G.R. No.

102383 November 26, 1992

BANK OF THE PHILIPPINE ISLANDS, petitioner,

-versus-
THE HON. COURT OF APPEALS (SEVENTH
JUDICIAL), HON. JUDGE REGIONAL TRIAL COURT
OF MAKATI, BRANCH 59, CHINA BANKING CORP., and
PHILIPPINE CLEARING HOUSE
CORPORATION, respondents.

GUTIERREZ, JR., J.:

The present petition asks us to set aside the decision and

resolution of the Court of Appeals in CA-G.R. SP No. 24306
which affirmed the earlier decision of the Regional Trial Court
of Makati, Branch 59 in Civil Case No. 14911 entitled Bank of
the Philippine Islands v. China Banking Corporation and the
Philippine Clearing House Corporation, the dispositive portion
of which reads:

WHEREFORE, premises considered, judgment is

hereby rendered dismissing petitioner-appellant's
(BPI's) appeal and affirming the appealed order of
August 26, 1986 (Annex B of BPI's Petition) with
modification as follows:
1. Ordering the petitioner-appellant (BPI) to pay
respondent-appellee (CBC):

(a) the amount of One Million Two Hundred Six

Thousand, Six Hundred Seven Pesos and Fifty Eight
Centavos (P1,206,607.58) with interest at the legal
rate of twelve percent (12%) per annum starting
August 26, 1986, the date when the order of the PCHC
Board of Directors was issued until the full amount is
finally paid; and

(b) the amount of P150,000.00 representing attorney's

fees;

2. BPI shall also bear 75% or P5,437.50 and CBC,

25% or P1,812.50 of the cost of the arbitration
proceedings amounting to P7,250.00;

3. The ownership of respondent-appellee (CBC) of the

other sum of One Million Two Hundred Six Thousand
Six Hundred Seven Pesos and Fifty Eight Centavos
(P1,206,607.58) previously credited to its clearing
account on August 12, 1983 per PCHC Stockholders'
Resolution No. 6083 dated April 6, 1983, is hereby
confirmed.

4. The PCHC is hereby directed to immediately debit

the clearing account of BPI the sum of One Million
Two Hundred Six Thousand Six Hundred Pesos and
 Fifty Eight Centavos (P1,206,607.58) together with its
interest as decreed in paragraph 1 (a) herein above
stated and credit the same to the clearing account of
CBC;

5. The PCHC's counterclaim and cross-claim are

dismissed for lack of merit; and

6. With costs against the petitioner-appellant. (Rollo,

pp. 161-162)

The controversy in this case arose from the following facts as

found by the Arbitration Committee of respondent Philippine
Clearing House Corporation in Arbicom Case No. 83-029
entitled Bank of the Philippine Island v. China Banking
Corporation:

The story underlying this case began in the afternoon

of October 9, 1981 with a phone call to BPI's Money
Market Department by a woman who identified
herself as Eligia G. Fernando who had a money
market placement as evidenced by a promissory note
with a maturity date of November 11, 1981 and a
maturity value of P2,462,243.19. The caller wanted to
preterminate the placement, but Reginaldo Eustaquio,
Dealer Trainee in BPI's Money Market Department,
who received the call and who happened to be alone in
the trading room at the time, told her "trading time"
was over for the day, which was a Friday, and
suggested that she call again the following week. The
promissory note the caller wanted to preterminate was
a roll-over of an earlier 50-day money market
placement that had matured on September 24, 1981.

Later that afternoon, Eustaquio conveyed the request

for pretermination to the officer who before had
handled Eligia G. Fernando's account, Penelope
Bulan, but Eustaquio was left to attend to the
pretermination process.

The next Monday, October 12, 1981, in the morning,

the caller of the previous Friday followed up with
Eustaquio, merely by phone again, on the
pretermination of the placement. Although not familiar
with the voice of the real Eligia G. Fernando,
Eustaquio "made certain" that the caller was the real
Eligia G. Fernando by "verifying" that the details the
caller gave about the placement tallied with the details
in "the ledger/folder" of the account. Eustaquio knew
the real Eligia G. Fernando to be the Treasurer of
Philippine American Life Insurance Company
(Philamlife) since he was handling Philamlife's
corporate money market account. But neither
Eustaquio nor Bulan who originally handled
Fernando's account, nor anybody else at BPI, bothered
to call up Fernando at her Philamlife office to verify
the request for pretermination.
Informed that the placement would yield less than the
maturity value because of its pretermination, the caller
insisted on the pretermination just the same and asked
that two checks be issued for the proceeds, one for
P1,800,000.00 and the second for the balance, and that
the checks be delivered to her office at Philamlife.

Eustaquio, thus, proceeded to prepare the "purchase

order slip" for the requested pretermination as required
by office procedure, and from his desk, the papers,
following the processing route, passed through the
position analyst, securities clerk, verifier clerk and
documentation clerk, before the two cashier's checks,
nos. 021759 and 021760 for P1,800,000.00 and
P613,215.16, respectively, both payable to Eligia G.
Fernando, covering the preterminated placement, were
prepared. The two cashier's checks, together with the
papers consisting of the money market placement was
to be preterminated and the promissory note (No.
35623) to be preterminated, were sent to Gerlanda E.
de Castro and Celestino Sampiton, Jr., Manager and
Administrative Assistant, respectively, in BPI's
Treasury Operations Department, both authorized
signatories for BPI, who signed the two checks that
very morning. Having been singed, the checks now
went to the dispatcher for delivery.
Later in the same morning, however, the same caller
changed the delivery instructions; instead of the
checks being delivered to her office at Philamlife, she
would herself pick up the checks or send her niece,
Rosemarie Fernando, to pick them up. Eustaquio then
told her that if it were her niece who was going to get
the checks, her niece would have to being a written
authorization from her to pick up the checks. This
telephone conversation ended with the caller's
statement that "definitely" it would be her niece,
Rosemarie Fernando, who would pick up the checks.
Thus, Eustaquio had to hurriedly go to the dispatcher,
Bernardo Laderas, to tell him of the new delivery
instructions for the checks; in fact, he changed the
delivery instruction on the purchase order slip, writing
thereon "Rosemarie Fernando release only with
authority to pick up.

It was, in fact Rosemarie Fernando who got the two

checks from the dispatcher, as shown by the delivery
receipt. Actually, as it turned out, the same
impersonated both Eligia G. Fernando and Rosemarie
Fernando. Although the checks represented the
termination proceeds of Eligia G. Fernando's
placement, not just a roll-over of the placement, the
dispatcher failed to get or to require the surrender of
the promissory note evidencing the placement. There
is also no showing that Eligia G. Fernando's purported
signature on the letter requesting the pretermination
and the latter authorizing Rosemarie Fernando to pick
up the two checks, both of which letters were
presumably handed to the dispatcher by Rosemarie
Fernando, was compared or verified with Eligia G.
Fernando's signature in BPI's file. Such purported
signature has been established to be forged although it
has a "close similarity" to the real signature of Eligia
G. Fernando (TSN of January 15, 1985, pp. 24 and
26).

The story's scene now shifted when, in the afternoon

of October 13, 1981, a woman who represented herself
to be Eligia G. Fernando applied at CBC's Head Office
for the opening of a current account.

She was accompanied and introduced to Emily

Sylianco Cuaso, Cash Supervisor, by Antonio
Concepcion whom Cuaso knew to have opened,
earlier that year, an account upon the introduction of
Valentin Co, a long-standing "valued client" of CBC.
What Cuaso indicated in the application form,
however, was that the new client was introduced by
Valentin Co, and with her initials on the form
signifying her approval, she referred the application to
the New Accounts Section for processing. As finally
proceeds, the application form shows the signature of
"Eligia G. Fernando", "her" date of birth, sex, civil
status, nationality, occupation ("business woman"), tax
account number, and initial deposit of P10,000.00.
This final approval of the new current account is
indicated on the application form by the initials of
Regina G. Dy, Cashier, who did not interview the new
client but affixed her initials on the application form
after reviewing it. The new current account was given
the number: 26310-3.

The following day, October 14, 1981, the woman

holding herself out as Eligia G. Fernando deposited
the two checks in controversy with Current Account
No. 126310-3. Her endorsement on the two checks
was found to conform with the depositor's specimen
signature. CBC's guaranty of prior endorsements
and/or lack of endorsement was then stamped on the
two checks, which CBC forthwith sent to clearing and
which BPI cleared on the same day.

Two days after, withdrawals began on Current

Account No. 26310-3: On October 16, 1981, by means
of Check No. 240005 dated the same day for
P1,000,000.00, payable to "cash", which the woman
holding herself out as Eligia G. Fernando encashed
over the counter, and Check No. 240003 dated
October 15, 1981 for P48,500.00, payable to "cash"
which was received through clearing from PNB Pasay
Branch; on October 19, 1981, by means of Check No.
240006 dated the same day for P1,000,000.00, payable
to "cash," which the woman identifying herself as
Eligia G. Fernando encashed over the counter; on
October 22, 1981, by means of Check No. 240007
dated the same day for P370,000.00, payable to "cash"
which the woman herself also encashed over the
counter; and on November 4, 1981, by means of
Check No. 240001 dated November 3, 1981 for
P4,100.00, payable to "cash," which was received
through clearing from Far East Bank.

All these withdrawals were allowed on the basis of the

verification of the drawer's signature with the
specimen signature on file and the sufficiency of the
funds in the account. However, the balance shown in
the computerized teller terminal when a withdrawal is
serviced at the counter, unlike the ledger or usual
statement prepared at month-end, does not show the
account's opening date, the amounts and dates of
deposits and withdrawals. The last withdrawal on
November 4, 1981 left Current Account No. 26310-3
with a balance of only P571.61.

The day of reckoning came on November 11, 1981,

the maturity date of Eligia G. Fernado's money market
placement with BPI, when the real Eligia G. Fernando
went to BPI for the roll-over of her placement. She
disclaimed having preterminated her placement on
October 12, 1981. She executed an affidavit stating
that while she was the payee of the two checks in
controversy, she never received nor endorsed them and
that her purported signature on the back of the checks
was not hers but forged. With her surrender of the
original of the promissory note (No. 35623 with
maturity value of P2,462,243.19) evidencing the
placement which matured that day, BPI issued her a
new promissory note (No. 40314 with maturity date of
December 23, 1981 and maturity value of
P2,500.266.77) to evidence a roll-over of the
placement.

On November 12, 1981, supported by Eligia G.

Fernando's affidavit, BPI returned the two checks in
controversy to CBC for the reason "Payee's
endorsement forged". A ping-pong started when CBC,
in turn, returned the checks for reason "Beyond
Clearing Time", and the stoppage of this ping-pong, as
we mentioned at the outset, prompted the filing of this
case.

Investigation of the fraud by the Presidential Security

Command led to the filing of criminal actions for
"Estafa Thru Falsification of Commercial Documents"
against four employees of BPI, namely Quirino
Victorio, Virgilio Gayon, Bernardo Laderas and Jorge
 Atayan, and the woman who impersonated Eligia G.
Fernando, Susan Lopez San Juan. Victorio and Gayon
were both bookkeepers in BPI's Money Market
Operations Department, Laderas was a dispatcher in
the same department. . . . (Rollo, pp. 74-79)

The Arbitration Committee ruled in favor of petitioner BPI. The

dispositive portion of the decision reads:

WHEREFORE, we adjudge in favor of the Bank of

the Philippine Islands and hereby order China Banking
Corporation to pay the former the amount of
P1,206,607.58 with interest thereon at 12% per
annum from August 12, 1983, or the date when PCHC,
pursuant to its procedure for compulsory arbitration of
the ping-pong checks under Stockholders' Resolution
No. 6-83 was implemented, up to the date of actual
payment.

Costs of suit in the total amount of P7,250.00 are to be

assessed the litigant banks in the following proportion:

a) Plaintiff BPI P1,812.50

b) Defendant China P5,437.50

Total Assessment P7,250.00

conformably with PCHC Resolution Nos. 46-83 dated

October 25, 1983 and 4-85 dated February 25, 1985.
 The PCHC is hereby directed to effect the
corresponding entries to the litigant banks' clearing
accounts in accordance with the foregoing decision.
(Rollo, pp. 97-98)

However, upon motion for reconsideration filed by respondent

CBC, the Board of Directors of the PCHC reversed the
Arbitration Committee's decision in its Order, the dispositive
portion of which reads:

WHEREFORE, the Board hereby reconsiders the

Decision of the Arbitration Committee dated March
24, 1986 in Arbicom Case No. 183-029 and in lieu
thereof, one is rendered modifying the decision so that
the Complaint of BPI is dismissed, and on the
Counterclaim of CBC, BPI is sentenced to pay CBC
the sum of P1,206,607.58. In view of the facts, no
interest nor attorney's fees are awarded. BPI shall also
bear 75% or P5,437.50 and CBC, 25% or P1,812.50 of
the cost of the Arbitration proceedings amounting to
P7,250.00.

The PCHC is hereby directed to debit the clearing

account of the BPI the sum of P1,206,607.58 and
credit the same to that of CBC. The cost of Arbitration
proceedings are to be debited from the accounts of the
parties in the proportion above stated. (Rollo, pp. 112-
113)
BPI then filed a petition for review of the abovestated order with
the Regional Trial Court of Makati. The trial court dismissed the
petition but modified the order as can be gleaned from the
dispositive portion of its decision quoted earlier.

Not satisfied with the trial court's decision petitioner BPI filed
with us a petition for review on certiorari under Rule 45 of the
Rules of Court. The case was docketed as G.R. No. 96376.
However, in a Resolution dated February 6, 1991, we referred
the case to the Court of Appeals for proper determination and
disposition. The appellate court affirmed the trial court's
decision.

Hence, this petition.

In a resolution dated May 20, 1992 we gave due course to the

petition:

Petitioner BPI now asseverates:

THE DECISION AND RESOLUTION OF THE

RESPONDENT COURT LEAVES THE
UNDESIRABLE RESULT OF RENDERING
NUGATORY THE VERY PURPOSE FOR THE
UNIFORM BANKING PRACTICE OF REQUIRING
THE CLEARING GUARANTEE OF COLLECTING
BANKS.
 II

CONTRARY TO THE RULING OF THE

RESPONDENT COURT, THE PROXIMATE CAUSE
FOR THE LOSS OF THE PROCEEDS OF THE
TWO CHECKS IN QUESTION WAS THE
NEGLIGENCE OF THE EMPLOYEES OF CBC
AND NOT BPI; CONSEQUENTLY, EVEN UNDER
SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, BPI WAS NOT
PRECLUDED FROM RAISING THE DEFENSE OF
FORGERY.

III

THE RESPONDENT COURT COMMITTED

REVERSIBLE ERROR IN FAILING TO
APPRECIATE THE FACT THAT CBC HAD THE
"LAST CLEAR CHANCE" OF AVOIDING THE
LOSS OCCASIONED BY THE FRAUDULENT
ACTS INVOLVED IN THE INSTANT CASE. (Rollo,
p. 24)

The main issues raised in the assignment of errors are: When a

bank (in this case CBC) presents checks for clearing and
payment, what is the extent of the bank's warranty of the validity
of all prior endorsements stamped at the back of the checks? In
the event that the payee's signature is forged, may the
drawer/drawee bank (in this case BPI) claim reimbursement
from the collecting bank [CBC] which earlier paid the proceeds
of the checks after the same checks were cleared by petitioner
BPI through the PCHC?

Anent the first issue, petitioner BPI contends that respondent

CBC's clear warranty that "all prior endorsements and/or lack of
endorsements guaranteed" stamped at the back of the checks
was an unrestrictive clearing guaranty that all prior
endorsements in the checks are genuine. Under this premise
petitioner BPI asserts that the presenting or collecting bank,
respondent CBC, had an unquestioned liability when it turned
out that the payee's signature on the checks were forged. With
these circumstances, petitioner BPI maintains that
considerations of relative negligence becomes totally irrelevant.

In sum, petitioner BPI theorizes that the Negotiable Instruments

Law, specifically Section 23 thereof is not applicable in the light
of the absolute liability of the representing or collecting bank as
regards forged endorsements in consonance with the clearing
guarantee requirement imposed upon the presenting or
collecting banks "as it is worded today."

Petitioner BPI first returned to CBC the two (2) checks on the
ground that "Payee's endorsement (was) forged" on November
12, 1981. At that time the clearing regulation then in force under
PCHC's Clearing House Rules and Regulations as revised on
September 19, 1980 provides:
 Items which have been the subject of material
alteration or items bearing a forged endorsement when
such endorsement is necessary for negotiation shall be
returned within twenty four (24) hours after discovery
of the alteration or the forgery, but in no event beyond
the period prescribed by law for the filing of a legal
action by the returning bank/branch institution or
entity against the bank/branch, institution or entity
sending the same. (Section 23)

In the case of Banco de Oro Savings and Mortgage Bank

v. Equitable Banking Corporation (157 SCRA 188 [1988]) the
clearing regulation (this is the present clearing regulation) at the
time the parties' dispute occurred was as follows:

Sec. 21. . . . .

Items which have been the subject of material

alteration or items bearing forged endorsement when
such endorsement is necessary for negotiation shall be
returned by direct presentation or demand to the
Presenting Bank and not through the regular clearing
house facilities within the period prescribed by law for
the filing of a legal action by the returning
bank/branch, institution or entity sending the same.

It is to be noted that the above-cited clearing regulations are

substantially the same in that it allows a return of a check
"bearing forged endorsement when such endorsement is
necessary for negotiation" even beyond the next regular clearing
although not beyond the prescriptive period "for the filing of a
legal action by the returning bank."

Bearing in mind this similarity in the clearing regulation in force

at the time the forged checks in the present case and the Banco
de Oro case were dishonored and returned to the presenting or
collecting banks, we can be guided by the principles enunciated
in the Banco de Oro case on the relevance of negligence of the
drawee vis-a-vis the forged checks.

The facts in the Banco de Oro case are as follows: Sometime in

March, April, May and August 1983 Equitable Banking
Corporation through its Visa Card Department drew six (6)
crossed Manager's check with the total amount of Forty Five
Thousand Nine Hundred and Eighty Two Pesos and Twenty
Three Centavos (P45,982.23) and payable to certain member
establishments of Visa Card. Later, the checks were deposited
with Banco de Oro to the credit of its depositor, a certain Aida
Trencio. Following normal procedures, and after stamping at the
back of the checks the endorsements: "All prior and/or lack of
endorsements guaranteed" Banco de Oro sent the checks for
clearing through the PCHC. Accordingly, Equitable Banking
Corporation paid the checks; its clearing amount was debited for
the value of the checks and Banco de Oro's clearing account was
credited for the same amount. When Equitable Banking
Corporation discovered that the endorsements at the back of the
checks and purporting to be that of the payees were forged it
presented the checks directly to Banco de Oro for
reimbursement. Banco de Oro refused to reimburse Equitable
Banking Corporation for the value of the checks. Equitable
Banking Corporation then filed a complaint with the Arbitration
Committees of the PCHC. The Arbiter, Atty. Ceasar Querubin,
ruled in favor of Equitable Banking Corporation. The Board of
Directors of the PCHC affirmed the Arbiter's decision. A petition
for review of the decision filed by Banco de Oro with the
Regional Trial Court of Quezon City was dismissed. The
decision of the PCHC was affirmed in toto.

One of the main issues threshed out in this case centered on the
effect of Banco de Oro's (representing or collecting bank)
guarantee of "all prior endorsements and/or lack of
endorsements" at the back of the checks. A corollary issue was
the effect of the forged endorsements of the payees which were
late discovered by the Equitable Banking Corporation (drawee
bank) resulting in the latter's claim for reimbursement of the
value of checks after it paid the proceeds of the checks.

We agreed with the following disquisition of the Regional Trial

Court, to wit:

Anent petitioner's liability on said instruments, this

court is in full accord with the ruling of the PCHC
Board of Directors that:

In presenting the checks for clearing and for payment,

the defendant made an express guarantee on the
 validity of "all prior endorsements." Thus, stamped at
the back of the checks are the defendant's clear
warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid
on the checks.

No amount of legal jargon can reverse the clear

meaning of defendant's warranty. As the warranty has
proven to be false and inaccurate, the defendant is
liable for any damage arising out of the falsity of its
representation.

The principle of estoppel, effectively prevents the

defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an
action or declaration of the defendant, paid on the
checks. The same principle of estoppel effectively
prevents the defendant from denying the existence of
the checks. (pp. 10-11, Decision, pp. 43-44, Rollo) (at
pp. 194-195)

We also ruled:

Apropos the matter of forgery in endorsements, this

Court has presently succintly emphasized that the
collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that
the act of presenting the check for payment to the
drawee is an assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the endorsements. This is laid down in
the case of PNB v. National City Bank. (63 Phil. 1711)
In another case, this court held that if the drawee-bank
discovers that the signature of the payee was forged
after it has paid the amount of the check to the holder
thereof, it can recover the amount paid from the
collecting bank.

xxx xxx xxx

The point that comes uppermost is whether the drawee

bank was negligent in failing to discover the
alteration or the forgery. (Emphasis supplied)

xxx xxx xxx

The court reproduces with approval the following

disquisition of the PCHC in its decision.

xxx xxx xxx

III. Having Violated Its Warranty On Validity Of All

Endorsements, Collecting Bank Cannot Deny Liability
To Those Who Relied On Its Warranty.

xxx xxx xxx

 The damage that will result if judgment is not
rendered for the plaintiff is irreparable. The collecting
bank has privity with the depositor who is the
principal culprit in this case. The defendant knows the
depositor; her address and her history. Depositor is
defendant's client. It has taken a risk on its depositor
when it allowed her to collect on the crossed-checks.

Having accepted the crossed checks from persons

other than the payees, the defendant is guilty of
negligence; the risk of wrongful payment has to be
assumed by the defendant. (Emphasis supplied, at pp.
198-202)

As can be gleaned from the decision, one of the main

considerations in affirming the PCHC's decision was the finding
that as between the drawee bank (Equitable Bank) and the
representing or collecting bank (Banco de Oro) the latter was
negligent and thus responsible for undue payment.

Parenthetically, petitioner BPI's theory that the present clearing

guarantee requirement imposed on the representing or collecting
bank under the PCHC rules and regulations is independent of the
Negotiable Instruments Law is not in order.

Another reason why the petitioner's theory is uncalled for is the

fact that the Negotiable Instruments Law (Act No. 2031) applied
to negotiable instruments as defined under section one thereof.
Undeniably, the present case involves checks as defined by and
under the coverage of the Negotiable Instruments Law. To affirm
the theory of the petitioner would, therefore, violate the rule that
rules and regulations implementing the law should conform to
the law, otherwise the rules and regulations are null and void.
Thus, we held Shell Philippines, Inc. v. Central Bank of the
Philippines (162 SCRA 628 [1988]):

. . . while it is true that under the same law the Central

Bank was given the authority to promulgate rules and
regulations to implement the statutory provision in
question, we reiterate the principle that this authority
is limited only to carrying into effect what the law
being implemented provides.

In People v. Maceren (79 SCRA 450, 458 and 460),

this Court ruled that:

Administrative regulations adopted under legislative

authority by a particular department must be in
harmony with the provisions of the law, and should be
for the sole purpose of carrying into effect its general
provisions. By such regulations, of course, the law
itself cannot be extended. (U.S. v. Tupasi
Molina, supra). An administrative agency cannot
amend an act of Congress (Santos v. Estenzo, 109
Phil. 419, 422; Teoxon v. Members of the Board of
Administrators, L-25619, June 30, 1970, 33 SCRA
585; Manuel v. General Auditing Office, L-28952,
December 29, 1971, 42 SCRA 660; Deluao v. Casteel,
L-21906, August 29, 1969, 29 SCRA 350).

The rule-making power must be confined to details for

regulating the mode or proceeding to carry into effect
the law as it has been enacted. The power cannot be
extended to amending or expanding the statutory
requirements or to embrace matters not covered by the
statute. Rules that subvert the statute cannot be
sanctioned. (University of Santo Tomas v. Board of
Tax Appeals, 93 Phil. 376, 382, citing 12 C.J. 845-46.
as to invalid regulations, see Collector of Internal
Revenue v. Villaflor, 69 Phil. 319; Wise & Co. v.
Meer, 78 Phil. 655, 676; Del Mar v. Phil. Veterans
Administration, L-27299, June 27, 1973, 51 SCRA
340, 349).

xxx xxx xxx

. . . The rule or regulation should be within the scope

of the statutory authority granted by the legislature to
the administrative agency. (Davis, Administrative
Law, p. 194, 197, cited in Victorias Milling Co., Inc. v.
Social Security Commission, 114 Phil. 555, 558).

In case of discrepancy between the basic law and a

rule or regulation issued to implement said law the
basic law prevails because said rule or regulation
cannot go beyond the terms and provisions of the
 basic law (People v. Lim 108 Phil. 1091). (at pp. 633-
634)

Section 23 of the Negotiable Instruments Law states:

When signature is forged or made without the

authority of the person whose signature it purports to
be, it is wholly inoperative and no right to retain the
instrument, or to give discharge therefore, or to
enforce payment thereof, against any party thereto,
can be acquired through or under such forged
signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the
forgery or want of authority.

There are two (2) parts of the provision. The first part states the
general rule while the second part states the exception to the
general rule. The general rule is to the effect that a forged
signature is "wholly inoperative", and payment made "through
or under such signature" is ineffectual or does not discharge the
instrument. The exception to this rule is when the party relying
in the forgery is "precluded from setting up the forgery or want
of authority. In this jurisdiction we recognize negligence of the
party invoking forgery as an exception to the general rule.
(See Banco de Oro Savings and Mortgage Bank v. Equitable
Banking Corporation supra; Philippine National Bank v.
Quimpo, 158 SCRA 582 [1988]; Philippine National Bank v.
Court of Appeals, 25 SCRA 693 [1968]; Republic v. Equitable
Banking Corporation, 10 SCRA 8 [1964]; National Bank v.
National City Bank of New York, 63 Phil. 711 [1936]; San
Carlos Milling Co. v. Bank of P.I., 59 Phil. 59 [1933]). In these
cases we determined the rights and liabilities of the parties under
a forged endorsement by looking at the legal effects of the
relative negligence of the parties thereto.

In the present petition the payee's names in the two (2) subject
checks were forged. Following the general rule, the checks are
"wholly inoperative" and of no effect. However, the underlying
circumstances of the case show that the general rule on forgery
is not applicable. The issue as to who between the parties should
bear the loss in the payment of the forged checks necessities the
determination of the rights and liabilities of the parties involved
in the controversy in relation to the forged checks.

The records show that petitioner BPI as drawee bank and

respondent CBC as representing or collecting bank were both
negligent resulting in the encashment of the forged checks.

The Arbitration Committee in its decision analyzed the

negligence of the employees of petitioner BPI involved in the
processing of the pre-termination of Eligia G. Fernando's money
market placement and in the issuance and delivery of the subject
checks in this wise:

a) The impostor could have been readily unmasked by

a mere telephone call, which nobody in BPI bothered
 to make to Eligia G. Fernando, a vice-president of
Philamlife (Annex C, p. 13).

b) It is rather curious, too, that the officer who used to

handle Eligia G. Fernando's account did not do
anything about the account's pre-termination (Ibid, p.
13).

c) Again no verification appears to have been made by

(sic) Eligia G. Fernando's purported signature on the
letter requesting the pre-termination and the letter
authorizing her niece to pick-up the checks, yet, her
signature was in BPI's file (Ibid., p. 13).

d) Another step that could have foiled the fraud, but

which BPI neglected to take, was requiring before the
two checks in controversy were delivered, the
surrender of the promissory note evidencing the
money market placement that was supposedly pre-
terminated. (Rollo, p. 13).

The Arbitration Committee, however, belittled petitioner BPI's

negligence compared to that of respondent CBC which it
declared as graver and the proximate cause of the loss of the
subject checks to the impostor who impersonated Eligia G.
Fernando. Petitioner BPI now insists on the adoption of the
Arbitration Committee's evaluation of the negligence of both
parties, to wit:
a) But what about the lapses of BPI's employees who
processed the pretermination of Eligia G. Fernando's
placement and issued the checks? We do not think it
was a serious lapse not to confirm the telephone
request for pretermination purportedly made by Eligia
G. Fernando, considering that it is common
knowledge that business in the money market is done
mostly by telephone. Then, too, the initial request of
the caller was for the two checks representing the
pretermination proceeds to be delivered to "her"
office, meaning Eligia G. Fernando's office at
Philamlife, this clever ruse must have put off guard the
employee preparing the "purchase order slip", enough
at least for him to do away with having to call Eligia
G. Fernando at her office. (Annex C at p. 17).

b) We also do not think it unusual that Penelope

Bulan, who used to handle Eligia G. Fernando's
account, should do nothing about the request for
pretermination and leave it to Eustaquio to process the
pretermination. In a bank the of BPI, it would be quite
normal for an officer to take over from another the
handling of an account. (Ibid. p. 17)

c) The failure to verify or compare Eligia G.

Fernando's purported signature on the letter requesting
the pretermination and the letter authorizing the pick-
up of the checks in controversy with her signature in
BPI's file showed lack of care and prudence required
by the circumstances, although it is doubtful that such
comparison would have disclosed the deception
considering the "close similarity" between her
purported signature and her signature in BPI's file.
(Ibid., p. 17).

d) A significant lapse was, however, committed when

the two checks in controversy were delivered without
requiring the surrender of the promissory note
evidencing the placement that was supposedly
preterminated. Although, as we already said, it is hard
to determine whether the failure to require the
surrender of the promissory note was a deliberate act
of Laderas, the dispatcher, or simply because the
"purchase order slip" note, (sic) the fact remains that
such failure contributed to the consummation of the
fraud. (Ibid., p. 17-18)

The Arbitration Committee Decision's conclusion was

expressed thus

Except for Laderas, not one of the BPI

personnel tasked with the pretermination of
Eligia G. Fernando's placement and the
issuance of the pretermination checks
colluded in the fraud, although there may
have been lapses of negligence on their part
 which we shall discuss later. The secreting
out of BPI of Fernando's specimen
signature, which, as admitted by the
impostor herself (Exhibit E-2, page 5),
helped her in forging Fernando's signature
was no doubt an "inside job" but done by
any of the four employees colluding in the
fraud, not by the personnel directly charged
with the custody of Fernando's records.
(Annex C, p. 15)

With respect to the negligence of the CBC employees

in the payment of the two (2) BPI cashier's checks
involved in this case, the Arbitration Committee's
Decision made incontrovertible findings undisputed in
the statement of facts found in the Court of Appeals'
decision of 8 August 1991, the Regional Trial Court
decision of 28 November 1990 and the PCHC Board
of Directors' Order of 26 August 1986 (Annexes A, E,
D, respectively). These findings point to negligence of
the CBC employees which led to: (a) the opening of
the impostor's current account in the name of Eligia G.
Fernando; (b) the deposit of said account of the two
(2) checks in controversy and (c) the withdrawal of
their proceeds from said account.

The Arbitration Committee found that

1. Since the impostor presented only her tax
account number as a means of identification,
we feel that Emily Sylianco Cuaso, Cash
Supervisor, approved the opening of her
current account in the name of Eligia G.
Fernando on the strength of the introduction
of Antonio Concepcion who had himself
opened an account earlier that year. That
Mrs. Cuaso was not comfortable with the
introduction of the new depositor by
Concepcion is betrayed by the fact that she
made it appear in the application form that
the new depositor was introduced by
Valentin Co a long-standing valued client of
CBC who had introduced Concepcion when
he opened his account. We find this
misrepresentation significant because when
she reviewed the application form she
assumed that the new client was introduced
by Valentin Co as indicated in the
application form (tsn of March 19, 1985,
page 13). Thus we find that the impostor
was able to open with CBC's current account
in the name of Eligia G. Fernando due to the
negligence, if not misrepresentation, of its
Cash Supervisor, (Annex C, p. 18).
2. Even with negligence attending the
impostor's opening of a current account, her
encashment of the two checks in controversy
could still have been prevented if only the
care and diligence demanded by the
circumstances were exercised. On October
14, 1981, just a day after she opened her
account, the impostor deposited the two
checks which had an aggregate value of
P2,413,215.16, which was grossly
disproportionate to her initial deposit of
P10,000. The very date of both checks,
October 12, 1981, should have tipped off the
real purpose of the opening of the account
on October 13, 1981. But what surely can be
characterized only as abandonment of
caution was allowing the withdrawal of the
checks' proceeds which started on October
16, 1981 only two days after the two checks
were deposited; by October 22, 1981, the
account had been emptied of the checks'
proceeds. (Annex C, p. 19).

3. We cannot accept CBC's contention that

"big withdrawals" are "usual business" with
it. Huge withdrawals might be a matter of
course with an established account but not
 for a newly opened account, especially since
the supposed check proceeds being
withdrawn were grossly disproportionate to
the initial cash deposit. (Annex C, p. 19).

As intimated earlier, the foregoing findings of fact

were not materially disputed either by the respondent
PCHC Board of Directors or by the respondent courts
(compare statement of facts of respondent court as
reproduced in pp. 9-11 of this petition).

Having seen the negligence of the employees of both

Banks, the relevant question is: which negligence
was graver. The Arbitration Committee's Decision
found and concluded thus

Since there were lapses by both BPI and

CBC, the question is: whose negligence was
the graver and which was the proximate
cause of the loss? Even viewing BPI's lapses
in the worst light, it can be said that while its
negligence may have introduced the two
checks in controversy into the commercial
stream. CBC's lack of care in approving the
opening with it of the impostor's current
account, and its allowing the withdrawal's of
the checks' proceeds, the aggregate value of
which was grossly disproportionate to the
 initial cash deposit, so soon after such
checks were deposited, caused the
"payment" of the checks. Being closest to
the vent of loss, therefore, CBC's negligence
must be held to be proximate cause of the
loss. (Annex C, pp. 19-20) (Rollo, pp. 38-
41)

While it is true that the PCHC Board of Directors, and the lower
courts did not dispute the findings of facts of the Arbitration
Committee, the PCHC Board of Directors evaluated the
negligence of the parties, to wit:

The Board finds the ruling that the negligence of the

employees of CBC is graver than that of the BPI not
warranted by the facts because:

1. The acts and omissions of which BPI employees are

guilty are not only negligent but criminal as found by
the decision.

2. The act of BPI's dealer-trainee Eustaquio of

disclosing information about the money market
placement of its client over the telephone is a
violation, if not of Republic Act 1405, of Sec. 87 (a) of
the General Banking Act which penalizes any officer-
employee or agent of any banking institution who
discloses to any unauthorized person any information
relative to the funds or properties in the custody of the
bank belonging to private individual, corporations, or
any other entity; and the bland excuse given by the
decision that "business in the money market is done
mostly by the telephone" cannot be accepted nor
tolerated for it is an elementary rule of law that no
custom or usage of business can override what a law
specifically provides. (Ang Tek v. CA, 87 Phil. 383).

3. The failure of BPI employees to verify or compare

Eligia G. Fernando's purported signature on the letter
requesting for pre-termination and the letter
authorizing the pick-up of the checks in controversy
with the signatures on file is not even justified but
admitted in the decision as showing lack of care and
prudence required by the circumstances. The
conjectural excuse made in the decision that "it is
doubtful that such comparison would
have disclosed the deception" does not give an excuse
for the omission by BPI employees of the act of
verifying the signature, a duty which is the basic
requirement of all acts in the bank. From the very first
time an employee enters the services of a bank up to
the time he becomes the highest officer thereof, the
cautionary rule is drilled on him to always be sure that
when he acts on the basis of any signature presented
before him, the signature is to be verified as genuine
and that if the bank acts on the basis of a forgery of
such signature, the bank will be held liable. There can
be no excuse therefore for such an omission on the
part of BPI employees.

4. The decision admits that:

A significant lapse was, however, committed

when the two checks in controversy were
delivered without requiring the surrender of
the promissory note evidencing the
placement that was supposedly
preterminated.

This omission of the BPI to require the surrender of

the promissory notes evidencing the placement is
justified by the decision by saying that Sec. 74 of the
Negotiable Instrument Law is not violated by this
omission of the BPI employees because said provision
is intended for the benefit of the person paying (in this
case the BPI) so that since the omission to surrender
having been waived by BPI, so the non-surrender does
not invalidate the payment. The fallacy of this
argument is that the in this case is: whether or not such
non-surrender is a necessary ingredient in the cause of
the success of the fraud and not whether or not the
payment was valid. This excuse may perhaps be
acceptable if the omission did not cause damage to
any other person. In this case, however, it did cause
tremendous damage. Moreover, this statement
obviously overlooks the provision in Art. 1240 of the
Civil Code requiring the payor (which in this case is
the BPI) to be sure he pays to the right person and as
Art. 1242 states, he can claim good faith in paying to
the right person only if he pays to the person
possession of the credit (which in this case is the
promissory note evidencing the money market
placement). Clearly therefore, the excuse given in the
decision for the non-surrender of this promissory note
evidencing the money market placement cannot be
accepted.

xxx xxx xxx

The decision, however, discusses in detail the

negligent acts of the CBC in its lapses or certain
requirements in the opening of the account and in
allowing withdrawals against the deposited checks
soon after the deposit thereof. As stated by the
decision however, in computerized banks the history
of the account is not shown in the computer terminal
whenever a withdrawal is made.

The Board therefore believes that these withdrawals,

without any further showing that the CBC employees
"had actual knowledge of the infirmity or defect, or
knowledge of such facts" (Sec. 56, Negotiable
 Instruments Law) that their action in accepting their
checks for deposit and allowing the withdrawals
against the same "amounted to bad faith" cannot be
considered as basis for holding CBC liable. (Rollo, pp.
107-111)

Banks handle daily transactions involving millions of pesos. By

the very nature of their work the degree of responsibility, care
and trustworthiness expected of their employees and officials is
far greater than those of ordinary clerks and employees. For
obvious reasons, the banks are expected to exercise the highest
degree of diligence in the selection and supervision of their
employees.

In the present case, there is no question that the banks were

negligent in the selection and supervision of their employees.
The Arbitration Committee, the PCHC Board of Directors and
the lower court, however disagree in the evaluation of the degree
of negligence of the banks. While the Arbitration Committee
declared the negligence of respondent CBC graver, the PCHC
Board of Directors and the lower courts declared that petitioner
BPI's negligence was graver. To the extent that the degree of
negligence is equated to the proximate cause of the loss, we rule
that the issue as to whose negligence is graver is relevant. No
matter how many justifications both banks present to avoid
responsibility, they cannot erase the fact that they were both
guilty in not exercising extraordinary diligence in the selection
and supervision of their employees. The next issue hinges on
whose negligence was the proximate cause of the payment of the
forged checks by an impostor.

Petitioner BPI accuses the Court of Appeals of inconsistency

when it affirmed the PCHC's Board of Directors' Order but in
the same breath declared that the negligent acts of the CBC
employees occurred immediately before the actual loss.

In this regard petitioner BPI insists that the doctrine of last clear
chance enunciated in the case of Picart v. Smith (37 Phil. 809
[1918]) should have been applied considering the circumstances
of the case.

In the Picart case, Amado Picart was then riding on his pony
over the Carlatan Bridge at San Fernando, La Union when Frank
Smith approached from the opposite direction in a car. As Smith
neared the bridge he saw Picart and blew his horn to give
warning of his approach. When he was already on the bridge
Picart gave two more successive blasts as it appeared to him that
Picart was not observing the rule of the road. Picart saw the car
coming and heard the warning signals. An accident then ensued
resulting in the death of the horse and physical injuries suffered
by Picart which caused him temporary unconsciousness and
required medical attention for several days. Thereafter, Picart
sued Smith for damages.

We ruled:
The question presented for decision is whether or not
the defendant in maneuvering his car in the manner
above described was guilty of negligence such as
gives rise to a civil obligation to repair the damage
done; and we are of the opinion that he is so liable. As
the defendant started across the bridge, he had the
right to assume that the horse and rider would pass
over to the proper side; but as he moved toward the
center of the bridge it was demonstrated to his eyes
that this would not be done; and he must in a moment
have perceived that it was too late for the horse to
cross with safety in front of the moving vehicle. In the
nature of things this change of situation occurred
while the automobile was yet some distance away; and
from this moment it was no longer within the power of
the plaintiff to escape being run down by going to a
place of greater safety. The control of the situation
had then passed entirely to the defendant; and it was
his duty to either to bring his car to an immediate stop
or, seeing that there were no other persons on the
bridge, to take the other side and pass sufficiently far
away from the horse to avoid the danger of
collision. Instead of doing this, the defendant ran
starlight on until he was almost upon the horse. He
was, we think, deceived into doing this by the fact that
the horse had not yet exhibited fright. But in view of
the known nature of horses, there was an appreciable
risk that, if the animal in question was unacquainted
with automobiles, he might get excited and jump
under the conditions which here confronted him.
When the defendant exposed the horse and rider to
this danger he was, in our opinion, negligent in the
eyes of the law.

The test by which by which to determine the existence

of negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged
negligent act use that reasonable care and caution
which an ordinarily prudent person would have used
in the same situation? If not, then he is guilty of
negligence.

xxx xxx xxx

It goes without saying that the plaintiff himself was

not free from fault, for he was guilty of antecedent
negligence in planting himself on the wrong side of
the road. But as we have already stated, the defendant
was also negligent; and in such case the problem
always is to discover which agent is immediately and
directly responsible. It will be noted that the negligent
acts of the two parties were not contemporaneous,
since the negligence of the defendant succeeded the
negligence of the plaintiff by an appreciable interval.
Under these circumstances the law is that the person
 who has the last fair chance to avoid the impending
harm and fails to do so is chargeable with the
consequences, without reference to the prior
negligence of the other party."

Applying these principles, petitioner BPI's reliance on the

doctrine of last clear chance to clear it from liability is not well-
taken. CBC had no prior notice of the fraud perpetrated by BPI's
employees on the pretermination of Eligia G. Fernando's money
market placement. Moreover, Fernando is not a depositor of
CBC. Hence, a comparison of the signature of Eligia G.
Fernando with that of the impostor Eligia G. Fernando, which
respondent CBC did, could not have resulted in the discovery of
the fraud. Hence, unlike in the Picart case herein the defendant,
had he used reasonable care and caution, would have recognized
the risk he was taking and would have foreseen harm to the
horse and the plaintiff but did not, respondent CBC had no way
to discover the fraud at all. In fact the records fail to show that
respondent CBC had knowledge, actual or implied, of the fraud
perpetrated by the impostor and the employees of BPI.

However, petitioner BPI insists that even if the doctrine of

proximate cause is applied, still, respondent CBC should be held
responsible for the payment to the impostor of the two (2)
checks. It argues that the acts and omissions of respondent CBC
are the cause "that set into motion
the actual and continuous sequence of events that produced the
injury and without which the result would not have
occurred." On the other hand, it assets that its acts and
omissions did not end in a loss. Petitioner BPI anchors its
argument on its stance that there was "a gap, a hiatus, an interval
between the issuance and delivery of said checks by petitioner
BPI to the impostor and their actual payment of CBC to the
impostor. Petitioner BPI points out that the gap of one (1) day
that elapsed from its issuance and delivery of the checks to the
impostor is material on the issue of proximate cause. At this
stage, according to petitioner BPI, there was yet no loss and the
impostor could have decided to desist from completing the same
plan and could have held to the checks without negotiating
them.

We are not persuaded.

In the case of Vda. de Bataclan, et al, v. Medina (102 Phil. 181

[1957]), we had occasion to discuss the doctrine of proximate
cause.

Briefly, the facts of this case are as follows:

At about 2:00 o'clock in the morning of September 13, 1952 a

bus carrying about eighteen (18) passengers on its way to
Amandeo, Cavite figured in an accident. While the bus was
running, one of the front tires burst and the bus began to zigzag
until it fell into a canal on the right side of the road and turned
turtle. Some passengers managed to get out from the overturned
bus except for four (4) passengers, among them, Bataclan. The
passengers who got out heard shouts for help from Bataclan and
another passenger Lara who said they could not get out from the
bus. After half an hour, about ten men came, one of them
carrying a lighted torch made of bamboo with a wick on one end
fueled with petroleum. These men approached the overturned
bus, and almost immediately, a fierce fire started burning and all
but consuming the bus including the four (4) passengers trapped
inside. It turned out that as the bus overturned, gasoline began to
leak and escape from the gasoline tank on the side of the chassis
spreading over and permeating the body of the bus and the
ground under and around it. The lighted torch brought by one of
the men who answered the call for help set it on fire. On the
same day, the charred bodies of the trapped passengers were
removed and identified. By reason of his death, Juan Bataclan's
wife and her children filed a suit for damages against Maximo
Medina, the operator and owner of the bus in the then Court of
First Instance of Cavite. The trial court ruled in favor of the
defendant. However, we reversed and set aside the trial court's
decision and said:

There is no question that under the circumstances, the

defendant carrier is liable. The only question is to
what degree. The trial court was of the opinion that the
proximate cause of the death of Bataclan was not the
overturning of the bus, but rather the fire that burned
the bus, including himself and his co-passengers who
were unable to leave it; that at the time the fire started,
Bataclan, though the must have suffered, physical
injuries, perhaps serious, was still alive and so
damages were awarded, not for his death, but for the
physical satisfactory definition of promote cause is
found in Volume 38, pages 695-696 of American
Jurisprudence, cited by plaintiffs-appellants in their
brief. It is as follows:

. . . that cause, which, in natural and

continuous sequence, unbroken by any
efficient intervening cause, produces the
injury, and without which the result would
not have occurred. And more
comprehensively, the proximate legal cause
in that acting first and producing the injury,
either immediately or by setting other events
in motion, all constituting a natural and
continuous chain of events, each having a
close causal connection with its immediate
predecessor, the final event in the chain
immediately effecting the injury as natural
and probable result of the cause which first
acted, under such circumstances that the
person responsible for the first event should,
as an ordinarily prudent and intelligent
person, have reasonable ground to expect at
the moment of his act or default that an
 injury to some person might probably result
therefrom.

It may be that ordinarily, when a passenger bus

overturns, and pins down a passenger, merely causing
him physical injuries, if through some event,
unexpected and extraordinary, the overturned bus is
set on fire, say, by lightning, or if some highwaymen
after looting the vehicle sets it on fire, and the
passenger is burned to death, on might still contend
that the proximate cause of his death was the fire and
not the overturning of the vehicle. But in the present
case and under the circumstances obtaining in the
same, we do not hesitate to hold that the proximate
cause of the death of Bataclan was the overturning of
the bus, this for the reason that when the vehicle
turned not only on its side but completely on its back,
the leaking of the gasoline from the tank was not
unnatural or unexpected; that the coming of the men
with a lighted torch was in response to the call for
help, made not only by the passengers, but most
probably, by the driver and the conductor themselves,
and that because it was very dark (about 2:30 in the
morning), the rescuers had to carry a light with them;
and coming as they did from a rural area where
lanterns and flashlights were not available, they had to
use a torch, the most handy and available; and what
 was more natural than that said rescuers should
innocently approach the overturned vehicle to extend
the aid and effect the rescue requested from them. In
other words, the coming of the men with the torch was
to be expected and was natural sequence of the
overturning of the bus, the trapping of some of its
passengers and the call for outside help. (Emphasis
Supplied, at pp. 185-187)

Again, applying the doctrine of proximate cause, petitioner

BPI's contention that CBC alone should bear the loss must fail.
The gap of one (1) day between the issuance and delivery of the
checks bearing the impostor's name as payee and the impostor's
negotiating the said forged checks by opening an account and
depositing the same with respondent CBC is not controlling. It is
not unnatural or unexpected that after taking the risk of
impersonating Eligia G. Fernando with the connivance of BPI's
employees, the impostor would complete her deception by
encashing the forged checks. There is therefore, greater reason
to rule that the proximate cause of the payment of the forged
checks by an impostor was due to the negligence of petitioner
BPI. This finding, notwithstanding, we are not inclined to rule
that petitioner BPI must solely bear the loss of P2,413,215.16,
the total amount of the two (2) forged checks. Due care on the
part of CBC could have prevented any loss.

The Court cannot ignore the fact that the CBC employees closed
their eyes to the suspicious circumstances of huge over-the-
counter withdrawals made immediately after the account was
opened. The opening of the account itself was accompanied by
inexplicable acts clearly showing negligence. And while we do
not apply the last clear chance doctrine as controlling in this
case, still the CBC employees had ample opportunity to avoid
the harm which befell both CBC and BPI. They let the
opportunity slip by when the ordinary prudence expected of
bank employees would have sufficed to seize it.

Both banks were negligent in the selection and supervision of

their employees resulting in the encashment of the forged checks
by an impostor. Both banks were not able to overcome the
presumption of negligence in the selection and supervision of
their employees. It was the gross negligence of the employees of
both banks which resulted in the fraud and the subsequent loss.
While it is true that petitioner BPI's negligence may have been
the proximate cause of the loss, respondent CBC's
negligence contributed equally to the success of the impostor in
encashing the proceeds of the forged checks. Under these
circumstances, we apply Article 2179 of the Civil Code to the
effect that while respondent CBC may recover its losses, such
losses are subject to mitigation by the courts. (See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148 SCRA
353 [1987]).

Considering the comparative negligence of the two (2) banks,

we rule that the demands of substantial justice are satisfied by
allocating the loss of P2,413,215.16 and the costs of the
arbitration proceeding in the amount of P7,250.00 and the cost
of litigation on a 60-40 ratio. Conformably with this ruling, no
interests and attorney's fees can be awarded to either of the
parties.

WHEREFORE, the questioned DECISION and RESOLUTION

of the Court of Appeals are MODIFIED as outlined above.
Petitioner Bank of the Philippine Islands shall be responsible for
sixty percent (60%) while respondent China Banking
Corporation shall share forty percent (40%) of the loss of TWO
MILLION FOUR HUNDRED THIRTEEN THOUSAND, TWO
HUNDRED FIFTEEN PESOS and SIXTEEN CENTAVOS
(2,413,215.16) and the arbitration costs of SEVEN
THOUSAND, TWO HUNDRED FIFTY PESOS (7,250.00).
The Philippine Clearing House Corporation is hereby directed to
effect the corresponding entries to the banks' clearing accounts
in accordance with this decision. Costs in the same proportion
against the Bank of the Philippine Islands and the China
Banking Corporation.

SO ORDERED

Bidin, Davide, Jr., Romero and Melo, JJ., concur.