G.R. No.

L-36549 October 5, 1988

FAR EAST REALTY INVESTMENT INC., petitioner-appellant,

vs.
THE HONORABLE COURT OF APPEALS, DY HIAN TAT, SIY CHEE and GAW SUY AN, respondents-
appellees.

Crispino P. Reyes for petitioner-appellant.

Uy and Bacabac Law Offices for respondents-appellees.

PARAS, J.

This is a petition for review of the February 12, 1973 decision of the Court of Appeals * in CA-G.R. No. 01031-SP, "Dy
Hian Tat, et al. v. Hon. Alberto Francisco, et als.", reversing the judgment of the Court of First Instance of Manila, which
ordered private respondents to pay, jointly and severally, the petitioner the sum of P4,500.00 plus interest at the rate of
14% per annum, from September 13, 1960, until fully paid, plus the sum of P1,000.00 as attorney's fees.

The dispositive portion of respondent appellate court's decision reads:

IN VIEW WHEREOF, this Court is constrained to grant as it now grants, the remedy prayed for; the
judgment sought to be reviewed is hereby reversed; complaint is dismissed; but for lack of sufficient
merit, the claim of defendants for attorney's fees and damages is overruled; costs are however adjudged
against plaintiff in all instances.

IT IS SO ORDERED. (Rollo P. 126)

The antecedent facts of this case are as follows:

In its complaint dated May 9,1968, filed with the City Court of Manila, (Civil Case No. 170859) against the private
respondents for the collection and payment of P4,500.00 representing the face value of an unpaid and dishonored cheek,
the petitioner alleged, among others, that on September 13, 1960, the private respondents approached the petitioner at its
office in Manila and asked the latter to extend to them an accommodation loan in the sum of P4,500.00, Philippine
Currency, which they needed in their business, and which they promised to pay, jointly and severally, in one month time;
that they proposed to pay the petitioner interest thereon at the rate of 14% per annum, as in fact they delivered to the
petitioner the China Banking Corporation Check No. VN-915564, dated September 13, 1960, for P4,500.00, drawn by Dy
Hian Tat, and signed by them at the back of said check, with the assurance that after one month from September 13, 1960,
the said check would be redeemed by them by paying cash in the sum of P4,500.00, or the said check can be presented for
payment on or immediately after one month and said bank would honor the same; that, in order to accomodate the private
respondents, the petitioner agreed and actually extended to the private respondents an accommodation loan in the sum of
P4,500.00 under the aforesaid conditions proposed by the private respondents, which amount was delivered to the later;
that on March 5, 1964, the aforesaid check was presented for payment to the China Banking Corporation, but said check
bounced and was not cashed by said bank, for the reason that the current account of the drawer thereof had already been
closed; and that subsequently, the petitioner demanded from the private respondents the payment of their aforesaid loan
obligation, but the latter failed and refused to pay notwithstanding repeated demands therefor (Rollo, pp. 35-37).

Private respondent Gaw Suy An filed an answer with compulsory counterclaim dated July 8, 1968 denying the material
allegations contained in the complaint and by way of special and affirmative defenses alleged that the petitioner has no
cause of action against him because as it appears on the endorsement at the back of CBC Check No. VN-915564, he
signed said endorsement for his principal, the Victory Hardware and not for his own individual account, hence, could not
be made personally liable therefor and granting that he acted in his own capacity as the endorser, he has been wholly
discharged by delay in presentment of the check for payment. (Rollo, pp. 39-40).

Private respondent Dy Hian Tat likewise filed his answer with compulsory counterclaim, dated February 27, 1970,
denying the material allegations contained in the complaint and by way of special and affirmative defenses alleged that he
never had any transaction or negotiation of any check with the petitioner at anytime, so it could not be true that he and the
other defendants approached the petitioner on September 13, 1960, for an accommodation loan of P4,500.00 for which
they delivered to the petitioner CBC Check No. VN-915564 dated September 13, 1960 because as far as he could
remember, said check was delivered by him to Sin Chin Juat Grocery and not to the petitioner; that the manner the said
check was negotiated is clearly evident by the endorsement at its back which clearly belies the claim of the petitioner that
he (Dy Hian Tat) was one of those who approached the petitioner at its office on September 13, 1960 to deliver the check
in exchange for an accommodation loan of P4,500.00; that according to the immediate endorser, Gaw Suy An, who
endorsed the check for his principal, Victory Hardware, this check was delivered to the Asian Surety & Insurance Co.,
Inc., to be applied to the indebtedness of the Victory Hardware with said Insurance Company; and that petitioner not
being a holder of the check for value, has no recourse against the immediate endorser, and neither with the drawer thereof,
and considering that this check in question was dated September 13, 1960 and deposited only for payment on March 5,
1964, this unreasonable delay in presentment wholly discharged not only the endorser but also the drawer (Rollo, pp. 43-
44).

On March 31, 1970, private respondent Siy CHEE was declared in default
(Rollo, p. 45).

After hearing, the City Court of Manila ** rendered its decision in favor of the petitioner, the dispositive portion of which
reads:

After considering the evidence presented by the parties, judgment is hereby rendered, ordering the three
defendants to pay the plaintiff, jointly and severally, the sum of P4,500.00 with interest thereon at the
legal rate from September 13, 1960 until the said amount is fully paid; plus the sum of P500.00 by way of
attorney's fees, plus the costs of suit.

The counterclaim filed by the defendants Gaw Suy An and Dy Hiat Tat are hereby dismissed for lack of
basis.

SO ORDERED. (Rollo, p. 45).

The decision of the city court was appealed by the private respondents to the Court of First Instance of Manila, where the
case was heard de novo for lack of transcript of stenographic notes taken in the city court.

After trial, the Court of First Instance of Manila, Branch IX, *** rendered a decision in Civil Case No. 80583, dated
October 15, 1971, affirming the decision of the city court, the dispositive portion of which reads as follows:

WHEREFORE' in view of all the foregoing considerations, judgment is hereby rendered in favor of the
plaintiff and against defendants Dy Hian Tat, Gaw Suy An and Siy Chee ordering the latter to pay, jointly
and severally, the plaintiff the sum of P4,500.00, plus interest at the rate of 14% per annum, from
September 13, 1960, until fully paid, plus the sum of Pl,000.00 in the concept of attorney's fees; and costs
of suit.

SO ORDERED. (Rollo, p. 9).

The private respondents filed a petition for review of the foregoing decision with the Court of Appeals.

On February 12, 1973, the appellate court, finding that the questioned check was not given as collateral to guarantee a
loan secured by the three private respondents who allegedly came as a group to the Far East Realty Investment, Inc., on
September 13, 1960, but passed through other hands before reaching the petitioner and the said check was not presented
within a reasonable time and after its issuance, reversed the decision of the Court of First Instance (Rollo, p. 126).

Its motion for reconsideration having been denied, petitioner filed the instant petition.

The main issue in this case is whether or not presentment for payment and notice of dishonor of the questioned check
were made within reasonable time.

The petitioner argues that presentment for payment may be dispensed with if it will be useless. Hence, the drawer is liable
upon a check although it has not been presented to the bank for payment and although payment has not been refused,
where such a presentment would be useless because of the conduct or action of the drawer in the matter or where the
check is drawn on insufficient funds or no funds. Likewise, presentment for payment is not required in order to charge the
drawer, and that notice of dishonor is not required to be given to the drawer where he has no right to expect or require that
the drawee or acceptor wig pay or honor the instrument. Therefore, where presentment for payment and notice of
dishonor are not necessary as when funds are insufficient to meet a check, the drawer is liable, whether such presentment
and notice be totally omitted or merely delayed. However, in a situation where the presentment and/or notice is required
to be made without unreasonable delay, the drawer is discharged "pro tanto" or only up to the degree of the loss suffered,
by reason of delay. Since discharge is the exception to the general rule, the loss must be proven by the drawer. The drawer
in the instant case has not presented in evidence any loss which he may have suffered by reason of the delay.

On the other hand, the private respondents maintain that the questioned check was in fact drawn by Dy Bun Kim son of
Dy Hiat Tat, and delivered to the Sin Chin Juat Grocery in payment of grocery goods for the Goodyear Climber and not to
the Far East with which private respondents have no transaction of any kind. Such being the case, said check was not
delivered directly to the Far East in exchange for the alleged P4,500.00 as claimed by William Li Yao. Therefore, the
alleged cash of P4,500.00 claimed to have been delivered by Li Yao on September 13, 1960 could not in fact be
considered as the consideration for Far East as holder of the check because said delivery of the check in exchange for the
alleged P4,500.00 is contrary to the findings of fact by the Court of Appeals. Petitioner, therefore, cannot be considered a
holder of the check for value and in due course. Whether there was due presentment or not of the check, or whether there
was notice of dishonor or not to the drawer and endorsers, the petitioner cannot recover the amount of P4,500.00 which
was in fact not delivered to the private respondents nor the amount of the check for lack of consideration.
It is further argued by the private respondents that in order to charge the persons secondarily liable, such as drawer and
endorsers, the instrument must be presented for payment on the date and period therein mentioned in the instrument, if it
is payable on a fixed date, or within a reasonable time after issue, otherwise, the drawer and endorsers are discharged
from liability. The questioned check was dated September 13, 1960. Granting that it was agreed that it will only be
deposited after one month from its date, it should have been deposited for payment after one month and not only on
March 5, 1964. This delay in the presentment for payment of the check cannot be construed as a reasonable time.

The petition is devoid of merit.

Where the instrument is not payable on demand, presentment must be made on the day it fags due. Where it is payable on
demand, presentment must be made within a reasonable time after issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. (Section 71,
Negotiable Instruments Law).

Notice may be given as soon as the instrument is dishonored; and unless delay is excused must be given within the time
fixed by the law (Section 102, Negotiable Instruments Law).

No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an unreasonable
time, because "reasonable time" depends upon the peculiar facts and circumstances in each case (Tolentino,
Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eighth Edition, p. 327).

It is obvious in this case that presentment and notice of dishonor were not made within a reasonable time.

"Reasonable time" has been defined as so much time as is necessary under the circumstances for a reasonable prudent and
diligent man to do, conveniently, what the contract or duty requires should be done, having a regard for the rights, and
possibility of loss, if any, to the other party (Citizens' Bank Bldg. v. L & E. Wertheirmer 189 S.W. 361, 362, 126 Ark, 38,
Ann. Cas. 1917 E, 520).

In the instant case, the check in question was issued on September 13, 1960, but was presented to the drawee bank only
on March 5, 1964, and dishonored on the same date. After dishonor by the drawee bank, a formal notice of dishonor was
made by the petitioner through a letter dated April 27, 1968. Under these circumstances, the petitioner undoubtedly failed
to exercise prudence and diligence on what he ought to do al. required by law. The petitioner likewise failed to show any
justification for the unreasonable delay.

PREMISES CONSIDERED, the petition is DENIED and the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
 FAR EAST REALTY INVESTMENT INC. v. CA
G.R. No. L-36549 October 5, 1988
Paras, J.

Doctrine:
Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable
on demand, presentment must be made within a reasonable time after issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof.

Reasonable Time has been defined as so much time as is necessary under the circumstances for a reasonable prudent and
diligent man to do, conveniently, what the contract or duty requires should be done, having a regard for the rights, and
possibility of loss, if any, to the other party.

No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an unreasonable
time, because reasonable time depends upon the peculiar facts and circumstances in each case.

Facts:
Private respondents asked the petitioner to extend an accommodation loan in the sum of P4,500.00. Respondents
delivered to the petitioner a check for P4,500.00, drawn by Dy Hian Tat, and signed by them at the back of said check,
with the assurance that after one month from September 13, 1960, the said check would be redeemed by them by paying
cash in the sum of P4,500.00, or the said check can be presented for payment on or immediately after one month.
Petitioner agreed and extended an accommodation loan.

The aforesaid check was presented for payment to the China Banking Corporation, but said check bounced and was not
cashed by said bank, for the reason that the current account of the drawer thereof had already been closed. Petitioner
demanded payment from the private but the latter failed and refused to pay notwithstanding repeated demands.

Both private respondents raised the defense that both have been wholly discharged by delay in presentment of the check
for payment.

The Lower Court ruled in favor of the petitioner. However, this was reversed by the CA upon appeal by the respondents,
ruling that the check was not given as collateral to guarantee a loan secured since the check passed through other hands
before reaching the petitioner and the said check was not presented within a reasonable time. Hence this petition.

Petitioner argues that presentment for payment and notice of dishonor are not necessary as when funds are insufficient to
meet a check, thus the drawer is liable, whether such presentment and notice be totally omitted or merely delayed.

Issues:
1. Whether or not presentment for payment can be dispensed with
2. Whether or not presentment for payment and notice of dishonor of the questioned check were made within reasonable
time

Held:
1. No. Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is
payable on demand, presentment must be made within a reasonable time after issue, except that in the case of a bill of
exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof
(Section 71, Negotiable Instruments Law).

2. No. It is obvious in this case that presentment and notice of dishonor were not made within a reasonable time.

Reasonable time has been defined as so much time as is necessary under the circumstances for a reasonable prudent and
diligent man to do, conveniently, what the contract or duty requires should be done, having a regard for the rights, and
possibility of loss, if any, to the other party (Citizens Bank Bldg. v. L & E. Wertheirmer 189 S.W. 361, 362, 126 Ark, 38,
Ann. Cas. 1917 E, 520).

Notice may be given as soon as the instrument is dishonored; and unless delay is excused must be given within the time
fixed by the law (Section 102, Negotiable Instruments Law).

In the instant case, the check in question was issued on September 13, 1960, but was presented to the drawee bank only
on March 5, 1964, and dishonored on the same date. After dishonor by the drawee bank, a formal notice of dishonor was
made by the petitioner through a letter dated April 27, 1968. Under these circumstances, the petitioner undoubtedly failed
to exercise prudence and diligence on what he ought to do al. required by law. The petitioner likewise failed to show any
justification for the unreasonable delay.

No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an unreasonable
time, because reasonable time depends upon the peculiar facts and circumstances in each case (Tolentino,
Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eighth Edition, p. 327).
G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

x-----------------------x

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari 1 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 Decision 3 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 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

HSBCs 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 P19,572,992.10
and P32,904,437.30, 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 P19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

 July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

December 1998 2,684,097.50

Total P32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven Rualo, issued BIR
Ruling No. 132-99 to the effect that instructions or advises from abroad on the management of 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:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA

& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila

Attn: Atty. Tomas C. Toledo

Tax Counsel

Gentlemen:

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 whether or not the electronic instructions involving the following transactions of
residents and non-residents of the Philippines with respect to their local or foreign currency accounts are subject to
documentary stamp tax under Section 181 of the 1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a named
recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual fund transfer since
the funds are already in the 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, the payment is against the delivery of investments purchased. The
purchase of investments and the payment comprise one single transaction. DST has already been paid under Section 176
for the investment purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may be another bank, a
corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named
recipient, who may be another bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or tested cable, and may
not refer to any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in the Philippines is
permitted by the 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 (P200), 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 payors 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 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 payees 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-clients 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 P19,572,992.10 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 P32,904,437.30 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 P30,360,570.75 in CTA Case No. 6009 and P16,436,395.83 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 HSBCs 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 payors local or foreign currency account in the Philippines is the actual transaction that should
be properly entered as such.9

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 P30,360,570.75 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 P16,436,395.83 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 HSBCs
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 drawers 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 [HSBCs] 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 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 latters
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 CTAs 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 HSBCs 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 HSBCs 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-
payors] 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.

Section 181 of the 1997 Tax Code, which governs HSBCs 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
(P200), 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 HSBCs 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 P200 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.1wphi1 The identical text and common history of Section 230 of the 1977 Tax Code, as 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 exchange 28] 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 drawees consent to the drawers order to pay money and the expression of the drawees 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." 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

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 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.
[G.R. No. 105774. April 25, 2002]

GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG LIN, petitioners, vs. THE COURT OF
APPEALS and BANCASIA FINANCE AND INVESTMENT CORPORATION, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Revised Rules on Civil Procedure assailing the
June 9, 1992 Decision[1] of the Court of Appeals[2] in CA-G.R. CV No. 20167. The Court of Appeals affirmed the January
26, 1988 Decision[3] of the Regional Trial Court of Manila, Branch 52, [4] ordering petitioners Great Asian Sales Center
Corporation (Great Asian for brevity) and Tan Chong Lin to pay, solidarily, respondent Bancasia Finance and Investment
Corporation (Bancasia for brevity) the amount of P1,042,005.00. The Court of Appeals affirmed the trial courts award of
interest and costs of suit but deleted the award of attorneys fees.

The Facts

Great Asian is engaged in the business of buying and selling general merchandise, in particular household
appliances. On March 17, 1981, the board of directors of Great Asian approved a resolution authorizing its Treasurer and
General Manager, Arsenio Lim Piat, Jr. (Arsenio for brevity) to secure a loan from Bancasia in an amount not to
exceed P1.0 million. The board resolution also authorized Arsenio to sign all papers, documents or promissory notes
necessary to secure the loan. On February 10, 1982, the board of directors of Great Asian approved a second resolution
authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2.0 million. The second
board resolution also designated Arsenio as the authorized signatory to sign all instruments, documents and checks
necessary to secure the discounting line.

On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to guarantee, solidarily, the debts
of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin signed a Comprehensive and Continuing Surety
Agreement in favor of Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. Thus, Tan Chong Lin
signed two surety agreements (Surety Agreements for brevity) in favor of Bancasia.

Great Asian, through its Treasurer and General Manager Arsenio, signed four (4) Deeds of Assignment of
Receivables (Deeds of Assignment for brevity), assigning to Bancasia fifteen (15) postdated checks. Nine of the checks
were payable to Great Asian, three were payable to New Asian Emp., and the last three were payable to cash. Various
customers of Great Asian issued these postdated checks in payment for appliances and other merchandise.

Great Asian and Bancasia signed the first Deed of Assignment on January 12, 1982 covering four postdated checks
with a total face value of P244,225.82, with maturity dates not later than March 17, 1982. Of these four postdated checks,
two were dishonored. Great Asian and Bancasia signed the second Deed of Assignment also on January 12, 1982
covering four postdated checks with a total face value of P312,819.00, with maturity dates not later than April 1,
1982. All these four checks were dishonored. Great Asian and Bancasia signed the third Deed of Assignment on February
11, 1982 covering eight postdated checks with a total face value of P344,475.00, with maturity dates not later than April
30, 1982. All these eight checks were dishonored. Great Asian and Bancasia signed the fourth Deed of Assignment on
March 5, 1982 covering one postdated check with a face value of P200,000.00, with maturity date on March 18,
1982. This last check was also dishonored. Great Asian assigned the postdated checks to Bancasia at a discount rate of
less than 24% of the face value of the checks.

Arsenio endorsed all the fifteen dishonored checks by signing his name at the back of the checks. Eight of the
dishonored checks bore the endorsement of Arsenio below the stamped name of Great Asian Sales Center, while the rest
of the dishonored checks just bore the signature of Arsenio. The drawee banks dishonored the fifteen checks on maturity
when deposited for collection by Bancasia, with any of the following as reason for the dishonor: account closed, payment
stopped, account under garnishment, and insufficiency of funds. The total amount of the fifteen dishonored checks is
P1,042,005.00. Below is a table of the fifteen dishonored checks:

Drawee Bank Check No. Amount Maturity Date

1st Deed

Solid Bank C-A097480 P137,500.00 March 16, 1982

Pacific Banking Corp. 23950 P47,211.00 March 17, 1982

2nd Deed

Metrobank 030925 P68,722.00 March 19, 1982

 030926 P45,230.00 March 19, 1982

Solidbank C-A097478 P140,000.00 March 23, 1982

Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982

3rd Deed

Phil. Trust Company 060835 P21,228.00 April 21, 1982

060836 P22,187.00 April 28, 1982

Allied Banking Corp. 11251624 P41,773.00 April 22, 1982

11251625 P38,592.00 April 29, 1982

Pacific Banking Corp. 237984 P37,886.00 April 23, 1982

237988 P47,385.00 April 28, 1982

237985 P46,748.00 April 30, 1982

Security Bank & Trust Co. 22061 P88,676.00 April 30, 1982

4th Deed

Pacific Banking Corp. 860178 P200,000.00 March 18, 1982

After the drawee bank dishonored Check No. 097480 dated March 16, 1982, Bancasia referred the matter to its
lawyer, Atty. Eladia Reyes, who sent by registered mail to Tan Chong Lin a letter dated March 18, 1982, notifying him of
the dishonor and demanding payment from him. Subsequently, Bancasia sent by personal delivery a letter dated June 16,
1982 to Tan Chong Lin, notifying him of the dishonor of the fifteen checks and demanding payment from him. Neither
Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks.

On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila a petition for insolvency, verified
under oath by its Corporate Secretary, Mario Tan. Attached to the verified petition was a Schedule and Inventory of
Liabilities and Creditors of Great Asian Sales Center Corporation, listing Bancasia as one of the creditors of Great Asian
in the amount of P1,243,632.00.

On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong
Lin. Bancasia impleaded Tan Chong Lin because of the Surety Agreements he signed in favor of Bancasia. In its answer,
Great Asian denied the material allegations of the complaint claiming it was unfounded, malicious, baseless, and
unlawfully instituted since there was already a pending insolvency proceedings, although Great Asian subsequently
withdrew its petition for voluntary insolvency. Great Asian further raised the alleged lack of authority of Arsenio to sign
the Deeds of Assignment as well as the absence of consideration and consent of all the parties to the Surety Agreements
signed by Tan Chong Lin.

Ruling of the Trial Court

The trial court rendered its decision on January 26, 1988 with the following findings and conclusions:

From the foregoing facts and circumstances, the Court finds that the plaintiff has established its causes of action against
the defendants. The Board Resolution (Exh. T), dated March 17, 1981, authorizing Arsenio Lim Piat, Jr., general manager
and treasurer of the defendant Great Asian to apply and negotiate for a loan accommodation or credit line with the
plaintiff Bancasia in an amount not exceeding One Million Pesos (P1,000,000.00), and the other Board Resolution
approved on February 10, 1982, authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian Center a discounting line
with Bancasia at prevailing discounting rates in an amount not to exceed Two Million Pesos (P2,000,000.00), both of
which were intended to secure money from the plaintiff financing firm to finance the business operations of defendant
Great Asian, and pursuant to which Arsenio Lim Piat, Jr. was able to have the aforementioned fifteen (15) checks
totaling P1,042,005.00 discounted with the plaintiff, which transactions were obviously known by the beneficiary thereof,
defendant Great Asian, as in fact, in its aforementioned Schedule and Inventory of Liabilities and Creditors (Exh. DD,
DD-1) attached to its Verified Petition for Insolvency, dated May 12, 1982 (pp. 50-56), the defendant Great Asian
admitted an existing liability to the plaintiff, in the amount of P1,243,632.00, secured by it, by way of financing
accommodation, from the said financing institution Bancasia Finance and Investment Corporation, plaintiff herein,
sufficiently establish the liability of the defendant Great Asian to the plaintiff for the amount of P1,042,005.00 sought to
be recovered by the latter in this case. [5]

xxx
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the two (2) defendants ordering the
latter, jointly and severally, to pay the former:

(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from the filing of the complaint until the
same is fully paid;

(b) Attorneys fees equivalent to twenty per cent (20%) of the total amount due; and

(c) The costs of suit.

SO ORDERED.[6]

Ruling of the Court of Appeals

On appeal, the Court of Appeals sustained the decision of the lower court, deleting only the award of attorneys fees,
as follows:

As against appellants bare denial of it, the Court is more inclined to accept the appellees version, to the effect that the
subject deeds of assignment are but individual transactions which -- being collectively evidentiary of the loan
accommodation and/or credit line it granted the appellant corporation -- should not be taken singly and distinct
therefrom. In addition to its plausibility, the proposition is, more importantly, adequately backed by the documentary
evidence on record. Aside from the aforesaid Deeds of Assignment (Exhs. A, D, I, and R) and the Board Resolutions of
the appellant corporations Board of Directors (Exhs. T, U and V), the appellee -- consistent with its theory -- interposed
the Surety Agreements the appellant Tan Chong Lin executed (Exhs. W and X), as well as the demand letters it served
upon the latter as surety (Exhs. Y and Z). It bears emphasis that the second Resolution of the appellant corporations Board
of Directors (Exh. V) even closely coincides with the execution of the February 11, 1982 and March 5, 1982 Deeds of
Assignment (Exhs. I and R). Were the appellants posturings true, it seems rather strange that the appellant Tan Chong Lin
did not even protest or, at least, make known to the appellee what he -- together with the appellant corporation --
represented to be a corporate larceny to which all of them supposedly fell prey. In the petition for voluntary insolvency it
filed, the appellant corporation, instead, indirectly acknowledged its indebtedness in terms of financing accommodations
to the appellee, in an amount which, while not exactly matching the sum herein sought to be collected, approximates the
same (Exhs. CC, DD and DD-1).[7]

xxx

The appellants contend that the foregoing warranties enlarged or increased the suretys risk, such that appellant Tan Chong
Lin should be released from his liabilities (pp. 37-44, Appellants Brief). Without saying more, the appellants position is,
however, soundly debunked by the undertaking expressed in the Comprehensive and Continuing Surety Agreements
(Exhs. W and X), to the effect that the xxx surety/ies, jointly and severally among themselves and likewise with the
principal, hereby agree/s and bind/s himself to pay at maturity all the notes, drafts, bills of exchange, overdrafts and other
obligations which the principal may now or may hereafter owe the creditor xxx. With the possible exception of the fixed
ceiling for the amount of loan obtainable, the surety undertaking in the case at bar is so comprehensive as to contemplate
each and every condition, term or warranty which the principal parties may have or may be minded to agree on. Having
affixed his signature thereto, the appellant Tan Chong Lin is expected to have, at least, read and understood the same.

xxx

With the foregoing disquisition, the Court sees little or no reason to go into the appellants remaining assignments of error,
save the matter of attorneys fees. For want of a statement of the rationale therefore in the body of the challenged decision,
the trial courts award of attorneys fees should be deleted and disallowed (Abrogar vs. Intermediate Appellate Court, 157
SCRA 57).

WHEREFORE, the decision appealed from is MODIFIED, to delete the trial courts award of attorneys fees. The rest is
AFFIRMED in toto.

SO ORDERED.[8]

The Issues

The petition is anchored on the following assigned errors:

1. The respondent Court erred in not holding that the proper parties against whom this action for collection
should be brought are the drawers and indorser of the checks in question, being the real parties in interest,
and not the herein petitioners.

2. The respondent Court erred in not holding that the petitioner-corporation is discharged from liability for
failure of the private respondent to comply with the provisions of the Negotiable Instruments Law on the
dishonor of the checks.
 3. The respondent Court erred in its appreciation and interpretation of the effect and legal consequences of the
signing of the deeds of assignment and the subsequent indorsement of the checks by Arsenio Lim Piat, Jr. in
his individual and personal capacity and without stating or indicating the name of his supposed principal.

4. The respondent Court erred in holding that the assignment of the checks is a loan accommodation or credit
line accorded by the private respondent to petitioner-corporation, and not a purchase and sale thereof.

5. The respondent Court erred in not holding that there was a material alteration of the risk assumed by the
petitioner-surety under his surety agreement by the terms, conditions, warranties and obligations assumed by
the assignor Arsenio Lim Piat, Jr. under the deeds of assignment or receivables.

6. The respondent Court erred in holding that the petitioner-corporation impliedly admitted its liability to
private respondent when the former included the latter as one of its creditors in its petition for voluntary
insolvency, although no claim was filed and proved by the private respondent in the insolvency court.

7. The respondent Court erred in holding the petitioners liable to private respondent on the transactions in
question.[9]

The issues to be resolved in this petition can be summarized into three:

1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF ASSIGNMENT AND THUS
BIND GREAT ASIAN;

2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE DEEDS OF ASSIGNMENT FOR
BREACH OF CONTRACT PURSUANT TO THE CIVIL CODE, INDEPENDENT OF THE
NEGOTIABLE INSTRUMENTS LAW;

3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE SURETY AGREEMENTS.

The Courts Ruling

The petition is bereft of merit.

First Issue: Authority of Arsenio to Sign the Deeds of Assignment

Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed the checks in his personal
capacity. The primordial question that must be resolved is whether Great Asian authorized Arsenio to sign the Deeds of
Assignment. If Great Asian so authorized Arsenio, then Great Asian is bound by the Deeds of Assignment and must honor
its terms.

The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the
corporation, save in those instances where the Code requires stockholders approval for certain specific acts. Section 23 of
the Code provides:

SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees x x x.

In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on
authority of the board of directors. The board of directors normally designates one or more corporate officers to sign loan
documents or deeds of assignment for the corporation.

To secure a credit accommodation from Bancasia, the board of directors of Great Asian adopted two board
resolutions on different dates, the first on March 17, 1981, and the second on February 10, 1982. These two board
resolutions, as certified under oath by Great Asians Corporate Secretary Mario K. Tan, state:

First Board Resolution

RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat, Jr., be authorized as he is authorized to
apply for and negotiate for a loan accommodation or credit line in the amount not to exceed ONE MILLION
PESOS (P1,000,000.00), with Bancasia Finance and Investment Corporation, and likewise to sign any and all
papers, documents, and/or promissory notes in connection with said loan accommodation or credit line, including the
power to mortgage such properties of the corporation as may be needed to effectuate the same. [10] (Emphasis
supplied)

Second Board Resolution

 RESOLVED that Great Asian Sales Center Corp. obtain a discounting line with BANCASIA FINANCE &
INVESTMENT CORPORATION, at prevailing discounting rates, in an amount not to exceed** TWO MILLION
PESOS ONLY (P2,000,000),** Philippine Currency.

RESOLVED FURTHER, that the corporation secure such other forms of credit lines with BANCASIA FINANCE &
INVESTMENT CORPORATION in an amount not to exceed** TWO MILLION PESOS ONLY (P2,000,000.00),**
PESOS, under such terms and conditions as the signatories may deem fit and proper.

RESOLVED FURTHER, that the following persons be authorized individually, jointly or collectively to sign,
execute and deliver any and all instruments, documents, checks, sureties, etc. necessary or incidental to secure any of
the foregoing obligation:

(signed)

Specimen Signature

1. ARSENIO LIM PIAT, JR._

2. _______________________

3. _______________________

4. _______________________

PROVIDED FINALLY that this authority shall be valid, binding and effective until revoked by the Board of
Directors in the manner prescribed by law, and that BANCASIA FINANCE & INVESTMENT CORPORATION
shall not be bound by any such revocation until such time as it is noticed in writing of such revocation. [11] (Emphasis
supplied)

The first board resolution expressly authorizes Arsenio, as Treasurer of Great Asian, to apply for a loan
accommodation or credit line with Bancasia for not more than P1.0 million. Also, the first resolution explicitly
authorizes Arsenio to sign any document, paper or promissory note, including mortgage deeds over properties of Great
Asian, to secure the loan or credit line from Bancasia.

The second board resolution expressly authorizes Great Asian to secure a discounting line from Bancasia for not
more than P2.0 million. The second board resolution also expressly empowers Arsenio, as the authorized signatory of
Great Asian, to sign, execute and deliver any and all documents, checks x x x necessary or incidental to secure the
discounting line. The second board resolution specifically authorizes Arsenio to secure the discounting line under such
terms and conditions as (he) x x x may deem fit and proper.

As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a loan or discounting
line from Bancasia. The two board resolutions also categorically designate Arsenio as the authorized signatory to sign and
deliver all the implementing documents, including checks, for Great Asian. There is no iota of doubt whatsoever about the
purpose of the two board resolutions, and about the authority of Arsenio to act and sign for Great Asian. The second board
resolution even gave Arsenio full authority to agree with Bancasia on the terms and conditions of the discounting
line. Great Asian adopted the correct and proper board resolutions to secure a loan or discounting line from Bancasia, and
Bancasia had a right to rely on the two board resolutions of Great Asian. Significantly, the two board resolutions
specifically refer to Bancasia as the financing institution from whom Great Asian will secure the loan accommodation or
discounting line.

Armed with the two board resolutions, Arsenio signed the Deeds of Assignment selling, and endorsing, the fifteen
checks of Great Asian to Bancasia. On the face of the Deeds of Assignment, the contracting parties are indisputably Great
Asian and Bancasia as the names of these entities are expressly mentioned therein as the assignor and assignee,
respectively. Great Asian claims that Arsenio signed the Deeds of Assignment in his personal capacity because Arsenio
signed above his printed name, below which was the word Assignor, thereby making Arsenio the assignor. Great Asian
conveniently omits to state that the first paragraph of the Deeds expressly contains the following words: the ASSIGNOR,
Great Asian Sales Center, a domestic corporation x x x herein represented by its Treasurer Arsenio Lim Piat, Jr. The
assignor is undoubtedly Great Asian, represented by its Treasurer, Arsenio. The only issue to determine is whether the
Deeds of Assignment are indeed the transactions the board of directors of Great Asian authorized Arsenio to sign under
the two board resolutions.

Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a discount, over three months, to
Bancasia. The Deeds of Assignment uniformly state that Great Asian,

x x x for valuable consideration received, does hereby SELL, TRANSFER, CONVEY, and ASSIGN, unto the
ASSIGNEE, BANCASIA FINANCE & INVESTMENT CORP., a domestic corporation x x x, the following
ACCOUNTS RECEIVABLES due and payable to it, having an aggregate face value of x x x.
The Deeds of Assignment enabled Great Asian to generate instant cash from its fifteen checks, which were still not due
and demandable then. In short, instead of waiting for the maturity dates of the fifteen postdated checks, Great Asian sold
the checks to Bancasia at less than the total face value of the checks. In exchange for receiving an amount less than the
face value of the checks, Great Asian obtained immediately much needed cash. Over three months, Great Asian entered
into four transactions of this nature with Bancasia, showing that Great Asian availed of a discounting line with Bancasia.

In the financing industry, the term discounting line means a credit facility with a financing company or bank, which
allows a business entity to sell, on a continuing basis, its accounts receivable at a discount. [12] The term discount means
the sale of a receivable at less than its face value. The purpose of a discounting line is to enable a business entity to
generate instant cash out of its receivables which are still to mature at future dates. The financing company or bank which
buys the receivables makes its profit out of the difference between the face value of the receivable and the discounted
price. Thus, Section 3 (a) of the Financing Company Act of 1998 provides:

Financing companies are corporations x x x primarily organized for the purpose of extending credit facilities to
consumers and to industrial, commercial or agricultural enterprises by discounting or factoring commercial papers
or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of
indebtedness, or by financial leasing of movable as well as immovable property. (Emphasis supplied)

This definition of financing companies is substantially the same definition as in the old Financing Company Act (R.A.
No. 5980).[13]

Moreover, Section 1 (h) of the New Rules and Regulations adopted by the Securities and Exchange Commission to
implement the Financing Company Act of 1998 states:

Discounting is a type of receivables financing whereby evidences of indebtedness of a third party, such as
installment contracts, promissory notes and similar instruments, are purchased by, or assigned to, a financing
company in an amount or for a consideration less than their face value. (Emphasis supplied)

Likewise, this definition of discounting is an exact reproduction of the definition of discounting in the implementing rules
of the old Finance Company Act.

Clearly, the discounting arrangements entered into by Arsenio under the Deeds of Assignment were the very
transactions envisioned in the two board resolutions of Great Asian to raise funds for its business. Arsenio acted
completely within the limits of his authority under the two board resolutions. Arsenio did exactly what the board of
directors of Great Asian directed and authorized him to do.

Arsenio had all the proper and necessary authority from the board of directors of Great Asian to sign the Deeds of
Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of Assignment as agent and authorized
signatory of Great Asian under an authority expressly granted by its board of directors. The signature of Arsenio on the
Deeds of Assignment is effectively also the signature of the board of directors of Great Asian, binding on the board of
directors and on Great Asian itself. Evidently, Great Asian shows its bad faith in disowning the Deeds of Assignment
signed by its own Treasurer, after receiving valuable consideration for the checks assigned under the Deeds.

Second Issue: Breach of Contract by Great Asian

Bancasias complaint against Great Asian is founded on the latters breach of contract under the Deeds of
Assignment. The Deeds of Assignment uniformly stipulate[14] as follows:

If for any reason the receivables or any part thereof cannot be paid by the obligor/s, the ASSIGNOR unconditionally
and irrevocably agrees to pay the same, assuming the liability to pay, by way of penalty three per cent (3%) of the total
amount unpaid, for the period of delay until the same is fully paid.

In case of any litigation which the ASSIGNEE may institute to enforce the terms of this agreement, the ASSIGNOR shall
be liable for all the costs, plus attorneys fees equivalent to twenty-five (25%) per cent of the total amount due. Further
thereto, the ASSIGNOR agrees that any and all actions which may be instituted relative hereto shall be filed before the
proper courts of the City of Manila, all other appropriate venues being hereby waived.

The last Deed of Assignment[15] contains the following added stipulation:

xxx Likewise, it is hereby understood that the warranties which the ASSIGNOR hereby made are deemed part of the
consideration for this transaction, such that any violation of any one, some, or all of said warranties shall be deemed as
deliberate misrepresentation on the part of the ASSIGNOR. In such event, the monetary obligation herein conveyed unto
the ASSIGNEE shall be conclusively deemed defaulted, giving rise to the immediate responsibility on the part of the
ASSIGNOR to make good said obligation, and making the ASSIGNOR liable to pay the penalty stipulated hereinabove
as if the original obligor/s of the receivables actually defaulted. xxx

Obviously, there is one vital suspensive condition in the Deeds of Assignment. That is, in case the drawers fail to pay
the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonored checks,
including penalty and attorneys fees. The failure of the drawers to pay the checks is a suspensive condition, [16] the
happening of which gives rise to Bancasias right to demand payment from Great Asian. This conditional obligation of
Great Asian arises from its written contracts with Bancasia as embodied in the Deeds of Assignment. Article 1157 of the
Civil Code provides that -

Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia the
full value of the dishonored checks. In short, Great Asian sold the postdated checks on with recourse basis against
itself. This is an obligation that Great Asian is bound to faithfully comply because it has the force of law as between Great
Asian and Bancasia. Article 1159 of the Civil Code further provides that -

Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith.

Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the receivables were
negotiable instruments with the endorsement of Arsenio. The contracting parties had the right to adopt the with
recourse stipulation which is separate and distinct from the warranties of an endorser under the Negotiable Instruments
Law. Article 1306 of the Civil Code provides that

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy.

The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of
Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of
dishonor to Great Asian, the latter remains liable to Bancasia because of the with recourse stipulation which is
independent of the warranties of an endorser under the Negotiable Instruments Law.

There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old or new), that prohibits
Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of
Assignment. Instead of being negotiated, a negotiable instrument may be assigned. [17] Assignment of a negotiable
instrument is actually the principal mode of conveying accounts receivable under the Financing Company Act. Since in
discounting of receivables the assignee is subrogated as creditor of the receivable, the endorsement of the negotiable
instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly true with checks
because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is merely
to facilitate collection of the proceeds of the checks.

The purpose of the endorsement is not to make the assignee finance company a holder in due course because policy
considerations militate against according finance companies the rights of a holder in due course. [18] Otherwise, consumers
who purchase appliances on installment, giving their promissory notes or checks to the seller, will have no defense
against the finance company should the appliances later turn out to be defective. Thus, the endorsement does not operate
to make the finance company a holder in due course. For its own protection, therefore, the finance company usually
requires the assignor, in a separate and distinct contract, to pay the finance company in the event of dishonor of the notes
or checks.

As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the Negotiable
Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasias cause of
action. Bancasia, however, did not choose this route. Instead, Bancasia decided to sue Great Asian for breach of contract
under the Civil Code, a right that Bancasia had under the express with recourse stipulation in the Deeds of Assignment.

The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will not leave Great Asian
holding an empty bag. Great Asian, after paying Bancasia, is subrogated back as creditor of the receivables. Great Asian
can then proceed against the drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonor,
still there would be no prejudice whatever to Great Asian. Under the Negotiable Instruments Law, notice of dishonor is
not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has
countermanded payment.[19] In the instant case, all the checks were dishonored for any of the following reasons: account
closed, account under garnishment, insufficiency of funds, or payment stopped. In the first three instances, the drawers
had no right to expect or require the bank to honor the checks, and in the last instance, the drawers had countermanded
payment.
 Moreover, under common law, delay in notice of dishonor, where such notice is required, discharges the drawer only
to the extent of the loss caused by the delay. [20] This rule finds application in this jurisdiction pursuant to Section 196 of
the Negotiable Instruments Law which states, Any case not provided for in this Act shall be governed by the provisions of
existing legislation, or in default thereof, by the rules of the Law Merchant. Under Section 186 of the Negotiable
Instruments Law, delay in the presentment of checks discharges the drawer. However, Section 186 refers only to delay in
presentment of checks but is silent on delay in giving notice of dishonor. Consequently, the common law or Law
Merchant can supply this gap in accordance with Section 196 of the Negotiable Instruments Law.

One other issue raised by Great Asian, that of lack of consideration for the Deeds of Assignment, is completely
unsubstantiated. The Deeds of Assignment uniformly provide that the fifteen postdated checks were assigned to Bancasia
for valuable consideration. Moreover, Article 1354 of the Civil Code states that, Although the cause is not stated in the
contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. The record is devoid of any
showing on the part of Great Asian rebutting this presumption. On the other hand, Bancasias Loan Section Manager,
Cynthia Maclan, testified that Bancasia paid Great Asian a consideration at the discount rate of less than 24% of the face
value of the postdated checks.[21] Moreover, in its verified petition for voluntary insolvency, Great Asian admitted its debt
to Bancasia when it listed Bancasia as one of its creditors, an extra-judicial admission that Bancasia proved when it
formally offered in evidence the verified petition for insolvency.[22]The Insolvency Law requires the petitioner to submit a
schedule of debts that must contain a full and true statement of all his debts and liabilities. [23] The Insolvency Law even
requires the petitioner to state in his verification that the schedule of debts contains a full, correct and true discovery of all
my debts and liabilities x x x. [24] Great Asian cannot now claim that the listing of Bancasia as a creditor was not an
admission of its debt to Bancasia but merely an acknowledgment that Bancasia had sent a demand letter to Great Asian.

Great Asian, moreover, claims that the assignment of the checks is not a loan accommodation but a sale of the
checks. With the sale, ownership of the checks passed to Bancasia, which must now, according to Great Asian, sue the
drawers and indorser of the check who are the parties primarily liable on the checks. Great Asian forgets that under the
Deeds of Assignment, Great Asian expressly undertook to pay the full value of the checks in case of dishonor. Again, we
reiterate that this obligation of Great Asian is separate and distinct from its warranties as indorser under the Negotiable
Instruments Law.

Great Asian is, however, correct in saying that the assignment of the checks is a sale, or more properly a discounting,
of the checks and not a loan accommodation. However, it is precisely because the transaction is a sale or a discounting of
receivables, embodied in separate Deeds of Assignment, that the relevant provisions of the Civil Code are applicable and
not the Negotiable Instruments Law.

At any rate, there is indeed a fine distinction between a discounting line and a loan accommodation. If the accounts
receivable, like postdated checks, are sold for a consideration less than their face value, the transaction is one of
discounting, and is subject to the provisions of the Financing Company Act. The assignee is immediately subrogated as
creditor of the accounts receivable. However, if the accounts receivable are merely used as collateral for the loan, the
transaction is only a simple loan, and the lender is not subrogated as creditor until there is a default and the collateral is
foreclosed.

In summary, Great Asians four contracts assigning its fifteen postdated checks to Bancasia expressly stipulate the
suspensive condition that in the event the drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Since the
common condition in the contracts had transpired, an obligation on the part of Great Asian arose from the four contracts,
and that obligation is to pay Bancasia the full value of the checks, including the stipulated penalty and attorneys fees.

Third Issue: The liability of surety Tan Chong Lin

Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on the Surety Agreements
he signed wherein he solidarily held himself liable with Great Asian for the payment of its debts to Bancasia. The Surety
Agreements contain the following common condition:

Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above mentioned, or in
case of the Principals failure promptly to respond to any other lawful demand made by the Creditor, its successors,
administrators or assigns, both the Principal and the Surety/ies shall be considered in default and the Surety/ies agree/s to
pay jointly and severally to the Creditor all outstanding obligations of the Principal, whether due or not due, and whether
held by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as to the amount due
from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and purposes.

Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great Asian, if
the drawers of the checks fail to pay on due date. The condition on which Tan Chong Lins obligation hinged had
happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the same extent as Great
Asian.

Tan Chong Lin, however, contends that the following warranties in the Deeds of Assignment enlarge or increase his
risks under the Surety Agreements:

The ASSIGNOR warrants:

 1. the soundness of the receivables herein assigned;

2. that said receivables are duly noted in its books and are supported by appropriate documents;

3. that said receivables are genuine, valid and subsisting;

4. that said receivables represent bona fide sale of goods, merchandise, and/or services rendered in the ordinary
course of its business transactions;

5. that the obligors of the receivables herein assigned are solvent;

6. that it has valid and genuine title to and indefeasible right to dispose of said accounts;

7. that said receivables are free from all liens and encumbrances;

8. that the said receivables are freely and legally transferable, and that the obligor/s therein will not interpose
any objection to this assignment, and has in fact given his/their consent hereto.

Tan Chong Lin maintains that these warranties in the Deeds of Assignment materially altered his obligations under
the Surety Agreements, and therefore he is released from any liability to Bancasia.Under Article 1215 of the Civil Code,
what releases a solidary debtor is a novation, compensation, confusion or remission of the debt made by the creditor with
any of the solidary debtors. These warranties, however, are the usual warranties made by one who discounts receivables
with a financing company or bank. The Surety Agreements, written on the letter head of Bancasia Finance & Investment
Corporation, uniformly state that Great Asian Sales Center x x x has obtained and/or desires to obtain loans,
overdrafts, discounts and/or other forms of credits from Bancasia. Tan Chong Lin was clearly on notice that he was
holding himself as surety of Great Asian which was discounting postdated checks issued by its buyers of goods and
merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of Great Asians business
activities or discounting transactions with Bancasia. Thus, the warranties do not increase or enlarge the risks of Tan
Chong Lin under the Surety Agreements.There is, moreover, no novation of the debt of Great Asian that would warrant
release of the surety.

In any event, the provisions of the Surety Agreements are broad enough to include the obligations of Great Asian to
Bancasia under the warranties. The first Surety Agreement states that:

x x x herein Surety/ies, jointly and severally among themselves and likewise with principal, hereby agree/s and bind/s
himself/themselves to pay at maturity all the notes, drafts, bills of exchange, overdraft and other obligations of every
kind which the Principal may now or may hereafter owe the Creditor, including extensions or renewals thereof in the
sum *** ONE MILLION ONLY*** PESOS (P1,000,000.00), Philippine Currency, plus stipulated interest thereon at the
rate of sixteen percent (16%) per annum, or at such increased rate of interest which the Creditor may charge on the
Principals obligations or renewals or the reduced amount thereof, plus all the costs and expenses which the Creditor may
incur in connection therewith.

xxx

Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above mentioned, or
in case of the Principals failure promptly to respond to any other lawful demand made by the Creditor , its successors,
administrators or assigns, both the Principal and the Surety/ies shall be considered in default and the Surety/ies agree/s to
pay jointly and severally to the Creditor all outstanding obligations of the Principal, whether due or not due, and
whether held by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as to the
amount due from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and
purposes. (Emphasis supplied)

The second Surety Agreement contains the following provisions:

x x x herein Surety/ies, jointly and severally among themselves and likewise with PRINCIPAL, hereby agree and bind
themselves to pay at maturity all the notes, drafts, bills of exchange, overdraft and other obligations of every kind
which the PRINCIPAL may now or may hereafter owe the Creditor, including extensions and/or renewals thereof in the
principal sum not to exceed TWO MILLION(P2,000,000.00) PESOS, Philippine Currency, plus stipulated interest
thereon, or such increased or decreased rate of interest which the Creditor may charge on the principal sum outstanding
pursuant to the rules and regulations which the Monetary Board may from time to time promulgate, together with all the
cost and expenses which the CREDITOR may incur in connection therewith.

If for any reason whatsoever, the PRINCIPAL should fail to pay at maturity any of the obligations or amounts due to the
CREDITOR, or if for any reason whatsoever the PRINCIPAL fails to promptly respond to and comply with any other
lawful demand made by the CREDITOR, or if for any reason whatsoever any obligation of the PRINCIPAL in favor of
any person or entity should be considered as defaulted, then both the PRINCIPAL and the SURETY/IES shall be
considered in default under the terms of this Agreement. Pursuant thereto, the SURETY/IES agree/s to pay jointly and
severally with the PRINCIPAL, all outstanding obligations of the CREDITOR, whether due or not due, and whether
owing to the PRINCIPAL in its personal capacity or as agent of any person, endorsee, assignee or transferee. x x x.
(Emphasis supplied)

Article 1207 of the Civil Code provides, xxx There is a solidary liability only when the obligation expressly so
states, or when the law or nature of the obligation requires solidarity. The stipulations in the Surety Agreements
undeniably mandate the solidary liability of Tan Chong Lin with Great Asian. Moreover, the stipulations in the Surety
Agreements are sufficiently broad, expressly encompassing all the notes, drafts, bills of exchange, overdraft and other
obligations of every kind which the PRINCIPAL may now or may hereafter owe the Creditor. Consequently, Tan Chong
Lin must be held solidarily liable with Great Asian for the nonpayment of the fifteen dishonored checks, including penalty
and attorneys fees in accordance with the Deeds of Assignment.

The Deeds of Assignment stipulate that in case of suit Great Asian shall pay attorneys fees equivalent to 25% of the
outstanding debt. The award of attorneys fees in the instant case is justified, [25] not only because of such stipulation, but
also because Great Asian and Tan Chong Lin acted in gross and evident bad faith in refusing to pay Bancasias plainly
valid, just and demandable claim. We deem it just and equitable that the stipulated attorneys fee should be awarded to
Bancasia.

The Deeds of Assignment also provide for a 3% penalty on the total amount due in case of failure to pay, but the
Deeds are silent on whether this penalty is a running monthly or annual penalty. Thus, the 3% penalty can only be
considered as a one-time penalty. Moreover, the Deeds of Assignment do not provide for interest if Great Asian fails to
pay. We can only award Bancasia legal interest at 12% interest per annum, and only from the time it filed the complaint
because the records do not show that Bancasia made a written demand on Great Asian prior to filing the complaint.
[26]
Bancasia made an extrajudicial demand on Tan Chong Lin, the surety, but not on the principal debtor, Great Asian.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 20167 is AFFIRMED with
MODIFICATION. Petitioners are ordered to pay, solidarily, private respondent the following amounts: (a) P1,042,005.00
plus 3% penalty thereon, (b) interest on the total outstanding amount in item (a) at the legal rate of 12% per annum from
the filing of the complaint until the same is fully paid, (c) attorneys fees equivalent to 25% of the total amount in item (a),
including interest at 12% per annum on the outstanding amount of the attorneys fees from the finality of this judgment
until the same is fully paid, and (c) costs of suit.

SO ORDERED.
Negotiable Instruments Case Digest: Great Asian Sales Center Corp. V. CA (2002)

G.R. No. 105774 April 25, 2002

Lessons Applicable: Notice of Dishonor (Negotiable Instruments Law)

FACTS:
March 17, 1981: Great Asian BOD approved a resolution authorizing its Treasurer and General Manager, Arsenio
Lim Piat, Jr. (Arsenio) to secure a loan, not exceeding 1M, from Bancasia
February 10, 1982: Great Asian BOD approved a resolution authorizing Great Asian to secure a discounting line
with Bancasia in an amount not exceeding P2M
also designated Arsenio as the authorized signatory to sign all instruments, documents and checks
necessary to secure the discounting line
Tan Chong Lin signed 2 surety agreements in favor of Bancasia
Great Asian, through its Treasurer and General Manager Arsenio, signed 4 Deeds of Assignment of Receivables
(Deeds of Assignment), assigning to Bancasia 15 postdated checks:
9 checks were payable to Great Asian
3 were payable to "New Asian Emp."
3 were payable to cash
various customers of Great Asian issued these postdated checks in payment for appliances and other
merchandise.
Deed of Assignments of assignment:
January 12, 1982: 4 post-dated checks of P244,225.82 maturing March 17, 1982, 2 were dishonored
January 12, 1982: 4 post-dated checks of P312,819 maturing April 1, 1982, all 4 were dishonored
February 11, 1982: 8 postdated checks of P344,475 maturing April 30, 1982, all 8 checks were
dishonored
March 5, 1982: 1 postdated checks of P200K maturing March 18, 1982 also dishonored
Great Asian assigned the postdated checks to Bancasia at a discount rate of less than 24% of the face value of the
checks
Arsenio endorsed all the 15 dishonored checks by signing his name at the back of the checks
8 dishonored checks bore the endorsement of Arsenio below the stamped name of "Great Asian Sales
Center"
7 dishonored checks just bore the signature of Arsenio
The drawee banks dishonored the 15 checks on maturity when deposited for collection by Bancasia, with any of
the following as reason for the dishonor:
"account closed"
"payment stopped"
"account under garnishment"
"insufficiency of funds
March 18, 1982: Bancasia's lawyer,Atty. Eladia Reyes, sent by registered mail to Tan Chong Lin a letter notifying
him of the dishonor and demanding payment from him
June 16, 1982: Bancasia sent by personal delivery a letter to Tan Chong Lin
May 21, 1982: Great Asian filed a case before the CFI for insolvency listing Bancasia as one of the creditors of
Great Asian in the amount of P1,243,632.00
June 23, 1982: Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong
Lin
CFI: favored Bancasia ordering Great Asian and Tan Chong Lin to pay jointly and severally
CA: deleted atty. fees
ISSUE: W/N Bancasia and Tang Chon Lin should be held liable under the Civil Code because it was a separate and
distinct deed of assignment

HELD: YES. Affirmed with Modification

As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a loan or discounting
line from Bancasia
 Clearly, the discounting arrangements entered into by Arsenio under the Deeds of Assignment were the very
transactions envisioned in the two board resolutions of Great Asian to raise funds for its business.
There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old or new), that prohibits
Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of
Assignment. Instead of being negotiated, a negotiable instrument may be assigned.
the endorsement does not operate to make the finance company a holder in due course. For its own protection,
therefore, the finance company usually requires the assignor, in a separate and distinct contract, to pay the finance
company in the event of dishonor of the notes or checks. (only security)
Otherwise, consumers who purchase appliances on installment, giving their promissory notes or checks
to the seller, will have no defense against the finance company should the appliances later turn out to be defective
As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the Negotiable
Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasias cause of
action. Bancasia, however, did not choose this route.
Instead, Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that
Bancasia had under the express with recourse stipulation in the Deeds of Assignment.
Great Asian, after paying Bancasia, is subrogated back as creditor of the receivables. Great Asian can
then proceed against the drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonor,
still there would be no prejudice whatever to Great Asian.
Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer has no right to expect or
require the bank to honor the check, or if the drawer has countermanded payment
In the instant case, all the checks were dishonored for any of the following reasons:
"account closed"
"account under garnishment"
"insufficiency of funds"
drawers had no right to expect or require the bank to honor the checks
"payment stopped"
drawers had countermanded payment
Moreover, under common law, delay in notice of dishonor, where such notice is required, discharges the drawer
only to the extent of the loss caused by the delay.
Again, we reiterate that this obligation of Great Asian is separate and distinct from its warranties as indorser
under the Negotiable Instruments Law.Civil Code are applicable and not the Negotiable Instruments Law.
separate Deeds of Assignment - provisions of the Civil Code are applicable (NOT Negotiable Instruments Law)
Great Asians four contracts assigning its fifteen postdated checks to Bancasia expressly stipulate the suspensive
condition that in the event the drawers of the checks fail to pay, Great Asian itself will pay Bancasia
The stipulations in the Surety Agreements undeniably mandate the solidary liability of Tan Chong Lin with Great
Asian
Moreover, the stipulations in the Surety Agreements are sufficiently broad, expressly encompassing "all
the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or
may hereafter owe the Creditor"
 G.R. No. L-43191 November 13, 1935
PAULINO GULLAS, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Gullas, Lopez, Tuao and Leuterio for plaintiff-appellant.
Jose Delgado for defendant-appellant.

MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which sentenced the
defendant to return to the account of the plaintiff the sum of P5098, with legal interest and costs, the plaintiff to
secure damages in the amount of P10,000 more or less, and the defendant to be absolved totally from the
amended complaint. As it is conceded that the plaintiff has already received the sum represented by the United
States treasury, warrant, which is in question, the appeal will thus determine the amount, if any, which should be
paid to the plaintiff by the defendant.

The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member of the
Philippine Bar, resident in the City of Cebu. The second named is a banking corporation with a branch in the
same city. Attorney Gullas has had a current account with the bank.

It appears from the record that on August 2, 1933, the Treasurer of the United States for the United States
Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos.
Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine
National Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against this balance
he had issued certain cheeks which could not be paid when the money was sequestered by the On August 20,
1933, Attorney Gullas left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which could not
be delivered to him at that time because he was in Manila. In the bank's letter of August 21, 1933, addressed to
Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United States Treasury warrant No. 20175 in
the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received has been
returned by our Manila office with the notation that the payment of his check has been stopped by the Insular
Treasurer. "In view of this therefore we have applied the outstanding balances of your current accounts with us to
the part payment of the foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to
Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the United States Treasury
warrant was immediately paid by him.

As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney Gullas. In the
first place, as above indicated, checks including one for his insurance were not paid because of the lack of funds
standing to his credit in the bank. In the second place, periodicals in the vicinity gave prominence to the news to
the great mortification of Gullas.lawphil.net

A variety of incidental questions have been suggested on the record which it can be taken for granted as having
been adversely disposed of in this opinion. The main issues are two, namely, (1) as to the right of Philippine
National Bank, and to apply a deposit to the debt of depositor to the bank and (2) as to the amount damages, if
any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq., 1758 et
seq. The portions of Philippine law provide that compensation shall take place when two persons are reciprocally
creditor and debtor of each other (Civil Code, article 1195). In his connection, it has been held that the relation
existing between a depositor and a bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China Banking
Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the
procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if he be dishonored
and the, necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder.
(Negotiable Instruments Law, sec. 66.) In this connection, it has been held a long line of authorities that notice of
dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice
is given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.)

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to
it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a
bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount
sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory of confidential contracts
arising from irregular deposits, e. g., the deposit of money with a banker. With freedom of selection and after full
preference to the minority rule as more in harmony with modern banking practice. (1 Morse on Banks and
Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code
 Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al
Codigo Civil Espaol, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)

Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a
right of set off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that
prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the
money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely
an indorser and had issued in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it
has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of
notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against
him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the minority
doctrine, for on principle it would seem that notice is not necessary to a maker because the right is based on the
doctrine that the relationship is that of creditor and debtor. However this may be, as to an indorser the situation is
different, and notice should actually have been given him in order that he might protect his interests.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that
statement with others proving exact damages is not so easy. For instance, for alleged libelous articles the bank
would not be primarily liable. The same remark could be made relative to the loss of business which Gullas
claims but which could not be traced definitely to this occurrence. Also Gullas having eventually been reimbursed
lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw
checks in all good faith, then, leave for Manila, and on return find that those checks had not been cashed because
of the action taken by the bank. That caused a disturbance in Gullas' finances, especially with reference to his
insurance, which was injurious to him. All facts and circumstances considered, we are of the opinion that Gullas
should be awarded nominal damages because of the premature action of the bank against which Gullas had no
means of protection, and have finally determined that the amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the result that
the judgment of the trial court will be modified by sentencing the defendant to pay the plaintiff the sum of P250,
and the costs of both instances.
Villa-Real, Imperial, Butte, and Goddard, JJ., concur.