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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
___________________________________________________________________________________________________________
Facultad de Derecho Civil 1 UNIVERSITY OF SANTO TOMAS
UNIVERSITY OF SANTO TOMAS
Faculty of Civil Law A.Y. 2013-2014 First Semester
INTRODUCTION GENERAL CONSIDERATIONS
Q: What is the governing law on negotiable instruments? A: Act
No. 2031 (Negotiable Instruments Law). NOTE: The provisions of the
Code of Commerce on negotiable instruments were impliedly repealed
by the NIL, save for some provisions: Ex: Provisions on
crossed-checks. Q: When does the NIL apply? A: Only to negotiable
instruments. If the instrument is not negotiable, the instrument is
not governed by the provisions of the NIL.
History Copied from American Uniform Negotiable Instruments Law
which is based largely on the Bills of Exchange Act of 1882 of
England.
Definition Q: What is a negotiable instrument? A:
a. It is a written contract for the payment of money b. Which is
intended as a substitute for money c. And passes from one person to
another as money, in
such a manner as to give a holder in due course the right to
hold the instrument free from defenses available to prior
parties
Functions of a negotiable instrument
Q: What are the 2 main functions of a negotiable instrument?
A:
1. A substitute for money Ex: Pedro, a manufacturer, wants to
buy raw materials for his production: it would be risky for him to
bring
cash amounting to 2M, negotiable instruments may be used as a
substitute for money
2. It is a credit instrument Ex: Pedro has money to pay for the
raw materials but would like to use his cash to make his store
bigger; he may obtain the raw materials from supplier by signing
and delivering a promissory note in favor of his supplier.
Therefore, there are more transactions that can be undertaken.
Pedro can buy his raw materials and expand his store at the same
time
Q: What are its functions? A:
1. It is a substitute for money 2. It is a medium of exchange 3.
It is a credit instrument which increases credit
circulation 4. It increases purchasing power in circulation 5.
It is proof of transactions
Q: Are negotiable instruments legal tender? A: No. R.A. 7653
provides that only notes and coins issued by the BSP are considered
legal tender. Q: What are the consequences of the rule that
negotiable instruments are not legal tender? A:
1. Delivery of negotiable instruments does not even produce the
effect of payment. Obligations are deemed paid only when the
instrument is encashed
2. The creditor may refuse to accept negotiable instruments
Negotiable v. Non-Negotiable instrument
Negotiable Non-Negotiable
As to fulfillment of the requisites under Sec.1
Contains all the requisites of Sec. 1
Does not contain
As to governing law
NIL The NIL does not apply
MERCANTILE LAW REVIEW 1: LAW ON NEGOTIABLE INSTRUMENTS
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 2 UNIVERSITY OF SANTO TOMAS
except by analogy
As to Manner of transfer
1. Negotiation 2. Assignment
1. Assignment
As to the Right of the transferee
He can be a holder in due course
Can never be a holder in due course
As to defenses
The transferee who as HDC is not subject to all defenses, only
real defenses
The transferee is subject to all defenses of prior parties
Features of a negotiable instrument
Q: What are the features of a negotiable instrument? A:
1. Negotiability 2. Accumulation of secondary contracts- the
indorsers
become secondarily liable not only to their immediate
transferees but also to any holder
KINDS OF NEGOTIABLE INSTRUMENTS
Q: What are the 2 kinds of negotiable instrument? A:
PROMISSORY NOTE BILL OF EXCHANGE
a. An unconditional promise
b. in writing c. made by one person
to another, d. signed by the maker, e. engaging to pay on
demand, or at a fixed future time,
f. a sum certain in money
g. to order or to bearer.
i. An unconditional order
ii. in writing iii. addressed by one
person to another, iv. signed by the person
giving it, v. requiring the person
to whom it is addressed
vi. to pay on demand or at a fixed or determinable future
time
vii. a sum certain in money
viii. to order or to bearer
Also known as draft in other countries
Kinds of bill of exchange
Check Drawn on a bank payable on demand
Time draft Draft payable at a fixed time
Sight or demand draft
Draft payable when the holder presents it for paymebt
Trade acceptance
Used in contracts of sale whereby the seller as drawer orders
the buyer (as drawee) to pay a sum certain to the same seller
(payee)
Draft Used in documentary exchange Ex: letters of credit
transaction
Inland bill Drawn and payable in the Philippines
Foreign bill Does not purport to be both drawn and payable in
the Philippines
Bankers acceptance
A time draft across the face of which the drawee which is a bank
has written the word accepted
Clean Bill of exchange
No document is attached when presentment for payment or
acceptance is made
Documentary bill of exchange
A document is attached when presentment for payment or
acceptance is made
Bills in set One bill of exchange drawn in a set, each part of
the set being numbered and containing a reference to the other
parts, the whole of the parts constitutes one bill
Kinds of promissory notes
Certificate of deposit
A written acknowledgement of a bank of its receipt of a sum
certain with a promise to repay the same
Bonds Certificate or evidence of a debt on which the issuing
company or governmental body promises to pay the bondholders a
specified amount of interest for a specified time, and to repay the
loan on the expiration date
Debanture A bond or promissory note backed by the general credit
of a corporation and usually not secured by a mortgage or lien on
any specific property
Q: In what instances may a bill of exchange (BOE) be treated as
a promissory note? A:
1. when the drawer and the draweee of the BOE are the same
person
2. the drawee is a fictitious person 3. drawee has no capacity
to contract 4. the instrument is so ambiguous that there is
doubt
whether it is a bill or a note
Parties
Q: Who are the parties to a promissory note? A:
1. maker- the person who promises to pay the amount stated in
the PM
2. payee- the person who is supposed to be paid by the maker
January 10, 2004
I promise to pay Leona or order, the sum of P100 on January 5,
2006.
Sgd. Carlo
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 3 UNIVERSITY OF SANTO TOMAS
NOTE: Maker- Carlo Payee- Leona Q: Who are the parties to a bill
of exchange? A:
1. drawer- the person who draws and signs the instrument; he
orders the drawee to pay
2. drawee- the person who is being ordered to pay; while he
appears to be a party on the face of the bill, he is not yet liable
until he accepts
3. acceptor- the drawee who already accepted the BOE 4. paye-
the one to whom payment should be made by
the acceptor
January 2, 2004
Pay to the order of Joshua P100,000.00 on or before January 2,
2006
Sgd. Justin To: Lauren
NOTE: Drawer- Justin Drawee- Lauren Payee- Joshua
Account Name: Bebeng No. 123456A Date: June 3, 2001 PAY TO THE
ORDER OF Ayel P1,000,000.00 One million only PESOS MARZAN BANK
Ayala Branch Sgd: Jed Mark Makati City
NOTE: Drawer- Bebeng Drawee- Marzan Bank Payee- Ayel (Jed Mark,
in this example, has a current checking account with Marzan
Bank)
5. indorsers- persons who transfer or negotiate an instrument by
indorsement completed by delivery
6. holder- a. the payee or indorsee of a bill or note who is
in
possession of a bill or note payable to order, or b. the bearer
of a note or bill payable to bearer
7. bearer- the person in possession of a bill or note which is
payable to bearer
Promissory Note v. Bill of Exchange
Promissory Note Bill of Exchange
Contains an unconditional promise
Contains an unconditional order
There are 2 parties on its face:
1. maker 2. payee
There are 3 parties on its face:
1. drawer 2. drawee 3. payee
The person who signs is the maker
The person who signs is the drawer
The maker is primarily liable
The drawer is secondarily liable
The maker is primarily liable
The acceptor is primarily liable
There is only 1 presentment for payment
There are 2 presentments: 1. for acceptance 2. for payment
Bill of Exchange v. Check
Bill of Exchange Check
As to drawee
The drawee may or may not be a bank
Drawee is always a bank
When payable
May be payable: 1. on demand 2. at a fixed 3. determinable
future time
Always payable on demand
Presence of deposit or checking account
Not necessarily drawn on a deposit or checking account
Necessarily drawn on a deposit or checking account
Effect of death of drawer
Death of drawer, with knowledge of the bank, does not revoke the
authority of the banker to pay
Death of drawer, with knowledge of the bank, revokes the
authority of the banker to pay
Incidents in the life of a negotiable instrument
1. Preparation and signing 2. Issuance
-first delivery of the instrument to the payee 3.
Negotiation
-transfer from one person to another so as to constitute the
transferee a holder
4. Presentment for acceptance 5. Acceptance
-written assent of the draweee to the order 6. Dishonor by
non-acceptance 7. Presentment for payment 8. Dishonor by
non-payment 9. Notice of dishonor
- notice to the persons secondarily liable that the maker or the
drawee/acceptor refused to pay or to accept the instrument
10. Protest (in some cases) 11. Discharge
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 4 UNIVERSITY OF SANTO TOMAS
FORM AND INTERPRETATION
Sec 1. Form of negotiable instruments. - An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and Where the
instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty. Q: How is
negotiability determined? A: By ascertaining if all the
requirements of Section 1 appear on the face of the instrument. Q:
What are the factors to be considered? A:
1. The whole of the instrument shall be considered 2. Only what
appears on the face of the instrument shall
be considered 3. Sec.1 shall be applied
NOTE: The negotiability is not determined by looking at a
separate instrument
REQUISITES UNDER SEC.1
1. It must be in writing
a. The writings may be printed, in ink or in pencil
Q: May it be written using a pencil? A: The use of pencil must
be avoided because such writing is not as durable as ink and is an
invitation to alteration by forgery. b. It may be written in any
material that substitutes paper like
cloth, leather, or parchment
Q: May it be written on a wall? A: Since negotiable instruments
are intended for circulation, they should not be written on an
immovable object, such as wall Q: May it be written on a stone
tablet? A: It cannot be written on a stone tablet because it cannot
be written on an object, which though movable, may make it
inconvenient for the parties to circulate
Signed by the maker or drawer
a. The maker must sign the PN and the drawer must sign the
BOE
Q: How shall it be signed? A: It may be in their handwriting,
printed, engraved, lithographed, or photographed so long as they
are adopted as the signature of the signer. Q: What are the
contents of the signature? A: The signature may consist of the
signers complete name, initials, or symbol or any other mark that
is intended as the maker or drawers signature.
b. Location
Q: Where should it be found? A: It is usually placed at the
bottom right corner of the instrument. However, negotiability is
not affected although the signature is placed on any other part of
the face of the instrument such as on its body. Ex:
Manila, Philippines January 15. 2012
I, Janette Lim Napoles, promise to pay to the order of Paloma
Pineda the sum of P20,000.00
2. Must contain an unconditional promise or order to pay a
sum certain in money
Promissory Note Bill of Exchange
Contains an unconditional promise
Contains an unconditional order
Q: What is a condition? A: A condition is an event which may or
may not happen. Q: What is the effect of the presence of a
condition on the face of the instrument? A: It renders the
instrument non-negotiable because it affects the free
transferability of the instrument. NOTE: The subsequent happening
of the condition does not cure such defect Examples: 1. Conditional
promise
January 10, 2004
I promise to pay Leona or order, the sum of P100,000.00, if she
wins the Miss Philippines-Universe title this coming May. Sgd.
Carlo
WUPP
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 5 UNIVERSITY OF SANTO TOMAS
NOTE: The condition of the promise in the example is: if she
wins the Miss Philippines-Universe title this coming May. Even if
Leona wins said title, the instrument remains non-negotiable.
However, Leona can demand payment from Carlo since the instrument
is valid and she can enforce it as an ordinary contract. 2.
Conditional order
January 10, 2004 Pay Leona or order the sum of P100,000.00, if
she wins the Miss Philippines-Universe title this coming May.
Sgd. Carlo
To: Winnie Wagner
Promise to pay and its equivalent
NOTE: The word promise need not be used. A promise may be
implied from the language used. Examples:
a. I agree to pay b. I shall pay c. I oblige myself to pay d.
Good to the order of P e. Due to P or order payable on demand
Q: Is mere acknowledgment of a debt without a promise to pay
enough? A: No. Examples:
1. I acknowledge my debt to Bebeng for P10,000.00 2. Borrowed
P10,000 from Bebeng 3. Due Bebeng the sum of P10,000.00
NOTE: The words payable and to be paid signify an intention to
pay:
1. I acknowledge my debt to Bebeng or order for P10,000.00
payable on December 1, 2012
2. I acknowledge my debt of P10,000.00 to Bebeng or order to be
paid on demand
Order to pay and its equivalent
NOTE: Usually, the word order is used. However, what is
important is that a command is given to the drawee to pay. The word
order in the second requisite should not be confused with the same
word in the fourth requisite which has another function: that of
designating the another instrument as payable to order (or to
bearer) for purposes of negotiability. Q: Is mere authorization
enough? A: No. It gives the drawee the discretion to pay or not to
pay Ex: I authorize you to pay.
Q: How about mere request? A: No. It will render the instrument
non-negotiable. Ex: Please let the bearer have. NOTE: However, mere
words of civility such as Mr. Walter Warren will oblige himself by
paying do not make the instrument non-negotiable. Q: What
stipulations make the promise or order conditional? A:
1. An indication of an account or fund out of which payment
shall be made
February 28, 2011 Pay to the order of Maya Dela Rosa the sum of
P15,000.00 out of my funds in your possession
Sgd. Richard Lim
2. When payment is made to depend upon a contingency
Q: What stipulations do not make the promise or order
conditional? A:
1. An indication of a particular fund out of which reimbursement
is to be made
February 28, 2011 Pay to the order of Maya Dela Rosa the sum of
P15,000.00 and charge my payroll account
Sgd. Richard Lim
2. An indication of a particular account to be debited
with the amount 3. A statement of the transaction which gives
rise to the
instrument Q: Distinguish fund for reimbursement and fund for
payment. A:
FUND FOR REIMBURSEMENT FUND FOR PAYMENT
2 Process of payment: 1. Drawee pays out of his
own funds 2. He reimburses himself
from the particular fund indicated or debits the account stated
in the instrument
There is only 1 step and that is that payment is to be made
directly out of a particular fund.
Negotiable Not negotiable because the payment will be
dependent
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 6 UNIVERSITY OF SANTO TOMAS
upon the sufficiency or availability of the fund and not on the
general credit of the maker or drawer
Particular fund indicated is not the direct source of the
payment but only the source of reimbursement
Particular fund indicated is the direct source of the
payment
Order to pay a sum certain in money
Q: Why should it be paid in money? A: Money is the standard of
value in business. It remains the same notwithstanding the rise and
fall in value of other commodities. NOTE: If the instrument is
payable in foreign currency, the particular kind of current money
should be indicated. Q: When is the amount considered as certain?
A: When the holder can determine it from the instrument itself with
any necessary computation at the time the instrument is payable. 3.
Must be payable on demand, or at a fixed or determinable
future time Examples:
1. Payable on a fixed date Ex: I promise to pay Mr. X or order
P300,000 on January 2, 2012
2. Payable on demand Ex: I promise to pay Mr. X or order
P300,000 on demand
3. Payable at a determinable future time Ex: I promise to pay
Mr. X or order on or before January 2, 2012
4. Must be payable to order or to bearer
NOTE: An instrument that is payable to a specified person or
entity is not negotiable. An instrument is intended to pass freely
from one hand to another, to circulate in commerce as a substitute
for money.
5. Identification of the drawee: Where the instrument is
addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
This requisite applies only to bill of exchange, and not to PM.
Q: What is the ratio for this requirement? A: It is indispensable
that any person who will take the BOE must know the person who will
be primarily responsible under the instrument.
Ex: This is improper: designate the drawee as the person who
always wears a yellow t-shirt in his office in the City Hall of
Dumaguete City. Q: If the instrument is addressed to 2 or more
drawees, will it be acceptable? A: Yes. Ex: To Mr. X and Mr. Y. Q:
What if the instrument is addressed to 2 or more drawees in the
alternative? A: This indication of drawees is not valid. Ex: To Mr.
X or Mr. Y Q: What if the instrument is addressed to 2 or more
drawees in succession? A: This indication of drawees is not valid.
Ex: To Mr. X or in his absence or failure to pay Mr. Y Q: Give
examples of non-negotiable instruments. A:
1. Treasury warrants- an order in check form drawn on the
treasury of the government on which the treasury disbursements are
paid. This is conditional
2. Letter of credit- there is no unconditional promise to pay;
it is addressed to a specified person
3. Certificate of stock- written evidence of shareholdings of a
person in a corporation; no promise or order to pay money
4. Bill of lading- it represents goods rather than a promise or
order to pay money
5. Warehouse receipt- it represents goods rather than a promise
or order to pay money
6. Postal money order- there are restrictions imposed on them by
postal laws
Sec. 2. What constitutes certainty as to sum. - The sum payable
is a sum certain within the meaning of this Act, although it is to
be paid:
(a) with interest; or (b) by stated installments; or (c) by
stated installments, with a provision that,
upon default in payment of any installment or of interest, the
whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current
rate; or
(e) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
Payable in money
The instrument is still negotiable even if the amount to be paid
is expressed in currency that is not legal tender so long as it is
expressed in money.
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 7 UNIVERSITY OF SANTO TOMAS
The promise or order to pay in goods is not negotiable. An
instrument is also not negotiable if what is to be paid is money
and/or another thing at the option of the maker or acceptor or
anybody who is supposed to pay. Q: When is the amount considered
sum certain? A: If the amount that is to be unconditionally paid by
the maker or drawee can be determined on the face of the
instrument. NOTE: An instrument is not certain if what is supposed
to be paid is a sum certain plus another undetermined amount. Ex: I
promise to pay P1000 plus all the profits that the makers bakery
will earn in the month of December 2005
Interest
Stipulations like payment of interest do not affect the
certainty of the sum to be paid. Ex: Pay to the order of Mr. X
P2000 with interest at 20% per annum In this case, there is
absolute obligation to pay a fixed amount of P2000. The interest is
just an addition to the sum that is payable.
Installment Payments
Q: To be valid, what are the requirements? A:
1. the dates of each installment must be fixed or at least
determinable
2. the amount to be paid for each installment must also be
stated or at least determinable
Examples:
March 2, 2004 I promise to pay Bebeng or order P8000.00 in four
equal installments or P2000.00 per installment, the first
installment to be paid on December 5, 2005, and every 5
th day of the succeeding
months until fully paid.
Sgd. Budoy
Invalid example (not payable in stated installments):
March 2, 2004 I promise to pay Bebeng or order P8000.00 in four
equal installments or P2000.00 per installment.
Sgd. Budoy
Ratio: The dates of each installment is not fixed
March 2, 2004 I promise to pay Bebeng or order P8000.00 in every
month
starting September
Sgd. Budoy
Ratio: The amount of each installment and the dates of each
installments are not fixed.
Acceleration clause
Q: What is an acceleration clause? A: Payment of sum in stated
installments with a provision that the whole shall become due in
case of default in the payment of an installment or of interest. It
is one which hastens the maturity of the instrument. Nevertheless,
it does not affect the negotiability of the instrument.
Example:
April 23, 2010
I promise to pay to the order of Ayel the sum of P100,000.00 in
ten equal monthly installments the first installment being due and
payable on May 1, 2010 and the succeeding installments on the first
day of each month thereafter until fully paid. In case of default
in the payment of any installment on its due date, all remaining
installments shall become due and payable at once.
Sgd. Sarah
Payment with exchange
This provision refers only to foreign bill of exchange. Q: What
is exchange? A: It refers to the interchange of valuables and
especially of bills of exchange or money of different countries
with an allowance for differences in value. The negotiability of
the instrument is not affected because the principal sum is still
certain. Examples:
April 23, 2012 I promise to pay Mr. X or order $8000.00 United
States currency payable in Philippine Pesos on January 10, 2013 at
the rate of 1 Peso per Dollar (1:2)
Sgd. Mr. M
April 23, 2012 I promise to pay Mr. X or order $8000.00 United
States currency payable in Philippine Pesos on January 10, 2013 at
current rate of exchange at the time of payment
Sgd. Mr. M
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 8 UNIVERSITY OF SANTO TOMAS
New York City March 31, 2011
Pay to the order of Pacita Paez the sum of US $20,000.00 with
exchange at the current rate at Citibank, Makati City,
Philippines.
Sgd. Robert Rotschild To: Wilma Watson
Payment with attorneys fees and collection costs
Q: What is the effect of this stipulation? A: This does not
render the instrument non-negotiable. Q: Why is it not rendered
non-negotiable? A: Even if the sum payable is uncertain, such
uncertainty occurs after maturity when the instrument is no longer
negotiable in its commercial sense, i.e., the transferee will no
longer be considered a holder in due course because he acquires it
after the instrument becomes overdue. All that the law requires for
the instrument to be negotiable is for the sum at maturity be
certain. Example:
March 2, 2011
For value received, I promise to pay to the order of Paloma the
sum of P100,000.00 on or before December 12, 2011, with costs of
collection and attorneys fees if payment is not made at
maturity.
Sgd. Dei
Sec. 3. When promise is unconditional. - An unqualified order or
promise to pay is unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to be debited
with the amount; or
(b) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional. Q: What is a condition? A: It is a future and
uncertain event, or past event unknown to the parties, the
happening (positive) or non-happening (negative) of which may
either give rise to an obligation or may extinguish existing
ones.
SUSPENSIVE RESOLUTORY
The happening or non-happening of the event will give rise to an
obligation
The happening or non-happening of the event will extinguish
existing obligations
Reference to transaction
The statement of the transaction that gives rise to the
obligation covered by the note or the bill does not destroy the
negotiability of the instrument.
April 23, 2004 I promise to pay Bebeng or order P8000.00
representing my rental for March 2012
Sgd. Budoy
April 2, 2004 I promise to pay Bebeng or order P8000.00 to apply
on the purchase price of goods that I bought from him last March
2004
Sgd. Budoy
Q: Is the instrument below negotiable?
March 24, 2004 I promise to pay Bebeng or order P8000.00 on or
before April 23, 2004 subject to the terms and conditions of the
Contract of Sale executed by the parties.
Sgd. Budoy
A: No. The statement that the promise or order is dependent upon
the terms of a separate agreement makes the promise or order
conditional and negates negotiability. Q: Is the instrument below
negotiable?
March 24, 2004 I promise to pay Bebeng or order P8000.00 on or
before April 23, 2004. This Note is secured by a chattel mortgage
and is subject to the terms and conditions thereof.
Sgd. Budoy
A: Not negotiable because the note is subject to or restricted
by the mortgage.
Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or (b) On or before a
fixed or determinable future time
specified therein; or (c) On or at a fixed period after the
occurrence of a
specified event which is certain to happen, though the time of
happening be uncertain.
An instrument payable upon a contingency is not negotiable, and
the happening of the event does not cure the defect.
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 9 UNIVERSITY OF SANTO TOMAS
At a fixed period after date or sight; or
April 23, 2004 I promise to pay Ayel or order P8000.00 thirty
(30) days after due date
Sgd. CJ
On or before a fixed or determinable future time specified
therein
April 23, 2004 I promise to pay Ayel or order P8000.00 on or
before June 30, 2004
Sgd. CJ
February 23, 2004 I promise to pay Ayel or order P8000.00 on
Good Friday of the year 2004
Sgd. CJ
On or at a fixed period after the occurrence of a specified
event
which is certain to happen, though the time of happening be
uncertain
April 23, 2004 I promise to pay Maria or order P8000.00 on the
death of her father
Sgd. CJ
April 23, 2004 I promise to pay Maria or order P8000.00 thirty
(30) days after the death of her father
Sgd. CJ
However, the following instrument is not negotiable because the
instrument is payable at a fixed period before the occurrence of a
specified event which is certain to happen. By the time that its
maturity date is curtained, the instrument is already overdue.
April 23, 2004 I promise to pay Maria or order P8000.00 thirty
(30) days before the death of her father
Sgd. CJ
Payable upon contingency
These are non-negotiable:
April 23, 2004 I promise to pay Bebeng or order P8000.00 upon
the consummation of the sale of my lot in Tagaytay City
Sgd. CJ
April 23, 2004 I promise to pay Bebeng or order P8000.00 thirty
(30) days after she passes the CPA Licensure Examination
Sgd. CJ
Sec. 5. Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But the
negotiable character of an instrument otherwise negotiable is not
affected by a provision which:
(a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the instrument be not
paid at maturity; or
(c) waives the benefit of any law intended for the advantage or
protection of the obligor; or
(d) gives the holder an election to require something to be done
in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
Q: What is the effect of provisions in addition to order to pay
a sum of money? A: GR: Renders the instrument non-negotiable Ratio:
While that part pertaining to payment of a sum of money could be
negotiated, the part relating to the performance of the other act
would have to be assigned.
Provisions not affecting negotiability
1. Collateral
February 23, 2004 I promise to pay Ayel or order P8000.00 on
January 10, 2006. This note is secured by a chattel mortgage and
the holder is authorized to sell the mortgaged property if I fail
to pay at maturity date
Sgd. CJ
2. Confession of judgment
Q What is a warrant of attorney? A: It is a provision in the
instrument that allows a person or attorney in advance to appear in
court and confess judgment---admit the liability sought to be
enforced in a future case. Q: What is the note embodying this
provision? A: It is called judgment note or cognovits note. Q: Is
this valid? Will it affect the negotiability of the instrument?
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 10 UNIVERSITY OF SANTO TOMAS
A: It is a void stipulation because it enlarges the field for
fraud; the promissory bargains away his right to a day in court;
and the effect of the instrument is to strike down the right to
appeal accorded by statute. But, it does not affect the
negotiability of the instrument sine on the face of the note, the
act of confession is to be made after maturity.
February 23, 2004 I promise to pay Ayel or order P8000.00 on
January 10, 2006. If case will be filed to collect this amount, I
hereby authorize the holder to appear in court in my behalf with
authority to confess judgment and admit liability under this
note.
Sgd. CJ
3. Waiver by obligor
February 23, 2004 I promise to pay Ayel or order P8000.00 on
January 10, 2006. Presentment for payment waived.
Sgd. CJ
February 23, 2004 I promise to pay Ayel or order P8000.00 on
January 10, 2006. Exemption under homestead laws waived.
Sgd. CJ
4. Gives the option to holder
Q: Why is it that it does not affect the negotiability of the
instrument? A: If the holder has the option, he can require the
payment of money, thus satisfying that the instrument must be
payable in a sum certain in money. Q: What is the purpose of this
alternative act? A: It gives the holder a hedge against inflation,
making the instrument more attractive or marketable.
February 23, 2004 I promise to pay Ayel or order P8000.00 or 50
sacks of rice at the option of the holder.
Sgd. CJ
However, the following is not negotiable:
February 23, 2004 I promise to pay Ayel or order P8000.00 or 50
sacks of rice.
Sgd. CJ
Reason: It does not state that the holder has the option.
Sec. 6. Omissions; seal; particular money. - The validity and
negotiable character of an instrument are not affected by the fact
that:
(a) it is not dated; or
(b) does not specify the value given, or that any value had been
given therefor; or
(c) does not specify the place where it is drawn or the place
where it is payable; or
(d) bears a seal; or (e) designates a particular kind of current
money in
which payment is to be made. But nothing in this section shall
alter or repeal any statute
requiring in certain cases the nature of the consideration to be
stated in the instrument.
Omission of date
GR: Negotiability is not affected If the instrument is not
dated, it will be considered to be dated as of the time it was
issued. XPNS:
1. Where the date is necessary to fix the maturity date or to
make the maturity date determinable
Example:
February 23, 2004 I promise to pay Ayel or order P8000.00 sixty
(60) days from date.
Sgd. CJ
2. To determine when interest is to run 3. To fix period of
prescription
Value given
February 23, 2004 For value received, I promise to pay Ayel or
order P8000.00 on June 1, 2004
Sgd. CJ
NOTE: The omission of the words For value received does not
render the instrument non-negotiable because every NI is deemed
prima facie to have been issued for a valuable consideration.
However, the nature of the consideration should be stated in the
instrument if any statute requires.
Place of issuance or it is payble
Manila, Philippines February 23, 2004
I promise to pay Ayel or order P8000.00 on June 1, 2004 at the
Philippine National Bank, Aurora Blvd. Branch, Cubao, Quezon
City.
Sgd. CJ
Q: What are the rules if the place of payment is not stated? A:
The same shall be:
1. Address of the person to make payment if stated in the
instrument
2. His usual place of business or residence 3. Wherever he may
be found or his last known place of
business or residence, in the order given (Sec. 73)
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 11 UNIVERSITY OF SANTO TOMAS
Sec. 7. When payable on demand. - An instrument is payable on
demand:
(a) When it is so expressed to be payable on demand, or at
sight, or on presentation; or
(b) In which no time for payment is expressed. Where an
instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.
When it is so expressed to be payable on demand, or at
sight,
or on presentation
February 23, 2004 I promise to pay Ayel or order P8000.00 on
call
Sgd. CJ
February 23, 2004 I promise to pay Ayel or order P8000.00 at any
time called for.
Sgd. CJ
February 23, 2004 I promise to pay Ayel or order P8000.00.
Sgd. CJ
Q: Give other instances when the instrument is payable on
demand. A:
1. As regards the drawer, the instrument is deemed payable on
demand when it is issued after it has become overdue.
June 23, 2004 I promise to pay Ayel or order P8000.00 on May 4,
2004.
Sgd. CJ
2. As regards the acceptor, the instrument is deemed payable on
demand when he accepts it after it has become overdue.
3. As regards an indorser, the instrument is deemed payable on
demand when he indorses it after it has become overdue.
Sec. 8. When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified person
or to him or his order. It may be drawn payable to the order
of:
(a) A payee who is not maker, drawer, or drawee; or (b) The
drawer or maker; or (c) The drawee; or (d) Two or more payees
jointly; or
(e) One or some of several payees; or (f) The holder of an
office for the time being.
Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable certainty.
Q: What is order? A: The maker of the PM empowers the payee to
demand payment from him (maker) or to direct him (maker), through
the process of negotiation, to pay a designated person. In case of
a BOE, the drawer orders a named drawee to pay the designated
payee, or to pay a third person designated by the payee, if the
instrument is negotiated. Q: What are the 2 ways by which an
instrument is made payable to order? A:
1. Payable to the order of a specified person
March 31, 2011 Pay to the order of Pacita Paez the sum of
P20,000.00 .
Sgd. Robert Rotschild To: Wilma Watson
2. To a specified person or his order
March 31, 2011 Pay to Pacita Paez or order the sum of P20,000.00
.
Sgd. Robert Rotschild To: Wilma Watson
However, the following are non-negotiable:
March 31, 2011 Pay to Pacita Paez the sum of P20,000.00 .
Sgd. Robert Rotschild To: Wilma Watson
Reason: Only the person named as payee can receive payment
March 31, 2011 Pay to Pacita Paez or his agent the sum of
P20,000.00 .
Sgd. Robert Rotschild To: Wilma Watson
Reason: An agent is merely an extension of the personality of
the principal.
To whose order may an instrument be made payable
A payee who is not maker
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 12 UNIVERSITY OF SANTO TOMAS
June 23, 2004 I promise to pay Ayel or order P8000.00 on May 4,
2004.
Sgd. CJ
A payee who is not drawer or drawee
June 23, 2004 Pay Ayel or order P8000.00 on May 4, 2004.
Sgd. CJ To: Bebeng
To the order of the drawer
June 23, 2004 Pay to the order of myself the sum of P8000.00 on
May 4, 2004.
Sgd. CJ To: Bebeng
June 23, 2004 Pay to the order Bebeng the sum of P8000.00 on May
4, 2004.
Sgd. Bebeng To: CJ
To the order of the maker
June 23, 2004 I promise to pay to the order of myself P8000.00
on May 4, 2004.
Sgd. CJ
June 23, 2004 I promise to pay to the order of CJ P8000.00 on
May 4, 2004.
Sgd. CJ
NOTE: There must be indorsement here.
To the order of the drawee
June 23, 2004 Pay to the order of yourself the sum of P8000.00
on May 4, 2004.
Sgd. Bebeng To: CJ
June 23, 2004 Pay to the order of CJ the sum of P8000.00 on May
4, 2004.
Sgd. Bebeng To: CJ
To the order of Two or more payees jointly
June 23, 2004 I promise to pay to the order of Bebeng and Ayel
P8000.00 on May 4, 2004.
Sgd. CJ
To the order of One or some of several payees
June 23, 2004 I promise to pay to the order of Bebeng or Ayel
P8000.00 on May 4, 2004.
Sgd. CJ
June 23, 2004 I promise to pay to the order of Bebeng or Ayel,
or any of two of them P8000.00 on May 4, 2004.
Sgd. CJ
To the order of The holder of an office for the time being
June 23, 2004 I promise to pay to the order of the Rector of the
UST P8000.00 on May 4, 2004.
Sgd. CJ
Sec. 9. When payable to bearer. The instrument is payable to
bearer:
(a) When it is expressed to be so payable; or (b) When it is
payable to a person named therein or
bearer; or (c) When it is payable to the order of a fictitious
or
non-existing person, and such fact was known to the person
making it so payable; or
(d) When the name of the payee does not purport to be the name
of any person; or
When the only or last indorsement is an indorsement in
blank.
When it is expressed to be so payable
June 23, 2004 Pay to the bearer the sum of P8000.00 on May 4,
2004.
Sgd. Bebeng To: CJ
When it is payable to a person named therein or bearer
June 23, 2004 Pay to Jed Mark or bearer the sum of P8000.00 on
May 4, 2004.
Sgd. Bebeng To: CJ
When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable
June 23, 2004 Pay to the order of Prinsipe Abante the sum of
P8000.00 on May 4, 2004.
Sgd. Bebeng To: CJ
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 13 UNIVERSITY OF SANTO TOMAS
June 23, 2004 Pay to the order of Prince Charles the sum of
P8000.00 on May 4, 2004.
Sgd. Bebeng To: CJ
When the name of the payee does not purport to be the name
of any person
June 23, 2004 Pay to the order of CASH the sum of P8000.00 on
May 4, 2004.
Sgd. Bebeng To: CJ
When the only or last indorsement is an indorsement in blank
June 23, 2004 I promise to pay to the order of Bebeng and Ayel
P8000.00 on May 4, 2004.
Sgd. CJ
Back:
Sgd. Bebeng
NOTE: This is applicable to cases where originally, the
instrument is an order instrument.
INSTRUMENTS PAYABLE TO ORDER
INSTRUMENTS PAYABLE TO BEARER
The payee must be named or indicated with reasonable
certainty
The payee need not be indicated, it is enough that it is
expressed to be so payable to bearer
This is negotiated by: 1. Indorsement coupled
with 2. Delivery
Negotiated by delivery even if specially endorsed
Instruments originally payable to order can be converted to
bearer through blank instrument
A bearer instrument is always a bearer instrument
Sec. 10. Terms, when sufficient. - The instrument need not
follow the language of this Act, but any terms are sufficient which
clearly indicate an intention to conform to the requirements
hereof. NOTE: The language of the law need not be used. Preferably,
the language of the law should be used in the instrument as to
avoid any uncertainty or doubt as to its negotiability.
Nonetheless, the law allows the use of equivalent words without
affecting the negotiability of the instrument.
The intention of the parties must be determined
Unlike ordinary contracts, the intent of the parties must be
determined only based on what is stated in the instrument. It
cannot be determined on the basis of other documents nor even on
contemporaneous acts of the parties.
Sec. 11. Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is deemed
prima facie to be the true date of the making, drawing, acceptance,
or indorsement, as the case may be. NOTE: The negotiability of the
instrument is not affected if the instrument is not dated. Q: What
is the effect of an erroneous date? A: None. The negotiability of
the instrument is not affected. However, Where the instrument or an
acceptance or any indorsement thereon is dated, such date is deemed
prima facie to be the true date of the making, drawing, acceptance,
or indorsement. In law, a prima facie presumption may be rebutted
by proof to the contrary. Thus, if the date appearing in the
instrument is the wrong date, the party who is questioning the date
or who is alleging that the date is wrong may prove the true date.
Example:
November 5, 2010
Thirty days after date, I promise to pay to the order of Pablo
Perdon the sum of P100,000.00
Sgd. Miguel Manansala
NOTE: November 5 is deemed prima facie to be the true date of
the making of the instrument. Accordingly, the date of maturity
counting from such date is December 5, 2010. Sec. 12. Ante-dated
and post-dated. - The instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided this is not done for
an illegal or fraudulent purpose. The person to whom an instrument
so dated is delivered acquires the title thereto as of the date of
delivery. Q: What do you mean by ante-dated? A: An instrument is
considered ante-dated if it is dated earlier than the date of
issue, such as a check dated earlier April 1, 2011 is issued on May
1, 2011. Q: What do you mean by post-dated? A: An instrument is
considered post-dated if it is dated ahead of the issue, such as a
check dated May 1, 2011 is issued on April 1, 2011. Q: What is the
reason for post-dating? A: A person may post date an instrument,
usually a check, when he has no sufficient funds at the time that
he is drawing the check, but intends to deposit sufficient funds to
cover its amount by the date appearing thereon. He may also
post-date a check to protect himself when some act is to be
performed by the payee before the date of the check. The payees
non-performance of
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 14 UNIVERSITY OF SANTO TOMAS
such act before the date of the check will enable him to stop
its payment particularly if check is for deposit to the payees
account only. Q: What is the reason for ante-dating? A: It may be
ante-dated to evidence a pre-existing debt. For example, on
November 1, 2010, M obtained a 60-day loan of P10,000.00 from P
with promise that he will immediately issue a promissory note for
such debt. However, M forgot to issue the note immediately until he
remembered if after a week. So on November 8, M issues a note to
evidence the pre-existing debt placing on the instrument November
1, 2010, the date when it was supposed to have been issued. Q: What
is the effect of ante-dating or post-dating? A:
1. The validity and negotiability of the instrument is not
affected XPN: When it is done for an illegal or fraudulent purpose
NOTE: Although the implication of Sec. 12 is that the instrument is
rendered invalid if the ante-dating and post-dating of the check is
done for an illegal purpose, the invalidity affects holders not in
due course. In case of a holder-in-due-course, his right to recover
the amount of the instrument cannot be barred by any party on the
ground that the instrument was ante-dated or post-dated for an
illegal or fraudulent purpose.
2. If the instrument is a check, its post-dating has the effect
of converting it from a demand instrument to a time instrument
because it is an order to pay a specified amount at the future date
indicated thereon. Accordingly, it cannot be cashed with the bank
against which it is drawn or be deposited before the date stated on
the check.
Q: When is title to ante-dated or post-dated instrument
acquired? A: The person to whom an ante-dated or post-dated
instrument is delivered acquires the title thereto not as of the
date written thereon but as of the date of its delivery to him.
Sec. 13. When date may be inserted. - Where an instrument expressed
to be payable at a fixed period after date is issued undated, or
where the acceptance of an instrument payable at a fixed period
after sight is undated, any holder may insert therein the true date
of issue or acceptance, and the instrument shall be payable
accordingly. The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due course; but
as to him, the date so inserted is to be regarded as the true
date.
When date may be inserted
a. When an instrument expressed to be payable at a fixed period
after date is issued undated
(no date)
Thirty days after date, I promise to pay to the order of Pablo
Perdon the sum of P100,000.00
Sgd. Miguel Manansala
b. Where the acceptance of an instrument payable at a fixed
period after sight is undated
Thirty days after sight, I promise to pay to the order of Pablo
Perdon the sum of P100,000.00
Sgd. Miguel Manansala
To: Wendell Wagner Accepted. (No date) Sgd. Wendell Wagner
Who may insert date
The a.) payee or b.) any holder of the instrument may insert the
true date of issue or acceptance. Q: What is the effect of
insertion of wrong date? A: a. In the hands of a
holder-in-due-course, the date so
inserted, even though it is wrong is to be regarded as the true
date
b. In the hands of a holder who is not a holder-in-due-course:
1. As against parties before the wrongful insertion, the
instrument is avoided 2. As against the party guilty of the
wrongful insertion and
parties subsequent to him, the instrument is not avoided
Sec. 14. Blanks; when may be filled. - Where the instrument is
wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filling up
the blanks therein. And a signature on a blank paper delivered by
the person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must
be filled up strictly in accordance with the authority given and
within a reasonable time. But if any such instrument, after
completion, is negotiated to a holder in due course, it is valid
and effectual for all purposes in his hands, and he may enforce it
as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.
Mechanically incomplete but delivered instrument Q: When does
this section apply? A: This refers to an instrument which is
wanting in a material particular such as the amount of the
instrument, and it is delivered to another for him to fill the
blank or blanks and he
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 15 UNIVERSITY OF SANTO TOMAS
negotiates it either for his own benefit or that of the person
making the person. Q: What are the rules under Sec. 14? A:
1. A person in possession of an instrument that is wanting in a
material particular has prima facie authority to complete it by
filling up the blanks therein strictly in accordance with the
authority given and within a reasonable time.
2. If a person delivers a blank paper to another person
containing his signature for the purpose of converting it into a
negotiable instrument, the person to whom the instrument is
delivered has prima facie authority to fill it up for any
amount
3. If the holder of the instrument, after it was filled up is a
holder in due course, the holder may enforce the instrument as if
it has been filled up strictly in accordance with the authority
given and within a reasonable time.
Material Particular
Q: What are the matters mentioned in Sec. 25 which involves
material alteration? A:
1. Date 2. Sum payable, either for principal or interest 3. The
time and place of payment 4. The member or the relations of the
parties 5. The medium or currency in which payment is to be
made 6. Which adds a place of payment where no place of
payment is specified, or any other changes or addition which
alters the effect of the instrument in any respect
Prima facie authority on incomplete but delivered instrument
Q: What are the 2 kinds of prima facie which exists in a
mechanically incomplete but delivered instrument? A:
1. Prima facie authority to fill up the blanks 2. Prima facie
authority to fill up the instrument for any
amount, provided the following facts concur: a. There is a
signature on the blank b. The person who signed the instrument in
blank
delivers it to another in order that it may be converted into a
negotiable instrument
Q: What do you mean by the payee is deemed to have a prima facie
authority to fill it up? A: The moment the instrument is completed,
the presumption is that the instrument was completed with prior
authority from the maker or the drawer and that the person who
completed the instrument did not exceed his authority.
NOTE: This presumption is conclusive in case of a
holder-in-due-course. Filling up the blanks not in accordance with
the authority given is only a personal defense.
Signed blank piece of paper
Q: What is the rule in case of a signed blank piece of paper
delivered to another person for the purpose of converting the same
into a negotiable instrument? A: If a person delivers a blank paper
to another person containing his signature for the purpose of
converting it into a negotiable instrument, the person to whom the
instrument is delivered has prima facie authority to fill it up for
any amount. Q: What are the requisites? A:
1. There must be delivery of a paper to another person 2. The
paper that was delivered was a blank paper
containing the signature of the person who will deliver 3. The
delivery was for the purpose of converting it into a
negotiable instrument Examples:
1. If Mr. M signs his name on a blank paper and delivers the
said blank paper to Mr. P for the purpose of providing Mr. P a
specimen of signature. Mr. M will not be liable to Mr. P if the
latter converted the blank paper to a negotiable instrument;
2. If Mr. P negotiated the instrument to Mr. A who in turn
negotiated the instrument to Mr. B, the present holder is not a
holder-in-due-course. In such a situation, the purported maker is
also not liable to Mr. B because there was no authority to convert
the paper into a negotiable instrument.
Q: What are the requisites in order to hold liable a person who
became a party to the instrument prior to completion? A:
1. The blank must be filled up strictly in accordance with the
authority given
2. The same must be filled up within reasonable time Q: What are
the rights and obligations of parties in case of wrongful
completion? A:
HOLDER-IN-DUE-COURSE HOLDER-NOT-IN-DUE-COURSE
He may enforce the instrument as if it had been filled up
strictly in accordance with the authority given and within a
reasonable time against:
1. The parties prior to the wrongful completion
2. The party guilty of the wrongful
He can enforce the instrument as completed against:
1. The party guilty of the wrongful completion
2. The parties subsequent to the wrongful completion
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 16 UNIVERSITY OF SANTO TOMAS
completion 3. The parties
subsequent to the wrongful completion
Q: Is the last sentence applicable to a HDC? A: Yes, because
under Sec. 14 if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for
all purposes in his hands, and he may enforce it as if it had been
filled up strictly in accordance with the authority given and
within a reasonable time. Contra view: The HDC cannot recover from
the purported maker because there was no intention on the part of
the said maker to issue the instrument. Fraud in factum is a real
defense which is available even against a HDC.
Nature of defense
1. If there was intention on the part of the person whose
signature appears on the blank paper to convert it into a
negotiable instrument but the instrument is wrongfully completed,
the wrongful completion is only a personal defense. Such defense is
referred to a want or lack of authority to complete instrument
2. If there was no intention on the part of the person whose
signature appears on the blank paper to convert it into a
negotiable instrument but the instrument, the wrongful completion
is a real defense referred to as fraud in factum (fraud in factum)
or fraud in esse contractus (fraud in the essence of the
contract).
Q: Brad was in desperate need of money to pay his debt to Pete,
a loan shark. Pete threatened to take Brads life if he failed to
pay. Brad and Pete went to see Seorita Isobel, Brads rich cousin,
and asked her if she could sign a promissory note in his favor in
the amount of P10,000.00 to pay Pete. Fearing that Pete would kill
Brad, Seorita Isobel acceded to the request. She affixed her
signature on a piece of paper with the assurance of Brad that he
will just fill it up later. Brad then filled up the blank paper,
making a promissory note for the amount of P100,000.00. He then
indorsed and delivered the same to Pete, who accepted the note as
payment of the debt. What defense or defenses can Seorita Isobel
set up against Pete? Explain. A: The defense (personal defense)
which Seorita Isobel can set up against Pete is that the amount of
P100,000.00 is not in accordance with the authority given to her to
Brad (in the presence of Pete) and that Pete was not a holder in
due course for acting in bad faith when accepted the note as
payment despite his knowledge that it was only 10,000.00 that was
allowed. Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid contract in
the hands of any holder, as against any person whose signature was
placed thereon before delivery.
Mechanically incomplete and undelivered instrument
This refers to an instrument which is wanting in a material
particular, such as the amount of the instrument or the name of the
payee, and it is undelivered. Q: What are the important
circumstances under this situation? A:
1. The instrument is incomplete 2. The incomplete instrument has
not been delivered
NOTE: In Sec. 14, there was prima facie authority to fill up the
incomplete instrument because there was delivery, in Sec. 15, there
is no such presumption. Q: What is the effect if a mechanically
incomplete instrument is completed and delivered without authority?
A: The instrument shall not be valid in the hands of any holder, as
against any person whose signature was placed thereon before
delivery. Q: What are the rights and obligations of the parties if
a mechanically incomplete instrument is completed and delivered
without authority? A: a. As against a party whose signature was
placed on the
instrument before delivery
He cannot be held liable because want or lack of delivery of an
instrument is a real defense. b. As against a party who signed the
instrument after
completion and delivery
The instrument can be enforced against the guilty party, as well
as those subsequent to him. Sec. 16. Delivery; when effectual; when
presumed. - Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as regards
a remote party other than a holder in due course, the delivery, in
order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing, as
the case may be; and, in such case, the delivery may be shown to
have been conditional, or for a special purpose only, and not for
the purpose of transferring the property in the instrument. But
where the instrument is in the hands of a holder in due course, a
valid delivery thereof by all parties prior to him so as to make
them liable to him is conclusively presumed. And where the
instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him
is presumed until the contrary is proved.
Mechanically complete but undelivered instrument
Q: What is the nature of the contract in case of mechanically
complete but undelivered instrument?
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 17 UNIVERSITY OF SANTO TOMAS
A: An instrument though complete in form is an incomplete and
revocable contract until the same is delivered for the purpose of
giving effect thereto. Delivery is needed in order to make the
contract on the instrument complete. Before delivery, the maker or
drawer may cancel the instrument.
Need for delivery
Q: What is delivery? A: It means the transfer of possession of
the negotiable instrument by one person to another with the
intention to transfer title to the instrument. This involved:
a. Issue- first delivery of the instrument from the maker or
drawer to the payee (or bearer)
b. Negotiation- transfer from one person to another that
constitutes the transferee the holder of the instrument
Q: Who makes the delivery? A:
1. Personally by the person who is supposed to transfer like the
maker, drawer, or indorser
2. Authorized agent or representative NOTE: If the employee is
not authorized to deliver the instrument, the contract of transfer
is still incomplete.
Presumptions of valid delivery 1. In the hands of a
holder-in-due-course
A valid delivery of the instrument by all parties prior to him
so as to make them liable to him is conclusively presumed.
2. As between immediate parties and as regards a remote
party other than a holder-in-due-course
A valid and intentional delivery by the party sought to be
charged is presumed until the contrary is proved. The presumption
of valid delivery is disputable. The party sought to be charged
(maker, drawer, acceptor, or endorser), in order to escape
liability, may prove:
1. That he made no delivery of the instrument 2. That if there
was delivery, he did not authorize the
same 3. That if he authorized or made the delivery, the same
was conditional or for special purpose only and not for the
purpose of transferring the property in the instrument.
Q: Who is an immediate party? A: One who, in relation to another
party, may be physically remote, but is considered an immediate
party by reason of his knowledge of the conditions or limitations
placed upon the delivery of the instrument, or the fact that the
instrument has not been delivered. Q: What is the nature of the
defense?
A: The defense of want or lack of authority to complete
instrument or that the delivery was conditional or for special
purpose only and not for the purpose of transferring the property
in the instrument, is only a personal defense and may be availed of
by any party against a holder-not-in-due-course. Examples: a. Want
of delivery of complete instrument
Q: M executed a PN payable to the order of P for P10,000.00. He
then placed the instrument in his safe. Without the consent of M, P
took the instrument and indorsed it to A, then A to B, B to C, and
C to H, holder. Is H an immediate party? What are Hs rights? A: If
H was aware that P took the instrument without Ms authority, H is
an immediate party although he may be physically remote from M, the
maker. If H is a HDC, he can enforce the instrument against any
party including M, because a valid delivery of the instrument by
all parties prior to him so as to make them liable to him is
conclusively presumed. In addition, P, A, B and C are liable as
endorsers. If H is not a HDC, he cannot enforce the instrument
against M. However, he can enforce it against , P, A, B and C, who
are liable on their warranty as endorsers. b. Conditional
delivery
Q: M executed a PN payable to the order of P for P10,000.00
payable to the order of P and delivered the same to P. M and P
agreed that the note shall become binding on M only after M has
secured the approval of his loan from the bank. Without Ms
authority and before M has obtained the required bank approval, P
indorsed the note to A, then A to B, B to C, and C to H, holder.
What are the rights and liabilities of the parties? A: If H was a
HDC, He can enforce the instrument against any party including M,
because a valid delivery of the instrument by all parties prior to
him so as to make them liable to him is conclusively presumed. In
addition, P, A, B and C are liable as endorsers. If H is not a HDC,
he cannot enforce the instrument against M. For M, the
non-fulfillment of the condition is a valid defense against H.
However, he can enforce it against , P, A, B and C, who are liable
on their warranty as endorsers. c. Delivery for a special
purpose
Ex: delivery for safe-keeping only Q: Jun was about to leave for
a business trip. He signed several blank checks. He instructed
Ruth, his secretary, to fill them as payment for his obligations.
Ruth filled one check with her name as payee, placed P30,000.00
thereon, endorsed and delivered it to Marie. She accepted the check
in good faith as payment for goods she delivered to Ruth.
Eventually, Ruth regretted what she did and apologized to Jun.
Immediately he directed the drawee bank to dishonor the check. When
Marie encashed the check, it was dishonored.
a. Is Jun liable to Marie?
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 18 UNIVERSITY OF SANTO TOMAS
b. Supposing the check was stolen while, filled the blank check,
endorsed and delivered it to Marie.is Jun liable to Marie if the
check is dishonored?
A:
a. Yes. This covers the delivery of an incomplete instrument,
under Section 14 of the Negotiable Instruments Law, which provides
that there was prima facie authority on the part of Ruth to fill-up
any of the material particulars thereof. Having done so, and when
it is first completed before it is negotiated to a holder in due
course like Marie, it is valid for all purposes, and Marie may
enforce it within a reasonable time, as if it had been filled up
strictly in accordance with the authority given.
b. No. Even though Marie is a holder in due course, this is an
incomplete and undelivered instrument, covered by Section 15 of the
Negotiable Instruments Law. Where an incomplete instrument has not
been delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, as
against any person, including Jun, whose signature was placed
thereon before delivery.
BASIC RULES
SECTION 14 SECTION 15 SECTION 16
Refers to an incomplete but delivered instrument
Refers to an incomplete and undelivered instrument
Refers to a complete instrument but delivered
The defense that is available is a personal defense that is
available only against a holder-not-in-due-course NOTE: Sorianos
view: 1. If there was intention on the part of the person whose
signature appears on the blank paper to convert it into a
negotiable instrument but the instrument is wrongfully completed,
the wrongful completion is only a personal defense. Such defense is
referred to a want or lack of authority to complete instrument
2. If there was no intention on the part of the person whose
signature appears on the blank paper to convert it into a
negotiable
The defense available to the payor is a real defense that can be
set up even against a HDC
The defense that is available is a personal defense that is
available only against a holder-not-in-due-course
instrument but the instrument, the wrongful completion is a real
defense referred to as fraud in factum (fraud in factum) or fraud
in esse contractus (fraud in the essence of the contract).
Section 17. Construction where instrument is ambiguous. - Where
the language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply: (a) Where the
sum payable is expressed in words and also in figures and there is
a discrepancy between the two, the sum denoted by the words is the
sum payable; but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount; (b) Where the
instrument provides for the payment of interest, without specifying
the date from which interest is to run, the interest runs from the
date of the instrument, and if the instrument is undated, from the
issue thereof; (c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued; (d) Where
there is a conflict between the written and printed provisions of
the instrument, the written provisions prevail; (e) Where the
instrument is so ambiguous that there is doubt whether it is a bill
or note, the holder may treat it as either at his election; (f)
Where a signature is so placed upon the instrument that it is not
clear in what capacity the person making the same intended to sign,
he is to be deemed an indorser; Where an instrument containing the
word "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon. Q: When is this
provision applicable? A: When the instrument is ambiguous or vague
or there are omissions therein. The rules on interpretation are
intended to deal with the problems enumerated therein and how they
are to be resolved.
Rules
Where the sum payable is expressed in words and also in figures
and there is a discrepancy between the two, the sum
denoted by the words is the sum payable Ratio: The sum in words
is considered to have been more carefully written. Also, the sum in
words is more difficult to alter. If the words are ambiguous or
uncertain, reference may be had
to the figures to fix the amount
Instrument provides for the payment of interest, without
specifying the date from which interest is to run
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 19 UNIVERSITY OF SANTO TOMAS
1. If the instrument is dated, the interest runs from such
date
2. If instrument is undated, interest runs from the date of its
issue
I promise to pay to the order of Patricia Palermo the sum of
P50,000 on June 30, 2011 with 12% interest.
Sgd. Marisa Hernandez
Thus, if the foregoing note is issued on May 10, 2011, then the
interest runs from such date. If the instrument is not dated, it
will be considered to be dated
as of the time it was issued If there is conflict between the
written and printed provisions of
the instrument, the written provisions prevail. Ratio: The
written provisions are deemed to have been made at a later time and
will be considered an amendment of the printed provisions
Where the instrument is so ambiguous that there is doubt whether
it is a bill or note, the holder may treat it as either at
his election
I promise to pay to the order of Portia Palomares the sum of
P100,000.00
Sgd. Martha Martin To: Webster Ong
The instrument makes a promise and yet it contains a drawee
which is a party in a bill of exchange.
Q: In what instances may a bill of exchange (BOE) be treated as
a promissory note? A:
1. when the drawer and the draweee of the BOE are the same
person
2. the drawee is a fictitious person 3. drawee has no capacity
to contract 4. the instrument is so ambiguous that there is
doubt
whether it is a bill or a note
Where a signature is so placed upon the instrument that it is
not clear in what capacity the person making the same
intended to sign, he is to be deemed an indorser GR: liable as
indorser XPN: He indicates the capacity he is signing NOTE: The
maker, drawer, or acceptor must indicate in what capacity they are
signing. Where an instrument containing the word "I promise to pay"
is signed by two or more persons, they are deemed to be jointly
and severally liable thereon
JOINT LIABILITY SOLIDARY OR JOINT AND SEVERAL LIABILITY
2 or more persons are bound to pay only their proportionate
share in the obligation
2 or more persons are bound to and can be made to comply with
the entire obligation
a. when the obligation expressly so states
b. when the law c. when the nature of
the obligation requires
Presumption under the law: Art.1207 of the NCC, the presumption
is that the liability of the debtors is joint.
I promise to pay to the order of Potia Palomares the sum of
P10,000.00
Sgd. Martha Martin Sgd. Mary Milan
Either Martin or Milan can be held liable by the holder for the
whole amount of P10,000.00 since their liability is joint and
several, i.e., solidary. However, if note uses the words we promise
to pay, Martin and Milan can each be held liable only for P5,000.00
since their liability is only joint.
REFERENCES:
SORIANO, FIDELITO R., Negotiable Instruments: Law and
Application for Business Students, 2011 Edition, GIC Enterprises
& Co., Inc.
AUSTRIA SALVADOR E., and AQUINO, TIMOTEO B., Fundamentals of
Negotiable Instruments Law, 2004 Edition, Central Book Supply
Inc.
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 20 UNIVERSITY OF SANTO TOMAS
Section 18. Liability of person signing in trade or assumed
name. - No person is liable on the instrument whose signature does
not appear thereon, except as herein otherwise expressly provided.
But one who signs in a trade or assumed name will be liable to the
same extent as if he had signed in his own name.
Liability of persons whose signature does not appear on an
instrument
GR: A person whose signature does not appear on an instrument is
not liable thereon. RATIO: A person must sign the negotiable
instrument before he can be made liable under the same instrument.
XPNs:
1. Where a person signs under a trade name or assumed
name; E.g. If Pauleen Alcaraz signs a promissory note he issues
with Binay Entreprises, his trade name. he shall be liable on the
instrument to the same extent as if he has signed his own name.
2. Where an authorized agent signs for and on behalf of his
principal, the latter is liable (Sec. 20) although his signature
does not appear thereon.
3. Where a person forges the signature of another, the forger is
liable (Sec.23);
4. Where a person negotiates an instrument by mere delivery
(Sec. 65);
5. Where the acceptor accepts the instrument on a paper other
than the bill itself (Sec. 134). The separate paper which must be
attached to the instrument is called allonge;
6. Where a person promises to accept in writing a bill before it
is drawn (Sec. 135);
7. Where a person destroys a bill or refuses within 24 hours to
return the bill accepted or not accepted (constructive acceptance)
(Sec. 137).
8. Incapacitated persons who sign through their legal
guardians;
Section 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose; and
the authority of the agent may be established as in other cases of
agency.
Form of agents authority The signature of any party may be made
by duly authorized agent. The authority may be oral or written as
no particular form is required by law. a written authority may be
made on a separate power of attorney or on the instrument itself
although the latter is not required for the regularity of the
signature or the indorsement of the agent.
Jai-Alai Corp of the Philippines vs. Bank of the Philippine
Islands
Any person who accepts for cash checks made payable to a
corporation, which can act only by its agents, without making any
inquiry as to the authority of an individual to exchange checks
belonging to said payee-corporation, does so at his own peril if
agent is without authority. Section 20. Liability of person signing
as agent, and so forth. - Where the instrument contains or a person
adds to his signature words indicating that he signs for or on
behalf of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal, does
not exempt him from personal liability.
Liability of an agent A person signing an instrument as an agent
is not liable thereon provided the following requisites are
present: a. He must be duly authorized; b. Must act within the
scope of his authority; c. Must disclose his principal; d. Must add
words to his signature describing himself as an
agent or that he is acting in a representative capacity.
Otherwise, the agent is deemed to be signing the instrument as his
personal obligation and not that of another.
Examples:
E.g.
Where an officer of a corporation or other organization signs
for the latter, his representative capacity is sufficiently shown
by his signature followed by the title of his office and the name
of the corporation or organization. Thus: Section 21. Signature by
procuration; effect of. - A signature by "procuration" operates as
notice that the agent has but a limited authority to sign, and the
principal is bound only in case the agent in so signing acted
within the actual limits of his authority.
Signature by procuration
Joy Binay By: (Sgd.) Arwin Cabanting Agent
Sgd. Constanza Brillantes As agent of Carmela Brillantes
Sgd. Dominic De Alban For: GV De Leon
Sgd. Saki De Leon President Maranan-De Leon Corporation
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 21 UNIVERSITY OF SANTO TOMAS
Q: What is procuration? A: It is the act of appointing another
as ones agent or attorney. The appointment must be made on the
instrument itself or on a separate power of attorney.
Effect of signature by procuration It operates as a notice that
the agent has but limited authority to sign and the principal is
bound only in case the agent so signing acted within the actual
limits of his authority. Accordingly, it is incumbent upon the
person dealing with an agent to inquire into the agents authority
since the principal is liable only if the agent by procuration
acted within the scope of his authority. Section 22. Effect of
indorsement by infant or corporation.- The indorsement or
assignment of the instrument by a corporation or by an infant
passes the property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no liability
thereon.
Capacity of infant (minor) or corporation
A minor is incapable of giving consent to a contract (Art. 1327,
NCC). Any contract entered into by him is voidable (Art. 1390). On
the other hand, it is unenforceable if both parties are minors.
Under the NIL, the transfer of title by a minor is effective
although he is incapacitated. However, the minor can still use as a
defense that he is a minor. Thus, the minor can still refuse to pay
on the ground of minority. E.g. Mr. Omar Deloso (DR), issued a
negotiable BOE to the payee, Ms. Lyra Gonzaga. The instrument is
payable to the order of Ms. Gonzaga who in turn negotiated the
instrument by indorsing and delivering it to Ms. Kristine Liu (A)
who is a minor. Ms. Liu then negotiated the instrument by
indorsement and delivery to Mr. William Malang (B) who in turn
negotiated the instrument to Ms. Em Maranan (C) in the same manner.
There is an effective transfer to Mr. Justin Matibag and Ms.
Maranan but Ms. Liu can invoke minority as a defense. Mr. Matibag,
Ms. Gonzaga and Mr. William cannot invoke the defense of minority
of Ms. Liu. In case of corporations, they cannot perform acts
beyond those that they can lawfully exercise. Such acts are ultra
vires (Sec. 45, Corporation Code) which are deemed voidable. Effect
of indorsement or assignment of minor or corporations
performing ultra vires act a. Minor
The indorsement made by a minor passes title to the instrument.
Yet, the minor does not incur any liability on the instrument even
to a holder in due course because the lack of capacity is a real or
complete defense.
b. Corporation
Where the indorsement or assignment made by a corporation is
ultra vires, title to the instrument likewise passes although the
corporation may incur no liability thereon. Negotiation by a
corporation through its officer effectively transfers title but the
corporation itself may invoke the absence of capacity.
Examples:
1. Ms. Ei Medina (M) makes a PN payable to the order of
Ms. Jemae Nadonga (P). Ei issues the same to Jemae who indorses
it to Mr. Vins Platon (A), a minor. Vins indorses the note to Mr.
Anthony Robles (B), Robles to Ms. Juzzy Sulit (C), Sulit to Mr.
Akira Vargas (D), and Vargas to Em Maranan (H), holder. a. Q: May
Em (H) collect from Ei and Jemae, parties
before Vins?
A: Em, whether a holder in due course or not may collect from Ei
and Jemae who cannot raise the defense that Vins is a minor because
Vins indorsement passes title.
b. Q: May Em (H) collect from Anthony, Juzzy and
Akira, parties after Vins?
A: Em, whether a holder in due course or not, may collect from
Anthony, Juzzy and Akira because as indorsers, they warrant that
all prior parties had capacity to contract (Sec. 65 and 66);
c. Q: May Em (H) collect from Vins?
A: Em, whether a holder in due course or not may not collect
from Vins because Vins minority is a real defense.
2. Maam Mendoza (M) makes a promissory note payable to the order
of Diwa Bontuyan (P),a minor. Maan issues the note to Diwa who
indorses it to Karlo Silva (A), Karlo to Nicole Atienza (B). Nicole
to Angela Paguio (C), Angela to Lisettle Mandocdoc (D), Lisette to
Anthony (H). a. Q: May Anthony collect from Maan?
A: Yes. First, Maan, by making the instrument admits the
existence of the payee and his then capacity to indorse (Sec. 60).
Second, the indorsement of Diwa although he is a minor passes title
(Sec. 22).
b. Q: May Anthony collect from Karlo, Ico, Angela and Lisette?
A: Yes. They are are indorsers who are liable on their warranty
that all prior parties had the capacity to contract.
c. Q: May Anthony collect from Diwa? A: No. Diwa is not liable
because minority is a real defense.
Section 23. Forged signature; effect of. - When a signature is
forged or made without the authority of the person whose signature
it purports to be, it is wholly inoperative, and no right
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NOTES ON NEGOTIABLE INSTRUMENTS LAW Kenneth and King C. Hizon
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Facultad de Derecho Civil 22 UNIVERSITY OF SANTO TOMAS
to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it
is sought to enforce such right is precluded from setting up the
forgery or want of authority. Application of Sec. 23
1. Where the signature on the instrument is forged; and 2. Where
the signature is made without the authority of
the person whose signature it purports to be. 3. It can also be
applied in cases involving irregularities
that amount to forgery. These include the presence of: i. Duress
amounting to forgery;
ii. Alteration amounting to forgery; and iii. Fraud in
factum.
NOTE: In these cases, the persons involved do not have the
intention to be bound or to sign a negotiable instrument.
Forgery
It is the counterfeit making or fraudulent alteration of any
writing and may consist in the signing of anothers name, or the
alteration of an instrument in the name, amount, description of the
person and the like, with the intent to defraud. Sec. 23 applies
only to a signature that is forged or made without the authority of
the person whose signature it purports to be.
Effect of forgery
a. The signature that is forged or made without authority is
wholly inoperative;
b. GR: No right to retain the instrument or to give a discharge
therefor or to enforce payment thereof against any party thereto,
can be acquired through or under such signature. XPNs: 1. When the
party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of
authority, including