Académique Documents
Professionnel Documents
Culture Documents
Important provisions
Sec. 1 Elements of Negotiable Instrument
Sec. 2 certainty of the amount payable
Sec. 3 in rel. to Sec. 47 unconditional character of instrument
Sec. 4 determinable future time, fixed future time, contingency
Sec. 5 provisions that do not affect the negotiability of the instrument
Sec. 6 omissions and additions
Sec. 7 payable on demand
Sec. 8 payable to order
Sec. 9 payable to bearer
Sec. 11 presumption of date (date is presumed correct)
Sec. 12 antedate and postdate
Sec. 13 insertion of date
Sec. 14 incomplete instrument but delivered
Sec. 15 incomplete and undelivered
Sec. 16 complete instrument but undelivered
Sec. 23 forgery
Sec. 124 material alteration
Sec. 125 material alteration
Sec. 24 presumption of valuable consideration
Sec. 28 want of consideration and failure of consideration
Sec. 29 accommodation party
Sec. 30 negotiation (referring to transfer of instrument)
Sec. 33-39 kinds of indorsement eg. Blank, special, restrictive (36), qualified, conditional
Sec. 48 striking out indorsement
Sec. 52 what constitutes a holder in due course
Sec. 59
Sec. 57 rights of a holder in due course
Sec. 60 liability of a maker
Sec. 61 liability of a drawer
Sec. 62 liability of an acceptor
Sec. 65 & 66 warranties of an indorser
Sec. 70-73 presentment for payment
Sec. 89 notice of dishonor
Sec. 126 definition of bill of exchange
Sec. 184 definition of a promissory note
Sec. 185 definition of a check
It is a written contractual obligation that requires payment of money with the following essential elements:
2. contains unconditional
a. promise (for promissory note), or
b. order (for check or bill of exchange[BOE])
3. must be payable on
a. demand
b. fixed future time, or
c. determinable future time
4. payable to
a. order, or
b. bearer
UNCONDITIONAL PROMISE/ORDER
Ex:
P10,000.00
(Sgd)Amado
If it is ABSOLUTE then it is NEGOTIABLE and PAYABLE ON DEMAND
CONDITIONAL PROMISE
P20,000.00
(Sgd)Amado
If it is CONDITIONAL then it is NON-NEGOTIABLE
Ex:
P30,000.00
(Sgd)Amado
This is not negotiable because it is with condition.
Ex:
P5,000.00
(Sgd)Harry Potter
This is not negotiable because it with condition for it is dependent on the happening of an event that not sure to happen.
DEMAND (Sec. 7)
OVERDUE
NO TIME for payment is indicated
EXPRESSLY made payable on demand
EXPRESSLY
P40,000.00
NO TIME
Baguio City
19 November 2001
P40,000.00
Pay to the order of Juana forty thousand pesos.
Instrument is OVERDUE
Ex:
At the outset bill of exchange/promissory note was issued at 1 May 2001 and payable on 7 August 2001.
Notes on Negotiable Instruments 3
Atty. Abelardo Dumaguing
Baguio City
1 May 2001
P8,000.00
I promise to pay to Ana or bearer the sum of eight
thousand pesos on 7 August 2001.
(Sgd) Pablo
Sec. 47 An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or
discharged by payment or otherwise. (ex: destroying the instrument)
How to determine with reference to the happening of a specified event that is sure to happen but it cannot be known
when.
P50,000.00
I promise to pay to the order of Berto fifty thousand
pesos 1 week after his only carabao will die.
(Sgd) Harry Potter
Carabao will die specified event
P80,000.00
I promise to pay to the order of Claro eighty thousand
pesos 1 month after his only cow will die of syphilis.
(Sgd) Harry Potter
Cow will die of syphilis not sure to happen
*Day certain
PAYABLE TO ORDER
Sec. 8 Payable to
i. the ORDER of a specified person or
ii. a specified person or his order.
*Sec. 34 Indorsement
Notes on Negotiable Instruments 4
Atty. Abelardo Dumaguing
1. Fictitious
2. Expressly made payable
3. Not named
4. Indorsement in blank
5. Specified (named)
BLANK INDORSEMENT
- signature affix, written at the back of the instrument
- made by the payee who is first to indorse
CLASSIFICATIONS OF INDORSEMENT
1. Blank indorsement
- an indorsement that does not specify the indorsee
Ex:
Baguio City
22 November 2001
P50,000.00
I promise to pay to the order of Ruby the sum of fifty
thousand pesos.
(Sgd) Harry Potter
At the back
To: (Sgd)
Ruby
2. Special indorsement
- one that specifies the indorsee
Ex:
Face of instrument (same as above)
At the back
-not permitted to alter the instrument (that is: in words) to make it payable to bearer.
-impossible and illegal to make an instrument payable to bearer to become payable to order.
Notes on Negotiable Instruments 5
Atty. Abelardo Dumaguing
Sec.2 the amount payable remains a sum certain although it is to be paid with an interest by stated installments with an
acceleration clause although it is to be paid with exchange with cost of collection or an attorneys fee. (keyword: CESIA
Cost, Exchange, Stated, Interest, Acceleration)
1. with an INTEREST
-must be in writing to be binding on the debtor (Art. 1956, NCC)
2.
P12,000.00
I promise to pay to Maria or bearer the sum of twelve
thousand pesos with an interest on 22 April 2002.
Nb: 1) It must be EXPRESSLY STATED that there is payment of interest (Art. 1956, NCC)
2) If there is stipulation but no rate then legal rate of interest applies.
2. STATED INSTALLMENT
The following must be specified:
a. Amount of each installment and
b. Due date for each installment
If there is not amount and due date specified the it is NOT NEGOTIABLE because the amount will be uncertain.
PAYABLE BY INSTALLMENT
Ex:
Negotiable; amount sum certain
P20,000.00
Pay to Adquilen or bearer the sum of twenty thousand
pesos by installment as follows:
a) P3,000.00 due on 1 January 2002
b) P4,000.00 due on 2 February 2002
c) P5,000.00 due on 3 March 2002
d) P2,000.00 due on 4 April 2002
e) P6,000.00 due on 5 May 2002
NOT NEGOTIABLE
P12,000.00
I promise to pay to the order of Gandeza the sum of
twelve thousand pesos by stated installments on 1
January 2002 and 2 February 2002.
(Sgd) Harry Potter
3. ACCELERATION CLAUSE
Definition: with a provision that upon default the whole amounts shall become due.
Ex:
NEGOTIABLE
P20,000.00
Pay to Adquilen or bearer the sum of twenty thousand
pesos by installment as follows:
a) P3,000.00 due on 1 January 2002
b) P4,000.00 due on 2 February 2002
c) P5,000.00 due on 3 March 2002
d) P2,000.00 due on 4 April 2002
e) P6,000.00 due on 5 May 2002
4. EXCHANGE
-difference in value of same amount of money by different countries
Ex
US$1 and Canadian$1
(here, the US dollar is more valuable. Their difference is called EXCHANGE)
2. Current rate
-average rate that will be prevailing at the time of the transaction during a particular date.
US$2,000.00
Pay to the order of Juan de la Cruz the sum of two
thousand US dollar in Philippine peso at the current
rate of exchange.
-current rate at the time of the payment prevails (Ponce vs CA, 90 SCRA 332)
SECTION 3
-Promise is unconditional
-a mere statement on how come the instrument was issued in ONLY a statement stating WHAT TRANSPIRED between
the parties as a consequence of it the instrument was issued.
P50,000.00
I promise to pay to the order of Reynaldo the sum of
fifty thousand pesos on 5 May 2002.
This promissory note was executed by me because
of the fact that I purchased from the payee a
Mitshubishi Lancer car model 1964 with plate number
ADB398 and the aforesaid amount represents my
balance on that sale.
P50,000.00
I promise to pay to the order of Reynaldo fifty
thousand pesos after he will sell to me his car with
plate number ADB 398.
(Sgd) Harry Potter
Q: Is this negotiable?
A: It is NOT because the condition is unconditional.
-DRAWEE IS REQUIRED TO PAY BUT WHETHER HE CAN BE REIMBURSED OR NOT IS BESIDE THE POINT
P90,000.00
Pay to the order of Pedro or bearer the sum of ninety
thousand pesos and reimburse yourself out of money
which is in your custody.
-The drawee will pay whether the fund indicated is sufficient or not.
Sec. 5(d)
Holder:
1. May demand MONEY or
2. Something to be done (ie: performance of an act)
Where the holder has the option (or election to require something to be done)
Ex:
P10,000.00
I promise to pay to the order of Ruby the sum of ten
thousand pesos or deliver a carabao at the option of
the holder.
(Sgd) Harry Potter
A: The HOLDER (ie. Last indorser/bearer but never to the drawer or drawee) not the maker or payee. Even if it is a Bill of
Exchange (not the drawer or drawee)
Collateral Security
-refers to a property constituted to guarantee satisfaction or payment of obligation.
Ex:
P50,000.00
I promise to pay to the order on 5 May 2002. This
obligation is secured by a mortgage involving my car, a
Mitshubishi Lancer with plate numbe ADB 398 which
may be sold by the holder in a public auction sale and
the proceeds thereof may be applied to satisfy the
aforesaid obligation, in the event this note is not paid at
maturity.
For this purpose, I hereby appoint the holder as my
attorney in fact to undertake the public auction sale in
my behalf.
(Sgd) Harry Potter
-Any holder can make the auction
-in the event this note is not paid at maturity this is not a condition
-The car can be sold at public auction sale if note is not paid at maturity.
-Selling the car here is not a condition; it is only an option of the holder.
-Source of payment does not come from the proceed of the sale.
-Here, there is authority of the holder to sell collateral security
Ex:
P50,000.00
I promise to pay to the order of Ruby fifty thousand
pesos on 5 May 2002 after I am able to sell my
Mitshubishi Lancer Car with plate number ABD 398 in a
public auction sale to be undertaken by me or my
attorney in face.
Sec. 5 (b)
3 forms of Confession of Judgment
1. WARRANT of Attorney
2. Cognovit Actionem
3. Relicta verificationem
Warrant of attorney
-Confession of judgment made before an action filed in the court
Confession of judgment means that the obligor acknowledge his liability that may arise from the instrument.
Cognovit actionem
-one that is made after a case has been filed in court.
Relicta actionem
-similar to cognovit actionem, valid also in this jurisdiction, but here, the defendant or the respondent initially raise a
defense against a claim but later on abandons this defense.
Notes on Negotiable Instruments 10
Atty. Abelardo Dumaguing
Ex:
Defendant denying that he paid the liability, but the abandonment is tantamount to a liability.
P50,000.00
I promise to pay to the order of Ruby fifty thousand
pesos on 6 June 2002. In the event I failed to pay the
aforesaid obligation and as a consequence thereof a
case should be filed against me in court for collection
of sums of money, I hereby authorize Pedro as my
attorney in fact to acknowledge in my behalf the liability
that may arise from the issuance of this note.
(Sgd) Harry Potter
Sec. 5 (c)
-obligor = drawer/indorser in relation to Sec. 89
Sec. 89
-person secondarily liable (referring to the drawer/indorser) is entitled to a notice of dishonor.
NOTICE OF DISHONOR
-notice to be made by the holder informing the person secondarily liable the fact that the instrument was refused payment
or acceptance.
Sec. 6
1. Omissions (may be intentional or not)
2. Additions
ADDITIONS
1. seal
2. particular kind of current money which payment is to be made (ie: designating of denomination)
NOT DATED
-When the promissory note is not dated, and one does not know when it was executed, then he can put the date of issue
[Sec. 17 (c)]
PLACE (issued/drawn)
In his (obligors)
1. residence
2. place of business, or
3. in any other place where he could be found.
P80,000.
CROSSED CHECK
1. Generally crossed by 2 diagonal parallel lines at the upper left corner of the check or
instrument.
2. Specially
Baguio City
6 December 2001
Notes on Negotiable Instruments 12
Atty. Abelardo Dumaguing
P80,000.
DRAFT/BANK DRAFT
-a check drawn by one bank against another bank.
Addenda:
1) Sec. 184 Promissory Note: Unconditional promise in writing
Sec. 126 Bill of Exchange: Unconditional order
3) PN not presented
-maker, when he presents PN = payment
Sec. 126
5) Maker liable
-pay instrument according to the tenor of Sec. 60.
-person directly responsible to pay to whom instrument should be presented first
Check drawn for specific amount but not sufficiently funded with the drawee and is subsequently dishonored (bouncing
check) by the drawee.
Sec. 6 Addendum:
P100,000.00
Marlon promised to pay to the order of Reynaldo one
hundred thousand pesos with use of 100 pieces of
P100 bills.
-specify denomination but not condition simply a designation of the denomination used.
As differentiated with:
Sec. 2 amount payable is to be made in exchange (speaks of two kind of currency)
Sec. 184
To pay on
1. Demand
2. Fixed future time, or
3. Determinable future time
A sum certain in money to order or a bearer
CASHIERS CHECK
-check drawn by a cashier of a particular bank against the same bank where he is employed as a cashier.
Effect: as good as cash, but not a legal tender
Date of payment
-takes the effect of payment when encashed
MANAGERS CHECK
-check drawn by a manager of a particular bank against the same bank where he is employed as manager
-as good as cash, but not a legal tender
-takes effect when encashed
BLANK CHECK
-incomplete instrument (Secs. 14 and 15)
-the amount is not yet written
MEMORANDUM CHECK
-contains memorandum to the effect that this will be followed before encashing
-not condition
-guidelines
-written at the back on another paper attach to the check.
GUARANTEE CHECK
-issued to simply guarantee payment of an existing obligation.
ACCOMMODATION CHECK
-issued by drawer who did not receive any valuable consideration for drawing it from the payee or bearer.
Sec. 12
ANTE-DATED POST-DATED
-date earlier than the actual date of drawing or -date later than the actual date of issuance or
issuance drawing the instrument
effect: before encashing, wait for the arrival of post
date
NEGOTIATION
-refers to transfer of instrument
-purpose: makes the transferee becomes holder of the instrument as:
1. Bearer, or
2. Endorser
But, NOT if the transferee if for depositary only.
BACK
(Sgd) Juan
indorsement
SPECIAL INDORSEMENT
-if indorsee is specifically named
BLANK INDORSEMENT
last indorser
-payable to bearer
3. When it vests title to the indorsee in trust of for the benefit of other persons
ex: To: Maria in trust for my son
(Sgd) Juan
CONDITIONAL INDORSEMENT
-nothing to do with promise or order to pay
ex: To: Maria if she tops the 2001 Bar Exams (not referring with the promise to pay)
-however, the payee may disregard such condition or vice versa he may not be required to pay without the happening of
the event.
QUALIFIED INDORSEMENT
-indorsee is only an assignee of the indorser
ex: To: Maria sans (without) recourse
indorser indorses the instrument to indorsee for payment from payee, but if drawee is insolvent, indorsee has not
recourse against indorser.(but not for other reason than insolvency)
2. Instrument is payable at fixed period after sight but the acceptance is undated.
Q: What is the effect of inserting a wrong date and thereafter the instrument is negotiated in due course?
A: Sec 13. Insertion of a wrong date does not avoid the instrument but as to him that is the true date because of the right
of a holder in due course (see: Sec. 57)
before overdue
Ex: Suppose the check was issued on 1 January 2002, today is 7 January 2002, the check is already overdue
Sec. 59 Presumption: Every holder is a holder in due course (this is a disputable presumption the adverse party
may prove the insufficiency of the conditions)
See: Sec. 13
(Sgd) Marta
PNBank
wanting in any material particular (eg: the amount payable is wanting, therefore incomplete)
BUT it can be delivered (but it cannot be negotiated because the instrument is not negotiable for one of its essential
element is absent)
Notes on Negotiable Instruments 16
Atty. Abelardo Dumaguing
-The person in the possession thereof has a prima facie authority to complete it by filling up the blank therein (he is still
a possessor, not still a holder because the instrument is not yet negotiable)
ILLUSTRATION OF SEC. 14
FACE
Baguio City
10 January 2002
P__________.00
Pay to the order of Juan the sum of
_________________
(Sgd) Pedro
Land Bank
Facts:
Pedro instructed Juan to put any amount but not exceeding P40,000.00. However, Juan placed P47,000.00.
Subsequently, Juan indorsed the check to Marta.
(Sgd) Juan
Question #1
Q: As a holder (indorsee), what can Marta do with the check?
A: Marts may:
1. Indorse it further, or
2. Present the check to the drawee bank for payment
Question #2
Q: If Marta chose to present the check for payment but the bank dishonors the check, what must Marta do so that she
can recover from the persons who are secondarily liable?
A: Marta should give notice of dishonor to the persons secondarily liable [ie: 1) the drawer and 2) the drawee]
Question #3
Q: If Marta is not a holder in due course (ex: she knew of the infirmity/defect), can she enforce the check against Pedro?
A: No. She cannot enforce the instrument against Pedro because the latter can raise the personal defense that the
instrument was filled up not strictly in accordance with the authority given. The law requires that in order that the
instrument may be enforced it must be filled up with authority given and within a reasonable time.
Question #4
Q: Will your answer be the same as in the preceding question if Marta is a holder in due course (ie: she did not know that
there was infirmity/defect and if she knew, she was not a party thereor)?
A: NO. My answer will not be the same as in the preceding question. Marta can enforce the instrument as if it was strictly
filled up in accordance with the authority given and within a reasonable time. (see: last sentence of Sec. 14, NIL) [Sec.
57 Rights of holder in due course]
Notes on Negotiable Instruments 17
Atty. Abelardo Dumaguing
Marta can enforce the instrument free from defect and in its full amount of P47,000.00
Question #5
Q: Can Marta require Juan to pay P47,000.00 if the bank and Pedro do not pay?
A: YES.
Juan warrants Marta that:
1. The check is genuine and in all respect what it purports to be (ie: the amount is correct even if it was written
not strictly in accordance of the authority given)
-instrument is INCOMPLETE
-Effect of signing: the instrument is NOT a valid contract in the hands of ANY HOLDER
-the instrument cannot be enforced by the holder (nb: even holder in due course) against the person who became the
party thereto prior to delivery
ILLUSTRATION:
FACE
P80,000.00
Pay to the order of Mr. ____________________
the sum of eighty thousand pesos .
(Sgd) RUA
To: PNBank
Facts:
Because of his gross negligence, RUA lost his incomplete instrument. Amado was the finder. He (Amado) placed
his name as payee unknown to RUA.
Thereafter, Amado negotiated the check to Lito.
To: Lito
Nb: from Amado to Lito = there is a valid delivery BUT from RUA to Amado = no valid delivery.
-Lito cannot enforce the instrument against RUA if the instrument is dishonored by the bank.
Lito cannot enforce the instrument against RUA because the check cannot be valid in the hands of ANY HOLDER. Even if
Lito is a holder in due course he cannot enforce it against RUA considering that RUA was a person who place the
signature in the instrument before delivery.
FACE
P____________.00
Pay to BEARER the sum of
____________________
(Sgd) Amado
To: Land Bank
Facts:
Amado placed this incomplete instrument in his cabinet. Rey took it without the consent of Amado.
Subsequently, Rey put the amount of ninety thousand pesos. Later, Rey indorsed it to Bartolo.
Bartolo presented the instrument to the bank but it was dishonored. He gave a notice of dishonor to Rey and
Amado.
To: Bartolo
(Sgd) Rey
Sec. 40: Payable to bearer can be indorsed but it may not be necessary because Sec. 30 payable to bearer is
negotiated by delivery.
Question #1
Q: Can Bartolo require Amado to pay P90,000.00
A: NO.
Reason: The check is not a valid contract in the hands of any holder. Bartolo cannot enforce against Amado because
Amado is the person who placed his signature before delivery.
[additional facts: Rey made a SPECIAL INDORSEMENT (this made Amado a general indorser) and since Rey
indorsed it, Sec. 66 applies, otherwise, Sec. 65 applies]
Even if Rey has no valid title, as far as Bartolo is concern Rey has a valid/good title because Rey warrants this.
Amado has a real defense (ie: the instrument is NOT a valid contract in the hands of any holder) under Sec. 15.
Sec. 14 is only a PERSONAL DEFENSE (that the instrument was filled up not strictly in accordance with the
authority given)
SEC. 16 (here, no problem about the instrument for it is COMPLETE but it is UNDELIVERED)
*There must have been a delivery BUT not effectual (eg: delivery was made by a person not authorized)
Notes on Negotiable Instruments 19
Atty. Abelardo Dumaguing
-The instrument is COMPLETE but CONTRACT involving the complete instrument is INCOMPLETE if there is NO
DELIVERY.
-Any time before delivery the complete instrument does not produce any legal effect.
KINDS OF DELIVERY
1. Conditional delivery
2. Delivery for a special purpose
3. Delivery not intended to transfer title (it may transfer physical possession but not the title)
Conditional delivery
-happening of the suspensive condition the delivery becomes effectual
Q: What is the consequence if there is NO EFFECTUAL DELIVERY but it is in the hands of a holder in due course?
A: There is a conclusive presumption that there is a valid and intentional delivery by all parties prior to him (holder in due
course). [All these prior parties can be liable to a holder in due course]
TERMS in Sec. 16
1. IMMEDIATE PARTY refers to the one who knows the defect/infirmity of the instrument (this does not mean
proximity)
2. REMOTE PARTY OTHER THAT HOLDER IN DUE COURSE refers to a party who is not aware of the
defect/infirmity of the instrument (eg: one who received an instrument after overdue)
P80,000.00
Pay to the order of Juan eighty thousand pesos.
(Sgd) Pedro
To: Land Bank
Facts:
Pedro signed this instrument, put it in his cabinet and the sister of Juan took it without Pedros consent.
The sister of Juan delivered the instrument to Juan but she is not authorized by Pedro.
Later, Juan indorsed the instrument to Harry.
BACK
To: Harry
(Sgd) Juan
Harry is still an IMMEDIATE PARTY as long as he is aware that the instrument was not deliverd by Pedro (NOT
PROXIMITY)
BUT, If Harry is NOT AWARE but the check is overdue, then Harry is a REMOTE PARTY OTHER THAN HOLDER IN
DUE COURSE
Question #1
Q: As a holder in due course what may Harry do with the check?
A: Harry can 1) present the check to Land Bank for payment, or 2) indorse if further.
Question #2
Q: If Harry presents the check to the Land Bank for payment but the bank refuses to pay, what should Harry do so that he
may be able to recover?
A: Harry shall give a notice of dishonor to Pedro and Juan.
Question #3
Q: If Harry is not a HOLDER IN DUE COURSE can he require Pedro to pay P80,000.00?
A: NO.
Reason: There is no effectual delivery because the check was not delivered by or under the authority of Pedro.
Notes on Negotiable Instruments 20
Atty. Abelardo Dumaguing
Question #4
Q: Will your answer be the same as in the preceding question if Harry is a holder in due course?
A: See: Sec 16, last sentence: 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 proven.
In the hands of a holder in due course, a valid and intentional delivery is conclusively presumed to have been
made by all parties prior to him (holder in due course) [until the contrary is proven]
Question #5
Q: If Harry decides to go against Juan will the latter be liable?
A: YES.
Reason: Juan as indorser warrants that he has a good title to the check (see: Sec. 65)
P80,000.00
Pay to the order of Juan eighty thousand pesos.
(Sgd) Pedro
T: Land Bank
Facts:
Pedro instructed Juan to indorse this check until such time the latter will be able to complete the construction of
Pedros house.
Construction has never started when Juan indorsed the check to Ruby.
Subsequently, Ruby indorsed the check to Clara.
BACK
To: Ruby
(Sgd) Juan
To: Clara
(Sgd) Ruby
Question #1
Q: If Clara is not a holder in due course can she require Pedro to pay after giving him notice of dishonor?
A: NO.
Pedro has a personal defense that there was no effectual delivery of the instrument considering that delivery was
conditional and the suspensive condition was not fulfilled. (Juan was not acting under the authority of Pedro).
Question #2
Q: Will your answer be the same as in the preceding question if Clara is a holder in due course?
A: NO. My answer is not the same as in the preceding question because Clara can require Pedro to pay because the law
provides that when the instrument is in the hands of a holder in due course a valid and intentional delivery by all
parties prior to him (holder in due course) so as to make them (prior parties) liable to her, is conclusively presumed.
(Clara holds the instrument as though there was a valid delivery from Pedro, Juan and Ruby)
Question #3
Q: As a holder in due course, can Clara require Juan to pay?
A: YES. Clara can require Juan to pay (*warranty of Juan extends beyond Ruby)
[See: Sec. 66, opening sentence (every indorser who indorses without qualification, warrants, to all subsequent
holders in due course ) in relation to Par(b) of Sec. 65 (that he has a good title to it)]
Juan is a general indorser and he warrants ALL SUBSEQUENT HOLDERS IN DUE COURSE that he has a good
title.
Question #4
Q: If Clara fails to find Pedro and Juan, can she require Ruby to pay?
A: YES. Clara can require Ruby to pay because the latter is a general indorser and such she warrants that the check is
genuine.
Notes on Negotiable Instruments 21
Atty. Abelardo Dumaguing
NOTES:
-Check is complete, therefore, negotiable.
-Delivery is conditional (ie: construction)
-The suspensive condition was not fulfilled, therefore, the delivery is NOT EFFECTUAL.
Juan was not acting under the authority of Pedro because of the non-fulfillment of the obligation, therefore, no
effectual delivery to Ruby (as far as Pedro is concern)
SEC. 14 vs SEC. 15 vs SEC. 16
Sec. 14 Sec. 15 Sec. 16
1. INCOMPLETE instrument but DELIVERED. 1. INCOMPLETE instrument but UNDELIVERED. 1. COMPLETE instrument but UNDELIVERED
2. A Personal Defense (can be availed of only as against 2. A Real Defense (can be availed of even as against a 2. A Personal Defense (can be awaited of only against a
a holder who is NOT a holder in due course). holder in due course) holder who is not a holder in due course).
3. DEFENSE: That the instrument was filled up NOT 3. DEFENSE: That the instrument is NOT A VALID 3. DEFENSE: That there is NO EFFECTUAL DELIVERY
STRICTLY in accordance with authority given and with a CONTRACT in the hands of any holder. of the instrument because:
reasonable time.
a) The delivery was conditional and the
suspensive condition was not fulfilled.
OR
b) The delivery was special purpose only
and the instrument was not intended to be
negotiated.
4. Cannot be enforced by one who in not a holder in due 4. Cannot be enforced even by one who is a holder in 4. Cannot be enforced by one who is NOT A HOLDER IN
course. due course. DUE COURSE.
Against whom? Against a person who placed his Against whom? Any person who became a party prior to Against whom? Person who placed his signature before
signature thereon prior to the completion. completion or delivery. delivery of instrument.
5. In the hands of a holder in due course, the instrument 5. In the hands of any holder, the instrument is not a valid 5. In the hands of a holder in due course, a valid and
is AS IF it was filled up strictly in accordance with the contract. intentional delivery by all parties prior to a holder in due
authority given. course is conclusively presumed. All such prior parties
may be liable to the holder in due course.
-if the drawee bank pays then I cannot debit against the drawers (whose signature was forged) account.
Nb: the instrument can still be validly negotiated but ONLY the forged signature is rendered INOPERATIVE.
2. The subsequent indorser (he is an indorser who makes his indorsement after forgery is committed. (also
precluded from setting up forgery as a defense.)
Reason: The indorser warrants (Secs. 65 and 66)
3. The acceptor/drawee who accepts an instrument where the signature of the drawer was forged (also precluded
from setting up forgery as a defense.)
See: Sec. 62
FORGERY
Payable to ORDER
Forgery in the signature of the drawer is a real defense by the DRAWER.
Drawers defense: that the forged signature is rendered wholly inoperative (ie. He [the drawer] will never be liable in that
forged signature)
Forgery in the signature of the payee is a real defense by BOTH the drawer and payee (or original indorser).
Drawers defense: that he is not liable because of lack of valid indorsement by the payee.
(NB: In an instrument that is payable to order, a valid indorsement by the payee is necessary to negotiate the instrument,
sec. 30)
Face
P80,000.00
Pay to theORDER of Amado eighty thousand
pesos.
(Sgd)
Pedro
To: PNBank
This instrument was forged by Amado.
Back
To: Bella
(Sgd
) Amado
To: Harry
(Sgd
) Bella
QUESTIONS:
1) If the bank dishonors the check and H gives notice of dishonor to Pedro, is the latter liable?
Ans: No. The forged signature is wholly inoperative. (real defense)
Pedro will never be liable for that signature because Harry did not acquire any right to enforce payment of the
instrument, based on that signature, against the person whose signature was forged. (NB: even if you are a holder in due
course)
2) If Harry gives notice of dishonor to Amado, can Harry recover from the former?
Ans: Yes. Reason: he is a forger and as such he is precluded from setting up forgery or want of authority as a defense.
As a general indorser, he warrants under Art. 66 that the signature is genuine and in all respects what it purports
to be
Forged instrument in hands of a HOLDER IN DUE COURSE cant be enforced for payment.
NB: When the payees signature was ONLY forged, the payee and the drawer can still avail of the real defense. Reason:
No valid indorsement by the payee.
(see: sec. 30 indorsement + delivery)
Face
P80,000.00
Pay to theORDER of Juan eighty thousand pesos.
(Sgd)
Berto
To: Land Bank
Back
To: Pablo
(Sgd
) Juan
To: Harry
(Sgd
) Pablo
This payees (aka orginal indorser) signature is forged by Pablo.
QUESTIONS:
1) If The bank does not pay Harry and Harry gives notice of dishonor (NOD) to Berto, is the latter liable?
Ans: NO. Berto can set up the real defense that the forged signature of Juan (payee) is wholly inoperative (that is using
the payees forged signature as a real defense).
Berto is not made liable even to a HOLDER IN DUE COURSE bec. of lack of valid indorsement by the payee.
Face
P60,000.00
Pay to REY or BEARER sixty thousand pesos.
(Sgd)
Pablo
To: PNBank
Back
To: Pedro
(Sgd
) REY
To: Harry
(Delivered by) Pedro
this signature was forged by Pedro
not by indorsement bec. this is a bearer instrument.
NOTE: Under 30, there is no need to indorse the bearer instrument. Negotiation is made by delivery only.
However, under 40, the bearer instrument may be indorsed.
NB: Forgery anent indorsement of the payee is IMMATERIAL or IRRELEVANT (reason: bec. indorsement is not needed in
b.i.).
The bearer/holder acquires title even sans indorsement.
In order instrument, valid indorsement by the payee is necessary to the title of the holder.
QUESTIONS:
1) If the bank does not pay Harry, and Harry gives NOD to Pablo, is the latter liable?
Ans: YES. Pablo is liable to Harry. Pablo cant use forger as a defense bec. the FORGERY is IRRELEVANT.
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then
capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to
its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the
instrument an express stipulation negativing or limiting his own liability to the holder.
2) If Harry gives a NOD to Rey, can Rey avail of the defense of forgery to defeat the claim of Harry?
Ans: NO. Forgery in the indorsement is IRRELEVANT or IMMATERIAL to the title of Harry bec. Harry acquires title even
with or without indorsement for bearer instrument need not be indorsed.
BEARER INSTRUMENT
Face
P60,000.00
Pay to JUAN or BEARER sixty thousand pesos.
(S
gd) Pedro
To: LandBank
this signature was forged by Juan.
Back
To: Nena
(Deli
vered by) Juan
To: Harry
(Delivered by) Nena
QUESTIONS:
1) If the bank does not pay and Harry gives NOD to Pedro, is the latter liable?
Ans: NO. Perdo can set up a real defense that the signature is wholly inoperative, and this does not make Pedro liable.
The Holder did not acquire any right to enforce payment of the instrument against Pedro.
NOTE: The question here is not of forgery (in 23) but of warranty (in 65). Even if there is forgery, forgery cant always
be availed of as a defense.
Face
P60,000.00
Pay to JUAN or BEARER sixty thousand pesos.
(S
gd) Pedro
To: LandBank
this signature was forged by Juan
Back
To: Nena
(Sgd)
Juan
To: Harry
(Deliv
ered by) Nena
QUESTIONS:
1) If the bank does not pay and Harry gives NOD to Pedro, is the latter liable?
Ans: NO. Perdo can set up a real defense that the signature is wholly inoperative, and this does not make Pedro liable.
The Holder did not acquire any right to enforce payment of the instrument against Pedro.
Apply 40; do not apply 65 bec. it was NOT negotiated by delivery only; see: 66 is applicable but 40 is MORE
PARTICULAR.
Juan is liable as indorser to ONLY such holder as make title through his indorsement, that is TO NENA ONLY.
40 last sentence vs 65 last paragraph : similarity in immediate transferee but different in reasoning.
DOCTRINE IN FORGERY
1) San Carlos Milling Co. vs BPI, 59 P 59
Face
US$10,000.00
Pay to the order of San Carlos Milling Co
(Sg
d) Baldwin
To: BPI
Forged by Dolores
Back
To: Hongkong and Shanghai Bank (HSB)
(Sgd) Dolores in
behalf of SCMC
DOCTRINE:
A bank (drawee bank) is BOUND to know the signature of its depositors (ie. The drawers). If it pays a forged check
(forged signature of the drawer), it is considered as making payment out of its own funds and cannot debit the amount so
paid against the account of the depositor(drawer) whose signature was forged.
Eg: BPI cannot debit the amount so paid against Baldwin account.
Face
P2,000.00
Pay to the order of MELICOR
(Sgd)
GELAC
To: PNBank
Back
To: Maasim
(Sgd)
MELICOR
To: HSB
(Sgd)
Maasim
this check was drawn by GELAC involving payment of insurance proceeds for MELICOR.
This check was lost and Maasim had possession of the check and tried to make it appear that it was indorsed to him by
MELICOR.
Maasim deposited the check to HSB and the amount was allowed to be credited in Maasims account, and so he was
allowed to withdraw amount.
DOCTRINE:
When a check is payable to the order of a person and it is presented for payment BY ANOTHER it is the duty of
the bank to see to it that the check was duly indorsed by the original payee. (Reason: no valid indorsement)
So, PNB should see to it that MELICOR made a valid indorsement. It cannot debit against the account of
GELAC.
Face
(Sgd) J.
Klar
in behalf of
the PANTRANCO
To: PNB
This was forged
Back
To: Motor Service
(Sgd)
IARS
by
unknown person
To: Natl City Bank of New York (NCBNY)
(Sgd)
Motor Service
There was negligence on the part of PNB bec. it failed to see to it that the signature of J. Klar is GENUINE. So, PNB is
guilty of CONSTRUCTIVE NEGLIGENCE by not ascertaining of its drawers/depositors signature is genuine or forged.
Motor Service was negligent bec. it accepted indorsement of UNKNOWN PERSON. It should ascertain his identity. So, it
was guilty of ACTUAL NEGLIGENCE in accepting check from persons whose identity remains unknown.
SC: PNB can go against Motor Service and let Motor Service to go against the unknown person.
Face
Back
To: Manuel Go
(Sgd)
M. Pulido
To: Lim
(Sgd)
M. Go
To: PCIB
(Sgd)
Lim
Managers and Auditors signature were forged (this check was lost)
2 months before PCIB went to PNB. GSIS has already notified PNB to stop payment bec. GSIS said that the check was
forged (lost).
But PNB still paid bec. of the ANNOTATION: PCIB guaranteed that the indorsement were GENUINE but not the
signature.
DOCTRINE
a person who takes a check or purchases draft is bound to satisfy himself that the check he is taking is genuine,
and by putting it into circulation, or by presenting it for payment or by indorsing it, he impliedly asserts that he has
performed his duty.
Face (GENUINE)
Pay to A or ORDER
(Sgd)
Y
To: Bank
Back (FORGED)
To: B
(Sgd)
A
(Sgd)
B
B is the holder.
if B purchases a draft, B should believe in good faith that the check in his possession is genuine.
Doctrine in GELAC is not applicable but the doctrine in Rep Bank vs Ebrada does not mean abandonment of ruling in
GELAC case.
6)
Face
P10,000.00
Pay to the order of Inter Island Gas Services, Corp
(IGSP)
(Sg
d) DD
To: VB
10 different drawers in various drawee banks
Back
To: Jai Alai
(Sgd)
IGSCorp
(by A.
Ramirez)
To: BPI
(Sgd)
Jai Alai
BPI credited amount of checks to the account of Jai Alai; VB does not pay.
NOTE: The payee is corporation a corporation can act only through its Board of Directors. The Board can authorize any
of the corporate employees or officers to act for in its behalf.
DOCTRINE:
A person taking a check of corporation (which can act only through its Board of Directors) does so on his own peril when
the one who indorses in behalf of the corporation was in fact not authorized.
If you are the holder, you cannot compel the drawee to pay BUT go against the indorsee, or the person who appear to
be secondarily liable.
7) PNB vs CA (1997)
Face
P80,000.00
Pay to the order of Ana eighty thousand pesos.
(Sg
d) Pedro
To: X Bank
This signature was forged.
Back
To: Y Bank (indorsee)
(Sgd) Ana
(indorsed check to
Y Bank [indorser])
NOTE: X Bank is the drawee bank, Y Bank is the collecting bank (where the payee deposits/indorses the check)
Similar to Rep. Bank vs Ebrada case/doctrine.
DOCTRINE:
A collecting bank incurs the liability of the indorser (warrants the check is genuine)
MATERIAL ALTERATION
It is any unauthorized change in the instrument.
It includes:
a) Change in the amount payable.
b) Change in the maturity date.
c) Change in the number or relation.
d) Change in the nature of the instrument.
e) Adds interest when in fact not stipulated.
AVOIDED void as far as the person who did not make or authorized or has assented to the alteration is concern.
You cannot enforce as to the alteration but you can as to the original tenor.
Real defense
You cannot use your unlawful act as a defense
Assented eg. First you did not know the alteration then later you knew, so, you assented.
As a drawer Danny issued a check to Pablo in the amount of P69,000.00. Without any authority from Danny, Pablo (the
payee) changed the amount of P69,000.00 to P77,000.00.
Pablo indorsed the check to Indong. Later, Indong indorsed it to Harry.
Subsequently, Harry presented the check for payment by PNBank (the drawee bank. The bank dishonored it.
QUESTIONS:
1) If Harry will give NOD to Danny, is the latter liable to pay P77,000.00?
Ans: NO. Danny is not liable to pay the P77K bec. as far as he is concern the instrument is AVOIDED. He did not
authorize or assent to the alteration.
Primary reason: Pablo is liable to pay P77K bec. the law provides that the instrument can be enforced against the party
who made the alteration. The general rule is that the instrument is avoided except to the one who made or is not
authorized to make the alteration. Here, Pablo falls under the exception.
Pablo as an indorser warrants to all subsequent holders that the instrument is genuine and in all respects what it
purports to be.
4) What if Harry gives NOD to Indong, is the latter liable to pay P77K?
Ans: YES. Indong is liable to pay P77K bec. under the law a subsequent indorser is liable in material alteration.
YES. Indong is liable to pay P77K. As a subsequent indorser, Indong is liable bec. he warrants that the instrument is
genuine and in all respects what it purports to be.
5) Assuming that Indong and Pablo are not in the country and Harry badly needs money and wants to recover from the
drawer, can Harry as HDC recover the amount other than P77K from Danny?
Ans: YES. As HDC Harry can recover the amount of P69K ONLY from Danny bec. the HDC can enforce the instrument
according to its original tenor.
Face
US$79.00 (to US$39,000.00)
(Sgd) Luis
Gonzalez (Ambassador)
To: PNBank
this was altered.
Back
To: Banco Atlantico de Espanyol
(Sgd) Azucena
Pace
Banco Atlantico presented this for payment by the PNB (before this BA allowed AP to withdraw the amount even without
clearing.
SC: BA cannot recover bec.since the 3 checks were fraudulently altered they are rendered wholly inoperative. (acc. to
AD wholly inoperative is for forgery, so this is a wrong reasoning)
Accommodation indorser
Accommodation acceptor eg. A bank who pays your payee even if you do not have any deposit in the bank but you have
a good credit. Reason: bank did not receive any valuable consideration.
One remains an AP even if he receives payment bec. of the good name he lends.
What matters is he received nothing for being a drawer.
lending name or good credit
NB: An accommodation party is liable to a HOLDER FOR VALUE (HFV)
Illustration:
Without receiving valuable consideration from Nena, the drawer Pedro issued a check to the former. Nena
indorsed this check to Clara for payment of services rendered by Clara (HFV) to Nena. The amount of the check is
P10,000.00.
Clara presented the check for payment by the drawee bank but was dishonored. As consequence, Clara gave
NOD to Pedro and another notice to Nena.
QUESTIONS:
1) Can Clara require Pedro to pay P10,000.00?
Ans: YES. Pedro is liable to a HFV.
2) Suppose Nena paid P3.00 to Pedro for the latters good credit which he lent to the former, will your answer be the same
as in the answer in question number 1?
Ans: YES. See: 29 - notwithstanding such holder at a time of taking the instrument knew him to be an accommodation
party.
1. Want of consideration
2. Failure of consideration
3. Partial failure of consideration
***all of them are PERSONAL DEFENSES
Want of consideration
- the parties did not contemplate of intend a value or valuable consideration for the issuance or indorsement of the
instrument.
Failure of consideration
- If the parties agreed on a consideration for the issuance or indorsement of instrument but that, which was stipulated, did
not materialize then this is called failure of consideration.
Illustration:
Juana was a drawer of a check containing the amount of P100,000.00 which is made payable to the order of
Jose. Juana issued this check to Kose with the understanding that Jose will deliver 10 carabaos to Juana. Jose indorsed
the check to Harry who is a HDC.
The drawee bank PNB did not pay the check upon presentment by Harry.
QUESTIONS: (assume that in Q1 and Q2 no carabao was delivered)
1) Can Harry require Juana to pay P100,000.00?
Ans: YES. Failure of consideration is a personal defense and so that is not available to Juana against a HDC.
3) Suppose only 3 carabaos equivalent to P30K were delivered by Jose to Juana, can Harry who is not a HDC require
Juana to pay P100,000.00?
Ans: NO. Juana has a defense PRO TANTO against the holder who is not a HDC.
Sec. 60
Illustration:
Amado issued a promissory note payable to the order of Rey P20K. Rey indorsed this to Ronnie. Ronnie
presented this note for payment by Amado. Amado refused to pay bec. he contends that Rey is insane an so he could not
incur liability.
Is the contention of Amado tenable or not?
NOT tenable.
See: 60. The maker by making the instrument engages to pay according to its original tenor. The maker
ADMITS the existence of the payee and his then capacity to indorse.
Amado has admitted that Rey has the capacity to indorse. He is already precluded form contending the legal
capacity of the payee.