The Incompatibility of the Negotiable Instruments Law in the Banking System

I. Introduction/Rationale
Much had been written about the negotiable instruments, and more had they been
used. Offers in writing, addressed by one person to another, signed, and promising to pay
a specified person or bearer a fixed sum in exchange for goods in certain future time.
Negotiable instruments are critical to our economy. They allow people to do business and
to be certain that they will receive money for their services or goods without the actual
transfer of cash. In the world of business and finance, negotiable instruments are a very
important tool. They provide the parties with an ease of doing business. And they can also
be a source of finance when in need of funds. The concept of a 'negotiable' instrument is
very important in overseas trade. Among instruments now legally recognised as negotiable
are Bills of Exchange, Promissory Notes, Cheques, Exchequer Bills, Bank Notes, Dividend
Warrants, Share Warrants, Banker's Circular Notes, Debentures payable to Bearer.
The remarkable discovery of negotiable instrument is a very helpful thing in the
commercial world. However, in the 21st century the traditional negotiable instruments
could be deemed unsatisfactory for business, unclear and of dubious nature. As computers
had taken over the markets in an effort to ease the burden on international trade, negotiable
instruments had been viewed as obsolete by many due to their original paper form.
Another point of criticism is the fact that the Bill of Exchange Act 1882 had been
regulating the usage of negotiable instruments from a time when the use of negotiable
instruments could have been deemed as invaluable in trade – which is not the case of today,
having the world trade currencies of the US Dollar, Japanese Yen and the European
Union’s own Euro. The Uniform Commercial Code (of the United States of America) had
also been at the scene, however both significant pieces of legislation must now stand the
test of the electronic negotiable instruments.
This legal research aims to identify essential laws and reasons which make
negotiable instruments irrelevant in the banking system. Are negotiable instruments really
irrelevant now especially in the banking system? The evolution in recent years of
alternatives to the check system, such as credit card systems and electronic funds transfer
systems, has prompted considerable interest in the law of payment systems. This evolution
also touched the issues on second endorsement of the checks. Issuances and real practical
discretion of the bank in limiting acceptance of second endorsed letter created a cloud on
the applicability of negotiable instruments law in the banking system. Thus the goal of this
research study to clear the cloud on the matter.

Significance of the Study

The present study is significant and timely to the current banking system and the
results can give valuable and important information about the incompatibility of the negotiable
instruments law and the banking system.
The following individual and groups may benefit from the results of this study.
 First, to the legislators. The result of this study can give them idea on whether there is a
need to amend the laws on negotiable instruments law to make it parallel to the banking system.
It will provide basis to improve laws on negotiable instruments and banking laws.
To the students, this study will enlighten them to compare relevant banking laws in the
Philippines and compare it to the negotiable instruments law. This will also test the analytical skills
of students in doing comparative study on different laws.
Research questions
This study intends to identify if the negotiable instruments are still relevant to the
Philippine banking system. Specifically, this study will answer the following questions:
1. What is a negotiable instrument?
2. What laws govern the negotiable instruments in the Philippines?
3. What are the importance of negotiable instruments in the banking system?
4. Are there laws in the banking system which are incompatible with the laws on
negotiable instruments?
5. Is negotiable instrument law of the Phillipines irrelevant to the Banking System?

Framework of the study

The study is guided by the theory of comparative law. Comparative law means the
application of the comparative technique to the field of law. Comparatists have identified an array
of purposes attributed to comparative law. For instance, for Örücü, these objectives may range
from ‘aiding law reform and policy development, providing a tool of research to reach a universal
theory of law, giving a critical perspective to students and an aid to international law practice,
facilitating international unification and harmonisation of laws, helping courts to fill gaps in the
law and even working towards the furthering of world peace and tolerance’. In short, these
objectives can be of practical, sociological, political and pedagogical nature, depending on the
comparatist involved—for example, a policy-maker or legislator would pursue a practical and
political objective geared towards law reform and policy development, while a legal academic
would pursue a pedagogical objective aimed at providing students with a critical perspective on
the domestic legal system by contrasting it with the foreign legal system. The legitimacy of
comparative law can be controversial though, notably for its use by courts, including international
courts, when they tend to use it as a source of persuasive authority to fill in the gaps in the law.
Certainly comparative law, like any other method of legal research, aims to make suggestions
on how the law can be improved. The overarching aim of a quest for ‘better law’ through the use
of comparative law comprises different kinds of objectives as developed by Siems. First,
comparative law may help improve law ‘technically’, which is typical of a ‘functional-technical
perspective of comparative law’—that is when one looks at two or more legal systems presuming
that the law would lead to a similar result, and chooses the best one (for example, the one which
provides more legal certainty); secondly, comparative law may help improve a particular social
problem or policy, which is typical of a ‘socio-legal functionalism’ approach to comparative law;
thirdly, comparative law may act as a trigger for legal changes, such as ‘introducing a new social or
economic policy or a re-balancing of group interests’, because the foreign law provides a better
response to a particular evolution of society
 II. Background of the Study

Review of Related Literature

History of Negotiable Instrument

Early forms of negotiable instruments have existed since ancient Babylon. One notable example
is in 8th-century China, when the feitsyan ('flying money') document was used as a way to safely
transfer large amounts of money over long distances. Because the feitsyan represented the money,
no actual money had to be carried. Over the years, while the documents have changed in looks,
the purpose remains the same: a promise to pay a specified amount to a specific person.
Negotiable Instruments Law in the Philippines
The law that governs negotiable instruments in the Philippines is Act 2031. The chief
purpose for its codification is to produce uniformity in the laws of the different
states upon this important subject, so that the citizens of each state
might know the rules which would be applied to their notes, checks, and other negotiable
paper in every other state in which the law was
enacted, since it is an absolute impossibility for the commercial purchaser.
A negotiable instrument is a written instrument signed by the maker/drawer that contains
an unconditional promise or order to pay a certain sum of money which must be payable on
demand or at a fixed or determinable future time. It must be payable to the bearer or order (read:
sequence) and if it is addressed to a drawee, the drawee must be identified or indicated with
reasonable certainty. The drawee requirement applies in case the instrument is a negotiable bill of
exchange (like a check.) If there is no mention of a drawee, the instrument will pertain to a
negotiable promissory note.

Two important features of a negotiable instrument are negotiability and accumulation of

secondary contracts. Negotiability, simply put, means the instrument can be transferred from one
person to another with the recipient being given the right to collect. As the instrument is negotiated
from person to person, juridical ties (secondary contracts) are created between the parties involved
in the transaction.
Check as Negotiable Instrument
For the purpose of clarity and the definition of ‘cheques as a negotiable instrument’ we must define
what a negotiable instrument is.
A Negotiable instrument is a financial instrument whose full legal title is transferable by mere
delivery or by endorsement and delivery, with the effect that its complete ownership and legal
interest are passed on to a transferee.
In a layman’s language an instrument is said to be negotiable if it is capable of transferring a
bonafide title in the instrument, better than that of the transferor’s title, provided the recipient
takes it in good faith and for a ‘value’. Examples of negotiable instruments are cheques, bills of
exchange, debentures, treasury bills, bank notes, bank drafts and others, with our major focus on
CHECKS.
Now the concept of a negotiable instrument has being established, the definition of cheques as a
negotiable instrument;
A cheque is a negotiable instrument instructing a financial institution to pay a specific amount of
a specific currency from a specified transactional account held in the drawer's name with that
institution (bank).
Personally, A Cheque is the most common and widely used negotiable instrument far above other
negotiable instruments in business transactions; As a negotiable instrument, it can also be defined
as an express directive from the customer requiring his banker to repay the money he deposited
to him as indicated in the cheque.
Checks as Instruments of Bank Credit Transfer
In assessing the soundness of the view that checks should be regarded as negotiable
instruments, it is important initially to clarify the role of checks in the monetary system. Aside
from electronic funds transfers, the bulk of the payments in the modem economy are made by
checks and the bulk of the money supply consists of bank deposits subject to transfer by check.8
Currency forms only a small part of the monetary system. In a sense, therefore, checks are a
substitute for currency, just as in earlier times bank notes and notes issued by nonfinancial entities
were substitutes for specie. To those interested in "macro" matters of monetary policy and
economic history, this is an important truth. To those interested in the "micro" matter of the law
governing the rights and obligations of participants in the payment systems, however, the similarity
of economic function between checks and other specie substitutes can be misleading.
Consider first the sort of legal categories and concepts appropriate to the relatively simple
monetary system in which specie is the only form of money. One may puzzle at great length over
the complex social phenomenon of the use of precious metals as money; for purposes of legal
analysis, though, most of that interesting line of inquiry is not significant." The important
characteristic of a specie-based monetary system is that money is completely reified. A gold or
silver coin that the sovereign has minted and declared to be current coin of the realm is money it
does not represent money or substitute for money; it is money. Accordingly, fairly simplistic
property notions will suffice as the basis of payment system law. For example, deciding what
counts as payment in such a system requires merely specifying the appropriate rules for the transfer
of ownership of coins. Moreover, the set of property transfer rules that evolved in the specie-
based system are simple: possession here is ten-tenths of the law.
Relatively little modification of basic legal concepts is required to pass from a specie-based
system to a bank note system, that is, a monetary system in which payments are made by
transferring not specie itself but paper bank notes that are not themselves legal tender but embody
the promise of a bank to pay in specie. The essence of a bank note system is that bank credit is
used as a substitute for specie as a medium of exchange. The use of promises to pay money as
substitutes for money is, to be sure, an innovation of major economic significance, and a
sophisticated legal structure is required to control the dangers inherent in the use of bank credit as
money.13 Nonetheless, the use of credit as money in the bank note system requires little
modification of the basic legal concepts of payment systems law.
 Just as in a specie system the individual items of minted precious metal are complete
reifications of money, so too in a bank note system the individual paper bank notes are complete
reifications of the money substitute, bank credit. Accordingly, the same set of property and
property transfer concepts used in analyzing payment transactions between participants in the
specie system can be employed in the bank note system. As in the specie system, the ownership of
money can be viewed as a relationship between a person and a thing; the only difference is that
the thing, a bank note, is of symbolic rather than inherent value. Nonetheless, so long as the symbol
serves as a complete reification of the bank's promise to pay money, basic property and property
transfer concepts remain useful; only the object of the concepts changes. Establishing a legal
framework for the bank note monetary system is only a matter of apply ing the property transfer
rules used in a specie system to the pieces of paper representing banks' promises to pay money.
Thus, in the AngloAmerican legal system, the significant steps were the recognition of the free
transferability of debts embodied in written promises to pay; and second, the application to those
writings of the rule that good title to currency can be derived even from a thief.
The transition from a payment system based on bank notes to a payment system based on
deposit accounts subject to transfer by check is, in an odd sense, both a simple and a complex
matter. To modem students of economics and banking, nothing seems simpler than the notion
that bank deposits are every bit as much a money substitute as bank notes.16 Even the narrowest
measure of money stock, for example, includes commercial bank demand deposits as well as
currency. Students of banking and economic history, however, know what a long struggle this
modem recognition represents. Scholars of the history of American banking theory and policy
have been struck by the obsession of eighteenth- and nineteenth-century thinkers and politicians
with bank note issue, and their failure to recognize that bank deposits play essentially the same
economic role. Given this background, I can anticipate roars of protestor, more likely, laughter-at
the suggestion that there is an important difference between a monetary system based on bank
note issue and a monetary system based on demand deposits subject to checks. Nonetheless, the
difference, although of little or no concern from the perspective of monetary theory and policy, is
of major concern for payment systems law.
In both a bank note system and a check system, payments are made by the transfer of
bank credit from one person to another. The two systems, however, differ significantly in the role
played by the pieces of paper. In the bank note system, the bank notes themselves are reifications
of bank credit. The holder of a bank note is, by virtue of holding that note, the creditor of the
issuing bank. When payment is made by transferring a bank note from one person to another, the
act of transferring possession of the bank note effects the transfer of the bank credit. Forthat
reason, a system of legal rules governing such a payment system can be erected appropriately on a
foundation of ordinary property concepts. In such a system, it is entirely sensible to discuss
questions of good title, transfer, and conversion, because the note, which represents the bank
credit, is a reification of money.
In the check system, however, the check is not a reification, embodiment, or representation of
bank credit. In the usual case of an uncertified check, the drawee bank never incurs any contractual
liability on the instrument. Although the drawer of the check incurs secondary liability under
section 3-413(2),19 the bank on which the check is drawn has no contractual obligation to the
payee or any other holder of the check.20 The transfer of bank credit through check payment
occurs not as the instrument passes from person to person but when the instrument ultimately is
presented to and paid by the drawee bank.21 In short, a check is simply an instruction directing
the transfer of bank credit, not a medium for the transfer of bank credit.
 To illustrate the difference between checks and bank notes in bank credit monetary
systems, it is instructive to trace the steps taken by a check in a typical payment transaction and
the relationship between the check and the transfer of bank credit. For convenience, consider a
typical sales transaction in which the person making the payment is the buyer and the person
receiving the payment is the seller. At the outset, assume that the buyer has opened a checking
account with the drawee bank. Because of his deposit of funds, the buyer is the beneficiary of a
certain amount of bank credit. The drawee bank gives the buyer a supply of blank checks that he
can use to instruct the drawee bank to transfer the deposit credit to others.
The buyer can initiate the process of payment by drawing a check for the appropriate
amount to the order of the seller and delivering the check to him. Although this transaction might
have significant legal consequences, it does not transfer bank credit from the buyer (the drawer)
to the seller (the payee). Indeed, Article 3 makes this quite explicit: "A check or other draft does
not of itself operate as an assignment of any funds in the hands of the drawee available for its
payment, and the drawee is not liable on the instrument until he accepts it.
Although issuance of a check does not itself effect a transfer of bank credit, a check does
authorize the drawee bank to transfer credit from the drawer to the payee. It is possible, therefore,
to characterize this initial step in the transaction as a transfer from the drawer to the payee of a
thing of value: authorization to receive bank credit. Such a characterization, however, is wholly
inapt. At the moment the payee receives the check, he cannot know whether the authorization it
represents has any value. The check might be drawn on insufficient funds or on a nonexistent
account. In addition, the authorization is revocable by means of a stop payment order.
Thus, in the initial step of issuance of the check by the drawer to the payee, there is no
occasion to analyze the transaction in the language of property transfer. The transfer of the money
substitute-bank credithas not yet happened. Thus it is hardly appropriate to describe the delivery
of the check by the drawer to the payee as a transfer of a writing that represents bank credit. The
check, in a sense, represents the credit of the drawer, but bank credit and not the drawer's credit
is the money substitute in this system. Although it is possible to describe the check as an item of
property, checks are so bereft of genuine value that it is only misleading to analyze the transaction
in these terms.
Beyond the initial step of the issuance of the check, the simplest scenario for completing
the payment transaction is for the payee to deposit the check in an account maintained at the same
bank on which the check was drawn. The payor bank will verify the authenticity of the check and
the state of the drawer's account; if all is in order, the bank immediately will debit the drawer's
account and credit the payee's account. The transfer of bank credit is effected by accounting entries
on the books of the bank. Although the check is used in this transaction to instruct the bank to
make this transfer, the check itself is not the mechanism that effects the transfer. Indeed, the check
is not very significant. The drawer could use a variety of forms of communication to initiate the
transfer of bank credit. For example, the transfer banks of medieval Europe provided a mechanism
for payment by book transfer of bank credit but the transfers were initiated by oral instructions
given to the banker in the presence of the party receiving the transfer.
In most cases, of course, the check's path is more complicated, involving several entities within
the banking system and several coordinated transfers of bank credit. The check's role, however,
remains the same no matter how convoluted the path. Assume, for example, that the payee
deposits the check for collection in an account maintained at a bank other than the one on which
the check is drawn. Obviously, at a physical level, something has passed from the payee to the
depositary bank, yet that alone would hardly warrant characterization of the transaction in the
language of property transfers. If any occasion exists for the use of the language of property
transfers, it must be in the context of the effect of the transaction on the parties' claims to bank
credit.26 The deposit of the check for collection, however, has no more effect in transferring bank
credit than did the issuance of the check from the drawer to the payee. The indorsement and
delivery of the check from the payee to the depositary bank does authorize the drawee bank to
transfer credit to the depositary bank for the benefit of the payee, but the authorization to receive
credit is different from the right to receive credit. Indeed, the most basic rule on check collections
in Article 4 is that the mere deposit of a check does not effect a final transfer of the authorization
to receive payment: "Unless a contrary intent clearly appears and prior to the time that a settlement
given by a collecting bank for an item is or becomes final... the bank is an agent or sub-agent of
the owner of the item and any settlement given for the item is provisional. Although this basic rule
of check collection is expressed in property language, that characterization is by no means essential.
Indeed, the rule is designed precisely to ensure that the rights of collecting banks will not be
prejudiced by those aspects of the system that suggest or permit a property-transfer
characterization.
The collection of a check, of course, ultimately affects claims to bank credit. The structure
of the collection process, however, makes it wholly misleading to regard the check as an
embodiment of claims to bank credit. Although it would be possible to design a check collection
system in which no notations of credit for the check were made until the check reached the payor
bank and the decision to pay was made, such a system would be terribly cumbersome. Rather,
because nearly all checks in fact are paid, it is simpler for each collecting bank in the chain to give
provisional credit for the amount of the check to its predecessor in the chain as the check moves
toward the payor bank. Then, in the unlikely event that the payor bank dishonors the check, the
credits can be reversed. This practice, of course, is characteristic of the American check collection
system, and is reflected in the rules of Article 4 concerning the entry of provisional settlements as
checks are forwarded for collection,the "firming up" of provisional credits if the check ultimately
is paid by the payor bank,30 and the revocation of such credits, or other form of charge-back, if
the check ultimately is not paid.
At each step in the process of check collection, a transfer of bank credit is made,
provisional at the outset but ordinarily ripening without further action into final settlement. The
"transfer" of the check itself, however, must not be confused with the transfer of bank credit
initiated by the check. In fact, in the present check collection system, the flow of bank credit is
opposite to the flow of checks; if, for example, bank A transfers a check to bank B, then bank B
must grant bank A provisional credit.32 The important point, though, is not that checks and bank
credit move in opposite directions-that feature is particular to the present check system.33 Rather,
the important point-which is quite general to modem payment systems-is the conceptual
distinction between the transfer of checks and the transfer of bank credit that the checks initiate.
In a bank note system, each step in the transfer of a note effects, without more, a transfer
of bank credit from the issuing bank to the holder of the instrument. Accordingly, it is entirely
understandable that the law described the problems presented by the bank note system within a
conceptual structure that regarded the note itself as an embodiment of bank credit and hence an
appropriate object for analysis in terms of property law concepts. In the modem check collection
system, however, that conceptual structure is inapt. Although checks initiate and direct the transfer
of bank credit in the payment system, they never represent or embody bank credit.
Crossing of Checks
The concept of a crossed cheque or crossing of cheques is a very important concept as regards the
dealing of cheques and the channels it passes through; as it majors on the security of the collector,
the cheque and mode of cashing i.e. cashing the cheque or collecting the proceeds of the cheque.
Where a cheque bears across its face an addition:
A). the words ‘and company’ or any abbreviations of them, between parallel transverse lines, either
with or without the words ‘not negotiable’; or
b). two parallel transverse lines simply, either with or without the words ‘not negotiable’,
That addition constitutes a crossing and the cheque is crossed generally
in some simple words: crossing of cheques occurs in a situation where the cheque bears across its
face an addition of the name of a banker, either with or without the words not negotiable that
addition constitutes a crossing, and the cheque is crossed specially, and to that banker.
CROSSING OF Checks can summarily be explained as a cheque that has been marked to specify
an instruction about the way it is to be redeemed, as it is a cheque that is payable only through a
collecting banker and not directly at the counter of the bank, even as it ensures the security to the
holder of the cheque, as only the collecting banker credits the proceeds to the account of the payee
of the cheque.
In this light a cheque may be crossed specially of generally by the drawer. Where a cheque is
uncrossed, the holder may cross it generally or specially; where a cheque is crossed generally, the
holder is also permitted to cross it specially; also, where a cheque is crossed generally or specially,
the holder may add the word ‘not negotiable’.
As a matter of fact, where a cheque is crossed specially, the banker to whom it is crossed may again
cross it especially to another bank for collection, likewise, if an uncrossed cheque, or a cheque
crossed generally, is sent to a banker on collection he may cross it specially to himself
It should be properly kept in mind that crossing of cheques, either general or special, is an
important, material part of the cheque; therefore it will be unlawful for any person to obliterate or,
except as authorised under the BILLS OF EXCHANGE ACT, to add or alter the CROSSING.
For the purpose of clarity, the key points on the types of crossing will be examined as we continue.

Existing Legal Framework

Negotiable Instruments Law in the Philippines ( Act 2031)
The law that governs negotiable instruments in the Philippines is Act 2031. The chief
purpose for its codification is to produce uniformity in the laws of the different
states upon this important subject, so that the citizens of each state
might know the rules which would be applied to their notes, checks, and other negotiable
paper in every other state in which the law was
enacted, since it is an absolute impossibility for the commercial purchaser.
 A negotiable instrument is a written instrument signed by the maker/drawer that contains
an unconditional promise or order to pay a certain sum of money which must be payable on
demand or at a fixed or determinable future time. It must be payable to the bearer or order (read:
sequence) and if it is addressed to a drawee, the drawee must be identified or indicated with
reasonable certainty. The drawee requirement applies in case the instrument is a negotiable bill of
exchange (like a check.) If there is no mention of a drawee, the instrument will pertain to a
negotiable promissory note.

Two important features of a negotiable instrument are negotiability and accumulation of

secondary contracts. Negotiability, simply put, means the instrument can be transferred from one
person to another with the recipient being given the right to collect. As the instrument is negotiated
from person to person, juridical ties (secondary contracts) are created between the parties involved
in the transaction.
Indorsement of Negotiable Instruments
Section 31 of Act 2031 provides that indorsement must be written on the instrument
itself or upon a paper attached thereto.
The signature of the indorser, without additional words, is a sufficient indorsement.
Section 2 provides that the indorsement must be an indorsement of the entire instrument.
An indorsement which purports to transfer to the indorsee a part only
of the amount payable, or which purports to transfer the instrument to two or more
indorsees severally, does not operate as a negotiation of the instrument. But where the instrument
has been paid in part, it may be indorsed as to the residue.

Statuos quo/laws
CIRCULAR LETTER
Series of 2002
TO : All Banks
Pursuant to the provisions of item 8, Circular No. 251 dated 7 July 2000, requiring banks to adopt
reasonable measures to prevent the use of their facilities for laundering of proceeds of crimes and
other illegal activities, all banks are hereby enjoined to adopt stricter policy guidelines in the
acceptance of second-endorsed checks to ensure that they are not being used as instruments for
money laundering or other illegal activities.
For this purpose, banks should limit the acceptance of second endorsed checks from properly
identified clients and only after establishing that the nature of the business of said client justifies,
or at least, makes practical the deposit of second endorsed checks. In case of isolated transactions
involving deposits of second endorsed checks by clients who are not engaged in trade or business,
the identity of the first endorser should be established and the record of the identification shall
also be kept for five (5) years. It is also understood that banks shall at all times follow the Know-
Your-Customer (KYC) rules whenever they handle or transact second endorsement checks.
This Circular-Letter shall take effect immediately.
Practical Basis on the Inapplicability of the concept of Indorsement in the Banking System
Second endorsed checks may be accepted but in a limited sense. Client must have a Second Endorsed Check Line
subject to conditions. A case to case basis acceptance of second endorsed checks may also be accepted in cases where
the payee of a check is the signatory of a corporate account and such check is deposited to the corporate account.
Checks with payee’s name followed by “or Cash” is strictly not acceptable as Philippine Clearing House
Commission’s mandate.
Telephone Interview with Prescillepearl C. Baril, Branch Operations Head, China Banking Corporation
(November 26, 2019).

Second endorsed checks are strictly not acceptable. Acceptance of SEC are rarely accepted. We are really strict
with it. For example, A check payable to ABC Inc. but the bank account name is ABC Incorporated is not
acceptable.
Telephone Interview with Jay-Nova S.Potot, Operations Office, Security Bank Corporation (November 26,
2019).

Second endorsed checks are by default not allowed but subject to further approval may be accepted.
Telephone Interview with Shaira Melissa Hernandez, Assistant Manager, Bank of the Philipine Islands
(November 27, 2019).

III. Analysis/Discussion

No existing laws explicitly and clearly repeal the Negotiable Instruments Law of the
Philippines. It is still used and been using by all business transactions. However, with the birth
of increase awareness to fraud cases, the banks now are more vigilant to fraud incidents
involving second endorsed checks. There has been recorded fraud cases involving this second
endorsed checks. As a result thereto, the Bangko Sentral issued a 2002 Circular containing an
advice to limit the acceptance of second endorsed checks.
Second-endorsed checks are checks which are presented for payment not by the payees
but by subsequent holders to whom the checks were endorsed by the payees. Normally, checks
are deposited with a collecting bank with the payees signing their endorsement on the checks.
This act constitutes the first-endorsement of these checks. If instead of depositing the check,
the payee endorses the check to a third party and such third party in turn deposits the check
to his bank account, such act by the third party now constitutes a second-endorsement. Such
 second-endorsement is not prohibited by law, as in fact, it is a recognized transaction under
the Negotiable Instruments Law. Thus, acceptance by banks of second-endorsed checks is not
illegal. Yet, some banks have adopted internal policies which disallow outright acceptance of
these checks. Some other banks may allow acceptance in very limited instances and subject to
strict risk controls. The policy on the acceptance of these checks differs from one bank to
another.
Related to this subject, the Bangko Sentral in a 2002 Circular Letter advised as follows:
“(B)anks should limit the acceptance of second-endorsed checks from properly identified
clients and only after establishing that the nature of the business of said client justifies, or at
least, makes practical the deposit of second-endorsed checks. In case of isolated transactions
involving deposits of second-endorsed checks by clients who are not engaged in trade or
business, the identity or the first endorser should be established and the record of the
identification shall also be kept for five years. It is also understood that banks shall at all times
follow the Know-Your-Customer (KYC) rules whenever they handle or transacts second-
endorsement checks.”
The above-mentioned Circular Letter was supplemented by a 2004 Circular Letter
which enjoined banks “to take the necessary precaution in accepting deposit of second-
endorsed dividend checks, especially those in unusually large volume. Banks should examine
thoroughly dividend checks with particular attention to the payee’s endorsement.”
What can be gathered is that the acceptance of second-endorsed checks is a matter
of serious policy concern. Unless the first-endorser is a client of the collecting bank, it
would be very difficult for that bank to verify the authenticity of his endorsement, such
that if it turns out that the same is a forgery, the bank can be held liable for the amount of
the check. This is because once the collecting bank sends the check for clearing, it is
required, under clearing rules, to warrant the genuineness of all prior signatures appearing
on the check.
Of course, the collecting bank can proceed against its depositor who deposited the
second-endorsed check, and that is, if said depositor has remained a bank client and has
sufficient funds or a credit line to cover the loss. The bank can adopt risk safeguards which
may have to be maintained for a long time because, under the law, the payee (whose
signature was forged) has five years to file a claim counted from the discovery of the
forgery. That will be a long wait for the collecting bank.
Another risk that the banks should guard against is the use of second-endorsed checks
as a medium for money laundering arising, for example, from a syndicated theft of dividend
checks and the forgery of the signatures of the payees thereof, or the evasion by money
launderers of the KYC rules by endorsing checks payable to them to third parties.
Special Law versus Circulars
While it is clear that there is specific circular issued by Banko Sentral limiting the
acceptance of the banks of the second endorsed check, let us now know the power of Special law
versus Circulars as issuances.
Executive Order No. 292, Section 50 defines circulars as issuances prescribing policies,
rules and regulations, and procedures promulgated pursuant to law, applicable to individuals and
organizations outside the Government and designed to supplement provisions of the law or to
provide means for carrying them out, including information relating thereto.
Courts have held that instructions given by a statutory body under its rule making powers
dealing with service matters are not considered to have statutory backing and hence are not
enforceable, as such instructions are a mere declaration of policy. Therefore, the lack of statutory
force can be seen as the reason for the non-binding nature of the administrative instructions. While
the main purpose of administrative instruction is to fill the lacunae in the statutes and supplement
the rules and regulations, it is often observed that such instructions directly trench upon the ambit
of the legislature. This gives rise to confusion as to whether the statute will be binding or the
administrative instructions. Further, many a times an administrative instruction is nullified by the
enactment of a statute. There have been instances where administrative directions were found to
be inconsistent with the judicial decisions on the one hand and judicial decisions that are
incompatible with administrative directions on the other. Administrative decisions issued by
executive authority cannot supersede a statutory provision.
The Circular 2002 issued by the BSP is an example of issuance which provides means in
carrying laws related to second endorsed checks.
It is clear therefore that circulars do not supersede special laws.

IV. Conclusion

No existing laws explicitly and clearly repeal the Negotiable Instruments Law of the
Philippines. It is still used and been using by all business transactions.
As computers had taken over the markets in an effort to ease the burden on
international trade, negotiable instruments had been viewed as obsolete by many due to their
original paper form. But it is still a fact that despite the obsolete form of this instruments, their
use is till been enjoyed by many though in a limited form.
As to the issue on endorsement, second endorsement is contained in the Negotiable
Instruments Law of the Philipines, however there was a cloud created with this application
with the issuance of circular 2002 issued by the BSP which limits acceptance by the bank of
second endorsed checks. It is now clear that second-endorsement is not prohibited by law, as
in fact, it is a recognized transaction under the Negotiable Instruments Law. Thus, acceptance
by banks of second-endorsed checks is not illegal. The circular is only an advice enjoining
banks to adopt stricter policy guidelines in the acceptance of second-endorsed checks to ensure
that they are not being used as instruments for money laundering or other illegal activities.
Therefore, the negotiable instruments law of the Philippines is not irrelevant in the
banking system but there is already a limitation as to its use. To some extent, commercial law
is a reflection of customs and usages of trade in the business world. The development of the
law concerning commercial paper—checks, promissory notes and the like—grew from
commercial necessity and its use is affected now by the technology.