This Supreme Court decision clarifies the liability of a bank as the drawer of dishonored bank drafts, particularly when a stop payment order has been issued. The Court ruled that the bank remains primarily liable to a holder in due course, even if the bank has already reimbursed the payee who requested the stop payment. This emphasizes the bank’s obligations under the Negotiable Instruments Law and protects the rights of those who legitimately receive negotiable instruments.

Casino Chips and Legal Slips: Who Pays When a Bank Draft Bounces?

This case revolves around Quintin Artacho Llorente, a patron of Star City Casino in Sydney, Australia, and Star City Pty Limited (SCPL), the casino operator. Llorente negotiated two Equitable PCI Bank (EPCIB) drafts totaling US$300,000 to participate in the casino’s Premium Programme. After playing, Llorente requested EPCIB to stop payment on the drafts, alleging fraud and unfair gaming practices by SCPL. SCPL, claiming to be a holder in due course of the drafts, sued Llorente and EPCIB for the amount of the drafts. The central legal question is whether EPCIB, as the drawer of the drafts, remains liable to SCPL despite Llorente’s stop payment order and a subsequent indemnity agreement between Llorente and EPCIB.

The Regional Trial Court (RTC) initially ruled in favor of SCPL, holding Llorente and EPCIB solidarily liable for the value of the drafts. The Court of Appeals (CA) affirmed SCPL’s legal capacity to sue and its status as a holder in due course. However, the CA absolved EPCIB from liability, reasoning that EPCIB had already reimbursed Llorente for the draft amounts, and holding EPCIB liable would unjustly enrich Llorente. SCPL appealed this decision, arguing that as a holder in due course, it is entitled to payment from all parties liable on the drafts, including EPCIB as the drawer.

The Supreme Court examined the issue through the lens of the Negotiable Instruments Law (NIL), specifically focusing on the liability of a drawer. Section 61 of the NIL states:

Sec. 61. Liability of drawer. – The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.

Building on this principle, the Court emphasized that EPCIB, by issuing the demand drafts, guaranteed that the drafts would be honored upon presentment. When Llorente stopped payment, it triggered EPCIB’s secondary liability to pay the holder, in this case, SCPL. The Court noted that the effect of the stop payment order converted EPCIB’s conditional liability into an unconditional one, similar to that of a maker of a promissory note due on demand. The liability of a drawer to a holder in due course is not discharged by a stop payment order.

The CA’s decision to absolve EPCIB based on the principle of unjust enrichment was deemed erroneous by the Supreme Court. The Court clarified that unjust enrichment would only apply if SCPL had benefitted from EPCIB’s reimbursement to Llorente. Since the benefit was received by Llorente, SCPL was not unjustly enriched. The Court highlighted that the Indemnity Agreement between Llorente and EPCIB, which facilitated Llorente’s reimbursement, was not formally offered as evidence and, therefore, could not be used to release EPCIB from its liability to SCPL. Moreover, the Court emphasized the principle of relativity of contracts under Article 1311 of the Civil Code, which states that contracts take effect only between the parties, their assigns, and heirs.

The Court emphasized that SCPL, as a holder in due course, is entitled to enforce payment of the instrument for the full amount against all parties liable, according to Section 57 of the NIL. A holder in due course holds the instrument free from any defect in the title of prior parties and free from defenses available to prior parties among themselves. As stated in Section 51, every holder of a negotiable instrument may sue thereon in his own name; and payment to him in due course discharges the instrument.

Moreover, the Supreme Court clarified the nature of EPCIB’s liability, stating that the bank’s liability as the drawer of the drafts is primary, not solidary, with Llorente. This means that while SCPL can pursue both parties for payment, it cannot recover more than the total amount due. If EPCIB is compelled to pay SCPL, it retains the right to seek reimbursement from Llorente under their cross-claim and the indemnity clause of their agreement. Both EPCIB and Llorente are individually and primarily liable as drawer and endorser of the subject demand/bank drafts, respectively.

The Court modified the monetary awards, specifying the interest rates applicable from the date of extrajudicial demand until full payment, in accordance with prevailing jurisprudence. This adjustment reflects the Court’s commitment to ensuring equitable compensation while adhering to established legal guidelines regarding interest on monetary obligations. The Supreme Court’s decision reinforces the integrity of negotiable instruments and provides clarity on the responsibilities of financial institutions acting as drawers of such instruments.

FAQs

What was the key issue in this case?	The key issue was whether a bank, as the drawer of a bank draft, remains liable to a holder in due course when the payee has stopped payment on the draft.
What is a holder in due course?	A holder in due course is someone who takes a negotiable instrument in good faith, for value, and without notice of any defects or dishonor. They have greater rights than an ordinary holder.
What is the liability of the drawer of a negotiable instrument?	The drawer guarantees that the instrument will be accepted or paid and, if dishonored, they will pay the amount to the holder. This liability is secondary but becomes primary upon dishonor.
What is the effect of a stop payment order on the drawer’s liability?	A stop payment order does not discharge the drawer’s liability to the holder, especially a holder in due course. It converts the drawer’s conditional liability to one free from conditions.
What is the principle of unjust enrichment?	Unjust enrichment occurs when someone benefits at another’s expense without just or legal ground. This principle did not apply in this case because the benefit was received by Llorente, not SCPL.
What is the principle of relativity of contracts?	This principle states that contracts only bind the parties, their assigns, and heirs. The indemnity agreement between EPCIB and Llorente could not affect SCPL’s rights as a holder in due course.
What was the Supreme Court’s ruling on EPCIB’s liability?	The Supreme Court reversed the CA’s decision and reinstated the RTC’s ruling, holding EPCIB primarily liable to SCPL as the drawer of the dishonored bank drafts.
What is the nature of EPCIB’s liability – solidary or primary?	The Supreme Court clarified that EPCIB’s liability is primary, not solidary, meaning that SCPL can pursue both parties but cannot recover more than the total amount due.
What recourse does EPCIB have if it pays SCPL?	EPCIB can seek reimbursement from Llorente under their cross-claim and the indemnity clause of their agreement, which remains valid between them.

This decision underscores the importance of honoring negotiable instruments and clarifies the obligations of banks as drawers. By upholding the rights of a holder in due course, the Supreme Court reinforces the integrity of financial transactions and provides a clear framework for resolving disputes involving dishonored instruments.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Quintin Artacho Llorente vs. Star City Pty Limited, G.R. No. 212216, January 15, 2020