. Presentment for
acceptance is necessary only in the instances where the law requires it. In
the instances where presentment for acceptance is not necessary, the
holder of the bill of exchange can proceed directly to presentment for
payment.
Same; Same; Same; Same; Presentment for Payment; Presentment for
payment is the presentation of the instrument to the person primarily
liable for the purpose of demanding and obtaining payment thereof.—
Presentment for payment is the presentation of the instrument to the
person primarily liable for the purpose of demanding and obtaining
payment thereof. Thus, whether it be presentment for acceptance or
presentment for payment, the negotiable instrument has to be produced
and shown to the drawee for acceptance or to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment
(of bills of exchange or orders for the payment of money that have been
drawn abroad but payable in the Philippines) that is subjected to DST
under Section 181 of the 1997 Tax Code is done after presentment for
acceptance or presentment for payment, respectively. In other words, the
acceptance or payment of the subject bill of exchange or order for the
payment of money is done when there is presentment either for
acceptance or for payment of the bill of exchange or order for the payment
of money.
PETITIONS for review on certiorari of the decisions and resolutions of the
Court of Appeals.
The facts are stated in the opinion of the Court.
Siguion Reyna, Montecillo & Ongsiako for petitioner.
The Solicitor General for respondent
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1
assail the Decision2
and Resolution
dated July 8, 2004 and October 25, 2004, respectively, of the Court of
Appeals in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution
dated September 2, 2004 and April 4, 2005, respectively, of the Court of
Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said
cases similarly reversed and set aside the decisions of the Court of Tax
Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively, and
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 23
dismissed the petitions of petitioner Hongkong and Shanghai Banking
Corporation Limited-Philippine Branches (HSBC). The corresponding
Resolutions, on the other hand, denied the respective motions for
reconsideration of the said Decisions.
HSBC performs, among others, custodial services on behalf of its investor-
clients, corporate and individual, resident or non-resident of the
Philippines, with respect to their passive investments in the Philippines,
particularly investments in shares of stocks in domestic corporations. As a
custodian bank, HSBC serves as the collection/payment agent with respect
to dividends and other income derived from its investor-clients’ passive
investments.6
HSBC’s investor-clients maintain Philippine peso and/or foreign currency
accounts, which are managed by HSBC through instructions given through
electronic messages. The said instructions are standard forms known in
the banking industry as SWIFT, or "Society for Worldwide Interbank
Financial Telecommunication." In purchasing shares of stock and other
investment in securities, the investor-clients would send electronic
messages from abroad instructing HSBC to debit their local or foreign
currency accounts and to pay the purchase price therefor upon receipt of
the securities.7
Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September to
December 1997 and also from January to December 1998 amounting to
₱19,572,992.10 and ₱32,904,437.30, respectively, broken down as
follows:
A. September to December 1997
September 1997 P 6,981,447.90
October 1997 6,209,316.60
November 1997 3,978,510.30
December 1997 2,403,717.30
Total ₱19,572,992.10
B. January to December 1998
January 1998 P 3,328,305.60
 N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 24

February 1998 4,566,924.90 to their local or foreign currency accounts are subject to documentary
stamp tax under Section 181 of the 1997 Tax Code, viz:
March 1998 5,371,797.30
A. Investment purchase transactions:
April 1998 4,197,235.50

May 1998 2,519,587.20 An overseas client sends instruction to its bank in the Philippines to either:
June 1998 2,301,333.00
(i) debit its local or foreign currency account and to pay a
July 1998 1,586,404.50 named recipient in the Philippines; or
August 1998 1,787,359.50
(ii) receive funds from another bank in the Philippines for
September 1998 1,231,828.20 deposit into its account and to pay a named recipient in
the Philippines."
October 1998 1,303,184.40

November 1998 2,026,379.70 The foregoing transactions are carried out under instruction from abroad
and [do] not involve actual fund transfer since the funds are already in the
December 1998 2,684,097.50 Philippine accounts. The instructions are in the form of electronic
messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases,
Total ₱32,904,437.30
the payment is against the delivery of investments purchased. The
purchase of investments and the payment comprise one single transaction.
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then DST has already been paid under Section 176 for the investment purchase.
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the
effect that instructions or advises from abroad on the management of B. Other transactions:
funds located in the Philippines which do not involve transfer of funds from
abroad are not subject to DST. BIR Ruling No. 132-99 reads:
An overseas client sends an instruction to its bank in the Philippines to
either:
Date: August 23, 1999
(i) debit its local or foreign currency account and to pay a
FERRY TOLEDO VICTORINO GONZAGA named recipient, who may be another bank, a corporate
& ASSOCIATES entity or an individual in the Philippines; or
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
(ii) receive funds from another bank in the Philippines for
Metro Manila
deposit to its account and to pay a named recipient, who
may be another bank, a corporate entity or an individual in
Attn: Atty. Tomas C. Toledo the Philippines."
Tax Counsel
The above instruction is in the form of an electronic message (i.e., SWIFT
Gentlemen: MT 100 or MT 202) or tested cable, and may not refer to any particular
transaction.
This refers to your letter dated July 26, 1999 requesting on behalf of your
clients, the CITIBANK & STANDARD CHARTERED BANK, for a ruling as to The opening and maintenance by a non-resident of local or foreign
whether or not the electronic instructions involving the following currency accounts with a bank in the Philippines is permitted by the
transactions of residents and non-residents of the Philippines with respect Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax
Code, which provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.–
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional
part thereof, of the face value of any such bill of exchange, or order, or
Philippine equivalent of such value, if expressed in foreign currency.
(Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or
order for payment purporting to be drawn in a foreign country but payable
in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied
on the instrument, i.e., a bill of exchange or order for the payment of
money, which purports to draw money from a foreign country but payable
in the Philippines. In the instant case, however, while the payor is residing
outside the Philippines, he maintains a local and foreign currency account
in the Philippines from where he will draw the money intended to pay a
named recipient. The instruction or order to pay shall be made through an
electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made, signed or
issued by the payee. In the meantime, such electronic instructions by the
non-resident payor cannot be considered as a transaction per se
considering that the same do not involve any transfer of funds from
abroad or from the place where the instruction originates. Insofar as the
local bank is concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of accounts. The
actual debiting of the payor’s account, local or foreign currency account in
the Philippines, is the actual transaction that should be properly entered as
such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money
from a bank deposit, local or foreign currency account, is not subject to
DST, unless the account so maintained is a current or checking account, in
which case, the issuance of the check or bank drafts is subject to the
documentary stamp tax imposed under Section 179 of the 1997 Tax Code.
In the instant case, and subject to the physical impossibility on the part of
the payor to be present and prepare and sign an instrument purporting to
pay a certain obligation, the withdrawal and payment shall be made in
cash. In this light, the withdrawal shall not be subject to documentary
stamp tax. The case is parallel to an automatic bank transfer of local funds
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 25
from a savings account to a checking account maintained by a depositor in
one bank.
Likewise, the receipt of funds from another bank in the Philippines for
deposit to the payee’s account and thereafter upon instruction of the non-
resident depositor-payor, through an electronic message, the depository
bank to debit his account and pay a named recipient shall not be subject
to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the
Philippines by a local depository bank for the account of its client residing
abroad is part of its regular banking transaction which is not subject to
documentary stamp tax. Neither does the receipt of funds makes the
recipient subject to the documentary stamp tax. The funds are deemed to
be part of the deposits of the client once credited to his account, and
which, thereafter can be disposed in the manner he wants. The payor-
client’s further instruction to debit his account and pay a named recipient
in the Philippines does not involve transfer of funds from abroad. Likewise,
as stated earlier, such debit of local or foreign currency account in the
Philippines is not subject to the documentary stamp tax under the
aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction
made through an electronic message by non-resident payor-client to debit
his local or foreign currency account maintained in the Philippines and to
pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the 1997 Tax Code. Such
being the case, such electronic instruction purporting to draw funds from a
local account intended to be paid to a named recipient in the Philippines is
not subject to documentary stamp tax imposed under the foregoing
Section.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it shall be disclosed that the
facts are different, this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of ₱19,572,992.10

allegedly representing erroneously paid DST to the BIR for the period
covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative
claim for the refund of the amount of ₱32,904,437.30 allegedly
representing erroneously paid DST to the BIR for the period covering
January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA as CTA Case Nos. 5951 and
6009, respectively, in order to suspend the running of the two-year
prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent
Commissioner of Internal Revenue was ordered to refund or issue a tax
credit certificate in favor of HSBC in the reduced amounts of
₱30,360,570.75 in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case
No. 5951, representing erroneously paid DST that have been sufficiently
substantiated with documentary evidence. The CTA ruled that HSBC is
entitled to a tax refund or tax credit because Sections 180 and 181 of the
1997 Tax Code do not apply to electronic message instructions transmitted
by HSBC’s non-resident investor-clients:
The instruction made through an electronic message by a nonresident
investor-client, which is to debit his local or foreign currency account in the
Philippines and pay a certain named recipient also residing in the
Philippines is not the transaction contemplated in Section 181 of the Code.
In this case, the withdrawal and payment shall be made in cash. It is
parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank. The
act of debiting the account is not subject to the documentary stamp tax
under Section 181. Neither is the transaction subject to the documentary
stamp tax under Section 180 of the same Code. These electronic message
instructions cannot be considered negotiable instruments as they lack the
feature of negotiability, which, is the ability to be transferred (Words and
Phrases).
These instructions are considered as mere memoranda and entered as
such in the books of account of the local bank, and the actual debiting of
the payor’s local or foreign currency account in the Philippines is the actual
transaction that should be properly entered as such.9
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 26
The respective dispositive portions of the Decisions dated May 2, 2002 in
CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951
read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the
amount of ₱30,360,570.75 representing erroneous payment of
documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby
partially granted. Accordingly, respondent is hereby ORDERED to REFUND,
or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the
petitioner in the reduced amount of ₱16,436,395.83 representing
erroneously paid documentary stamp tax for the months of September
1997 to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and
ruled that the electronic messages of HSBC’s investor-clients are subject
to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients
as regards their passive investments in the Philippines mainly involving
shares of stocks in domestic corporations. These investor-clients maintain
Philippine peso and/or foreign currency accounts with [HSBC]. Should they
desire to purchase shares of stock and other investments securities in the
Philippines, the investor-clients send their instructions and advises via
electronic messages from abroad to [HSBC] in the form of SWIFT MT 100,
MT 202, or MT 521 directing the latter to debit their local or foreign
currency account and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section
181 of the NIRC, [HSBC] was thus required to pay [DST] based on its
acceptance of these electronic messages – which, as [HSBC] readily
admits in its petition filed before the [CTA], were essentially orders to pay
the purchases of securities made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST]
from [HSBC] considering that the said tax was levied against the
acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic

messages may be equated as a written document and thus be subject to
tax is beside the point. As We have already stressed, Section 181 of the
law cited earlier imposes the [DST] not on the bill of exchange or order for
payment of money but on the acceptance or payment of the said bill or
order. The acceptance of a bill or order is the signification by the drawee of
its assent to the order of the drawer to pay a given sum of money while
payment implies not only the assent to the said order of the drawer and a
recognition of the drawer’s obligation to pay such aforesaid sum, but also
a compliance with such obligation (Philippine National Bank vs. Court of
Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate
Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the
[DST] under Section 181 is the existence of the requirement of acceptance
or payment by the drawee (in this case, [HSBC]) of the order for payment
of money from its investor-clients and that the said order was drawn from
a foreign country and payable in the Philippines. These requisites are
surely present here.
It would serve the parties well to understand the nature of the tax being
imposed in the case at bar. In Philippine Home Assurance Corporation vs.
Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that
[DST is] levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments, independently
of the legal status of the transactions giving rise thereto. In the same
case, the High Court also declared – citing Du Pont vs. United States (300
U.S. 150, 153 [1936])
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction
of the business. It is an excise upon the facilities used in the transaction of
the business separate and apart from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment
made by [HSBC] pursuant to the order made by its client-investors as
embodied in the cited electronic messages, through which the herein
parties’ privilege and opportunity to transact business respectively as
drawee and drawers was exercised, separate and apart from the
circumstances and conditions related to such acceptance and subsequent
payment of the sum of money authorized by the concerned drawers.
Stated another way, the [DST] was exacted on [HSBC’s] exercise of its
privilege under its drawee-drawer relationship with its client-investor
through the execution of a specific instrument which, in the case at bar, is
the acceptance of the order for payment of money. The acceptance of a bill
or order for payment may be done in writing by the drawee in the bill or
order itself, or in a separate instrument (Prudential Bank vs. Intermediate
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 27
Appellate Court, supra.)Here, [HSBC]’s acceptance of the orders for the
payment of money was veritably ‘done in writing in a separate instrument’
each time it debited the local or foreign currency accounts of its client-
investors pursuant to the latter’s instructions and advises sent by
electronic messages to [HSBC]. The [DST] therefore must be paid upon
the execution of the specified instruments or facilities covered by the tax –
in this case, the acceptance by [HSBC] of the order for payment of money
sent by the client-investors through electronic messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it
disregarded the factual and legal conclusions of the CTA. According to
HSBC, in the absence of abuse or improvident exercise of authority, the
CTA’s ruling should not have been disturbed as the CTA is a highly
specialized court which performs judicial functions, particularly for the
review of tax cases. HSBC further argues that the Commissioner of
Internal Revenue had already settled the issue on the taxability of
electronic messages involved in these cases in BIR Ruling No. 132-99 and
reiterated in BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that
Section 181 of the 1997 Tax Code imposes DST on the acceptance or
payment of a bill of exchange or order for the payment of money. The DST
under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a
privilege which is specifically taxed by law. BIR Ruling No. 132-99 is
inconsistent with prevailing law and long standing administrative practice,
respondent is not barred from questioning his own revenue ruling. Tax
refunds like tax exemptions are strictly construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax
Code is levied on the acceptance or payment of "a bill of exchange
purporting to be drawn in a foreign country but payable in the Philippines"
and that "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." A
bill of exchange is one of two general forms of negotiable instruments
under the Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of
HSBC’s investor-clients containing instructions to debit their respective
local or foreign currency accounts in the Philippines and pay a certain

named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions are
"parallel to an automatic bank transfer of local funds from a savings
account to a checking account maintained by a depositor in one bank." The
Court favorably adopts the finding of the CTA that the electronic messages
"cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred" and that the said
electronic messages are "mere memoranda" of the transaction consisting
of the "actual debiting of the [investor-client-payor’s] local or foreign
currency account in the Philippines" and "entered as such in the books of
account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic messages
that are subjected to DST in these cases are not negotiable instruments as
they do not comply with the requisites of negotiability under Section 1 of
the Negotiable Instruments Law, which provides:
Sec. 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.
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.
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 28
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax
refund for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional
part thereof, of the face value of any such bill of exchange, or order, or the
Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s
claim for tax refund for DST paid during the period September to
December 1997 and subject of G.R. No. 166018, is worded exactly the
same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of any
bill of exchange or order for the payment of any sum of money drawn or
purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a
stamp in payment of the tax upon such document in the same manner as
is required in this Act for the stamping of inland bills of exchange or
promissory notes, and no bill of exchange shall be paid nor negotiated
until such stamp shall have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right, or property incident thereto documentary
taxes for and in respect of the transaction so had or accomplished shall be
paid as hereinafter prescribed, by the persons making, signing, issuing,
accepting, or transferring the same, and at the time such act is done or
transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippine Islands, on each two hundred
pesos, or fractional part thereof, of the face value of any such bill of

exchange or order, or the Philippine equivalent of such value, if expressed
in foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all
other kinds of orders for the payment of money, payable at sight or on
demand, or after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for
the payment of money drawn in a foreign country but payable in this
country whether at sight or on demand or after a specified period after
sight or from a stated date, is presented for acceptance or payment, there
must be affixed upon acceptance or payment of documentary stamp equal
to P0.02 for each ₱200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939, 21 which
provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of four
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was
worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable
in the Philippines, there shall be collected a documentary stamp tax of
thirty centavos on each two hundred pesos, or fractional part thereof, of
the face value of any such bill of exchange, or order, or the Philippine
equivalent of such value, if expressed in foreign currency. (Emphasis
supplied.)
The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years.1âwphi1 The
identical text and common history of Section 230 of the 1977 Tax Code, as
N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 29
amended, and the 1997 Tax Code, as amended, show that the law
imposes DST on either (a) the acceptance or (b) the payment of a foreign
bill of exchange or order for the payment of money that was drawn abroad
but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto.23 Under Section 173 of
the 1997 Tax Code, the persons primarily liable for the payment of the
DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5)
transferring the taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of
such privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of
lands, mortgages, pledges and trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended, now
Section 181 of the 1997 Tax Code, levies DST on either (a) the acceptance
or (b) the payment of a foreign bill of exchange or order for the payment
of money that was drawn abroad but payable in the Philippines. In other
words, it levies DST as an excise tax on the privilege of the drawee to
accept or pay a bill of exchange or order for the payment of money, which
has been drawn abroad but payable in the Philippines, and on the
corresponding privilege of the drawer to have acceptance of or payment
for the bill of exchange or order for the payment of money which it has
drawn abroad but payable in the Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of
exchange has a very definite meaning in law.27 In particular, Section 132
of the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a
bill [of exchange28] 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.
Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the drawee’s
consent to the drawer’s order to pay money and the expression of the
drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange
directed to him and it contemplates an engagement or promise to
 N e g o t i a b l e I n s t r u m e n t s L a w S e s s i o n 1 P a g e | 30

pay."29 Once the drawee accepts, he becomes an acceptor.30 As acceptor,
he engages to pay the bill of exchange according to the tenor of his
acceptance.31
Acceptance is made upon presentment of the bill of exchange, or within 24
hours after such presentment.32Presentment for acceptance is the
production or exhibition of the bill of exchange to the drawee for the
purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the
law requires it.34 In the instances where presentment for acceptance is not
necessary, the holder of the bill of exchange can proceed directly to
presentment for payment.
Presentment for payment is the presentation of the instrument to the
person primarily liable for the purpose of demanding and obtaining
payment thereof.35
here in the Philippines. Thus, there was no acceptance as the electronic
messages did not constitute the written and signed manifestation of HSBC
to a drawer's order to pay money. As HSBC could not have been an
acceptor, then it could not have made any payment of a bill of exchange or
order for the payment of money drawn abroad but payable here in the
Philippines. In other words, HSBC could not have been held liable for DST
under Section 230 of the 1977 Tax Code, as amended, and Section 181 of
the 1997 Tax Code as it is not "a person making, signing, issuing,
accepting, or, transferring" the taxable instruments under the said
provision. Thus, HSBC erroneously paid DST on the said electronic
messages for which it is entitled to a tax refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated
May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A
Case No. 5951 of the Court of Tax Appeals are REINSTATED.
SO ORDERED.

Thus, whether it be presentment for acceptance or presentment for

payment, the negotiable instrument has to be produced and shown to the
drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment

(of bills of exchange or orders for the payment of money that have been
drawn abroad but payable in the Philippines) that is subjected to DST
under Section 181 of the 1997 Tax Code is done after presentment for
acceptance or presentment for payment, respectively. In other words, the
acceptance or payment of the subject bill of exchange or order for the
payment of money is done when there is presentment either for
acceptance or for payment of the bill of exchange or order for the payment
of money.

Applying the above concepts to the matter subjected to DST in these

cases, the electronic messages received by HSBC from its investor-clients
abroad instructing the former to debit the latter's local and foreign
currency accounts and to pay the purchase price of shares of stock or
investment in securities do not properly qualify as either presentment for
acceptance or presentment for payment. There being neither presentment
for acceptance nor presentment for payment, then there was no
acceptance or payment that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for

the payment of money on the part of HSBC. To reiterate, there was no bill
of exchange or order for the payment drawn abroad and made payable