Liability for Dishonored Bank Drafts: Holder in Due Course vs Drawer's Obligations

The Supreme Court recently settled important questions about who bears liability when bank drafts are dishonored after a stop payment order. In a decision involving Quintin Llorente and Star City Pty Limited (G.R. No. 212050, January 15, 2020), the Court ruled on the obligations of a bank that issues drafts and the rights of a holder who accepts them in good faith. The decision clarifies how the Negotiable Instruments Law (NIL) governs these relationships, even when the person who requested the drafts later orders payment stopped.

The Facts of the Case

Star City Pty Limited (SCPL), an Australian casino operator, accepted two Equitable PCI Bank drafts worth US$300,000 from patron Quintin Llorente. Llorente used these drafts to buy into the casino's Premium Programme, which entitled him to commission rebates on his gaming turnover. Before accepting the drafts, SCPL verified with the bank that they were issued on clear funds with no stop payment orders.

Days later, SCPL discovered that Llorente had requested a stop payment order on both drafts. The drafts were dishonored. SCPL demanded payment from both Llorente and the bank. The bank refused, saying it merely followed Llorente's instructions as payee. SCPL filed a collection suit in the Philippines.

The Issue

The central questions were: (1) Could SCPL, a foreign corporation, sue in Philippine courts? (2) Was SCPL a holder in due course? (3) Was the issuing bank liable as drawer despite the stop payment order and an indemnity agreement between the bank and Llorente?

The Ruling

On SCPL's capacity to sue. The Court held that a foreign corporation not doing business in the Philippines may sue for an isolated transaction. The governing law provides that a foreign corporation transacting business without a license cannot maintain an action, but this prohibition does not apply to isolated transactions. SCPL properly pleaded that it was not doing business in the Philippines and was suing on a singular transaction, so it had legal capacity to sue.

On SCPL's status as holder in due course. The Court affirmed that SCPL was a holder in due course under the NIL. It took the drafts complete and regular on their face, before they were overdue, in good faith, and for value. The right to play under the Premium Programme constituted "value." SCPL even verified the drafts' status with the bank before accepting them.

On the bank's liability as drawer. The Court ruled that the bank, as drawer of the drafts, remained liable under the NIL. A drawer engages that on due presentment the instrument will be paid, and if dishonored, the drawer will pay the holder. The stop payment order did not discharge the bank's liability to a holder in due course.

The Court rejected the bank's defenses. The indemnity agreement between the bank and Llorente could not defeat SCPL's rights as a holder in due course. Neither could the principle of unjust enrichment apply, because the NIL expressly governs the parties' rights and obligations. The bank's lack of privity with SCPL was immaterial since a drawer's liability arises from the warranties under the NIL, not from direct contract.

Practical Takeaways

• Bank drafts are negotiable instruments. When a bank issues a draft, it becomes the drawer and assumes the obligations under the NIL, regardless of any separate agreement with the payee.
• A stop payment order does not erase liability. Stopping payment does not discharge the drawer's liability to a holder in due course. The holder's right of recourse attaches immediately upon dishonor.
• "Value" is broadly defined. A benefit received in exchange for an instrument—such as the right to participate in a program—can constitute value for purposes of holder-in-due-course status.
• Foreign corporations may sue for isolated transactions. A foreign corporation not doing business in the Philippines can maintain a suit here if it pleads and proves the transaction is singular and isolated.
• Notice of dishonor may be excused. Where the drawer itself caused the dishonor, requiring formal notice would be futile and cannot be used as a defense.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.