PART I THE NEGOTIABLE INSTRUMENTS LAW (ACT NO
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INTRODUCTION
Historical Background
US Uniform Negotiable Instruments Act - our NIL was patterned
after this; this was based upon the English Bill of Exchange Act of
1882 US Uniform Commercial Code seeks to simplify & modernize
the law of commercial transactions Act No. 2031 Negotiable
Instruments Law took effect on June 2, 1911; this law was intended
to facilitate transactions in commercial paper & to promote
free flow of credit
Code of Commerce all articles relevant to negotiable instruments
have been repealed, except of those on crossed checks
Application of the NIL1. Applies only to negotiable instruments
(NIs)2. Excludes non-negotiable instruments from its application as
they are governed by the provisions of the Civil Code and special
laws3. The NIL can be applied but only by analogy if the instrument
is not negotiable if there is no law that can be applied
Function & Importance1. Substitute for money2. Means of
creating and transferring credit
3. Medium of exchange for most commercial transactions
4. Facilitates the sale of goods
5. Increases the purchasing medium in circulation
6. to allow men of undoubted credit to carry on a business
enterprise upon their promissory notes, bills of exchange and
checks knowing that other businessmen will treat these promises as
cash
Doubt resolved in favor of negotiability Purpose: to encourage
the free circulation of the negotiable papers because of the
admittedly indispensable function they perform in mercantile
business transactions in any given country & the world
NIs Not Legal Tender Since a NI is only a substitute for money
and not money, the delivery of such an instrument does not, by
itself, operate as payment. The obligation is not extinguished and
remains suspended until the payment by commercial document is
actually realized. e.g. a check, whether a managers check or an
ordinary check is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be
refused receipt by the oblige or creditor
RA 7653 (New Central Bank Act)
1. Sec. 52 only notes and coins issued by the BSP are considered
legal tender
2. Sec. 60 checks are not legal tender
a. GR: checks representing demand deposits do not have legal
tender power and their acceptance in the payment of debts, both
public and private, is at the option of the creditor
b. E: a check w/c has been cleared & credited to the account
of the creditor shall be equivalent to delivery to the creditor of
cash in an amount equal to the amount credited to his account
Coins as Legal Tender (RA 7653 & BSP Circular 537) the
maximum amount of coins to be considered as legal tender is:
1. P1000 for denominations of 1-peso, 5-peso, and 10-peso
coins2. P100 for denomination of 1-centavo, 5-centavo, 10-centavo
and 25-centavo
Characteristics/Features1. Negotiability
a. It is that attribute or property whereby a bill or note or
check may pass from hand to hand similar to money, so as to give
the holder in due course the right to hold the instrument and to
collect the sum payable for himself free from defenses
b. It is the ability to transfer to another a title and right
better than what the transferor hadc. Through negotiation, the
instrument could pass to a holder in due course who acquires the
instrument free from any defect of prior parties, and free from
defenses available to prior partiesd. note: a bona fide holder,
while free from personal defenses available to prior parties among
themselves, is subject to real defenses that might have obtained
between them2. Accumulation of Secondary Contractsa. In the course
of the negotiation of a NI, a series of juridical ties between the
parties thereto arises either by law or by privity
b. The more debts are added, the more advantageous it will be to
the holder as he can proceed not only against the maker but also
against all transferorsThe Theory of Negotiable Instruments1. Rests
upon the proposition that they appear to belong to the person
having them in possession and to no one else2. The maker of an NI
is estopped from urging, as against a bona fide holder who has
received it from anyone in possession, a defect of title.
3. The holder, though w/o title, has capacity to give a title
because he is the apparent owner of the instrumentNEGOTIABLE
INSTRUMENTSNON-NEGOTIABLE INSTRUMENT
governed by the NILNIL does not apply; application of the NIL to
non-negotiable instruments is only by analogy
can be transferred by negotiation or by assignment can be
transferred only by assignment
a transferee of a negotiable instrument can be a HDC if all the
requirements under Sec. 52 are complied withthe transferee of a
non-negotiable instrument can never be a HDC but remains to be an
assignee, thus all defenses available to prior parties may be
raised
FORMS OF NEGOTIABLE INSTRUMENTS
COMMON FORMS
SPECIAL TYPES OF
PROMISSORY NOTESSPECIAL TYPES OF
BILLS OF EXCHANGE
1. Promissory note
2. Bill of exchange
3. Bank check (they are really a special form or kind of bill of
exchange)1. Certificates of deposits
2. Bank notes
3. Due bills
4. Bonds1. drafts
2. trade acceptances
3. bankers acceptance
Negotiable instruments vs. Contracts
NIs - capable of being cast in such form as to have the quality
of negotiability
NIs have their foundation in the law merchant -> NIL
Negotiability vs. assignability
NIs are not in force until it is delivered
The peculiarities of the NIL relate to a holder who has taken by
negotiation, and not as an original party
Commercial Papers w/ Limited Negotiability
1. Crossed Check: usually negotiable as it normally complies w/
the requirements under Sec. 1, NIL, but issued for a special
purpose and can be negotiated only once
2. Trade Acceptance: negotiable, it is a bill of exchange
addressed by the seller of the goods to the buyer. But Sec. 1 must
be complied with.
Commercial Papers w/c are Non-Negotiable
1. Documents of title: a receipt/order for the delivery of
goods; it is w/o an unconditional promise/order to pay a sum
certain in money
2. Letter of credit: it is in favor of a specified person &
not to order
3. Bill of lading: it represents goods, not money
4. Trust receipt: a document of security pursuant to w/c a bank
acquires a security interest in the goods under trust receipt; it
is an evidence of ownership of goods, not money
5. Warehouse receipt: it represents goods, no money6.
Certificate of stock: a muniment of title to a given share in the
assets of a corporation; its w/o an unconditional promise/order to
pay a sum certain
7. Pawn ticket: it does not represent money but pawned
articles8. Money order: it is governed by postal rules &
regulations w/c may be inconsistent w/ the NIL and it can only be
negotiated once9. Treasury warrant: it is payable out of a
particular fundCHAPTER 1 FORM AND INTERPRETATION
Section 1. Form of negotiable instrumentsNegotiable Instrument A
contractual obligation to pay money
Either promises or orders to pay money
W/N an instrument is negotiable depends on form & content A
valid instrument is not necessarily negotiable
Considerations in determining the negotiability of an
instrument:
1. The whole of the instrument2. Determined from the writing --
only what is on the face of the instrument3. No other words are to
be added to it or substituted in its stead
4. Provisions of the NIL (especially Sec. 1 requirements of
negotiability)
Requisites in Sec. 1
deemed essential for the security of commercial transactions
they enable one to tell at a glance w/n an instrument is
negotiable
they enable one to gauge the risks involved in taking it as
security
KINDS OF NEGOTIABLE INSTRUMENTS
PROMISSORY NOTE (PN)BILL OF EXCHANGE (BILL)
An unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a
fixed or determinable future time, a sum certain in money to order
or to bearerAn unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to
bearer
A promise to pay a sum of moneyAn order made by one person to
another to pay money to a 3rd person
1. must be in writing & signed by the maker
2. must contain an unconditional promise to pay a sum certain in
money
3. must be payable on demand or determinable future time
4. must be payable to order or to bearer1. must be in writing
& signed by the drawer
2. must contain an unconditional order to pay a sum certain in
money
3. must be payable on demand or determinable future time
4. must be payable to order or to bearer
5. the drawee must be named or otherwise indicated therein w/
reasonable certainty
Maker: the one who makes the promise & signs the
instrument
Payee: the party to whom the promise is made or the instrument
is payable
Holder: every person to whom an instrument is delivered
Drawer: the person who draws up the bill; he gives the order to
pay money to a 3rd party
Drawee: the party to whom the bill is drawn; the person to whom
the bill is addressed & who is ordered to pay
Acceptor: the drawee who indicates a willingness to accept
responsibility for the payment of the bill
Payee: the party in whose favor the bill is drawn or is
payable
(The parties need not all be distinct persons.)
the one who issues the instrument (maker) is primarily liablethe
one who issues the instrument (drawer) is only secondarily
liable
A note drawn payable to the makers own order is not complete
until indorsed by himA bill drawn payable to the drawers own order
is complete w/o indorsement, provided it has been accepted by the
drawee
There is no need of presentment for acceptanceMust be presented
for acceptance in certain cases (sec. 143) & the drawee is not
liable unless & until he accepts the same
A note payable on demand must be presented for payment w/in a
reasonable time from its issueA bill payable on demand must be
presented for payment w/in reasonable time from its last
negotiation
the maker of a note may not do the samethe drawer may insert in
the instrument an express stipulation negativing or limiting his
own liability to the holder
Non-negotiable Instrument
An instrument which is not negotiable as it does not meet the
requirements laid down to qualify an instrument as a negotiable
one
An instrument w/c in its inception was negotiable but has lost
its quality of negotiability
It may not be negotiated but it may be assigned or transferred,
absent an express prohibition against assignment or transfer
FORMAL REQUIREMENTS
1) Must be in writinga. it may be written in pencil or pen,
lithographed, engraved or printed
b. it may be written upon parchment, leather, cloth, or any
other substitute for paper as long as it is movable in nature
c. it must be written on something that may be transferred from
1 person to another; where it cannot be transferred from 1 person
to another, it could not be considered negotiable
d. there is no such thing as an oral negotiable instrument
e. no other words may be added to it or substituted in its
stead
f. duty of the court is to ascertain what is the meaning of the
words they used
2) Must be signed by the maker/drawer
a. a party may sign a bill or note by using an abbreviation,
mark or assumed name
b. Preferable that the full name or at least surname should
appear
c. Initials or any mark (thumbmark) is sufficient, provided that
such signature be used as a substitute and the maker or drawer
intends to be bound by it
d. The name may be written w/ a pen, or pencil, or made by a
rubber stamp by one having authority
e. May be printed, type-written, engraved, photographed,
lithographed
f. Important: the signer has intended to adopt the signature on
the instrument as his own and to obligate himself for its
payment
g. Where the signature of the maker/drawer is denied, the burden
of proof is on the holder to show it
h. GR: the signature of the maker/drawer is placed at the lower
right hand corner of the instrument
i. but it may be placed in any part top, middle bottom, or at
the marginj. it is immaterial where a person signs, since the
intent of the signer ordinarily governs the nature of his
liability; but departure from the usual place of signature is
liable to misconstruction and should be avoided
k. A handwritten statement on the body of the instrument (I,
_____, promise to pay) will be considered as a that persons
signature
l. His signature is prima facie evidence of his intention to be
bound as maker/drawer
m. Indorser: if the signature is placed upon the instrument that
is not clear in what capacity the person intended to sign3) Must
contain an unconditional promise/order to pay
a. The promise/order to pay must be absolute, unconditional and
certain
b. Must not be dependent upon a contingent event that is not
certain to happen
c. Period an event w/c is certain to happen although it may not
be known when (e.g. death of a person); NI subject to a period
NEGOTIABLEd. Condition a future & uncertain event, or a past
event unknown to the parties (e.g. passing the bar exam); NI
subject to a condition NON-NEGOTIABLE
4) Must be payable in a sum certain in money
a. NIs acquire a uniform standard of value enabling them to pass
freely in lieu of money in the business world
b. Money: includes all legal tenderc. Legal tender: that sort of
money in w/c a debt or other obligation calling for money may be
lawfully paid, if the contract doesnt specify the medium of
payment5) Must be payable at a fixed or determinable future time6)
Must be payable to order or bearer7) The drawee must be named
a. Applies only to bills and checksb. The drawee may be
identified by his official or representative title
c. An order w/c is not addressed to any person cannot be a
bill
Money
1. Cash
2. Includes all legal tender
3. What is coined/stamped by public authority and has its value
fixed by public authority
4. A medium of exchange authorized/adopted by government as part
of its currency
Paper Money
1. A negotiable instrument
2. NIL is not applicable to it
3. Questions w/n an instrument constitutes money, payment, or
proper tender is not governed by the Act
Idea & Purpose of a Bill of Exchange
1. Drawers funds in hands of draweea. The office of the
instrument is to collect for the drawer from the drawee money to
w/c the former may be entitled2. Liability of drawee for
non-payment
a. If the drawee refuses to accept when he has funds for that
purpose, he becomes liable to the drawer for the resulting damages
& the harm done to his creditb. If the drawer has no funds in
the hands of the drawee, it is at least presumed that the former
must have made arrangements w/ the latter so that he will honor the
bill
Section 2. What constitutes certainty as to sum
NEGOTIABLE
Certainty of sum payable- payment of a fixed amount of money
- may be ascertained upon its face by computation, independent
of all extrinsic evidence
- permissible clauses or stipulations
NON-NEGOTIABLE:
- an instrument for a specified sum of money & also for the
payment of something else, the value of w/c is not ascertained
- PN giving the maker the right to ascertain the amount rightly
payable
Sum to be paid w/ interest- interest at a fixed rate
- interest at increased or reduced rate
- the total sum due on the instrument must be capable of
accurate computation at any time from the instrument itself
- accrual/rate of interest not specified (computed from the date
of the instrument, & if the instrument isnt dated, from the
issue thereof; interest due: legal rate)
- interest usurious (remains valid as to the principal)
Sum to be paid by stated installments- the number of
installments, the maturity of each installment, and the amount of
each installment must be specified
- acceleration must be dependent on maker
NON-NEGOTIABLE:
- an instrument payable in 2 installments
- acceleration at the option of holder
Sum to be paid w/ exchangeExchange: the difference in value of
the same amount of money between different countries
- Rate of exchange may be a:
1. fixed rate stated in the instrument
2. current rate prevailing at a given date & place
- payment w/ exchange rate
- exchange not applicable to inland or domestic bill so the
stipulation may be disregarded
Sum to be paid w/ costs of collection and/or attys fee- increase
in amount due effective after maturity
- uncertainty of sum payable only after maturity
- the stipulation for attorneys fees may be reduced by the
courts if found unconscionable or unreasonable
Acceleration Clauses
The negotiability of the instrument is not affected even if it
is to be paid by stated installments, w/ a provision that, upon
default in payment of any installment or of interest, the whole
shall become due.
Negotiable - Acceleration at the option of the MAKER, not
holder.
Insecurity Clauses
Provisions in the contract w/c allow the holder to accelerate
payment if he deems himself insecure.
The instrument is rendered non-negotiable.
Extension Clauses
An instrument is payable at a definite time if by its terms it
is payable at a definite time subject to extension at the option of
the holder, or to extension to a further definite time at the
option of the maker or acceptor of automatically upon or after a
specified act or event.
Section 3. When promise is unconditional
When promissory note contains a promise to pay
Implied promise to pay
payable
to be paid
I agree to pay
I guaranty to pay
M obliges himself to pay
good for
due on demand
this is to certify that I am to pay
Bare acknowledgement of indebtedness NON-NEGOTIABLE I.O.U
due P1000
for value received
Use of words of negotiability
due P or order
due P or bearer
When bill of exchange contains an order to pay
Words equivalent to an order to pay let the bearer
drawee will much oblige drawer to pay P or order
Mere request to pay NON-NEGOTIABLE Order: command or imperative
direction
A mere request w/c merely asks a favor doesnt constitute an
order
Note: the insertion of the word please does not alter the
character of the instrument as the use of the usual term of
civility does not necessarily imply that a favor is asked
Liability of drawer
Its immaterial w/n the drawee obeys the order to pay
When Promise to pay is conditional
1. An order or promise to pay out of a particular fund
2. An instrument payable upon a contingency (the happening of
the event does not cure the defect)
When promise to pay unconditional
Instrument payable absolutely Must be unconditional & not
subject to any condition/contingency
If the instrument is payable on a contingency, it is not
negotiable, and it is immaterial that the contingency afterward
actually happens, it does not cure the defect
Rationale: No one would accept a paper for debt if the right to
recover werent absolute
Terms not affecting unconditional liability
Statement of the purpose for w/c the instrument is issued
The collateral securing the instrument
Indication of a particular fund out of w/c REIMBURSEMENT is to
be made: NEGOTIABLE The drawee pays the payee from his own funds,
then afterwards the drawee pays himself from the particular fund
indicated
The fund indicated is not the direct source of payment but only
the source of reimbursement w/c is an act subsequent to the payment
Payment of the instrument is not contingent on the sufficiency of
the fund indicated
e.g. Pay to A or order P10,000 and debit the amount paid from my
Account No. 1234
Indication of a particular account to be DEBITED w/ the amount:
NEGOTIABLE
Indication of a particular fund out of w/c PAYMENT is to be
made: NON-NEGOTIABLE The amount to be paid is made to depend upon
the adequacy or existence of the fund designated The fund specified
is the direct source of payment & the measure of liability
e.g. pay to A or order P10,000 out of my Account No. 1234
e.g. Treasury Warrants payable out of Fund 501
Test of negotiability: w/n the instrument carries the general
personal credit of the maker or drawer
If it does negotiable
If it carries only the credit of a particular fund
non-negotiable
Statement of transaction w/c gives rise to instrument
Mere recital of consideration for instrument/origin of
transaction - NEGOTIABLE, provided it imposes no other liability on
any party thereto other than that for the payment of a sum therein
specified and does not qualify the promise or obligation
per contract
in accordance with the contract
per memorandum of agreement
e.g. a note reciting that it is for rent, or for a certain
policy of insurance, or given as payment of the price of a land
Terms & conditions contained in another paper -
NON-NEGOTIABLE If the promise/order is subject to the terms &
conditions of our contract executed by us this date
It is non-negotiable because the promise to pay is conditioned
upon or subject to the performance of a collateral agreement
referred to therein
Section 4. Determinable future time; what constitutes
Certainty of time of payment1) Instrument payable at all
events2) When time of payment certain
The payment will certainly come, though it may be uncertain when
that time will come
Payable at a fixed time
Payable at a fixed period after date
Payable at a fixed period after sight; after sight after it is
presented to the person supposed to make payment Payable on or
before a fixed time; holder cannot require payment or maintain an
action until the expiration of the time fixed Payable on or before
a determinable future time; date of payment must be at least
determinable otherwise, it is non-negotiable, e.g. there is a day
and month but no year of maturity Payable on the occurrence of a
specified event
Payable after the occurrence of a specified event
Non-negotiable
Payable upon a contingency
Payable when able
Payable w/in a reasonable time
A note containing a provision that it may be renewed at maturity
is non-negotiable
Section 5. Additional provisions not affecting negotiability
Acts in addition to payment of MoneyGR: the instrument is
non-negotiable if it contains a promise/order to do any act in
addition to the payment of money
Exceptions:
1) Sale of collateral securities the additional act is to be
performed after the date of maturity when the instrument is not
longer negotiable in the full commercial sense; until the date of
maturity the promise is to pay money only
2) Confession of judgment enables the holder to obtain a
judgment w/o the delay usually incident to a law suit, as it
eliminates the necessity of a trial Warrants of attorney to confess
judgment are void as against public policy for the enlarge the
field for fraud
3) Waiver of benefit granted by law neither does waiver of
protest, presentment for payment, or demand, or exemption from
attachment or execution, destroy the negotiability of an
instrument4) Election of holder to require some other act the
holder must have the choice; if the option is w/ the maker/drawee,
the instrument is non-negotiable because the holder cannot compel
him to make the payment in money
Cognavit Actiomen
he has confessed actionRelicta verificationem
his pleading being abandoned
A written confession of action by the defendant acknowledging
his indebtedness to the plaintiff after the action has been filed.
(valid)It is a confession of judgment by withdrawal of defense.
(valid)
Section 6. Omissions; seal; particular money
Effect of omission of date- the omission of the date will not
make the instrument non-negotiable
- instrument will be considered to be dated as of the time it
was issued- if there is a date stated, but there is no such date in
the calendar, the law will deem the nearest date of the month the
date intended
Effect of omission of value- its not necessary to state the
value that has been received for the instrument because
consideration is presumed
Effect of omission of place- an instrument is presumed to have
been made where it was date- a note that doesnt specify the place
of payment is presumed to be payable at the place of residence of
the maker
- if the place of execution or payment is not stated, it is
presumed to be the makers/drawers place of business or his home
(Sec. 73 specifies where presentment for payment should be made
when the place of payment is not specified)
Effect of presence of seal- the fact that the instrument bears a
seal doesnt destroy its negotiability- its advisable to have a
bill/note appear in a public instrument so that it will be included
among the preferred credits w/ respect to other property of the
debtor
Seal a particular sign, made to attest in the most formal manner
the execution of an instrument; when an instrument is acknowledged
before a notary public, it bears the signature & seal of a
notary, w/c have the effect of confirming the authenticity of the
signature
Effect of designation of particular kind of current money
payable- law doesnt require that payment be made in legal tender-
Money is not necessarily limited to legal tender
- the parties may agree that the obligation/transaction be
settled in any other currency at the time of payment
Money: includes any kind of current money or foreign money w/c
has fixed value in relation to our money
Section 7. When instrument payable on demand
Expressed to be payable on demand- due & payable immediately
after delivery
- an overdue instrument is necessarily a demand paperon
demand
at sight
on presentation
on call
at any time called for
at such times as the payee may requireat the holders
convenience
No time for payment is expressedPay to P or order P1000
Payable on demand as regards the makerA note payable at the
makers convenience is payable on demand (but is an incomplete
instrument)A note dated July 3, 2004 and payable 30 days after date
was issued August 4, 2004 (when it was already overdue)
Payable on demand as regards the acceptorA bill payable on July
20, 2004 was accepted by the drawee on July 21, 2004
Payable on demand as regards the indorserAn indorsement after
maturity creates a new instrument payable on demandA note payable
30 days after July 1, 2004 and indorsed on August 1, 2003.
Section 8. When payable to order
To the order of / or order / or bearer / to bearer
Expression of consent
Consent is indispensable since a maker/drawer assumes greater
risks under a negotiable instrument than under a non-negotiable
one
When instrument payable to order To the order of a specified
person
I promise to pay to the order of P P1000
To him or to his order
I promise to pay to P or order P1000
Payable to the order of the drawer complete even w/o indorsement
of A
Pay to A or order P10,000. To: X. (Sgd.) A.
Payable to the order of the maker not complete until it is
indorsed by him
I promise to pay A or order P10,000. (Sgd.) A.Effect where payee
not named/described
In an order instrument, a specified person must always be named
therein either before or after the word order
If there is no payee, there is nobody who could give the
order/authority to collect
There would be nobody who could indorse the instrument
to the administrator of the estate of P valid
The trade name of the payee may be used
Section 9. When payable to bearerInstruments payable to
bearer
May be transferred by delivery w/o indorsement & payment to
any person in possession thereof in good faith & w/o notice
that his title is defective, at or after maturity, discharges the
instrument
When instrument payable to bearer
Expressed to be payable to bearer
I promise to pay to bearer P1000
pay to holder
Payable to person named therein or bearer
Pay to P or bearer P1000
Pay to P or holder P1000
pay to bearer or P not negotiable
pay to P, bearer not negotiable (bearer is merely a description
of P)
Payable to order of a fictitious person
Fictitious person one who, though named as payee in an
instrument, has no right to it because the maker/drawer so intended
& it matters not, whether the name of the payee used by him be
that one living or dead, or on who never existed
Its essential that the payee is known to the maker/drawer to be
a fictitious or non-existing person
Payable to order of a non-existing person
The payee named is one who does not exist & had never
existed in the sense that he was not intended to be a payee by the
drawer or maker Payable to a person who is already dead
Payable to the order of a fictitious person
Fictitious name feigned or pretended
Fictitious person one who, although named payee in a check, has
no right to it, or the proceeds of it, because the drawer of it so
intended, and it therefore matters not whether the name of the
payee used by him be that of one living or dead, or one who never
existed; Fictitious person not necessarily a non-existing person;
an instrument may be payable to a fictitious payee although there
is an existing person corresponding to the name by w/c the payee is
designated & known to the parties, where it was not intended by
the maker/drawer of the instrument that he should have any
beneficial interest in the instrument
Note: such an instrument is payable to bearer only if the
fictitious or non-existent character of the payee is known to or
intended by the party who actually drew the instrument Name of
payee not name of any person
pay to cash
To the order Ps estate
Only indorsement in blank Last indorsement in blank
Note: the word indorsement as used in the law, refers only to
negotiable instruments
Section 10. Terms, when sufficient
Substance Criterion of Negotiability Clear intention of the
parties Use of foreign language
Mere defect in language or grammatical error
Section 11. Date, presumption as toPresumption as to date If the
instrument bears a date, its presumed that said date is the date
when it was made or drawn If the acceptance in a bill is dated,
said date is considered the date of such acceptance or
indorsement
He who claims that some other date is the true date has the
burden to establish such claim
GR: a date is not essential to make an instrument negotiable
Exceptions:
1. theres a stipulation as to interest
2. the maturity date has reference to the date of issuance
3. installments (when due)
When date is necessary to determine maturity (not
negotiability)
Where instrument is payable at a fixed period after date Date of
issue is material to determine the date from w/c to start counting
the number of days specified Where instrument is payable at a fixed
period after sight or presentment The date of site is necessary to
determine when the specified period will commence to runSection 12.
Ante-dated and post-datedANTE-DATEDPOST-DATED
It contains a date EARLIER than the true date of its issuance.It
contains a date LATER than the true date of its issuance.
e.g. the instrument was issued on July 30, 2004, but is dated
July 15, 2004.e.g. the instrument was issued on July 15, 2004, but
bears a date of July 30, 2004.
Effect of Ante-Dating & Post-Dating
Valid: provided this is not done for an illegal/fraudulent
purpose
Invalid: if its done for an illegal/fraudulent purpose
Date when instrument takes effect
The person to whom the instrument is delivered acquires
title/ownership over it, not as of the date it bears, but as of the
date it is delivered
Section 13. When date may be inserted
When date may be inserted1. instrument is payable at a fixed
period after date but is issued undated2. instrument is payable at
a fixed period after sight but the acceptance is undated
Note: Any holder may insert therein the true date of issuance or
acceptance & the instrument shall be payable
accordinglyImportance of date of Issuance/Acceptance
to determine the date of maturity
unless the true date is inserted, one will not now when the
instrument is due
this is not applicable to instruments payable on demand although
undated
its maturity is already fixed, being due immediately
this doesnt authorize the insertion of the date of issue in an
undated bill of exchange payable at a fixed period after sight
(e.g. 30 days after sight)
date of issue is not necessary to fix the maturity of the
bill
but if acceptance is undated, the insertion of the true date of
such acceptance is necessary (the 30 days is to be counted not from
the date of issue but from sight/acceptance)
Effect of insertion of wrong date
The insertion of a wrong date in an undated instrument by one
having knowledge of the true of issue/acceptance will avoid the
instrument as to him or anyone claiming under him But as to the
subsequent holder in due course, he may enforce the same despite
the improper date; In the hands of the holder in due course, the
date inserted, even if wrong, is to be regarded as the true
date
If the wrong date was inserted by mistake/clerical error, the
validity or negotiability of the instrument is not affected; in
such a case, the date intended will be taken as the true date
One who signs such an instrument furnishes the means of fraud
and is estopped from denying his liability there The insertion of a
wrong date constitutes material alterationSection 14. Blanks; when
may be filled
Steps in issuance of negotiable instrument1. mechanical act of
writing the instrument completely & in accordance w/ the
requirements of Section 1
2. the delivery of the complete instrument by the maker or the
drawer to the payee or holder w/ the intention of giving effect to
it
Obvious blanks are left at the time they are made/indorsed, of
such a character as to manifestly indicate that the instruments are
incomplete until such blanks shall be filled upApparently complete,
containing blanks only because the written matter doesnt so fully
occupy the entire paper as to preclude the insertion of additional
words or figures, or both
Doctrine of Implied authority: One who signs/indorses is liable
to bona fide holders thereofDoctrine of Negligence: the liability
for the amount of the instrument w/c as been increased by filling
up unoccupied space therein
Requisites for a person to have prima facie authority to convert
a signature on a blank paper into a NI and fill it up for any
amount:
1. the blank paper bears the signature of the maker/drawer
2. it was delivered by the person making the signature
3. it was delivered in order that the paper may be converted
into a NI
SECTION 14SECTION 15SECTION 16
IncompleteIncompleteCOMPLETE
DELIVEREDUndeliveredundelivered
Personal defenseREAL defensePersonal defense
NOT a Holder in Due CourseGR: he can go against parties
SUBSEQUENT to the completion but not against parties prior to
completion of the instrument
Exception: (requisites)
1. he filled it up strictly in accordance w/ authority given
2. completion was made w/in reasonable time after its issue- can
be set up as a defense against ANY holder (the law didnt
distinguish)
- a person whose signature was placed on the instrument PRIOR to
its delivery cannot be held liable- If its in the possession of a
party other than a holder in due course: PRIMA FACIEpresumption of
delivery but subject to rebuttal
Holder in Due Course- can go against ALL parties to the NI- the
instrument is valid & effectual for all purposes- he may
enforce the instrument as if it was filled up strictly in
accordance w/ the authority given & w/in reasonable time- can
go against persons whose signature is placed on the instrument
AFTER its delivery- Indorsers: they warrant that the instrument is
valid & subsisting, thus they are estopped from denying its
validityIf a complete instrument is in the hands of a holder in due
course, a valid delivery is CONCLUSIVELY presumed (admits of no
evidence to the contrary)
Other NotesMaterial Particular:- essential to complete the
instrument
- material necessary
- e.g. blanks for date, due date, name of payee, amount, rate of
interest, name of drawer - authority to complete authority to
alterReasonable Time:
- nature of instrument
- usage of trade/business
- facts of the case
Signature on Blank Paper: depends on the intention of the person
who signed it if its to be converted to a NI- prima facie authority
to fill it up for any amountDelivery:- no rights can arise until
the instrument is delivered
- essential to the consummation as an obligation
- until delivery, it is revocable, inoperative
- mailing a NI to the payee is sufficient delivery
Delivery may be:
- conditional
- for a special purpose
- not for the purpose of transferring the title of the
instrumentDelivery: transfer possession from 1 person to another,
actual or constructiveIssue: 1st delivery of instrument, complete
in form, to a person who takes it as a holder
Holder/bearer: payee/indorsee of a bill/note who is in
possession of it
Immediate Parties: - has knowledge of the conditions or
limitations placed upon the delivery of instrument (privity and not
proximity)- transferees w/ notice that delivery was unauthorized,
conditional, or for a special purpose only & not for the
purpose of transferring the property in the instrument Remote
Parties: - has no knowledge of any defect or condition in the
delivery of the instrument
- not in direct contractual relation to each other
Section 17. Construction where instrument is ambiguousRules of
Construction in case of ambiguity or omission
1. Where the sum payable is expressed in words & 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 amount2.
Where the instrument provides for the payment of interest, w/o
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
3. Where the instrument is not dated, it will be considered to
be dated as of the time it was issued4. Where there is a conflict
between the written and printed provisions of the instrument, the
written provisions prevail5. 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 election6. 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 (indorsers assume the least liability only secondarily
liable)7. 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 thereonSection 18. Liability of Person
signing in trade or assumed nameGR: No person can be held liable on
the instrument if his signature does not appear
thereonExceptions:
1. a person who signs in his assumed name or trade name2. the
signature of a party made by a duly authorized agent
3. the forger, in cases of forgery, who forges the signature of
another person
4. acceptor makes acceptance by a separate instrument
5. unconditional promise in writing to accept a bill before it
is drawn6. the holder who negotiates an instrument payable to
bearer by mere delivery
7. a party who indorses in a paper attached to the instrument
called an allonge
8. a drawee who destroys the bill, or refuses w/in 24 hours to
return the bill accepted or non-accepted
9. a person who participated in an illegal scheme and conspiracy
w/ the person who signed the instrument
Section 19. Signature by agent; authority; how shownGR: the
authority of the agent may be given verbally or in writing as no
form is required by law
Exceptions:
1. those covered by the statute of frauds2. those that require a
Special Power of AttorneySection 20. Liability of person signing as
agent, and so forthWhen Agent is NOT Personally Liable:
Requisites1. must be duly authorized2. must act w/in scope of his
authority
3. must indicate in the instrument that he is signing merely as
agent4. must disclose his principal (not merely descriptive
words)
GR: where an instrument is executed by an agent and the
principal is undisclosed and his signatures does not appear
thereon, the principal cannot be held liable on the instrument
E: where the principal has adopted the agents name as his own
name, in w/c case the principal will be bound by such contracts and
this has been held to be signing in a trade/assumed name and
therefore, the principal is liable as if he signed in his own
name
Section 21. Signature by procuration; effect ofSignature by
Procuration (per pro. | per proc | P.P. | P.p. |PP) a notice that
the agent has limited authority, and the principal is bound on the
instrument only if the agent signed w/in the limits of his
authority Exceeding authority - acts outside the authority
Abusing authority theres authority, but used in unjust/improper
mannerSection 22. Effect of indorsement by infant or
corporationMinority/Insanity/Imbecility/Deaf-Mutes who do not know
how to write ( real defense
GR: A minor does not have the capacity to contract, and any
contract entered into by him is considered voidable
E: when the minor represents himself to be of age (principle of
estoppel)GR: a minor is not bound to restore anything he
received
E: to the extent that he benefited thereby
Corporation ( can only perform acts w/c are w/in the scope of
its powersNote: all acts done outside the corps primary clause are
considered ultra vires Section 23. Forged signature; effect
of.Forgery Sec. 23 applies only to forgery of a signature, and NOT
alteration of the instrument w/c is covered Sec. 124 & 125
Counterfeit-making or fraudulent alteration of a writing
It is not necessary that the signature should bear any
resemblance to that of the person whose signature it purports to be
Presence of intent to defraud/deceive E.g. the signing of anothers
name or the alteration of an instrument in the name, amount,
description of the person and the like w/ the intent to defraud
A real defense, even against a holder in due course
Must be proven clearly and convincingly
The forged signature is wholly inoperative
No right can be acquired through the forged signature
Payment made through or under such forged signature is
ineffectual and does not discharge the Instrument
A person whose signature was forged was never a party or never
gave his consent to the contract w/c gave rise to the
instrument
Kinds of Forgery under the NIL
1. Simple forgery when a person signs the name of another w/o
the authority of the person whose signature it purports to be
2. Fraudulent impersonation leading to forgery when the person
to whom the instrument was been delivered impersonated the real
person named as payee and signs his name
a. NO FORGERY if the intention of the person making the
instrument is to pay to the person before him, no forgery is
committed when the latter signs the name of the payee
3. Fraud in factum/fraud in esse contractus fraud on the very
nature of the paper signed such that the person signing it had no
intention of signing a NI
4. Signature on a blank paper w/c was converted into a
promissory note or other apparently valid instrument w/o
authority
CASES OF FORGERY IN GENERAL
Forgery of Promissory NotesForgery of Bills of Exchange
a) forgery of an indorsement on the note
b) forgery of the makers signaturea) forgery of an indorsement
on the bill
b) forgery of the drawers signature
- w/ acceptance by the drawee
- w/o such acceptance but the bill is paid by the drawee
Application of Sec. 23
1. the signature on the instrument is affixed by one who does
not claim to act as an agent & who has no authority to bind the
person whose signature he has forged
2. the signature is affixed by one who purports to be an agent
but has no authority to bind the alleged principal
GR: Effects of Forgery
1. the forged signature (and not the instrument itself nor the
genuine signatures) is wholly inoperative
2. no right against the party whose signature was forged nor
parties prior to such person can be acquired through or under such
signature:
a. to retain such instrument
b. to give discharge therefor
c. to enforce payment thereon
Exception: when the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of
authority as a defense
Extent of the Effect of Forgery
the whole instrument is not totally void the genuine signatures
arent rendered inoperative
it is only the forged/unauthorized signature that is declared to
be inoperative
rights may still exist and be enforced by virtue of such
instrument as to those whose signatures thereto are found to be
genuine
A forged indorsement prevents any subsequent party from
acquiring any right against any party whose name appears prior to
the forgery
GR: No right/title can be acquired to a negotiable instrument
through or under a forged or unauthorized signatureExceptions:
1. if the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority
2. where the signature is not necessary to the holders title in
w/c case the forgery may be disregarded
Persons Precluded/Estopped from Setting Up the Defense of
Forgery
1. those estopped by their acts, silence, or negligencea. the
forger as he cannot raise his own malfeasance as a defense
b. others who admit the genuineness of the signature expressly
or impliedly, such as those who failed to deny specifically under
oath the genuineness of an actionable document
2. those who warrant/admit the genuineness of the signatures in
question
a. indorsers
b. acceptors
c. persons negotiating by deliveryRight of Drawee to Recover
Payment Where DRAWERS Signature was Forged
1) Rule founded on estoppel and principle of natural justice
Drawee has obligation to know the signature of the drawer and it is
presumed that he does
Drawee (and not the indorsee/holder) has the best means of
knowing/learning whether the signature of the drawer is genuine
2) Rule founded on ground of public policy
Policy of maintaining confidence in the security of negotiable
paper by making the time and place of acceptance or payment the
time and place for the final settlement, as between the drawer and
the holder, of the question of the genuineness of the drawers
signature3) Responsibility of drawee bank When a bank receives
money to be checked out by a depositor, it is to be paid only as
the depositor shall order If the bank pays out money otherwise than
according to such order, it is liable to the depositor for the
amount paid
The bank assumes responsibility of seeing that the money gets to
the party authorized to receive it
If the bank pays money out on forged signature of the, depositor
being free from blame or negligence, it must bear the loss
Exception: if the payee was not a client of the bank and there
was not way of ascertaining the authenticity of the payees
indorsement on the checks
4) Allocation of loss between drawee bank and collecting
bank
The courts must consider the comparative negligence of the 2
banks
Right of Drawee to Recover Payment Where PAYEES/INDORSERS
Signature was Forged
1. From the encasher/last indorser
Drawee Bank: does not have the duty to ascertain whether the
signatures of the payee or indorsers are genuine or not
Note: the unqualified indorsement of the collecting bank on the
check should be read together w/ the 24-hour regulation on clearing
house operation; when the drawee bank fails to return a forged
check or altered check to the collecting bank w/in the 24-hour
clearing period, the collecting bank is absolved from liability
Indorser: supposed to warrant to the drawee that the signatures
of the payee & previous indorsers are genuine, warranty not
extending only to holders in due courseEncasher: impliedly asserts
that he has performed his duty to satisfy himself that the paper is
genuine, and the drawee who has paid the forged check may recover
the money from such negligent purchasers
Rationale: anyone would accept a check only because he has
proofs that it is genuine, or because he has sufficient confidence
in the honesty and financial responsibility of the person who
vouches for it2. From the drawer/depositor
GR: a drawee bank who has paid a check on w/c an indorsement has
been forged cannot debit/charge the drawers account for the amount
of said check & is not entitled to indemnification from the
drawer
E: where the drawer is guilty of negligence w/c causes the bank
to honor such a check
RIGHTS OF PARTIES IN CASES OF FORGED INDORSEMENTS
NOTEBILL
PAYABLE TO ORDER The party whose indorsement is forged is not
liable to any holder even a holder in due course The indorsement
being forged, it is inoperative Other parties, including the maker
prior to the party whose signature is forged are also not liable to
any holderPAYABLE TO ORDER The party whose indorsement is forged,
is not liable to any holder, even a holder in due course The forged
indorsement is wholly inoperative
PAYABLE TO BEARER The party whose indorsement is forged is
liable to a holder in due course, but not to the one who is not a
holder in due course
Other parties, including the maker, prior to the party whose
signature is forged, may also be held liable by one who is not a
holder in due course
Reason: the instrument being originally payable to bearer, it
can be negotiated by mere delivery; indorsement is not necessary to
the title of the holder; even if the indorsement is forged, the
forgery may be disregarded
Sec. 48 the forged indorsement does not prevent the transfer of
title since the holder may just strike out the forged
indorsement
Sec. 16 the only defense available is want of delivery, but this
can be raised only against a holder not in due coursePAYABLE TO
BEARER The drawee may debit the drawers account in spite of the
forged indorsement Reason: the forged indorsement is not necessary
to the title of the holder
The drawee cannot recover from the holder
EFFECTS OF PAMENT OF A BILL/CHECK UNDER A FORGED INSTRUMENT:
GR: One who acts on an indorsement of negotiable paper must
ascertain its genuineness at his own risk as it is his duty before
accepting from 1 person a check payable to another to investigate
& determine whether it bears the genuine indorsement of that
other
Drawee Bank
GR: If the drawee pays under a forged indorsement, the drawer is
not liable on the bill and the drawee may not debit the drawers
account E: when the drawers negligence is the proximate cause of
the loss.
But the drawee can recover the amount paid from the person to
whom payment was made since the drawee makes no warranty as to the
genuineness of any indorsement. Duties:
1. to verify the genuineness of the drawers signature and not of
the indorsement because the drawer is its client
2. to promptly inform the presentor of the forgery upon
discovery
3. it must be free of any negligence in failing to discover the
alteration or forgery in order that it may claim reimbursement from
the collecting bank.
Drawer A bank is bound to know the signature of its customers
(drawers), and if it pays a forged check it must be considered as
making the payment out of its own funds
Reasonable Diligence: If the drawer exercises reasonable
diligence in investigating forgeries, and after the discovery of a
particular forgery notifies, w/ reasonable promptness, the bank on
w/c the instrument was drawn, a subsequent holder under a forged
instrument cannot recover from the drawer.
Drawers Negligence: If due to the drawers negligence, the
forgery is not discovered until it is too late for the bank to
recover from the holder or the forger, the drawee may properly
charge the amount paid against the drawers account. The drawee may
likewise recover from the drawer when the latters negligence is the
proximate cause of the loss or has contributed thereto.
However, the drawer may generally pass liability back to the
party who took from the forger and the forger himself.
Both Drawer & Drawee Negligent: They should share in the
loss suffered even if the drawers negligence is the proximate cause
of the loss or has contributed thereto.
Indorser
An indorser subsequent to the forgery of an instrument could be
made liable on the instrument because by negotiating the
instrument, he warrants it to be genuine and in all respects what
it purports to be.
Payee
The payee of a check whose signature has been forged may recover
from:1. the drawer, if the payee is not negligent & if there is
no estoppels on his part
2. an indorsee to whom the check was paid by the drawee bank
3. the drawee who paid the amount of the check to one claiming
under a forged instrument
4. the collecting bank responsible for the encashment of the
check
The liability of the bank to the payee for the value of the
checks attaches w/n the bank was aware of the forged/unauthorized
indorsement If the check was never delivered to the payee, he does
not acquire any right or interest therein and cannot assert any
cause of action, founded on the checksCollecting Bank
A collecting bank that guarantees all prior indorsements shall
be laible to the drawee for money paid on such indorsements should
they prove to be forgeries.
By stamping on checks accepted by it for deposit its guarantee
that all prior endorsements and/or lack of endorsements guaranteed,
a collecting bank thereby makes the assurance that it has
ascertained the genuineness of all prior indorsements
The collecting bank is bound by its warranties as an indorser
and cannot set up the defense of forgery as against the drawee-bank
(principle of estoppel)
The collecting bank or last indorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
indorsements
The collecting bank has privity w/ its depositors who are its
clients; hence it is in a better position to detect forgery, fraud
or irregularity in the indorsement
Even if the collecting bank was not negligent, it would still be
liable to the drawee bank because of its indorsement. GR: the
collecting bank may recover from the person who forged the
indorsement on the check & deposited or enchased the same
E: if the collecting bank is guilty of negligence, it cannot
recover from the innocent person who deposited/encashed the
check.
If both the collecting bank & drawee bank are both guilty of
negligence, such that said banks contributed equally to the success
of the forger in enchasing the proceeds of the forged checks, both
banks shall share in the loss.
II. CONSIDERATIONSec. 24. Presumption of
consideration.Consideration
An inducement to a contract
The cause, price or impelling influence w/c induces a
contracting party to enter into the contract
The essential or more proximate purpose a party has in view at
the time of entering into a contract
Some right, interest, benefit or advantage conferred upon a
promissor, to which he is otherwise not entitled Any detriment,
prejudice, loss or disadvantage suffered or undertaken by the
promisee other than to such as he is at the time of consent bound
to suffer
Motive: the personal/private reasons of a party in entering into
a contract
Presumption of Consideration
It is not necessary that the consideration be expressly stated
in the instrument Presumption: the negotiable instrument has been
issued for a valuable consideration & that every person whose
signature appears thereon has become a party thereto for value,
whether the words value received appear in it or not
Consideration being presumed, it need not be alleged and
proved.
Presumption is only prima facie. It may be rebutted by evidence
to the contrary. But whoever alleges absence of consideration has
the burden of proof to show the contrary.
Sec. 25. Value, what constitutes.
Value: Any consideration sufficient to support a simple
contractValuable Consideration
Some right, interest, profit or benefit to the party who makes
the contract
Some forbearance, detriment, loss, responsibility, etc. on the
other side
Any prestation sufficient to support any contract in favor of
the party to a instrument
Obligation of contracting parties to give, to do, or not to do
as the cause for the contract or its reason for being The
consideration must be VALUABLE, as distinguished from GOOD
consideration. Thus, love, affection, or gratitude is NOT
sufficient to sustain an action on a note or bill
Need not be adequate. It is sufficient that it is
valuable.SUFFICIENCYADEQUACY
Whether or not the value given is enoughWhether the value given
by one to the other is equivalent to each other
Antecedent or Pre-existing Debt
A valuable consideration The debt may be that of a 3rd person
and the discharge of such debt is a valuable consideration for a
negotiable instrument, whether such instrument is payable on demand
or at a future time
It must be shown that the holder has given up the pre-existing
debt or the right to sue
Sec. 26. What constitutes holder for value
Holder for Value
One who has given valuable consideration for the instrument
issued or negotiated to him
The holder is deemed as such not only as regards the party to
whom the value has been given by him but also in respect to all
those who became parties prior to the time when value was given
GR: a holder of a NI is presumed to be a holder for value
E: the contrary is proven
Sec. 27. When lien on instrument constitutes holder for
value.Where a Holder has a Lien on Instrument
One who has taken a negotiable instrument as collateral security
for a debt has a lien on the instrument As such holder of
collateral security, he would be a pledge but the requirements
shall be governed by the provisions on pledge of incorporeal
rights
RULES ON PLEDGE OF INCORPOREAL RIGHTS
Amount of instrument > debtThe pledgee is a holder for value
to the extent of his lien
Amount of instrument debtThe pledgee is a holder for value or
full amount & may recover all
Defenses exist bet. pledgor & party liable on the
instrumentPledgee can collect on the instrument only to the extent
of amount of the debt
The defenses of the party liable are real defensesPledgee can
recover nothing upon the instrument
Sec. 28. Effect of want of consideration
ABSENCE/WANT OF CONSIDERATIONFAILURE OF
CONSIDERATION
No valuable consideration has been agreed upon or it is illegal
and therefore voidA valid consideration was agreed upon but there
was failure/refusal to execute/give the consideration agreed
upon.
it is a defense against any person not a holder in due coursea
defense pro tanto (to that extent) against a person not a holder in
due course
Both are only PERSONAL defenses. It is a good defense only as
against a holder not in due course. It cannot be put up as a
defense against a holder in due course.
Sec. 29. Liability of accommodation party.
Accommodation Bill/Note One to w/c the accommodation party has
put his name, w/o consideration, for the purpose of accommodating
some other party who is to use it, & is expected to pay it A
loan of ones credit Creates no obligation upon delivery to the
accommodated party & is of no legal efficacy and creates no
obligation until delivered or negotiated to a holder for value
Accommodation Party: Requisites
1. the party to the instrument signs as maker, drawer, acceptor,
or indorser
2. w/o receiving value therefore
3. for the purpose of lending his name to some other person
Accommodation Party
he lends his name to enable the accommodated party to obtain
credit or to raise money
usually expects that not he, but the accommodated party will
provide payment of the bill/note when it falls due
in lending his name to the accommodated party, the accommodation
party is, in effect, a surety for the former
he receives no part of the consideration for the instrument but
he assumes liability to the other parties thereto because he wants
to accommodated another
permitted to show parol evidence w/c party he accommodated
Accommodated Party
one to whom the credit of the accommodation party is loaned
one in whose favor a person, w/o receiving value therefor, signs
an instrument for the purpose of lending his credit & enabling
said party to raise money upon it he need not be a party to the
instrument, provided it was signed by one for his accomodation
impliedly agrees to take up the instrument at maturity & to
indemnify the accommodation party against the consequences of
non-payment
Liability of Accommodation Party to a Holder
1. absence of consideration not a defense
the absence of consideration between the accommodation party and
the accommodated party does not itself constitute a valid defense
against a holder for value even though he knew of it when he became
a holder
an accommodation party is ONLY liable to a HOLDER FOR VALUE
notwithstanding that such holder, at the time of taking the
instrument knew him to be only an accommodation party
an accommodation party is liable to a holder for value ONLY if
he is also a HOLDER IN DUE COURSE; he must meet al the requirements
of a HDC under Sec. 52 except notice of want of consideration
2. accommodation party in effect a surety
unlike a contract of suretyship, the liability of the
accommodation party remains not only primary but also unconditional
to a holder for value
even if the accommodated party receives an extension of the
period w/o the consent of the accommodated party, the latter is
still liable for the whole obligation & such extension doesnt
release him because as far as a holder for value is concerned, he
is a solidary-debtor3. rule not applicable to corporations the
indorsement of negotiable paper by a corporation w/o consideration
& for the accommodation of another is ultra vires lack of
capacity does not absolve the signatories, but they are rendered
personally liable where facts show that the accommodation involved
was for their personal account, undertaking or purpose & the
creditor was aware thereof4. where instrument vitiated by
illegality of cause there can be no recovery against an
accommodation party in an instrument vitiated by an illegality of
cause5. liability of solidary accommodation makers
e.g. 3 accommodation makers executed a promissory note jointly
and severally in favor of a bank, any of the solidary accommodation
makers may be held liable when the principal debtor who received
from the bank the full value of the note failed to pay the
sameRight of Accommodation Party
1. to revoke accommodation
since a signature for accommodation is gratuitous, it may be
revoked or rescinded by cancellation or by notice to those
interested anytime before it has been negotiated for value
but once the NI has been negotiated for value, the accommodation
party is liable accdg. to the face of his undertaking, the same as
if he were financially interested in the transaction
2. to reimbursement from accommodated party
the relation between the accommodated party & the
accommodation party is that of a principal and a surety. It is the
accommodated party who is expected to pay the NI directly to the
holder as he is the real debtor. If the accommodation party has
been compelled to pay the instrument, the party accommodated
becomes a debtor of the accommodation party, & the latter has a
right of action against the former.
3. to contribution from other solidary accommodation maker
where a solidary accommodation maker paid to the bank, the
balance due on a promissory note, he make seek contribution from
the other solidary accommodation makers in the absence of a
contrary agreement between them, & subject to conditions
imposed by law this right springs from an implied promise bet. the
accommodation makers to share equally the burden resulting from the
execution of the note.
ACCOMMODATION PARTYREGULAR PARTY
Signs an instrument w/o receiving value thereforSigns the
instrument for value
Signs an instrument for the purpose of lending his name to some
other personDoes not sign for that purpose
May always show parol evidence that he is only suchCannot
disclaim/limit his personal liability as appearing on the
instrument by parol evidence
Cannot avail of the defense of absence/failure of consideration
against a holder not in due courseMay avail of said defense against
a holder not in due course
After paying the holder, may sue for reimbursement the
accommodated partyMay not sue any subsequent party for
reimbursement
Without Receiving Value therefore no value has been received for
the NI & not w/o receiving payment for lending his name
III. NEGOTIATIONSec. 30. What constitutes negotiation
Transfer: the process by w/c property is delivered by 1 person
to anotherNote: The law does not prescribe an exclusive method of
transferring negotiable instruments but only the manner in w/c
their independence of equities or defenses that might obtain
between the original parties may be preserved.
Holder the payee or indorsee of a bill or not who is in
possession of it, or the bearer thereof
Requisites to be a Holder
1. he must be the payee or indorsee of a bill or note
2. he must be in possession of it or the bearer thereof
Methods of Transferring a Negotiable Instrument
Issue the 1st delivery of the instrument, complete in its form,
to a person who takes it as a holder it is the 1st transfer of an
instrument to a payeeNegotiation Makes it possible for the
transferee to acquire a better right to a negotiable instrument
than the transferor had
Ordinarily involves indorsement so that negotiation &
indorsement are used interchangeably
Negotiation may be:
Indorsement AND delivery, or
Mere delivery w/o indorsement where the instrument is payable to
bearer
Assignment The assignee takes only the title of the assignor
The less usual method, w/c may or may not involve indorsement in
the sense of a writing on the back of the instrument
Absent an express prohibition against assignment or transfer
writing on the face of the non-negotiable instrument, the same may
be assigned or transferred
The assignee who acquired the instrument is subject to the rules
applicable to non-negotiable paper
Negotiation: the transfer of a negotiable instrument from 1
person to another made in such a manner as to constitute the
transferee the holder thereof.
It is the mode & effect of the transfer of a negotiable
instrument. There is no negotiation if the transfer does not make
the transferee the holder of the instrument
Methods of Negotiation1. Instrument Payable to Order
a. 2 steps required
i. 1st indorsement by the payee of present holder
ii. 2nd delivery to the next holder
b. The instrument must be exhibited when presented for payment
to the person from whom payment is demanded. The party paying may
thus judge the genuineness of the indorsements & of the right
of the holder to receive payment2. Instrument Payable to Bearer
a. Negotiated by mere delivery w/o indorsementb. Any person in
possession of an instrument payable to bearer is always the bearer
thereof, although he may have no legal right thereto
Payment of Instrument by Drawee not Negotiation
The bank is neither the payee nor indorsee The check is
extinguished & cannot be put in circulation again as to bind
the drawee/indorsee
The writing of the name of the holder on the back of the check
before surrendering it for payment to the drawee-bank is not an
indorsement.
Such signature merely serves as a receipt for the money
Upon payment, the check merely becomes a voucher
Payment effects a discharge of the instrument, not a transfer of
title thereto
Assignment: a transfer of the title to the instrument, w/ the
assignee generally taking only such title as his assignor has,
subject to all defenses available against his
assignorNEGOTIATIONASSIGNMENT
Refers only to negotiable instrumentsRefers generally to an
ordinary contract
The transferee is a holderThe transferee is an assignee
negotiation may be done even w/o notice to the debtorNotice must
be given to the debtor
A holder in due course is subject only to real defensesAn
assignee is subject to both real & personal defenses
A holder in due course may acquire a better title than that of a
prior partyAn assignee merely steps into the shoes of the assignor
and merely acquires whatever rights the assignor may have
A general indorser warrants the solvency of prior partiesAn
assignor does not warrant the solvency of prior parties, unless
expressly stipulated or the insolvency is known to him
May be done even w/o notice to debtorNotice must be given to the
debtor (Art.1626)
An indorser isnt liable unless there be presentment & notice
of dishonorAn assignor is liable even w/o notice of dishonor
Governed by the NILGoverned by Arts. 1624-1635 of the CC
Note: the distinction is not material if there is no defense to
the obligation & only the maker is sought to be hold
Payment by Means of Instrument Merely Conditional
payment by means of promissory notes, bills of exchange &
other NIs is subject to the condition that they be converted into
cash at maturity
Effect of Delivery of Order Instrument w/o Indorsement
The transfer operates as an ordinary assignment & the
assignee merely placed in the position of the assignor, the former
acquiring the instrument subject to all defenses, real &
personal, available against the latter.
w/o the indorsement, the transferee wouldnt be the holder of the
instrument, he not being the payee, indorsee, or bearer thereof
but the assignee acquires the right to have the indorsement of
the assignor
when indorsement is subsequently obtained, the transfer operates
as a negotiation only as of the time the indorsement is actually
made
Can there be a Negotiation to a Payee?
1. 1st Delivery of Instrument to Payeea. The payee, as 1st
holder, acquires title to the instrument not by negotiation but by
issue or issuance.b. If negotiation refers to an instrument already
completely executed/issued, then only the holders subsequent to the
payee can acquire title by negotiation.
2. 1st Delivery of Instrument to other than Payee
c. Where the delivery by the maker or drawer is made to a person
other than the payee such as an agent of the maker or drawee, the
payee acquired title by negotiation.3. Delivery of instrument to
Payee as Last Holder
d. In such a case, the indorsement of the last holder is not
necessary because the payee is remitted to his former rights &
all intervening parties are discharged from liability.Delivery of
Negotiable Instrument
1. Kinds Delivery is the transfer of ownership, actual or
constructive, from 1 person to another.2. Necessity Delivery is an
essential part of every negotiation. Indorsement means an
indorsement completed by delivery.3. Presumption Delivery is
presumed from possession. Except as against a holder in due course,
the maker/drawer may overcome this prima facie presumption of proof
that the instrument was lost or stolen Where Delivery
Conditional
1. Condition Precedent Parol evidence is admissible to show that
the instrument was to become operative as a contract only upon the
happening of a future, contingent even, since this is a condition
precedent to the attaching of any obligation under the written
instrument2. Condition Subsequent where an instrument is
unconditionally delivered as an operative contract, parol evidence
is not admissible to show a parol condition attached to the
obligation of the contractSec. 31. Indorsement; how made
Indorsement1. the writing of the name of the indorser on the
instrument w/ the intent either to transfer the title to the same,
or to strengthen the security of the holder by assuming a
contingent liability for its future payment, or both Indorsement
alone w/o delivery conveys no title & creates no holder
Indorsement means an indorsement completed by delivery
2. Involves a new contract & an obligation on the part of
the indorser an implied guaranty that the instrument will be duly
paid according to the terms thereof. By his indorsement, the
indorser becomes a party to the instrument, & may be held
liable for its payment even w/o receiving any consideration
thereofIndorsement Involves Certainty of:
1. the identity of the indorser (as being the payee or true
owner)
2. the genuineness of his signature
Note: It is the duty of the person cashing/paying on an
instrument to ascertain both before paying. But the acceptor doesnt
admit the genuineness of the indorsers signature.
Q: Who has the power to indorse?
A: the payee, or the legal holder, or by his agent
If the instrument is payable to JOINT PAYEES (e.g. A and B)
GR: an indorsement of only one of them will NOT constitute a
valid indorsement
E: the one indorseing has the authority of the other
If the instrument is payable to PAYEES IN THE ALTERNATIVE (e.g.
A or B)
Rule: either one of them may negotiate the instrument
IndorsementAssignment
Sometimes included in the term assignmentBroader term
The indorsement of negotiable instrumentThe assignment of
non-negotiable instrument
Necessity of Indorsement
1. Essential to the execution of an instrument payable to the
order of the maker/drawer2. Essential to the negotiation of an
order instrument but not of a bearer instrument
3. Not necessary to a mere assignment of a negotiable or
non-negotiable instrument. One may acquire title to such instrument
w/o indorsement but w/o indorsement of an order instrument, he
cannot be a holder in due course even though he is entitled to have
the indorsement made4. An estoppel may take the place of an
indorsement to uphold the transfer of a bill or note such as where
the indorsement is forged/unauthorized & the party against whom
the instrument is sought to be enforced is precluded from setting
up the defense of forgery or want of authority
Form of Indorsement
The law doesnt require an exclusive form by w/c an indorsement
may be accomplished
It must be written writing includes print
Place of Indorsement
1. On the instrument itself
a. Latin word indorsa = writing on the back
b. While indorsement is usually written on the back, it may be
written on the face of the instrument
c. The place is not essential
d. The law looks to the intention of the parties rather than to
the form as to indorsement
e. When it is not clear in what capacity a person intended to
sign, he shall be deemed an indorser
2. Upon a paper attached thereto
a. Where the indorsement is on a slip of paper physically
attached to the instrument so as to become part of it, the paper is
known as ALLONGEQ: May indorsement be written on an allonge where
there is still a space at the back of the instrument where
indorsement can be made?
1st view: The use of the alonge was allowable only when the back
of the instrument itself was so covered w/ previous indorsements
that convenience or necessity required additional space for further
indorsements.
2nd view: Indorsement may be made on an allonge even if there is
still space at the back of the instrument. An indorsement made at
the back of the instrument is not invalid simply because there is
still a space above the said indorsement, then why should space be
material when indorsements are on an attached piece of paper? In
neither case does the leaving of a blank space facilitate fraud,
since nobody would gain any advantage by inserting his name in the
space & rendering himself liable to those who indorsed below
him upon the note or allonge.
Sec. 32. Indorsement must be of entire instrument
GR: Indorsement must be an indorsement of the entire
instrumentE: Partial indorsement is allowed if part of the amount
has already been paid, the unpaid balance may be indorsed as this
is expressly authorized by lawIndorsement to 2 or More Indorsees
Severally
An indorsement purporting to transfer the instrument to 2 or
more persons severally doesnt operate as a negotiation of the
instrument for the cause of action is split. But the negotiation is
valid where the indorsees are joint.Sec. 33. Kinds of
indorsement
CLASSIFICATION OF INDORSEMENT
As to the methods of negotiationSpecial
Blank
As to the kind of title transferredRestrictive
Non-restrictive
As to scope of liability of indorserQualified
Unqualified/general
As to presence or absence of limitationsConditional
Unconditional
Other kinds of indorsementsJoint
Successive
Irregular/anomalous
Facultative
Sec. 34. Special indorsement; indorsement in blankSpecial
Indorsement/Specific Indorsement/Indorsement in Full the name of
the payee is specifiedForms of Special Indorsement1. one that
specifies the person to whom the instrument is payable
a. Pay to A
2. one that specifies the person to whose order the instrument
is to be payable
a. Pay to the order of Ab. Pay to A or to order
Blank Indorsement one w/c specifies no indorsee generally
consists only of the signature of the indorser
an instrument so indorsed is payable to bearer & may be
negotiated by the indorser by delivery alone regardless of whether
the instrument is originally payable to bearer or not
a thief/finder could negotiate the instrument by mere delivery
& if payment were made in good faith, the real owner wouldnt
have the right to recover from the maker/drawer
Sec. 35. Blank indorsement; how changed to special
indorsementConversion of Blank Indorsement to Special
Indorsement
an instrument payable to order on its face becomes payable to
bearer if the only or last indorsement is in blank the holder may
protect himself from liability by changing the blank indorsement to
a special indorsement
an instrument made payable to bearer by indorsement in blank may
be converted into an order instrument by writing over the signature
of the indorser in blank any contract NOT INCONSISTENT w/ the
character of the indorsement
a bearer instrument always remains a bearer instrument
negotiable by mere delivery whether the last indorsement is a blank
of special one
Sec. 36. When indorsement restrictiveRestrictive Indorsement: 1.
prohibits entirely the further negotiation of an instrument 2.
restricts its further negotiation to a particular person or for a
particular purpose
3. modifies the rights of the holders or the liabilities of the
indorser1. Limits Rights of Indorsee
by means of a restrictive indorsement, an indorser notifies all
prospective holders that the indorsee has only the authority to
deal w/ the instrument as thereby directed & that the indorsee
has only a restrictive title thereto by such indorsement, an
indorser can safeguard his interests by limiting the rights of the
indorsee whenever he should find it necessary to entrust negotiable
paper to another2. Destroys Negotiability of Instrument
Such indorsement destroys the negotiability of the instrument
& bars further negotiation to a holder in due course
A restrictive indorsee is not a holder in due course, &
defenses available against the indorser are not cut off by the
transfer of the instrument under such an indorsement, in the
absence of waiver or estoppel All subsequent indorsees acquire only
the title of the 1st indorsee under the restrictive indorsement3
CLASSES OF RESTRICTIVE INDORSEMENT
1. Prohibits Further NegotiationPay to A only
Pay to A and no other person
2. Constitutes Indorsee Agent of IndorserPay to A for
collection
Pay to A for collection & remittance
Pay to A for collection only
Pay to A for deposit
3. Vests Title in Indorsee in Trust for AnotherPay to A in trust
for B
Pay to A as trustee for B
Pay to A for my use
Pay to A for the use of B
Effect of Absence of Words of Negotiability
The instrument, originally negotiable continues to be negotiable
inspite of absence of such words in an indorsement
Pay to A = Pay to the order of A or Pay to A or order
But if in their place a restrictive word such as only is
employed so as to prevent further negotiation, the instrument is
not only restrictively indorsed but it also ceases to be
negotiable
Sec. 37. Effect of restrictive indorsement; rights of
indorseeRights of Indorsee in Restrictive Indorsement
1. receive payment on the instrument2. sue thereon in his
name
3. negotiate the instrument,
a. except when it is prohibited in the indorsement
Note: the rights of the indrosees subsequent to the 1st indorsee
are subject to the terms of the restrictive indorsementRevocation
of a Restrictive Indorsement
a restrictive indorsement may be revoked by a later indorsement
by the previous restrictive indorser title over the instrument has
been held to pass where the indorser, after his restrictive
indorsement, takes the paper and delivers it to another w/o
striking out the restrictive indorsement, or reindorsing the
paper
where the indorsement is for collecting such restrictive
indorsement is revocable at the pleasure of either party and is
revoked by a return of the paper uncollected or by a recall of the
paper by the indorser, before collection, or by the restrictive
indorsers subsequent indorsement to other indorsees for value, but
is not revoked by the indorsers death.
Sec. 38. Qualified indorsement
Qualified Indorsement: one w/c constitutes the indorser a mere
assignor of the title to the instrument
1. Words used clearly express intention
An indorsement may be qualified by adding to the indorsers
signature the words: w/o recourse, san recourse, at indorsees own
risk, indorser not holder to be enjoyed in the same manner as may
have been by me to either a blank or special indorsement.
Examples:
Pay to the order of A w/o recourse on me. (Sgd.) P
Pay to A, indorser not holder. (Sgd.) P
2. Words used do not clearly express intention
There is conflict of opinion as to whether the words I hereby
transfer and assign all my right, title & interest and other
similar words of assignment or transfer constitute an indorsement
w/o recourse.
By the weight of authority, they have been held to constitute a
negotiation & render the writer liable to an innocent holder as
an indorser & not as an assignor
It is not enough that words are used w/c simply express an
assignmentwhen an indorser intends to qualify his indorsement &
instead of using the words w/o recourse he attempts to avail of
others of similar import, those other words must be such as to
clearly express that intention.
Recourse: resort to a person who is secondarily liable after the
default of the person who is primarily liable
An Indorsement w/o Recourse does not affect the negotiable
quality of an instrument
shows only an unwillingness to be answerable for the solvency of
prior parties a prudent precaution particularly where the note has
a long time to run before it matures
Effects of a Qualified Indorsement
1. Indorser, a mere assignor the purpose of an indorsement w/o
recourse is to transfer title w/o guaranteeing payment by the
primary party
2. Indorsers liability limited it doesnt mean that the qualified
indorser incurs no liability at all; He is still secondarily liable
for breach of his warranties as an indorser under Sec. 65.3.
Negotiability of instrument not effected it is a good precaution to
indorse w/o recourse where the instrument has a long period of
maturity so that there is danger that the principal debtor might
become insolvent
Qualified Indorser Liable if the Instrument is Dishonored by
Non-Acceptance or Non-Payment Due to:
1. forgery2. lack of good title to the instrument indorsed
3. lack of capacity to contract on the part of prior parties
4. the fact that the instrument was valueless or not valid at
the time of the indorsement w/c fact was known to himNote: the
qualified indorser is not liable to the indorsee if the instrument
is dishonored for some other reason like the insolvency of the
person primarily liable
Sec. 39. Conditional indorsement
ABSOLUTE INDORSEMENTCONDITIONAL INDORSEMENT
One by w/c the indorser binds himself to pay, upon no other
condition than the failure of prior parties to do so, & of due
notice to him of such failure.One by w/c the indorser adds some
other conditions to his liability; that is, where there is some
condition in the indorsement.
Conditional Indorsement
has no effect on the further negotiation of the instrument while
a condition in the indorsement doesnt destroy negotiability, a
condition appearing on the face of the instrument (in the promise
to pay or order to pay) renders the instrument
non-negotiableCOMBINATIONS OF INDORSEMENTSEXAMPLES
1. Special & RestrictivePay to A only. (Sgd.) P
2. Special & QualifiedPay to A without recourse. (Sgd.)
P
3. Special & ConditionalPay to A if he marries before
he reaches the age of 25. (Sgd.) P
4. Blank & RestrictiveFor collection only. (Sgd.) A
5. Blank & QualifiedWithout recourse. (Sgd.) A
6. Blank & ConditionalPayable upon completion of
House in Pateros, M.M. (Sgd.) A
7. Special, Unrestrictive, UnqualifiedPay to B. (Sgd.) A
Sec. 40. Indorsement of instrument payable to bearer
Effect of Special Indorsement Where Instrument Originally
Payable to Bearer An instrument payable to bearer is not converted
into an instrument payable to order by being indorsed specially,
and therefore, the indorsee may further negotiate the instrument by
mere delivery The person indorsing specially is liable only to
those holders who can trace their title to the instrument by a
series of unbroken indorsements from such