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NEGOTIABLE INSTRUMENTS Reviewer—ATTY.

BUSMENTE SBCA 2017-2018

What is a Negotiable Instrument? Without referring to a particular country, it is that kind of currency which the law compels
a creditor to receive in payment of a debt, be it public or private, provided it is tendered in
A negotiable instrument is a written and signed instrument by the maker or drawer that the right amount.
contains an unconditional promise or order to pay a sum certain in money made payable
on demand, or at a fixed or determinable future time, to be payable to order or to bearer, All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
and where the instrument is addressed to a drawee, he must be named or otherwise Government of the Republic of the Philippines and shall be the legal tender in the
indicated therein with reasonable certainty. Philippines for all debts, both public and private.
A negotiable instrument is not a legal tender.
It is an instrument which possesses all the elements of negotiability provided in Sec. 1 of
Act No. 2031, or otherwise known as the Negotiable Instruments Law. What are the two (2) characteristics or features of negotiable instruments?

Sec. 1. Form of Negotiable instruments.—An instrument to be negotiable must conform to the 1) Negotiability—the quality or attribute of the instrument whereby it may pass from
following requirements: hand to hand similar to money, so as to give the holder in due course the right to hold
a) It must be in writing and signed by the maker or drawer; the instrument and collect the sum payable for himself free from any infirmity in the
b) Must contain an unconditional promise or order to pay a sum certain in money; instrument or defect in the title of any of the prior parties, or defenses available to
c) Must be payable on demand, or at a fixed or determinable future time; them among themselves.
d) Must be payable to order or to bearer; and
e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated 2) Accumulation of Secondary Contracts—this is the most important feature of
therein with reasonable certainty. negotiable instruments as they are transferred from one person to another. Once an
instrument is issued, additional parties can become involved.
What is a Commercial Paper?
The more debts that are added, the more advantageous it will be to the holder in due
In its broadest sense, commercial paper refers to written promises or obligations that arise course as he can proceed not only against the maker but also against all transferors.
out of commercial transactions from the use of such instruments as promissory notes and
bills of exchange. What are the matters to be considered in determining negotiability?
All such paper is either negotiable or non-negotiable. It is negotiable if it satisfies certain
formal requirements, by giving it special characteristics not possessed by other types of In determining the negotiability of an instrument, the following must be considered:
contracts. a) The whole of the instrument; (form)
b) Only what appears on the face of the instrument; (content) and
Purpose of negotiable instruments? c) The provisions of the NIL especially Sec. 1 thereof which gives the requirements
of negotiability.
The NIL was enacted for the purpose of facilitating, not hindering or hampering
transactions in commercial paper. What is a Promissory Note?

What are the functions of negotiable instruments? A negotiable promissory note is 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
1) It operates as a substitute for money; future time, a sum certain in money to another or his order or to bearer. Where a note is
2) It is a medium of exchange; drawn to the maker’s own order, it is not complete until indorsed by him. (Sec. 184)
3) It is a credit instrument that increases credit circulation; Briefly stated, it is a written promise to pay a definite sum of money to another at a definite
4) It increases the purchasing power in circulation; and time. For brevity, a promissory note is usually called a “note.”
5) It is a proof of transaction.
EXAMPLE:
Define Money
1) Payable to order:
Money commonly means cash or government bills, notes and coins, which are means to 11 September 2017
buy goods or services or to pay indebtedness; they are a medium of exchange and legal Manila
P10,000.00
tender.
For value received, I promise to pay to the order of P the sum of Ten Thousand (P10,000.00) Pesos on or
Define Legal Tender before October 31, 2017 at his house at Hillsborough, Alabang.

(Sgd.) M

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

2) Payable to bearer:
2) Payable to bearer: 11 September 2017
Manila
11 September 2017
P10,000.00
Manila
For value received, pay P or bearer the sum of Ten Thousand (P10,000.00) Pesos on or before October 31,
P10,000.00 2017 and charge the same to my account.
(Sgd.) Drawer
For value received, I promise to pay P or bearer the sum of Ten Thousand (P10,000.00) Pesos on or before To Drawee
October 31, 2017 at his house at Hillsborough, Alabang. Better Living, Bicutan

(Sgd.) M

Promissory Note and Bill of Exchange distinguished


What is a Bill of Exchange? Who are the three (3) parties to such an instrument?
A negotiable bill of exchange is an unconditional order in writing addressed by one person PROMISSORY NOTE BILL OF EXCHANGE
to another, signed by the person giving it, requiring the person to whom it is addressed to Sec. 184 Sec. 126
pay on demand or at a fixed or determinable future time a sum certain in money to order
or to bearer. (Sec. 126) It contains an unconditional promise to pay; Contains an unconditional order to pay;
There are two (2) parties on its face; There are three (3) parties on its face;
Briefly stated, it is a written order made by one person to another to pay money to a third The person who signs it is the maker; The person who signs it is the drawer;
person or his order or to bearer. For brevity, a bill of exchange is usually called a “bill.” Maker is primarily liable; Drawer is secondary liable;
The fundamental idea and purpose of a bill is that the drawer has funds in the hands of the The drawee-acceptor is primarily liable;
drawee of which the drawer wishes to avail himself. There is only one presentment for payment; There are two (2) presentments:
a) For acceptance; and
If drawn on a blank AND payable on demand, the order bill is, by definition, called a check b) For payment.
(Sec. 185). The check is the most common form of order paper.
Sec. 2. Certainty as to sum; what constitutes.—The sum payable is a sum certain within the meaning
A bill requires in its inception at least three (3) parties—the drawer, the drawee and the
of this Act, although it is to be paid—
payee—to fill the legal roles involved. a) With interest; or
b) By stated installments; or
1) Drawer—person who issues and draws the order bill. He gives the order to pay c) By stated installments, with a provision that upon default in payment of any installment or
money to a third party. He does not pay directly. of interest the whole shall become due; or
d) With exchange, whether at a fixed rate or at the current rate; or
2) Drawee—the party upon whom the bill is drawn. He is the person to whom the
e) With costs of collection or an attorney’s fee, in case payment shall not be made at maturity.
bill is addressed and who is ordered to pay. He becomes an acceptor when he
indicates a willingness to accept responsibility for the payment of the bill (Sec. The “sum certain” requirement is met if the holder can determine from the instrument
62). The acceptor has the same legal liability as the maker of a note. The drawee itself the amount he is entitled to receive at maturity.
is a bank in the case of a check.
The basic test is whether the holder can determine by calculation or computation from the
3) Payee—the party in whose favor the bill is originally drawn or is payable. Up to
terms of the instrument the amount payable when the instrument is due.
the time of acceptance by the drawee, the payee looks exclusively to the drawer.
Again, the payee, as in a promissory note, may be specifically designated, or may If the instrument calls for an act other than the payment of money, it is not negotiable
be an office or title, or unspecified. because a negotiable instrument is intended as a substitute for money.
Drawer  Drawee  Payee Interest at a fixed rate
EXAMPLE:
1) Payable to order:
EXAMPLE:
11 September 2017
Manila
P10,000.00 “I promise to pay P or order P10,000, with interest at 15% per annum.”
For value received, pay P or order the sum of Ten Thousand (P10,000.00) Pesos on or before October 31,
2017 and charge the same to my account.
(Sgd.) Drawer The entire sum is still certain because the principal sum of P10,000 is certain and the
To Drawee
Better Living, Bicutan
amount of interest due at any given time can easily be computed.

But if the promise merely states “to pay P10,000 with interest that may accrue,” the
instrument would be non-negotiable as it is lacking in a “sum certain” on its face.
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

But an order or promise to pay out of a particular fund is not unconditional.

What is the effect if the accrual/rate of interest is not specified? An instrument which mentions a particular fund out of which reimbursement is to be made
is negotiable because the order to pay is not rendered conditional. The drawee is not
If the instrument provides for the payment of interest without statin the date from which limited to the money in his hands belonging to the drawer.
interest is to run, it shall be computed from the date of the instrument, and if the instrument
is not dated, from the issue thereof (Sec. 17[b]). If there is a stipulation for the payment of In other words, the fund indicated is not the direct source of payment, but only the source
interest but the rate is not specified, it shall be the legal rate of 12% (Art. 2209, Civil Code). of reimbursement which is an act subsequent to the payment. The drawee may pay the
amount out of any fund. It is only the reimbursement that is to come from the rentals. The
Stated installments instrument is to be paid first after which the particular account indicated will be debited.

The interest and due date of each installment must be fixed in the instrument. The EXAMPLE:
instrument must state the principal amount then the division of such as well as the number
of installments and the maturity date for each. 1) Pay to the order of P P10,000 and reimburse yourself from the rentals of
my house.
Stated installments with an acceleration clause 2) I promise to P or order the sum of P10,000 to be debited with his current
account with me.
The sum is still certain although payable by stated installments with an acceleration clause, 3) Pay P or order the sum of P10,000 and charge the same to my share of the
i.e., a promise that if any installment or interest is not paid as agreed, the whole shall profits.
become due. Such a clause requires full payment of an instrument immediately upon
default on any installment. On the other hand, an instrument payable out of a particular fund is non-negotiable as it is
not payable “in any event” because the amount to be paid is made to depend upon the
Where the acceleration is dependent on the maker, then it is negotiable as the maker can adequacy or existence of the fund designated.
avoid the acceleration by paying the installments on the due date. In such a case, the payee
or holder cannot accelerate the note unless the maker fails to pay an installment. The test of negotiability in every case is said to be whether or not the instrument carries
the general personal credit of the maker or drawer. If it does, the instrument is negotiable;
However, if the acceleration is at the option of the holder, then it is non-negotiable. if it carries only the credit of a particular fund, the instrument is non-negotiable.

Stated installment with an extension clause The intention to limit payment to a particular fund must be made plain. If the language used
is ambiguous or obscure, courts usually decide in favor of negotiability.
Extension clauses are opposites of acceleration clauses. They appear in instruments with a
fixed future maturity date and provide that under certain circumstances, the date shall be Sec. 4. Determinable future time; what constitutes.—An instrument is payable at a determinable
further extended. To be negotiable, the extension must be definite. future time, within the meaning of this Act, which is expressed to be payable—
a) At a fixed period after date or sight; or
A provision for the payment of a sum in a foreign currency does not impair negotiability b) On or before a fixed or determinable future time specified therein; or
because the current rate of exchange at any given time may easily be ascertained by inquiry c) On or at a fixed period after the occurrence of a specified event, which is certain to happen,
from the banks dealing on exchange or foreign currencies and such rate is a matter of though the time of happening be uncertain.
common commercial knowledge. An instrument payable upon a contingency is not negotiable, and the happening of the event does not
cure the defect.
Exchange is applicable only to foreign bills. (see Sec. 129)
It is an essential requisite of a negotiable instrument that it must be payable at all events.
Sum to be paid with exchange Hence, an instrument which is only payable upon a contingency is not negotiable because
it does not appear on its face whether or not it will ever be paid. A note containing a
Refers to instruments that are payable in foreign currency. The exchange is the charge for provision that it may be renewed a maturity is non-negotiable because there is no
the expense of providing funds at the place where the instrument is payable to cover such unconditional promise to pay at maturity.
instrument which is issued at another place. It may be at a fixed rate or at the current rate.
The last paragraph of Sec. 4 refers to a condition or an event which may or may not happen.
Sec. 3. When promise is unconditional.—An unqualified order or promise to pay is unconditional In order that an instrument may be negotiable, there must be certainty as to the time of
within the meaning of this Act, though coupled with— payment, i.e., the payment will certainly become due and demandable one time or another,
a) An indication of a particular fund out of which reimbursement is to be made, or a particular though it may be uncertain when that time will come. And there is certainty as to the time
account to be debited with the amount; or when the instrument is payable on demand, or at a fixed or determinable future time (Sec.
b) A statement of the transaction which gives rise to the instrument. 1[c]).
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

“On or before the start of the next school semester, I promised to pay P or order
The time must be certain so that the holder will know when he may enforce the instrument; P10,000.”
when the statute of limitations will arise; the person liable, when he may be required to
pay; or the secondary parties—the drawer, indorser, or accommodation party—when his The determinable future time specified is “the next school semester.” The maker may pay
obligation will arise. before the start of the semester if he shall so choose. The phrase “determinable future time”
refers to a definite time upon or after the occurrence of an event which is certain to happen.
Provide examples of each paragraph in Sec. 4 It means a time that can be determined with certainty after the execution of the instrument.

1) Payable at a fixed time 6) Payable on the occurrence of a specified event

“I promise to pay P or order the sum of P10,000 on September 11, 2018.” “I promise to pay P or order the sum of P10,000 upon the death of his father.”

Here, the future date specified is a fixed time The instrument is negotiable because the specified event, the death of the father of P, is
absolutely certain to happen although the time of happening or occurrence is unknown or
2) Payable at a fixed period after date uncertain (see Art. 1193, Civil Code).

“On or before sixty (60) days after date, I promise to pay P or order the sum of 7) Payable after the occurrence of a specified event
P10,0000.”
“Thirty (30) days after the death of his father, I promise to pay P or order the
The date of maturity may be determined beforehand by counting sixty (60) days from the sum of P10,000.”
date of its issuance.
But a bill or note payable several days before the occurrence of the specified even it non-
3) Payable at a fixed period after sight negotiable, since the date of maturity of the instrument can only be ascertained after it has
become overdue and, therefore, the time of payment is uncertain. Moreover, the law
“Sixty (60) days after sight, pay to the order of P the sum of P10,000.” provides “on or at a fixed period after” and not “before.”

After sight means after the instrument is seen by the drawee upon presentment for 8) Payable upon a contingency
acceptance (see Sec. 143[a]), or accepted by the drawee. Here, the date of maturity may be
determined beforehand by counting sixty (60) days from the date it is presented to the “Pay to the order of P the sum of P10,000 upon his reaching the age of majority.”
drawee. Non-negotiable because the order is conditional. The payment is uncertain. P may die
before reaching the age of majority in which case the bill will never mature. It makes no
4) Payable on or before a fixed time difference that P reaches such age because the happening of the contingent event does not
cure the defect (Sec. 4, par. 2) for the character of a negotiable instrument does not depend
“On or before September 11, 2018, I promise to pay P or order P10,000.” upon future events, but solely upon its character when created.

Here, the maker has the option to pay on September 11, 2018 or before the date. The legal A contingency is, in law, an uncertain future event which may or may not happen.
right of P, the payee, is clear and certain. He can demand payment only at the time fixed
and not before. The maker has the mere option pay in advance of the legal liability if he “I promise to pay P or order the sum of P10,000 if his father should die within
sees fit. five (5) years.”

It is necessary that the year of maturity be stated, otherwise, the time of payment of the Here, the instrument is likewise non-negotiable as happening of the event within the
instrument, although payable at a certain time, is not determinable. specified time period is a contingency, and therefore, the happening of which is uncertain.
Note that if there is no length of time within which the death may take place, the maturity
“On demand or at the end of the year, I promise to pay P or order P10,000.” is a determinable future time.

Here, the payee is given unrestricted power to declare the note due at any time before Sec. 5. Additional provisions not affecting negotiability.—An instrument which contains an order
maturity. It is a contingency over which the maker has no control. The note is non- or promise to do any act in addition to the payment of money is not negotiable. But the negotiable
negotiable because it renders the time of payment uncertain. character of an instrument otherwise negotiable is not affected by a provision which—
a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity;
5) Payable on or before a determinable future time or
b) Authorizes a confession of judgment if the instrument be not paid at maturity; or
c) Waives the benefit of any law intended for the advantage or protection of the obligor; or
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

d) Gives the holder an election to require something to be done in lieu of payment of money. a lawsuit, as it cuts off all defenses, eliminates the necessity of a trial, and right of appeal. It
But nothing in this section shall validate any provision or stipulation otherwise illegal. is a written statement signed by the defendant, setting forth the basis of liability and
authorizing the entry of judgment thereon.
The general rule is that the instrument is non-negotiable if it contains a promise or order
to do any act in addition to the payment of money. It is not authorized, nor contemplated by our laws. Unless expressly authorized by statute,
they are void as against public policy because they enlarge the field for fraud, because
The law, however, gives exceptions (Sec. 5[a-d]) to the general rule. under these instruments, the promissor bargains away his right to a day in court, and
because the effect of the instrument is to strike down the right of appeal.
1) Sale of collateral securities
However, the invalidity of the provision as to the confession of judgment does not render
“I promise to pay P or order the sum of P10,000 on September 11, 2018 secured the instrument non-negotiable. It remains valid as to the amount.
by a ring I delivered to him by way of pledge and which he could sell should I fail
to pay him at maturity.” What does cognavit actionem mean?

Here, the additional act is to be performed after the date of maturity when the instrument Literally means “he has confessed action.” It is a written confession of action by the
is no longer negotiable in the full commercial sense. Until the date of maturity, the promise defendant acknowledging his indebtedness to the plaintiff after the action has been filed.
is to pay money only. A statement that an instrument is secured by a collateral, in fact, adds It is valid. It is given after the action is brought to save expenses.
to the marketability of the instrument in commerce as a substitute for money or as a credit
instrument. What does relicta verificationem mean?

2) Confession of judgment Literally means “his pleading being abandoned.” It is a confession of judgment by
withdrawal of the defense.
“For value received, I promise to pay P or order the sum of P10,000 with interest
at 15% per annum and I hereby authorize my attorney-at-law to appear in any Sec. 6. Omissions; seal; particular money.—The validity and negotiable character of an instrument
court of record after the obligation becomes due and waive the issuing and are not affected by the fact that:
service of process and confess a judgment against me in favor of the holder of a) It is not dated; or
the note for such amount as may appear to be unpaid thereon, together with b) Does not specify the value given, or that any value had been given therefor; or
costs of suit and 12% attorney’s fees, and thereupon to waive all errors in any c) Does not specify the place where it is drawn or the place where it is payable; or
such proceedings and waive all rights of appeal.” d) Bears a seal; or
e) Designates a particular kind of current money in which payment is to be made.
3) Waiver of benefit granted by law But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the
consideration to be stated in the instrument.
“Pay bearer P10,000. Notice of dishonor waived.” (see Sec. 110)
Neither does waiver of protest (Sec. 111), presentment for payment (Sec. 70), or demand Are the Place and Date essential in a negotiable instrument? What is the effect if no date is
(ibid), or exemption from attachment or execution, destroy the negotiability of an inserted?
instrument.
No. The omission of the date and place will not affect the negotiability of the instrument. In
4) Election of holder to require some other act such case, the instrument will be considered to be dated as of the time it was issued and
presumed to be paid at the maker’s or drawer’s place of business or his home.
“I promise to pay P or order P10,000 or an air conditioner at the option of the
holder.” EXAMPLE:

Here, the holder has the choice. The instrument is, therefore, negotiable as it is as good as “I promise to pay P or order P10,000 30 days after date.”
an instrument payable in money.
Here, the date of issue is necessary to determine the date from which to start counting 30
If the option is with the promissor, the instrument is non-negotiable because the holder days. Nevertheless, the instrument is negotiable although it is not dated. The holder may
cannot compel him to make payment in money. insert the true date (Sec. 13). The insertion of a wrong date, however, will not avoid the
instrument in the hands of an innocent third party who may enforce the same
What is a Confession of judgement? Is it allowed in PH? notwithstanding the improper date (Sec. 14).

A confession of judgment is an acknowledgement by the debtor of his debt to another is However, there are cases where the date is necessary to determine the date of maturity as:
justly due. It enables the holder to obtain a judgment without the delay usually incident to
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

a) Where instrument is payable at a fixed period after date or after Sec. 9.When payable to bearer.—The instrument is payable to bearer:
sight/presentment (e.g., an undated note is “payable 30 days after date); or a) When I is expressed to be so payable; or
b) Where interest is stipulated for the purpose of determining when the interest is b) When it is payable to a person named therein or bearer; or
to run (Sec. 17[c]); or c) When it is payable to the order of a fictitious or non-existing person, and such fact was
c) For the purpose of determining whether a party acted within a reasonable time known to the person making it so payable; or
in making presentment for payment. (See Secs. 70, 71, 144) d) When the name of the payee does not purport to be the name of any person; or
e) When the only or last indorsement is an indorsement in blank.
What is the effect of an insertion of a wrong date?
Sec. 10. Terms, when sufficient.—The instrument need not follow the language of this Act, but any
The insertion of a wrong date in an undated instrument by one having knowledge of the terms are sufficient which clearly indicate an intention to conform to the requirements hereof.
true date of issue or acceptance will avoid the instrument as to him or any one claiming
under him but not as to a subsequent holder in due course who may enforce the same Sec. 11. Date, presumption as to.—Where the instrument or an acceptance or any indorsement
notwithstanding the improper date. thereon is dated, such date is deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.
In the hands of a holder in due course, the date inserted, even if wrong, is to be regarded as
the true date. (Sec. 13) Sec. 12. Ante-dated and post-dated.—The instrument is not invalid for the reason only that it is ante-
dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to
The insertion of a wrong date constitutes a material alteration. (Sec. 125[a]) whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

What is the effect of omission of place? What is Ante-Dating?

Sec.1 does not require a negotiable instrument to specify the place where it is made or An instrument is ante-dated when it contains a date earlier than the true date of its
drawn or where it is payable. issuance.

However, Sec. 73 specifies where presentment for payment should be made when the place Thus, if the instrument was issued on July 30, 2016, but bears a date of July 15, 2016, it is
of payment is not specified. ante-dated.

1) An instrument is presumed to have been made where it is dated; What is Post-Dating?


2) A note that does not specify the place of payment is presumed to be payable at the
place of residence of the maker; An instrument is post-dated when it contains a date later than the true date of its issuance.
3) If the place of execution or payment is not stated, it is presumed to be the maker’s or It is just the opposite of an ante-dated instrument.
drawer’s place of business or his home.
4) Thus, if the instrument was issued on July 15, 2016, but bears a date of July 30, 2016, it is
Sec. 7. When Payable on demand.—An instrument is payable on demand: post-dated.
a) When it is so expressed to be payable on demand, or at sight, or on presentation; or
b) In which no tome for payment is expressed. Sec. 13. When date may be inserted.—Where an instrument expressed to be payable at a fixed
period after date is issued undated, or where the acceptance of an instrument payable at a fixed period
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so after sight is undated, any holder may insert therein the true date of issue of acceptance, and the
issuing, accepting, or indorsing it, payable on demand. instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument
in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded
Sec. 8. When payable to order.—The instrument is payable to order where it is drawn payable to the as the true date.
order of a specified person or to him or his order. It may be drawn payable to the order of:
a) A payee who is not maker, drawer, or drawee; or Sec. 14. Blanks; when may be filled.—Where the instrument is wanting in any material particular,
b) The drawer or maker; or the person in possession thereof has a prima facie authority to complete it by filling up the blanks
c) The drawee; or therein. And a signature on a blank paper delivered by the person making the signature in order that
d) Two or more payees jointly; or the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it
e) One or some of several payees; or up as such for any amount. In order, however, that any such instrument when completed may be
f) The holder of an office for the time being. enforced against any person who became a party thereto prior to its completion, it must be filled up
strictly in accordance with the authority given and within a reasonable time. But if any such
Where the instrument is payable to order, the payee must be named or otherwise indicated therein instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
with reasonable certainty, purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

Applies only to an incomplete instrument which has been delivered by the maker or the Thus, if M signs his name on a piece of paper and delivers it to P for the purpose
drawer to the payee or holder. of identifying or comparing it with M’s other signatures, M will not be liable even
to a holder in due course after it is converted into a negotiable instrument.
Distinction between the two (2) classes of instruments:
1) Those in which obvious blanks are left at the time they are made or indorsed, of 3) Right against party prior to completion
such character as manifestly to indicate that the instruments are incomplete
until such blanks shall be filled up; and The instrument may be enforced only against a party prior to completion if filled
2) Those which are apparently complete, containing blanks only because the up strictly in accordance with the authority given and within a reasonable time.
written matter does not so fully occupy the entire paper as to preclude the
insertion of additional words or figures, or both. If an instrument is incomplete when delivered, the holder has prima facie
authority to fill up the blanks thereon.
With respect to the first class, one who signs or indorses is liable to bona fide holders
thereof on the doctrine of implied authority, while with respect to the second class, the If a blank paper is delivered by the person making the signature, the holder has
liability for the amount of the instrument which has been increased by filling up prima facie authority to fill it up for any amount if the person making the
unoccupied spaces therein is placed upon the doctrine of negligence. signature intended to convert it into a negotiable instrument.

Rules where instrument incomplete but delivered In either case, the presumption is that the blank was filled up in accordance with
the authority given and within a reasonable time.
1) Authority to fill up the blanks
4) Right of holder in due course
The holder or the person in possession has prima facie authority to complete an
incomplete instrument by filling up the blanks therein. The defense that the instrument had not been filled up in accordance with the
authority given and within a reasonable time is a person defense. It is not
The law speaks of material particular. available as against a holder in due course.
e.g., blanks for date, due date, name of payee, even the name of the drawer,
amount, or rate of interest may be filled in. Section 14 only raises a personal defense. The rule is founded upon the principle
that where one of two (2) persons must suffer by the bad faith of another, the
loss must fall upon the one who first reposed confidence and made it possible
The authority to complete is not an authority to alter. So the holder has no for the loss to occur.
authority to change the amount after it has been filled in or to insert the words
“or order” or “or bearer” after the name of the payee. Sec. 15. Incomplete instrument not delivered.—Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands
2) Authority to put any amount of any holder, as against any person whose signature was placed thereon before delivery.

A signature on a blank paper delivered in order that it may be converted into a Applies only to an incomplete instrument and undelivered.
negotiable instrument operates as a prima facie authority to fill it up as such for
any amount. The fact that an incomplete instrument, completed without authority, has not been
delivered, is a defense even against a holder in due course.
2 requisites to fill up amount:
i. Filled up strictly in accordance with the authority given; and EXAMPLE:
ii. Within a reasonable time.
Suppose M makes a note for P10,000 with the name of the payee in blank and
EXAMPLE: keeps it in his drawer. P steals the note and inserts his name as payee and then
indorses the note to A, A to B, B to C, and C to D, a holder in due course. Can D
M delivered a blank paper containing his signature to P. enforce the note against M?

In order that P may have authority to fill it up for any amount, it must be shown No, because the law is specific that the instrument is not a valid contract in the hands of
by him that the purpose of M was to convert the said blank paper into a any holder. And the phrase “any holder” includes a holder in due course. As the signature
negotiable instrument. In the absence of such a showing, there cannot arise a of M was placed thereon before delivery, he does not assume any responsibility
prima facie authority on the part of P to fill it up for any amount. whatsoever.

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

In this case, a real defense exists. The instrument may be considered a forgery insofar as M If a complete instrument is in the hands of a holder in due course, a valid delivery thereof
is concerned since both the two steps in the execution of a negotiable instrument are not by all parties prior to him is conclusively presumed. In short, this is equivalent to saying
complied with. There is, however, a prima facie presumption of delivery, which M must that in such case, delivery is not necessary.
rebut by proof to the contrary.
When one of two (2) persons must suffer by the acts of a third, he who has enabled such
Under certain circumstances, negligence on the part of M may render him liable to a holder third person to occasion the loss must bear it.
in due course.
EXAMPLE:
The invalidity of the above instrument is only with reference to the parties whose
signatures appear on the instrument before and not after delivery. M makes a note payable to the order of P and keeps it in his drawer.

EXAMPLE: In the absence of delivery, the instrument though complete in all its particulars, there is no
contract. M does not assume any liability. P does no acquire any right against M who may
In the same example, the instrument can be enforced against P, A, B, and C revoke, cancel or tear it up with or without any reason.
because, as indorsers, they warrant that the instrument is genuine and in all
respects what it purports to be, etc. As their signatures appear on the instrument Sec. 17. Construction where instrument is ambiguous.—Where the language of the instrument is
after delivery, the instrument is valid as to them. ambiguous or there are omissions therein, the following rules of construction apply:
a) Where the sum payable is expressed in words and also in figures and there is a discrepancy
In the case of P, he is liable not merely because he is an indorser but also because between the two, the sum denoted by the words is the sum payable; but if the words are
he is the one responsible for the theft, and the completion and negotiation of the ambiguous or uncertain, reference may be had to the figures to fix the amount;
instrument. b) Where the instrument provides for the payment of interest, without specifying the date
from which interest is to run, the interest runs from the date of the instrument, and if the
Sec. 16. Delivery; when effectual; when presumed.—Every contract on a negotiable instrument is instrument is undated, from the issue thereof;
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As c) Where the instrument is not dated, it will be considered to be dated as of the time it was
between immediate parties and as regards a remote party other than a holder in due course, the issued;
delivery, in order to be effectual, must be made either by or under the authority of the party making, d) Where there is a conflict between the written and printed provisions of the instrument, the
drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to written provisions prevail;
have been conditional, or for a special purpose only, and not for the purpose of transferring the e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the
property in the instrument. But where the instrument is in the hands of a holder in due course, a valid holder may treat it as either at his election;
delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. f) Where a signature is so placed upon the instrument that it is not clear in what capacity the
And where the instrument is no longer in the possession of a party whose signature appears thereon, person making the same intended to sign, he is to be deemed an indorser;
a valid and intentional delivery by him is presumed until the contrary is proved. g) Where an instrument containing the word “I promise to pay” is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.
Applies only to a complete instrument but undelivered.
Sec. 18. Liability of person signing in trade or assumed name.—No person is liable on the
Every contract on a negotiable instrument, even if it is completely written, is incomplete instrument whose signature does not appear thereon, except as herein otherwise expressly provided.
and revocable until its delivery for the purpose of giving it effect. But one who signs in a trade or assured name will be liable to the same extent as if he had signed in
his own name.
As a general rule, a negotiable instrument like any other written contract, has no legal
inception or existence, as such, until it has been delivered in accordance with the purpose Sec. 19. Signature by agent; authority; how shown.—The signature of any party may be made by a
and intent of the parties. Without the initial delivery of the instrument, there can be no duly authorized agent. No particular form of appointment is necessary for this purpose; and the
liability thereon. authority of the agent may be established as in other cases of agency.

Delivery must be intended to give effect to the instrument. Sec. 20. Liability of person signing as agent, and so forth.—Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a
An undelivered instrument is inoperative because delivery is a prerequisite to liability. representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
However, if the instrument is no longer in the possession of the person who signed it and addition of words describing him as an agent, or as filling a representative character, without
it is complete in its terms, “a valid and intentional delivery by him is presumed until the disclosing his principal, does not exempt him from personal liability.
contrary is proved.”
When may an agent escape personal liability?

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

In order that an agent who signs a negotiable instrument may escape personal liability, the 2) The delivery of the complete instrument by the maker or the drawer to the payee
following are the requisites: or holder with the intention of giving effect to it.
1) He is duly authorized;
2) He must act within the scope of his authority; Such instrument, complete and delivered, is negotiable and may be enforced accordingly.
3) He adds words to his signature indicating that he signs as an agent, that is, for or
on behalf of a principal, or in a representative capacity; and What are the three (3) methods of transferring instruments?
4) He discloses his principal.
1) Issue—it is the first delivery of the instrument, complete in form, to a person who takes it
Sec. 21. Signature by procuration; effect of.—A signature by “procuration” operates as notice that as holder (Sec. 191); it is the first transfer of an instrument to a payee. A negotiable
the agent has but a limited authority to sign, and the principal is bound only in case the agent in so instrument’s legal life does not begin until it is issued by the maker or drawer to the first
signing acted within the actual limits of his authority. holder.

Define Procuration 2) Negotiation—the transfer of a negotiable instrument from one person to another made in
such a manner as to constitute that transferee the holder thereof. Negotiation makes
The act by which a principal gives power to another to act in his place as he could himself. possible for the transferee to acquire a better right to a negotiable instrument that the
It is ordinarily understood in the same sense as agency or proxy for the one who signs in transferor had. Whether the holder is a holder in due course depends upon factors other
merely acting as agent for another. than the fact of negotiation (See Sec. 52).

The term has a special and technical meaning. It gives a warning that the agent has but a 3) Assignment—a transfer of the title to the instrument, with the assignee generally taking
limited authority, so that it is the duty of the person dealing with him to inquire into the only such title as his assignor has, subject to all defenses against his assignor. The assignee
extent of his authority. acquires no better title or right than the assignor. Assignee merely steps into the shoes of
the assignor. Whatever defenses that were available to the assignor are also available to
EXAMPLE: the assignee.

A signature by procuration may be made as follows: Sec. 30. What constitutes negotiation.—An instrument is negotiated when it is transferred from one
Richard Deleon person to another in such manner as to constitute the transferee the holder thereof. If payable to
Per Procuration: Miguel Deleon bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.
Instead of “per procuration,” it may also be expressed as: “per pro.,” “per proc.,” “P.P.,” or
“PP.” Define Negotiation

Sec. 22. Effect of indorsement by infant or corporation.—The indorsement or assignment of the An instrument is negotiated when it is transferred from one person to another in such
instrument by a corporation or by an infant passes the property therein, notwithstanding that from manner as to constitute the transferee the holder thereof. (Sec. 30)
want of capacity, the corporation or infant may incur no liability thereon.
To determine the “manner” required for negotiation, one must examine the form of the
A promissory note was issued by the maker made payable to the order of P, an infant or instrument.
corporation. Thereafter it was negotiated to X, an innocent purchaser for value. X presented it
for payment to M. Can M raise as a defense against X the incapacity of P? If payable to order, the instrument is negotiated by indorsement and completed by delivery
(actual or constructive).
No. It is only P who raise such defense against X. Although incapacity it is a real defense, it
is personal to P. The reason behind this is because the maker of a negotiable instrument, If payable to bearer, the instrument is negotiated by delivery alone.
by making it, engages that he will pay it according to its tenor, and admits the existence of
the payee and his then capacity to indorse (Sec. 60). By such admission, M cannot raise as Define Assignment
a defense the incapacity of P to indorse.
An assignment of a bill or note merely means a transfer of the title to the instrument, with
What are the steps in the issuance of a negotiable instrument? the assignee generally taking only such title as his assignor has, subject to all defenses
available against his assignor.
There are always two (2) steps involved in the issuance of every negotiable instrument,
namely: The assignee acquires no better title or right than the assignor. Assignee merely steps into
1) The mechanical act of writing the instrument completely and in accordance with the shoes of the assignor. Whatever defenses that were available to the assignor are also
the requirements of Sec. 1; and available to the assignee.

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

What are the rights of the assignee when the order instrument is merely delivered but not
indorsed? An indorsement:
a) Must be written on the instrument itself; or
1) Assignee steps into the shoes of the assignor; and b) Upon a paper attached thereto (allonge).
2) The transferee acquires the right to have the indorsement of the transferor.
The signature of the indorser, without additional words, is a sufficient indorsement. (Sec.
What can you compel the transferor so that you can be a holder, rather than an assignee? 31)

The assignee can compel the transferor to have the instrument indorsed so that your status What is the effect/function of an indorsement?
will be elevated from assignee to holder. If you are merely an assignee, you are not a holder
in due course. It serves as a conveyance from the indorser to the indorsee.

Negotiation and Assignment distinguished What is the contract created between the indorser and indorsee by virtue of an indorsement?

NEGOTIATION ASSIGNMENT An implied contract of guarantee if primary party does not pay, the indorser or transferor
Refers only to negotiable instruments; Refers generally to an ordinary contract; can be held liable. Indorsee may run after indorser. (This is the main difference between a
Document of Title and a Negotiable Instrument)
The transferee is a holder; The transferee is an assignee;
What is the Two-Fold Purpose of Indorsement?
A holder in due course is subject only to real An assignee is subject to both real and personal
defenses; defenses; 1) The transfer of the instrument from one person to another (conveyance); and
2) The implied guarantee that the instrument will be paid in accordance with its terms
A holder in due course may acquire a better Generally, an assignee merely steps into the (implied guarantee).
title or greater rights under the instrument shoes of the assignor;
than those possessed by the transferor or a Sec. 32. Indorsement must be of entire instrument.—The indorsement must be an indorsement of
prior party; the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the
amount payable, or which purports to transfer the instrument to two or more indorsees severally,
A general indorser warrants the solvency of An assignor does not warrant the solvency of does not operate as a negotiation of the instrument. But where the instrument has been paid in part,
prior parties; prior parties UNLESS expressly stipulated or it may be indorsed as to the residue.
the insolvency is known to him;
Must the indorsement be of the entire instrument?
An indorser is not liable UNLESS there be An assignor is liable even without notice of
presentment and notice of dishonor; dishonor; and Yes, as provided by Sec. 32.

Negotiation is governed by the NIL; Assignment is governed by Arts. 1624-1635 If part of the amount has already been paid, the unpaid balance may be indorsed as this is
expressly authorized by law.
(on assignment of credits) of the NCC.
EXAMPLE:
If M has paid P4,000 of a note for P5,000 to P, the latter can indorse it to someone
else as to the balance, thus: “Pay to B P1,000.” In this case, P must acknowledge
Sec. 31. Indorsement; how made.—The indorsement must be written on the instrument itself or
receipt or payment of P4,000.
upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient
indorsement.
What if there is only one (1) payee and the amount of the note is P5,000, but the indorsement
is only for P4,000? Can this be done?
Define Indorsement
No. The instrument must be indorsed in its entirety. No partial indorsement can be done
It is the writing of the name of the payee on the instrument with the intent either:
unless the excess of P1,000 has already been paid.
a) to transfer the title to the same; or
b) to strengthen the security of the holder by assuming a contingent liability for its
What are the reasons behind Sec. 32 (indorsement must be of the entire instrument)?
future payment; or
c) both.
To avoid a (a) multiplicity of suits and the be in accordance with the (2) physical necessity
of transfer as you cannot split the instrument into two.
How do you make an indorsement?
RMD 10
NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

Sec. 36. When indorsement restrictive.—An indorsement is restrictive which either:


Sec. 33. Kinds of indorsement.—An indorsement may be either special or in blank; and it may also a) Prohibits the further negotiation of the instrument; or
be either restrictive or qualified or conditional. b) Constitutes the indorsee the agent of the indorser; or
c) Vests the title in the indorsee in trust for or to the use of some other persons.
What are the kinds of indorsements?
But the mere absence of words implying power to negotiate does not make an indorsement
1) SPECIAL INDORSEMENT—specifies the person to whom, or to whose order, the restrictive.
instrument is to be payable, and the indorsement of such indorsee is necessary to the
further negotiation of the instrument. (Sec. 34) Sec. 37. Effect of restrictive indorsement; rights of indorsee.—A restrictive indorsement confers
upon the indorsee the right:
2) BLANK INDORSEMENT—specifies no indorsee, and an instrument so indorsed is payable a) To receive payment of the instrument;
to bearer, and may be negotiated by delivery. (Sec. 34) b) To bring any action thereon that the indorser could bring;
c) To transfer his rights as such indorsee, where the form of the indorsement authorizes him
3) RESTRICTIVE—an indorsement is restrictive which either: to do so.
a) Prohibits the further negotiation of the instrument; (e.g., Pay to A
only) or But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
b) Constitutes the indorsee the agent of the indorser; (e.g., Pay to A for indorsement.
collection and remittance) or
c) Vests the title in the indorsee in trust for or to the use of some other Sec. 38. Qualified indorsement.—A qualified indorsement constitutes the indorser a mere assignor
persons. (e.g., Pay to A as trustee for P) of the title to the instrument. It may be made by adding to the indorser’s signature the words “without
But the mere absence of words implying power to negotiate does not recourse” or any words of similar import. Such an indorsement does not impair the negotiable
make an indorsement restrictive. (Sec. 36) character of the instrument.
4) QUALIFIED—a qualified indorsement constitutes the indorser a mere assignor of the title
to the instrument. It may be made by adding to the indorser’s signature the words “without Sec. 39. Conditional indorsement.—Where an indorsement is conditional, the party required to pay
recourse” or any words of similar import. Such an indorsement does not impair the the instrument may disregard the condition and make payment to the indorsee or his transferee
negotiable character of the instrument. (Sec. 38) whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing
5) CONDITIONAL—where an indorsement is conditional, the party required to pay the conditionally.
instrument may disregard the condition and make payment to the indorsee or his
transferee whether the condition has been fulfilled or not. But any person to whom an Sec. 40. Indorsement of instrument payable to bearer.—Where an instrument payable to bearer, is
instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing
to the rights of the person indorsing conditionally. (Sec. 39) specially is liable as indorser to only such holders as make title through his indorsement.

Sec. 34. Special indorsement; indorsement in blank.—A special indorsement specifies the person In such a case, the person indorsing specially is liable only to those holders who can trace
to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is their title to the instrument by a series of unbroken indorsements from such special
necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, indorser. His liability shall be that of a general indorser as provided in Sec. 66.
and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
EXAMPLE:
Sec. 35. Blank indorsement; how changed to special indorsement.—The holder may convert a M issues a promissory note payable to P or bearer and delivers it to P. To
blank indorsement into a special indorsement by writing over the signature of the indorser in blank negotiate the note to A, P has only to deliver the same to A. With or without the
any contract consistent with the character of the indorsement. indorsement of P, A becomes the holder of the instrument by its delivery
because indorsement is not necessary. (Sec. 30)
Can a blank indorsement be converted into a special indorsement?
If P indorses the instrument to A, the latter may nevertheless negotiate it by
Yes, as provided by Sec. 35. mere delivery to B. However, B will have no right against P since he (B) did not
obtain his title through the indorsement of P. But A, as indorser and M, as maker,
EXAMPLE: will be liable to B.

M issues a note to P. P indorses it in blank to B. B may convert it into a special Suppose A also indorses the note to B who negotiates the same to C by mere
indorsement by writing his name above the signature of P, provided that the delivery. The following indorsements thus appear on the back:
contract will be consistent with the character of the indorsement.

Pay to A. (Sgd.) P RMD 11


Pay to B. (Sgd.) A
NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

1) An instrument payable to bearer on its face (Sec. 9) may be negotiated by mere delivery
without indorsement (Sec. 30). In case it is indorsed, it remains a bearer instrument and
may be further negotiated by mere delivery (Sec. 40). By virtue of Sec. 48, the holder may
strike out all intervening indorsements or any of them for none of them is necessary to the
acquisition of his title.

EXAMPLE:
In this case, P is liable to A and also to B as a general indorser under Sec. 66. A is
likewise liable to B. Suppose M makes a note payable to P or bearer. The note is indorsed specially
and in succession as follows:
C obtains his title through negotiation by delivery of the instrument by B and not
through the indorsements of P and A. Hence, P and A are not liable to C. But B
would be liable to C under Sec. 65. Pay to A
(Sgd.) P
Pay to B
Sec. 41. Indorsement where payable to two or more persons.—Where an instrument is payable to (Sgd.) A
the order of two or more payees or indorsees who are not partners, all must indorse unless the one Pay to C
(Sgd.) B
indorsing has authority to indorse for the others.

When joint indorsement by all payees or indorsees not required


C, the present holder, may strike out all indorsements because they are not
There are two (2) exceptions to the rule requiring joint indorsements: necessary to his title. The instrument being originally payable to bearer on its
1) Where the payees or indorsees are partners; and face, it remains a bearer instrument in spite of the special indorsements and,
2) Where the payee or indorsee indorsing has authority to indorse for the others. therefore, may be negotiated by mere delivery.

Sec. 42. Effect of instrument drawn or indorsed to a person as cashier.—Where an instrument is If C cancels P’s indorsement, then P, whose indorsement is struck out, and A and
drawn or indorsed to a person as “cashier” or other fiscal officer of a bank or corporation, it is deemed B “indorsers subsequent to him” (P), are released from liability on the
prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated instrument. C could claim only against M, the maker. A and B are also discharged
by either the indorsement of the bank or corporation or the indorsement of the officer. from liability because they are deprived of their right of recourse against P. (see
Sec. 120[c])
Sec. 43. Indorsement where name is misspelled, and so forth.—Where the name of a payee or
indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described If C strikes out B’s indorsement, then only B will be freed from liability. (see Sec.
adding, if he thinks fit, his proper signature. 40)

Sec. 44. Indorsement in representative capacity.—Where any person is under obligation to indorse 2) An instrument originally payable to order (Sec. 8) may be negotiated only by the
in a representative capacity, he may indorse in such terms as to negative personal liability. indorsement of the payee completed by delivery (Sec. 30).

Sec. 45. Time of indorsement; presumption.—Except where an indorsement bears date after the The indorser may not strike out the payee’s indorsement. Since the instrument is payable
maturity of the instrument, every negotiation is deemed prima facie to have been effected before the to order, it cannot be validly negotiated without his indorsement.
instrument was overdue.
EXAMPLE:
Sec. 46. Place of indorsement; presumption.—Except where the contrary appears, every Suppose M issues a promissory note payable to the order of P. it is indorsed as
indorsement is presumed prima facie to have been made at the place where the instrument is dated. follows:

Sec. 47. Continuation of negotiable character.—An instrument negotiable in its origin continues to
be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. (BLANK INDORSEMENT)
(Sgd.) P
Pay to B
(Sgd.) A
Sec. 48. Striking out indorsement.—The holder may at any time strike out any indorsement which Pay to C
is not necessary to this title. The indorser whose indorsement is struck out, and all indorsers (Sgd.) B
subsequent to him, are thereby relieved from liability on the instrument.

When holder may strike out indorsement

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

In this case, the indorsement of A and B are not necessary to C’s title by virtue of Who is a reacquirer?
the blank indorsement of P. If their indorsements are cancelled, the note would
become payable to bearer as the remaining indorsement would be an A holder who negotiates an instrument and then subsequently reacquires it.
indorsement in blank. C may aver that the first blank indorser (P) refers
immediately to him. What are the limitation on renegotiation?

If A’s indorsement is stricken out, B is also relieved from liability being an In the following cases, a prior party cannot further negotiate the instrument:
indorser subsequent to A. But P’s indorsement is necessary to the title of C since 1) Where it is payable to the order of a third person, and has been paid by the
P cannot validly negotiate the note, which is payable to order, to C by mere drawer;
delivery. 2) Where it was made or accepted for accommodation, and has been paid by the
party accommodated; and
Sec. 49. Transfer without indorsement; effect of.—Where the holder of an instrument payable to 3) In other cases, where the instrument is discharged when acquired by a prior
his order transfers it for value without indorsing it, the transfer vests in the transferee such title as party.
the transferor had therein, and the transferee acquires in addition, the right to have the indorsement
of the transferor. But for the purpose of determining whether the transferee is a holder in due course, Sec. 51. Right of holder to sue; payment.—The holder of a negotiable instrument may sue thereon
the negotiation takes effect as of the time when the indorsement is actually made. in his own name; and payment to him in due course discharges the instrument.

Sec. 50. When prior party may negotiate instrument.—Where an instrument is negotiated back to Meaning of holder
a prior party, such party may, subject to the provisions of this Act, re-issue and further negotiate the
same. But he is not entitled to enforce payment thereof against any intervening party to whom he was “Holder” means the payee or indorsee of a bill or note who is in possession of it, or the
personally liable. bearer thereof entitled to receive the sum for which it calls.
The payee refers to the person to whom the instrument was originally issued by the maker
EXAMPLE: or drawer, while the indorsee, to the person to whom the instrument was negotiated by
M makes a note payable to the order of P. it is indorsed successively as follows: indorsement and/or delivery. Thus, the term “holders” includes not only persons
possessing bearer instruments, but also payees and indorsees possessing order
Pay to A instruments.
(Sgd.) P
Pay to B
(Sgd.) A Sec. 52. What constitutes a holder in due course.—A holder in due course is a holder who has taken
Pay to C
(Sgd.) B
the instrument under the following conditions: (C-O-G-I)
Pay to D a) That it is complete and regular upon its face;
(Sgd.) C
Pay to B b) That he became the holder of it before it was overdue, and without notice that it
Pay to E
(Sgd.) D has been previously dishonored, if such was the fact;
(Sgd.) B c) The he took it in good faith and for value;
d) That at the time it was negotiated to him, he had no notice of any infirmity in the
In the above example, B, a prior party, reacquires the note. He may further instrument or defect in the title of the person negotiating it.
negotiate the same to any subsequent holder. What are the kinds of defenses that are available against holders in due course?
Only real defenses.
For instance, he may indorse it to E. If several persons indorse in succession What are the kinds of defenses that are available against holders not in due course?
(successive indorsements) they are liable to each other in the order that they
indorse (Sec. 68). But in this case, B may not sue C and D to whom he was Both real and personal defenses.
personally liable before his reacquisition of the instrument. If B can hold C and
D liable in his capacity as a subsequent holder to them, then C and D should also What are the warranties where negotiation by delivery or by a qualified indorsement? (Sec.
be able to hold B, a prior indorser, liable to them. This would result in a 65)
multiplicity of actions. B’s rights would, therefore, be limited to M, P, and A. But Every person negotiating an instrument by delivery or by a qualified indorsement
C and D are not discharged from liability on the instrument; only discharged warrants:
from liability to B. a) That the instrument is genuine and in all respects what it purports to be;
b) That he has a good title to it;
E, the present holder, could have a right of recourse not only against M, P, A, and c) That all prior parties had capacity to contract;
B, but also against C and D. But if B strikes out his indorsements to C under Sec. d) That he has no knowledge of any fact which would impair the validity of the
48, and this B can do because his indorsement to C is not necessary to his title, C instrument or render it valueless.
and D will be totally released from liability.

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

But when the negotiation is by delivery only, the warranty extends in favor of no holder
other than the immediate transferee. The signature is wholly inoperative and so no right can be acquired through the forged signature.
Payment made through or under such signature is ineffectual and does not discharge the
The provisions of subdivision (c) of this section do not apply to a person negotiating public instrument.
or corporation securities other than bills and notes.
A person whose signature was forged as M, D, P, or indorsee of a note or bill never gave his
What are the liabilities of a General Indorser? (Sec. 66) consent to the contract which gave rise to the instrument. Since his signature does not appear in
the instrument, he cannot be liable thereon by anyone. It is a real or absolute defense even
Every indorser who indorses without qualification, warrants to all subsequent holders in against a holder in due course.
due course:
a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next Exception?
preceding section; and
b) That the instrument is, at the time of his indorsement, valid and subsisting. Persons precluded from setting up the defense of forgery.

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, Who are the persons precluded from setting up the defense of want of authority or forgery?
as the case may be, according to its tenor, and that if it be dishonored and the necessary Illustrate.
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. a) Those who by their acts, silence, negligence are estopped from setting up the defense of
forgery; and
Sec. 23. Forged signature; effect of.—When a signature is forged or made without the authority of b) Those who warrant or admit the genuineness of the signatures in question, namely:
the person whose signature it purports to be, it is wholly inoperative, and no right to retain the i. The indorsers;
instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, ii. The acceptors; and
can be acquired through or under such signature, unless the party against whom it is sought to enforce iii. Persons negotiating by delivery
such right is precluded from setting up the forgery or want of authority.
What is the Cut-Off Rule?
What is wholly inoperative? Is it the signature? Entire instrument?
Parties PRIOR to the forged signature are cut-off from the parties AFTER the forgery in the sense
It is the forged signature or indorsement that is made without the authority of the person that prior parties cannot be held liable and can raise the defense of forgery. The holder can only
whose signature it purports to be. The other subsisting negotiations contained in the enforce the instrument against parties who became such AFTER the forgery.
instrument is left valid and binding provided that the signatures or the indorsements are
genuine. The exception to this rule is when the prior parties are precluded from setting up the defense of
forgery either because of their warranties, representation or negligence.
Doctrine of Republic v. Ebrada case?
Assuming M makes a Promissory Note to P or his order. But A forges the signature of P payable
The existence of a forged signature in the check will not render void all the other negotiations of to himself. A to B; B to C; C to D. Can D collect from M? From whom may he claim?
the check with respect to the other parties whose signatures are genuine. It is only the
negotiation predicated on the forged indorsement or the drawer’s signature that should be D cannot collect from M. Forgery is a real defense that M may invoke against any person
declared inoperative. even holders in due course.

When signature is forged, is it totally void? How would you treat the instrument itself? D may collect from A the forger, as well as from B and C, who are the indorsers and parties
subsequent to the forgery.
It is only the forged or unauthorized signature that is declared inoperative. The rights may still
exist and be enforced by virtue of such instrument as to those whose signatures are found to be Assuming that Ilusorio was able to prove the forgery, would your answer still be the same
genuine because their signatures, as indorsers warrants that the instrument is genuine and in given the facts of the case? (Ilusorio v. CA)
all respects what it purports to be. (Sec. 66) (See Ebrada case)
No. Ilusorio is precluded from setting up the defense of forgery by reason of his negligence
What are the warranties of an indorser? of entrusting to his secretary his credit cards and checkbook, and for failing to properly
examine his monthly bank statements. The proximate cause of his loss was due to his own
An indorser warrants that the instrument is genuine and in all respects what it purports to be. negligence. Ilusorio had sufficient opportunity to prevent or detect any misappropriation
He is in effect stating that all signatures contained therein are not forged. by his secretary had he only reviewed the bank statements.

General rule regarding forged signature? What does no right to retain the instrument mean?
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

Exception to the exception—collecting bank is not liable despite having a warranty stamp
The holder who acquired the instrument on the basis of the forgery has no right or title for failure of the drawee bank to return the forged check within 24 hours, in accordance
over such instrument. with the 24-hour Clearing House Rules and Regulations (Metrobank v. FNCB)

What does “to give discharge therefor” mean? Rules on Forgery

The release of all parties, whether primary or secondary, from the obligations arising i. In all cases, the forger is liable;
thereunder.
ii. Instruments payable to bearer
What is the general rule regarding collecting banks? The liability of the maker is absolute if the instrument involved is payable to bearer.
The forgery of the indorsement is immaterial since it is negotiated by mere delivery.
The collecting bank is not liable because they are only collecting.
The exception to this rule is where the collecting bank warrants the instrument. iii. Instruments payable to order
In case of forgery of an indorsement of an instrument payable to order, it is not only
What is a Collecting Bank? the person whose signature was forged who would not be liable BUT also the parties
prior to such person. Payment under a forged indorsement is not the drawer’s order.
It is the bank of the holder or payee of the instrument. Generally, it acts as a mere collector,
except when it warrants the indorsements/signatures contained in an instrument. Sec. 24. Presumption of consideration.—Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration and every person whose signature appears thereon to have
What is a Drawee Bank? become a party thereto for value.

The bank of the drawer of the instrument. What are the presumptions provided by Sec. 24?

Difference between Collecting Bank and Drawee Bank. 1) Every negotiable instrument is DEEMED PRIMA FACIE to have been issued for a VALUABLE
CONSIDERATION; and (consideration is presumed)
As a general rule, the collecting bank is not liable on a forged check. (Jai-Alai case) 2) Every person whose signature appears thereon to have become a PARTY THERETO FOR
Exception is when they put a stamp indicating all prior or lack of indorsements guaranteed, VALUE. (holder for value is presumed)
meaning that they are estopped for warranting the indorsements on the check.
What kind of presumption is provided by Sec. 24?
Whereas for drawees, the general rule is that the drawee who has paid upon a forged
signature is held to bear the loss because he has been negligent in failing to recognize that A prima facie presumption.
the signature is not that of his client.
What does Prima Facie mean?
The only exception to this rule is when negligence can be traced back to the drawer whose
signature was forged. It means a disputable presumption; one that may be rebutted or disproved by contrary
evidence. The person assailing the presumption has the burden of disproving it.
What is the 24-Hour Clearing Rule?
It is the opposite of conclusive presumption.
The drawee bank receiving the check for clearing from the Central Bank Clearing House
must return the check to the collecting bank within the 24-hour period if the check is Define Consideration
defective for any reason. Otherwise, the drawee bank forever loses the right to claim
against the collecting bank if the check is not returned at the next clearing day or within 24 An inducement to a contract, that is, the cause, price or impelling influence which induces
hours. a contracting party to enter into the contract. It is the essential or more proximate purpose
a party has in view at the time of entering into the contract. It is different from MOTIVE
Recap of Cases which is the personal or private reasons of a party in entering into a contract.

General Rule—collecting bank is not liable (Jai-Alai v. BPI) Simply defined, consideration means any prestation sufficient to support any contract in
favor of the party to an instrument, such as the maker or indorser, and it may consist in
Exception—collecting bank is liable for having a warranty stamp (BDO v. Equitable Bank) giving, doing, or not doing.

It need not be personally beneficial to the maker/drawer as it is sufficient if the


consideration was a benefit conferred upon a third person or a detriment suffered by the
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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

promisee, at the instance of the promissor. It is enough that the obligee foregoes some right A holder of a negotiable instrument is presumed to be a holder for value until the contrary
or privilege, or suffers some detriment. is shown.

Further, a valuable consideration need not be adequate. It is sufficient if it is a valuable one. A holder for value must give consideration for the instrument. If he doesn’t give anything,
The mere inadequacy of the consideration is not a sufficient ground for relief unless there then he is not a holder for value.
is fraud, mistake or undue influence. (Art. 1355, NCC)
The holder is a holder for value only to the extent that the consideration agreed upon has
Sec. 25. Value; what constitutes.-- Value is any consideration sufficient to support a simple contract. been paid, delivered or performed. Non-performance of the obligation will give rise to
An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is partial or full defense of failure of consideration.
payable on demand or at a future time.
Illustrate “…holder is deemed a holder for value in respect to all parties who become such prior
What constitutes Value? to that time.” (Sec. 26)

Any consideration sufficient to support a simple contract. M issues a note to P without consideration. P, also without consideration, indorses it to A
who, with value, indorses it to B. B is deemed a holder for value not only as regards to A
An antecedent or pre-existing debt constitutes value, and is deemed such whether the but also to M and P.
instrument is payable on demand or at a future time. (Sec. 25)
Sec. 27. When lien on instrument constitutes holder for value.—Where the holder has a lien on the
Value and Consideration distinguished instrument arising either from contract or by implication of law, he is deemed a holder for value to
the extent of his lien.
VALUE CONSIDERATION
(or cause) What does forbearance mean?
Any consideration sufficient to support a The immediate, direct, or essential reason
simple contract. which induces a party to enter into a contract. The action of refraining from exercising a legal right, especially enforcing the payment of a
debt.

Illustrate Pre-Existing or Antecedent Debt What does lien mean?

M owes P P1,000 payable today. M fails to pay in cash. He issues a check for that amount to A right to keep possession of property belonging to another person until a debt owed by
P who accepts the check. Here, the consideration for the check is the pre-existing debt of that person is discharged.
M.
A lien is an encumbrance on one person’s property to secure a debt the property owner
If X is the debtor and he fails to pay P the amount of P1,000, the check issued by M in favor owes to another person.
of P for the benefit of X rests on a sufficient consideration, i.e., the pre-existing debt of X.
“…lien on the instrument constitutes holder for value…” (Sec. 27)—what does this phrase mean?
Does Love and Affection constitute consideration?
Where the holder has a lien on the instrument arising either from contract or by
No. If such were considered as a valuable consideration, it would be insufficient to support implication of law, he is deemed a holder for value to the extent of his lien.
any contract and it would be impossible to be enforced as between the original parties.
When do you consider a person having a lien?
One who has taken a negotiable instrument as collateral security for a debt has a lien on
Sec. 26. What constitutes holder for value.—Where value has at any time been given for the the instrument.
instrument, the holder is deemed a holder for value in respect to all parties who become such prior
to that time. If the amount of the instrument is more than the debt secured by such instrument, the
pledgee is a holder for value to the extent of his lien. He can collect the full value of the
Who is a holder for value? instrument, and apply the same to the payment of the debt but he must deliver the surplus
to the pledger.
A party for value or holder for value is one who has given a valuable consideration for the
instrument issued or negotiated to him. The holder is deemed as such not only as regards If the amount of the instrument is less than or the same as the debt secured by such
the party to whom value has been given by him but also in respect to all those who became instrument, the pledgee is a holder for value for the full amount and may, therefore, recover
parties prior to the time when value was given. (Sec. 26) all.

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

If between the pledger and the party liable on the instrument, there are existing defenses, If only a 2/3 portion of the land was delivered, there would be a Partial Failure
then the pledgee can collect on the instrument only to the extent of the amount of the debt. of Consideration which would bar recovery only pro tanto. Hence, P could
If the defenses of the party liable on the instrument are real defenses, then the pledgee can recover only 2/3 of the note as M is not liable to the extent of 1/3 which is the
recover nothing upon the instrument. price of the undelivered portion.

EXAMPLE: What is the effect of Partial Consideration?

P owes A P600. M makes a note worth P1,000 payable to the order of P. A is said The payee can only recover a proportional amount of the negotiable instrument, not the
to have a lien on the note to the extent of P600 only, and it is to that extent that whole amount.
he is a holder for value. The excess of P400 shall be returned to P.
When can you interpose the defense of lack of consideration?
What does collateral security mean?
Absence of failure of consideration is a matter of defense against any person not a holder
An instrument or property that is used to secure a payment with a condition attached that in due course.
in the event that you cannot pay, such instrument or property shall be applied.
Lack of consideration is a personal defense, as opposed to a real defense. Therefore, it
Sec. 28. Effect of want of consideration.—Absence or failure of consideration is a matter of defense cannot be interposed against a holder in due course.
as against any person not a holder in due course; and partial failure of consideration is a defense pro
tanto, whether the failure is an ascertained and liquidated amount or otherwise. What is the status when…

Absence of Consideration 1) ABSENT = VOID


2) FAILURE = VALID, but subject to remedy or rescission
A total lack of any valid consideration for the contract, in consequence of which the alleged 3) PARTIAL FAILURE OF CONSIDERATION = defense pro tanto (to a certain extent)
contract must fall.

EXAMPLE: Sec. 29. Liability of accommodation party.—An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
M makes a promissory note to P in payment for a parcel of land which does not purpose of lending his name to some other person. Such a person is liable on the instrument to a
exist. holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.
As between the parties, there can be no recovery on the note as there is absence
of consideration. Accommodation Party

But if P indorses the note to A (a holder in due course), A can recover from M One who has signed the instrument as maker, drawer, acceptor, or indorser, without
because absence of consideration is only a personal defense not available receiving value therefor, and for the purpose of lending his name to some other person.
against a holder in due course. Such a person is liable to a holder for value, notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party. (Sec. 29)
Failure of Consideration He usually expects that not he, but the accommodated party, will provide payment of the
bill or note when it falls due. He actually lends his credit to the party to whom the
The failure or refusal of one of the parties to do, perform, or comply with the consideration accommodation is made.
agreed upon. He is classified according to the accommodated party’s status. If the accommodated party
is a maker, for example, he is liable on the instrument to subsequent parties as if he were
In other words, something was agreed upon as a consideration, but for some cause, such the maker. In lending his name to the accommodated party, the accommodation party is,
agreed consideration failed to materialize. in effect, a surety for the former.

EXAMPLE: REQUISITES:

M makes a promissory note to P in payment for a parcel of land, but P failed to 1) He must be a party to the instrument, signing as maker, drawer, acceptor, or
deliver it to M because he sold it again to X who in good faith registered the sale, indorser;
there is a failure of consideration so that P cannot recover from M. 2) He must not receive any value for the instrument; and
3) He must sign for the purpose of lending his name or credit.

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NEGOTIABLE INSTRUMENTS Reviewer—ATTY. BUSMENTE SBCA 2017-2018

EXAMPLE: He impliedly agrees to take up the instrument at maturity and to indemnify the
accommodation party against the consequences of non-payment.
1) Accommodation maker—M, as accommodation party, issues a promissory note
payable to P who may then negotiate it to A. What is the relationship between accommodation and accommodated party?

2) Accommodation drawer—M, as accommodation party, signs a bill of exchange The relation between them is that of principal debtor and surety, with the accommodation
with P as payee, and P may indorse the same to A. party lending his name, being the surety of the accommodated party.

3) Accommodation acceptor—M, as accommodation party, accepts a bill drawn on Accommodation Note or Bill
him by P in favor of himself and P may indorse the same to A.
One to which the accommodation party has put his name, without consideration, for the
4) Accommodation indorser—M, as accommodation party, simply signs as an purpose of accommodating some other party who is to use it, and is expected to pay it. In
indorser in blank, the bill or note made by P in favor of A, before it is delivered other words, it is a loan of one’s credit.
to A. (Sec. 63)
“Without receiving value therefor”—what does this phrase mean? (Sec. 29)
What are the rights of an accommodation party?
This phrase only means that no value has been received for the negotiable instrument and
1) Right to revoke the accommodation; not “without receiving payment for lending his name.” The accommodation party may
2) Right to reimbursement from an accommodated party after making the receive some consideration for the use of his name. The last word “therefore” refers to the
payment; and instrument itself and not to the use of the name by way of accommodation.
3) Right to contribution from other solidary accommodation parties, if any.
Thus, if for example, M is given P1,000 in consideration of lending his name but not for the
Liability of the accommodation party promissory note he signs, M does not lose his status as an accommodation party.

Accommodation party is liable to any holder for value despite that the holder had known
him to be only an accommodation party.

In other words, the holder for value can run after the accommodation party even if the
holder knew that the accommodation party made the negotiable instrument without
consideration.

The accommodated party must reimburse the accommodation party if the latter is held
liable by the holder for value.

Rules on Solidary Accommodation Parties

A solidary accommodation party may seek reimbursement from the accommodated party
or other accommodation parties subject to the following rules:
1) A joint and several accommodation party such as an accommodation maker may
demand from the principal debtor reimbursement for the amount that he paid
to the payee; and
2) A joint and several accommodation maker who pays on the said promissory note
may directly demand reimbursement from his co-accommodation maker
without first directing his action against the principal debtor provided that:
a. He made the payment by virtue of a judicial demand; or
b. The principal debtor is insolvent.
Accommodated Party

One in whose favor a person, without receiving value therefor, signs an instrument for the
purpose of lending his credit and enabling said party to raise money upon it.

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