A contract of sale is perfected the moment there is a meeting of the minds upon the thing [object of contract] and upon the price [consideration].
From that moment, parties may demand performance. Performance may be done through delivery. Delivery transfers the ownership. After delivery, the seller [vendor] and buyer [vendee] remain bound by specific obligations. The vendor is responsible for an implied warranty against hidden defects – one that renders the thing sold unfit for use. Thus, in a contract of sale, there is an implied warranty that the thing shall be free from any hidden faults or defects, unless there is contrary intention [Article 1547, new Civil Code states]. The seller is responsible to the buyer for any hidden faults or defects in the thing sold, even he was not aware of it [Article 1566, new Civil Code states]. As such, buyers must not agree to a sale on “as-is where is” basis, which means what you see is what you get. The buyer gets the thing whether it is in good or bad condition. In car sale, it is normal for buyer to get a bank loan where the bank pays the seller through manager’s check.
A manager’s check is a check drawn by the bank’s manager upon the bank itself and accepted in advance by the bank by the act of its issuance. It is really the bank’s own check and may be treated as a promissory note with the bank as its maker. Upon its purchase, the check becomes the bank’s primary obligation to pay the holder upon demand. It is similar to a cashier’s check that is drawn against sufficient funds. As a rule, the drawee bank is not liable until it accepts. Prior to acceptance, no contractual relation exists between the holder and the drawee. Acceptance creates a privity of contract between the holder and the drawee so much so that once accepted, it becomes the party primarily liable on the instrument. Acceptance is the act which triggers the operation of the liabilities of the drawee [under Section 62, Negotiable Instruments Law]. The drawee bank has unconditional duty to pay a manager’s check to a holder in due course irrespective of any available personal defenses.
When is a payee considered a holder in due course? Can a bank dishonor the check it issued?
Our Honorable Supreme Court ruled the issues in RCBC Savings Bank v. Odrada, G.R. 219037, 19 October 2016. In this case, Noel [Odrada] sold a secondhand car [Mitsubishi Montero] to Teodoro [Lim], who obtained a car loan from RCBC. After signing the deed of sale, RCBC issued to Noel two manager’s checks [P900,000.00 and P13,500.00]. Lim wrote Odrada to hold the deposit of the checks due to hidden defects of the sold car and called for a meeting or the sale is cancelled. Odrada deposited the manager’s checks. RCBC dishonored the check. Odrada sued for collection. As defense, Lim rescinded the sale due to roadworthiness issue of the car. RCBC dishonored the manager’s checks since Lim cancelled the loan prior to their deposit. The RTC ruled for Odrada that Lim cannot rescind the sale and RCBC is liable for the manager checks it issued. The CA affirmed the RTC. Not contented, only RCBC Savings Bank appealed.
Our Supreme Court ruled that RCBC as drawee bank who issued the manager’s check may interpose personal defenses of the purchaser [buyer Lim – purchaser of Manager’s Check] if the holder [seller Odrada] is not a holder in due course. The CA gravely erred when it considered Odrada as a holder in due course. The law [Section 52, Negotiable Instruments Law] defines a holder in due course as one who has taken the instrument under the following conditions: [1] it is complete and regular upon its face; [2] he became the holder of it before it was overdue; [3] he took it in good faith and for value; [4] had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. To be a holder in due course, the law requires a party must have acquired the instrument in good faith and for value. Odrada’s act in depositing the manager’s checks despite knowledge of car’s defects amounted to bad faith. RCBC may refuse payment of the manager’s checks by interposing a personal defense of Lim – the title of Odrada had become defective when there arose a partial failure or lack of consideration after it received a letter of cancellation of the auto loan, which is the basis or consideration for issuing the manager’s checks. Since Odrada is not a holder in due course, RCBC is not liable. Thus the CA judgment was reversed insofar as RCBC is concerned.
