View full case

BANK OF AMERICA NT v. PHILIPPINE RACING CLUB

FACTS:

The Philippine Racing Club, Inc. (PRCI) had a current account with Bank of America NT & SA (BA), with the president and vice president for finance as joint signatories. In December 1988, the president and vice president pre-signed several checks for operational continuity while they were out of the country. These pre-signed checks were given to the accountant. On December 16, 1988, an individual named John Doe presented two of the pre-signed checks to BA for encashment. The checks had irregular entries, but BA still encashed them without verifying their legitimacy. It was later discovered that an employee of PRCI had completed the entries without authority. PRCI demanded that BA pay for the wrongful encashment, but BA refused. PRCI filed a complaint against BA, which was ruled in favor by the trial court ordering BA to pay the amount of the checks. BA appealed to the Court of Appeals, which affirmed the trial court's decision. BA's motion for reconsideration was denied. BA then filed a petition for review on certiorari before the Supreme Court arguing various errors committed by the Court of Appeals. The key issue in the case is whether the proximate cause of the wrongful encashment of the checks was BA's failure to verify the checks before encashing them. The petitioner argues that it fulfilled its obligation under the law and contract by paying checks bearing genuine signatures of the drawer-client's authorized signatories. However, the petitioner failed to notice irregularities in the checks and claims that it was not obligated to verify with the respondent since the amount in words matched the amount indicated in figures. Banks have a duty to protect their clients and depositors and are expected to exercise a higher degree of care in handling transactions.

ISSUES:

  1. Whether the proximate cause of respondent's loss was due to:

    • Petitioner's failure to make a verification regarding the said checks with the respondent in view of the misplacement of entries on the face of the checks; or

    • The practice of the respondent of pre-signing blank checks and leaving the same with its employees.

  2. Whether petitioner should be liable for the encashment of the checks despite fulfilling its obligations under law and contract, and without any obligation to verify the encashment.

  3. Whether Section 14 of the Negotiable Instruments Law is applicable in this case.

  4. Whether the respondent's own negligence was the proximate cause of its loss.

  5. Whether the award of attorney's fees and litigation expenses to respondent is justified.

RULING:

  1. The Supreme Court affirmed that the petitioner's failure to verify the irregular checks was the proximate cause of the wrongful encashment. Despite claims of diligence, the bank failed to exercise the extraordinary care required of it given the fiduciary nature of its relationship with the client.

  2. The Supreme Court found the petitioner's standard of care to be deficient. The presence of irregularities should have prompted the bank to verify the checks with the respondent, a basic duty it neglected.

  3. The Supreme Court affirmed that Sections 14 and 16 of the Negotiable Instruments Law do not excuse the bank's liability in this instance because the irregularities were evident, requiring further verification which was not done.

  4. While recognizing respondent's contributory negligence in pre-signing blank checks, the Supreme Court applied the doctrine of last clear chance, holding the petitioner mainly liable for failing to prevent the loss despite having the final opportunity to do so.

  5. The award of attorney's fees and litigation expenses was deleted due to lack of justification based on bad faith or other sufficient grounds under Article 2208 of the Civil Code.

PRINCIPLES:

  1. Proximate Cause: The immediate cause of an injury in a negligence case, without which the injury would not have occurred.

  2. Doctrine of Last Clear Chance: The party who has the last clear opportunity to avoid an accident but fails to do so is considered responsible for the damages.

  3. Extraordinary Diligence in Banking: Banks are required to exercise more than the ordinary standard of care due to the fiduciary nature of their relationship with clients.

  4. Material Alteration and Verification Duty: Banks have a duty to verify checks for material alterations or irregularities.

  5. Contributory Negligence: The negligence of the injured party which, although contributing to the injury, does not entirely absolve the other party from liability but may reduce the compensation.

  6. Section 14 of the Negotiable Instruments Law: The presumption of authority and valid delivery in the case of incomplete instruments.

  7. Article 2208 of the Civil Code: Attorney's fees and litigation expenses may only be recovered when justified by special circumstances or specific grounds provided by law.