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Negotiable Instruments Law (Aquino and Agbayani Notes) 1 Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
CHAPTER 1: GENERAL CONSIDERATIONS

WHAT IS A NEGOTIABLE INSTRUMENT? It is a written contract for the payment of money which is intended as a substitute for money and passes from one person to another as money, in such a manner as to give the holder in due course the right to hold the instrument free from defenses available to prior parties. The instrument must comply with Section 1 of the negotiable Instruments Law. Governing Law: ct !"#1 $%egotiable Instruments Law&
Impliedly repealed the 'ode of 'ommerce e(cept on provisions that are not inconsistent with the %IL )e.g. rule on crossed chec*s+
APPLICABILITY OF THE NIL The provisions of the %IL are only applicable if the instrument involved is negotiable. ,therwise, the %IL can only be applied by analogy.
FUNCTIONS OF NEGOTIABLE INSTRUMENTS: (SEC-PF)
1. 2. 3. 4. 5.
Subst tut! for -oney -edium of E"#$%&'! 'redit instrument which increases #(!) t # (#u*%t +& Increases the ,u(#$%s &' ,+-!( in circulation P(++. of transactions
N+t!s +& L!'%* T!&)!(: .efinition: offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force. %egotiable instruments are not legal tender. ,nly notes and coins issued by the /S0 are considered legal tender. 'hec*s are declared by law not to be legal tender and creditors cannot be compelled to accept chec*s in payment of obligations Exceptions: 1. !. The obligation is deemed paid if the chec* has been cleared and credited to his account. Impairment due to the fault of the creditor.
MAIN FEATURES OF NEGOTIABLE INSTRUMENTS: . %egotiability 1 llows negotiable instruments to be transferred from one person to another so as to constitute the transferor a holder )a holder in due course+. 1 Such feature gives the negotiable instrument freedom as substitute for money. /. 1 ccumulation of Secondary 'ontracts 2hen negotiable instruments are transferred through negotiation, secondary contracts are accumulated because the indorsers become secondarily liable not only to their immediate transferees but also to any holder. It thus provides for greater security in dealing with such instruments.
/INDS OF NEGOTIABLE INSTRUMENTS B ** +. E"#$%&'!: an unconditional order in writing, addressed by one person to another, signed by the person giving it, re3uiring the person to whom it is addressed to pay on demand or at a fi(ed or determinable future time a sum certain in money to order or to bearer. 'ommonly termed a draft. It is used to designate bills of e(change that are used in trade of goods. -ay be an inland bill or a foreign bill. 1. Inland /ill: drawn and payable in the 0hilippines. !. 4oreign /ill either drawn or payable abroad. 'hec*s: a bill of e(change drawn on a ban* and payable on demand. ORDINARY BILL OF E0CHANGE %ot drawn on deposit. It is not necessary that the drawer of a /,5 should have funds in the hands of the drawee. .eath of the drawer of a /,5 with the *nowledge of the ban*, does not revo*e the authority of the ban*er to pay. -ay be presented for payment within a reasonable time after its last negotiation. CHEC/ It is necessary that a chec* is drawn on a deposit. ,therwise, there would be fraud. .eath of *nowledge the ban*er -ust be reasonable the drawer of a chec*, with the by the ban*, revo*es the authority of to pay. presented for payment within a time after its issue.
P(+1 ss+(2 N+t!s: negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the ma*er, engaging to pay on demand or at a fi(ed determinable future time, a sum certain in money to order or to bearer. 2here a note is drawn to the ma*er6s own order, it is not complete until it is indorsed by him. .ean Sundiang: when the situation contemplated in the last sentence occurs, the person who signs assumes to personalities 7 both as a ma*er and as an indorser. In what capacity is he then liable8 In such case, he becomes liable as a ma*er. The re3uirement of having to indorse does not deviate his very capacity as the ma*er of the instrument. 4urthermore, the ma*er has a more onerous liability compared to that of an indorser. B **s t(!%t!) %s N+t!s (S!#3 145) 1. 2hen the drawer and the drawee are the same person. !. The drawee is a fictitious person. #. The drawee has no capacity to contract. /ills vs. %otes PROMISSORY NOTE 'ontains an unconditional promise. There are ! parties on its face The person who signs it is the - 95:. The person who signs it is 0:I- :IL; LI /L5 The person primarily liable is the ma*er There is only one presentment: for payment. BILL OF E0CHANGE 'ontains an unconditional order. There are # parties on its face. The person who signs it is the .: 25: The person who signs it is S5',%. :IL; LI /L5 The person primarily liable is the .: 2551 ''50T,: There are ! presentments: 1. 4or acceptance !. 4or payment
PARTIES TO NEGOTIABLE INSTRUMENTS 0arties to a 0romissory %ote 1. !. -a*er: 0erson who promises to pay according to the tenor of the note. 0ayee: 0erson who is to receive payment from the ma*er.
0arties to a bill of e(change 1. !. .rawer: 0erson who draws the bill and orders the drawee to pay a sum certain in money. .rawee: the one being commanded to pay the bill. %,T5 <,25=5:, the drawee only becomes party to the transaction upon acceptance of the /,5. ,therwise, he is not liable at all.
,ther 0arties to a %egotiable Instrument: 1. !. #. Indorser: 0ersons who transfer the instrument through indorsement and completed by delivery. <older: 0ayee or indorsee of a bill or note who is in possession of it or the bearer thereof. /earer: person in possession of bill or note which is payable to bearer.
NEGOTIABLE INSTRUMENTS 6S3 NON-NEGOTIABLE INSTRUMENTS: DISTINCTIONS AND NOTES ,nly negotiable instruments are governed by the %IL. The application of %IL to non1negotiable instruments is only by analogy. %egotiable instruments can be transferred by negotiation or assignment. %on1negotiable instruments can only be transferred through assignment. The transferee of a non1negotiable instrument can never be a holder in due course> only an assignee. ll defenses available may be raised against the last transferee. INCIDENTS OR STAGES IN THE LIFE OF A NEGOTIABLE INSTRUMENT
1. P(!,%(%t +& %&) s '& &' complete with all the re3uisites provided for in Section 1 of %IL. 2. Issu%&#!: first delivery of the instrument to the payee )from ma*er to payee?bearer or from
drawer to the payee?bearer+.
3. N!'+t %t +&: transfer from one person to another so as to constitute the transferee a holder. 4. P(!s!&t1!&t .+( %##!,t%&#! for certain *inds of /,5 7 the bill of e(change shall be presented
to the drawee so that the latter will signify his agreement to the order of the drawer to pay.
5. A##!,t%&#!: written assent of the drawee to the order )act which ma*es the drawee a party to
the instrument, thus ma*ing him primarily liable 1 Sundiang+.
6. D s$+&+( b2 &+&-%##!,t%&#!: refusal to accept by the drawee. . P(!s!&t1!&t .+( ,%21!&t: the instrument is shown to the ma*er or drawee?acceptor so that
the ma*er or drawee?acceptor will pay.
!. D s$+&+( b2 &+&-,%21!&t: refusal to pay by the ma*er or drawee?acceptor ". N+t #! +. D s$+&+(: notice to the persons secondarily liable that the ma*er or the
drawee?acceptor refused to pay or to accept the instrument. 153 P(+t!st3 113 D s#$%('!3
CHAPTER 7: N!'+t %b * t2
:e3uisites of %egotiability )Section 1, %IL+ Keyword: WUPOA
Negotiable Instruments Law (Aquino and Agbayani Notes) 4 Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011! 1. 2. 3. 4. 5.
It must be in -( t &' and signed by the ma*er?drawer> It must contain an u&#+&) t +&%* promise or order to pay a sum certain in money> It must be ,%2%b*! on demand, or at a fi(ed or determinable future time> It must be payable to +()!( +( b!%(!(> 2here the instrument is %))(!ss!) to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
HOW NEGOTIABILITY IS DETERMINED: 1. !. #. The whole instrument shall be considered> ,nly what appears on the face in the instrument shall be considered> The provisions of %IL, especially Section 1 thereof shall be applied.
cceptance cceptance of an instrument is not important in the determination of its negotiability. The nature of acceptance is important only in the determination of the liabilities of the parties involved. Indorsement The negotiability of an instrument is not affected by the indorsement placed therein. EFFECT OF ESTOPPEL
RE8UISITE OF NEGOTIABILITY Requisite #1: IN WRITING AN !IGNE "# T$E %AKER OR T$E RAWER
It must be in writing. It may be printed, in in* or in pencil, and it may be written in any material that substitutes paper li*e cloth, leather, or parchment. Signed: mar*ed by any means as long as they are adopted as the signature of the signer.
Requisite #&: IT %U!T 'ONTAIN AN UN'ON ITIONA( PRO%I!E OR OR ER TO PA# A !U% 'ERTAIN IN %ONE# @nconditional 0ayment?,rder The promise in a promissory note is the underta*ing made by the ma*er to pay a sum certain in money to the payee or the holder. The order in a bill is a command made by the drawer addressed to the drawee ordering the latter to pay the payee or the holder a sum certain in money. The word $promise& or $order& need not appear to satisfy the re3uirements of Section 1)b+ of %IL. The promise or order must be unconditional. n un3ualified order or promise to pay is unconditional within the meaning of %IL although it is coupled with )Sec. #, %IL+: 1. n indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount. !. statement of the transaction which gives rise to the instrument. 'onditional )therefore not negotiable+: 1. n order or promise to pay out of a particular fund 7 in this case, payment shall be subAect to the availability or sufficiency of funds. !. n instrument payable upon a contingency.
Indication of a 0articular 4und for 0ayment vs. 4und for :eimbursement
Fu&) F+( R! 1bu(s!1!&t The drawee pays the payee from his own funds> afterwards, the drawee pays himself from the particular fund indicated 0articular fund indicated is not the direct source of payment. Sum 'ertain in -oney -oney need not be legal tender. n instrument is still negotiable although the amount to be paid is e(pressed in currency that is not legal tender, so long as it is e(pressed in -,%5;. If the obligor li*e the ma*er is given the option to deliver something in lieu of money, then the instrument is not negotiable. If the instrument gives the holder an election to re3uire something to be done in lieu of payment in money, the instrument is still negotiable. S@- '5:T I%: If the amount that is to be unconditionally paid by the ma*er or drawee can be determined from the face of the instrument even if it re3uires mathematical computation. Section !: sum is certain although it is to be paid a+ with interest> or b+ by stated installments> or c+ by stated installments, with a provision that upon default in payment of any installment or of interest, the whole obligation shall become due> or d+ with e(change, whether at a fi(ed rate or at a current rate> or e+ with costs of collection or an attorney6s fee, in payment shall not be made upon maturity. Stated Installments: the dates of each installment must be fi(ed or at least determinable and the amount to be paid for each installment must be stated. E%AN OR AT A *I+E OR ETER%INA"(E *UTURE TI%E Fu&) .+( P%21!&t There is only one act: the drawee pays directly from the particular fund indicated. 0articular fund indicated is the direct source of payment.
Requisite #): PA#A"(E ON
3uino: an instrument is not negotiable if the maturity date of an instrument is not certain. 0ayable on .emand 2hen an instrument is payable on demand, the persons liable may be re3uired to pay at the holder may so re3uest. 2hen 0ayable on .emand )Section B+: 1. 2hen it is e(pressed so to be payable on demand, or at sight, or on presentation> !. In which no time for payment is e(pressed. Sundiang ),n $at sight&+: what if the drawee is blind8 It should not be ta*en literally. 0ayable at a determinable future Section C: n instrument is payable at a determinable future time if it is e(pressed to be payable 1. t a fi(ed period after date or sight> !. ,n or before a fi(ed or determinable future time specified therein> #. ,n or at a fi(ed period after the occurrence of a specified event which is certain to happen, though the time of the happening be uncertain 'lauses that affect maturity of the instrument 1. cceleration clauses: %;TI-5 before
The negotiability of the instrument is not affected even if it is to be paid by stated installments, with a provision that upon the default in payment of any installment or of interest, the whole shall become due. uthorities seem 3uite uniform in holding that if the acceleration clause is dependent upon some act or default of the ma*er, the rule against uncertainty of maturity is not violated. !. Insecurity 'lauses: 0rovisions in the contract which allow the holder to accelerate payment if $he deems himself insecure.& The instrument rendered is not negotiable. The instrument is not negotiable because it is dependent upon the holder6s whims and caprice without the fault of the ma*er. )Duery: can such instruments be considered instruments payable on demand, thus, not affecting the negotiability of the instrument8+ 5(tenion 'lauses n instrument is payable at a definite time if by its terms it is payable at a definite time subAect to e(tension at the option of the holder, or to e(tension to a further definite time at the option of the ma*er or acceptor or automatically upon or after a specified act or event.
#.
Requisite #,: PA#A"(E TO OR ER TO "EARER %otes n instrument that is payable to a specified person or entity is not negotiable because the %IL re3uires that the instrument must be payable to order or to bearer. The rule has always been that the instrument in order to be considered negotiable must contain the so called $words of negotiability& 7 i.e. it must be payable to order or to bearer. These words serve as an e(pression of consent that the instrument may be transferred by negotiation. /earer Instruments 2here the instrument is a bearer instrument, the person in possession can demand payment from the person who are liable thereon. Section E: n instrument is payable to bearer 7 a+ 2hen it is e(pressed to be so payable> or b+ 2hen it is payable to a person named therein or bearer> or c+ 2hen it is payable to the order of a fictitious or non1e(isting person, and such fact was *nown to the person ma*ing it so payable> or d+ 2hen the name of the payee does not purport to be the name of any person e+ 2hen the only last indorsement is an indorsement in blan*. 4ictitious 0ayee :ule: n instrument is a bearer instrument if it is payable to the order of a fictitious or non1e(isting person and such fact is *nown t the person ma*ing it so payable. In a fictitious payee situation, the drawee ban* is absolved from liability and the drawer bears the loss. 2hen faced with a chec* payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot e(pect a fictitious payee to negotiate the chec* by placing his indorsement thereon. nd since the ma*er *new this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the chec* will bear the loss. The burden of proving that the instrument is payable to a fictitious payee rests on the person ma*ing such allegation. 5(ception to 4ictitious 0ayee :ule: showing of commercial bad faith on the part of the drawee1ban*, or any transferee of the chec* for that matter, will wor* to strip it of this defense. There is a commercial bad
Negotiable Instruments Law (Aquino and Agbayani Notes) Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
faith applicable when the transferee acts dishonestly 7 where it has actual *nowledge of the facts and circumstances that amount to bad faith, thus itself becoming a participant to the fraudulent scheme.
,rder Instruments Section F. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: a+ payee who is not ma*er, drawer, or drawee> or b+ The drawer or ma*er> or c+ The drawee> or d+ Two or more payees Aointly> or e+ ,ne or some of several payees> or f+ The holder of an office for the time being. Requisite #-: I ENTI*I'ATION O* T$E RAWEE
2here the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The holder must *now to whom he should present it for acceptance and?or for payment, otherwise, the purpose of negotiable instrument as a tool in commercial dealings will be greatly hampered. bill may be addressed to more than one drawee Aointly, whether they are partners or not> but not to two or more drawees in the alternative or in succession, )Sec. 1!F+. OMISSIONS AND PRO6ISIONS THAT DO NOT AFFECT NEGOTIABILITY Section G. ,missions> seal> particular money. 1 The validity and negotiable character of an instrument are not affected by the fact that: it is not dated> or a+ b+ c+ d+ does not specify the value given, or that any value had been given therefor> or does not specify the place where it is drawn or the place where it is payable> or bears a seal> or designates a particular *ind of current money in which payment is to be made.
The instrument is still negotiable if it is not dated. It should be noted, however, that there are cases where the date of the instrument is necessary and in the absence thereof can be inserted in the instrument. Section 1#. W.en d/te 0/y 1e inserted2 1 2here an instrument e(pressed to be payable at a fi(ed period after date is issued undated, or where the acceptance of an instrument payable at a fi(ed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subse3uent holder in due course> but as to him, the date so inserted is to be regarded as the true date. ,ther additional provisions that do not affect the negotiability of an instrument: Sec. H. dditional provisions not affecting negotiability. 1 n instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. /ut the negotiable character of an instrument otherwise negotiable is not affected by a provision which: a+ authoriIes the sale of collateral securities in case the instrument be not paid at maturity> or b+ authoriIes a confession of Audgment if the instrument be not paid at maturity> or c+ waives the benefit of any law intended for the advantage or protection of the obligor> or d+ gives the holder an election to re3uire something to be done in lieu of payment of money. /ut nothing in this section shall validate any provision or stipulation otherwise illegal.
Negotiable Instruments Law (Aquino and Agbayani Notes) ! Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
RELATED PRO6ISIONS: (AGBAYANI COMMENTARY)
S!#t +& 13 F+(1 +. &!'+t %b*! &st(u1!&ts3 - A& &st(u1!&t t+ b! &!'+t %b*! 1ust #+&.+(1 t+ t$! .+**+- &' (!9u (!1!&ts: (%) It 1ust b! & -( t &' %&) s '&!) b2 t$! 1%:!( +( )(%-!(; There must be a writing of some *ind for if the instrument were not in writing there would nothing to be negotiated or to pass from hand to hand. It may be in in*, print or pencil on a parchment, cloth leather or any substitute of paper. It must be signed by the ma*er or drawer> full name may be indicated but the surname is enough It may also consist of initials and numbers. 2here the name is not signed the holder must prove that what is written is intended as a signatureof the person sought to be charged. Signature may be printed, typewritten, stamped, engraved, photographed or lithographed> but in every case there must be a showing that the party have adopted and used such signature. 2here signature found: location of signature is not material what is important is that it appears therefrom that the person intended to ma*e it his own.
(b) Must #+&t% & %& u&#+&) t +&%* ,(+1 s! +( +()!( t+ ,%2 % su1 #!(t% & & 1+&!2; B ** +. !"#$%&'! bill must contain an order to pay, a bill is an instrument demanding a right. The word order may not necessarily be used, any words e3uivalent may suffice to ma*e an instrument a bill of e(change. -ere authoriIation to pay is not a negotiable instrument. mere re3uest to pay is not a negotiable instrument. P(+1 ss+(2 &+t! The promise to pay must be in the instrument itself although it is not necessary to use the word promise. It is enough that )1+ words of e3uivalent meaning are used or )!+ the promise is implied from promissory words contained in the instrument. %ote: the promise to pay cannot be implied from the e(istence of a debt. 2ords e3uivalent to promise: agree, will pay, shall pay and the li*e. U&#+&) t +&%* ,(+1 s! +( +()!( t+ ,%2 0romise or order must not be subAect to any condition. rt. 11BE a condition is a 1+ a future event that may or may not happen !+ a past event un*nown to the parties. Su1 ,%2%b*! 1ust b! )!. & t! %&) #!(t% & mount of money to be paid must be determinable by inspection and must be stated plainly in the face of the instrument. Li*e the denomination of money it must be stated in the body of the instrument.
Negotiable Instruments Law (Aquino and Agbayani Notes) " Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
ll that is re3uired is that the principal should be certain. Sum payable must be in money only. /onds, stoc*s, state paper, scrip, chec*s, foreign bills are not negotiable. :eason why %I should be in money: money is the one standard of value in actual business. ll other commodities may rise and fall in value but in theory, at least, money measures this rise and fall and remains the same.
(#) Must b! ,%2%b*! +& )!1%&)< +( %t % . "!) +( )!t!(1 &%b*! .utu(! t 1!; ()) Must b! ,%2%b*! t+ +()!( +( t+ b!%(!(; %&) the words order or bearer are usually referred as words of negotiability. n instrument is not negotiable unless made payable to a person or his order or to bearer unless words of similar import is used such as assigns, assignees or holder.
(!) W$!(! t$! &st(u1!&t s %))(!ss!) t+ % )(%-!!< $! 1ust b! &%1!) +( +t$!(- s! &) #%t!) t$!(! & - t$ (!%s+&%b*! #!(t% &t23 This re3uierement refers only to a bill of e(chang. @nder section 1C drawee6s name may be omitted and be filled in under implied authority li*e any other blan*. nd an acceptance may supply the omission of a designation. N+t!s The formalities re3uired by the %I are essential for the security of mercantile transactions. They distinguish the negotiable from non1negotiable. 2here the instrument does not comply with the re3uirement of section 1 of the negotiable instruments law, the provision of the %IL will not govern. <ow negotiability determined: 1+ %IL sec 1 !+ considering the whole of the instrument #+ what appears on the face of the instrument and not elsewhere. The re3uirement lac*ing may not be supplied by using a separate instrument containing that re3uirement which is lac*ing.
S!#3 73 W$%t #+&st tut!s #!(t% &t2 %s t+ su13 - T$! su1 ,%2%b*! s % su1 #!(t% & - t$ & t$! 1!%& &' +. t$ s A#t< %*t$+u'$ t s t+ b! ,% ): (%) - t$ &t!(!st; +( The fact that the sum payable is to be paid with interest does not render the sum uncertain. The sum is certain when the principal sum is certain. 2here interest is stipulated but not specified the rate is determined to be the legal rate. Interest shall earn interest from the time it is Audicially demanded.
(b) b2 st%t!) &st%**1!&ts; +( %I with stated instalment does not readily render it non1negotiable. Instalments must conform to the ff : 1+ must be stated !+ maturity of each instalment must be fi(ed and determinable.
Negotiable Instruments Law (Aquino and Agbayani Notes) 1# Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
The sum payable is a sum certain within the meaning of this act although it is to be paid by instalments, with the provision that upon default in payment of instalment or of interest the whole shall be due. The sum payable is a sum certain within the meaning of this act, although it is to be paid with e(change whether at a fi(ed rate or at a current rate. 5(change between two places at a particular date is a matter of common commercial *nowledge, or at least easily ascertained by any one so that the parties can always without difficulty ascertain the e(act amount necessary to discharge the paper. Gregorio araneta I%'. v. 0%/: held: although the plaintiff6s application provides for payment at maturity of the draft this refers merely to the time when the plaintiff was bound to pay , and not to the rate of e(change at which the draft should be paid by the plaintiff swince the latter6s obligation is determined by the rate of e(change von the date the drafts was drawn and presented or negotiated which was not later than ug. #1 1ECE((((. 0laintiff1appellant invo*es an alleged ban*ing practice, custom or practice whereby drafts should be paid at the rate e(isting on the date of its maturity. 5ven assuming the e(istence of this practice, the same is clearly immaterial for they have an e(press contract between the parties defining their rights andobligation.
(#) b2 st%t!) &st%**1!&ts< - t$ % ,(+= s +& t$%t< u,+& )!.%u*t & ,%21!&t +. %&2 &st%**1!&t +( +. &t!(!st< t$! -$+*! s$%** b!#+1! )u!; +( ()) - t$ !"#$%&'!< -$!t$!( %t % . "!) (%t! +( %t t$! #u((!&t (%t!; +( (!) - t$ #+sts +. #+**!#t +& +( %& %tt+(&!2>s .!!< & #%s! ,%21!&t s$%** &+t b! 1%)! %t 1%tu( t23 N+t!: after the date of maturity the instrument will no longer be negotiable in the full commercial sense that is in the sense that any transferee ac3uiring it would ac3uire the instrument after it is overdue. The transferee will not be considered a holder in due course and hold the instrument subAect to the defences as if it was non1negotiable. tty. 4ee must be reasonable. The written amount shall govern unless the court founds it unreasonable and unconscionable. tty. 4ees non recoverable subAect to some e(ceptions provided by law. S!#3 43W$!& ,(+1 s! s u&#+&) t +&%*3 - A& u&9u%* . !) +()!( +( ,(+1 s! t+ ,%2 s u&#+&) t +&%* - t$ & t$! 1!%& &' +. t$ s A#t t$+u'$ #+u,*!) - t$: (%) A& &) #%t +& +. % ,%(t #u*%( .u&) +ut +. -$ #$ (! 1bu(s!1!&t s t+ b! 1%)! +( % ,%(t #u*%( %##+u&t t+ b! )!b t!) - t$ t$! %1+u&t; +( The problem which is sought to be solved by this section is whether or not the indication of a particular fund or particular account or the statement of the transactions which gives rise to the instrument would ma*e promise or order conditional. n order or promise to pay out of a particular fund is not unconditional but if the order or promise is coupled only by a source where reimbursement in case of non1payment it is still unconditional. 2here the payment is out from the funds indicated, the payment is subAect to the condition that the funds indicated is sufficient.
(b) A st%t!1!&t +. t$! t(%&s%#t +& -$ #$ ' =!s ( s! t+ t$! &st(u1!&t3 Instruments are not issuede without any transactions which they are based. 2here the promise or order is made subAect to the terms and conditions of the transaction stated the instrument is rendered non1negotiable.
But %& +()!( +( ,(+1 s! t+ ,%2 +ut +. % ,%(t #u*%( .u&) s &+t u&#+&) t +&%*3 S!#3 ?3 D!t!(1 &%b*! .utu(! t 1!; -$%t #+&st tut!s3 - A& &st(u1!&t s ,%2%b*! %t % )!t!(1 &%b*! .utu(! t 1!< - t$ & t$! 1!%& &' +. t$ s A#t< -$ #$ s !",(!ss!) t+ b! ,%2%b*!:
(%) At % . "!) ,!( +) %.t!( )%t! +( s '$t; +( n instrument is payable at a determinable future time within the meaning of this act, which is e(pressed to be payable at a fi(ed period after date or after sight. fter sight means after the drawee has seen the instrument upon presentment for acceptance.
(b) O& +( b!.+(! % . "!) +( )!t!(1 &%b*! .utu(! t 1! s,!# . !) t$!(! &; +(
A##!*!(%t +& #*%us!: these provisions ma*e it possible for the ma*er to pay the instrument at an earlier date or ma*e it possible for the holder to re3uire payment of the instrument at an earlier date. / &)s: 1+ that which contain acceleration clauses on the ma*er6s default in payment of instalments or of interest or on the happening of the e(trinsic event> !+ or contain in notes secured by collateral a provision that the ma*er shall supply additional collateral in case of depreciation in the value of the original deposits with the holder6s right to declare the note due immediately on failure to ma*e good the depreciation or #+ contain provisions for acceleration where holder deems himself insecure. C+&.* #t &' +, & +& %s t+ t$! s!#+&): 1) those who maintained that such stipulation renders the instrument non1negotiable argue that the time for payment becomes uncertain and indefinite. If the ma*er fails when demanded to furnish additional security to the satisfaction of the holder, the note matures at once. If the holder is not satisfied with the additional security the note matures at once and thus the time at which it may mature would depend upon the time at which the holder declared himself dissatisfied with the security delivered by the ma*er3 7) Those who maintain that the stipulation in 3uestion does not render the instrument non1negotiable. This view is from the standpoint of e(pediency as encouraging circulation and of business custom on account of their common acceptance by the commercial world such clauses should be interpreted as not affecting negotiability. C+&.* #t +. +, & +& %s t+ t$ (): 1) t $%s b!!& $!*) t$%t % &+t! s (!&)!(!) &+&-&!'+t %b*! -$!(! t s ,%2%b*! %t % . "!) .utu(! t 1!< but - t$ %& +,t +& +& t$! ,%(t +. t$! $+*)!( t+ )!#*%(! t )u! %&) ,%2%b*! b!.+(! 1%tu( t2 -$!&!=!( $! )!!1s t &s!#u(!; 7) t s sub1 tt!) t$%t t$!s! #%s!s & $+*) &' %& &st(u1!&t ,%2%b*! %t % . "!) t 1! but %##!*!(%b*! %t t$! +,t +& +. t$! ,%2!! +( $+*)!( &+&-&!'+t %b*! %(! ) (!#t*2 #+&t(%(2 t+ t$! ,*% & 1!%& &' +. t$ s s!#t +&3
(#) O& +( %t % . "!) ,!( +) %.t!( t$! +##u((!&#! +. % s,!# . !) !=!&t -$ #$ s #!(t% & t+ $%,,!&< t$+u'$ t$! t 1! +. $%,,!& &' b! u&#!(t% &3 A& &st(u1!&t ,%2%b*! u,+& % #+&t &'!&#2 s &+t &!'+t %b*!< %&) t$! $%,,!& &' +. t$! !=!&t )+!s &+t #u(! t$! )!.!#t3 S!#3 @3 A)) t +&%* ,(+= s +&s &+t %..!#t &' &!'+t %b * t23 - A& &st(u1!&t -$ #$ #+&t% &s %& +()!( +( ,(+1 s! t+ )+ %&2 %#t & %)) t +& t+ t$! ,%21!&t +. 1+&!2 s &+t &!'+t %b*!3 But t$! &!'+t %b*! #$%(%#t!( +. %& &st(u1!&t +t$!(- s! &!'+t %b*! s &+t %..!#t!) b2 % ,(+= s +& -$ #$: (%) %ut$+( A!s t$! s%*! +. #+**%t!(%* s!#u( t !s & #%s! t$! &st(u1!&t b! &+t ,% ) %t 1%tu( t2; +( a promise of the ma*er to furnishadditional collateral will render the note non1negotiable, as that would be an additional act to promise to pay money.
(b) %ut$+( A!s % #+&.!ss +& +. Bu)'1!&t . t$! &st(u1!&t b! &+t ,% ) %t 1%tu( t2; +( 'lasses of confession of Audgement: cognovits actionem1 a written confession of an action by a defendant, subscribed, but not sealed and irrevocably authoriIing any attorney of any court of record to confess Audgement and issue e(ecution usually for sum named 'onfession relicta verification1 confession of Audgement after plea has been entered.
2arrant of attorney 7 an instrument in writing addressed to one or more attorneys named therein, authoriIing them generally to appear in court or in some specified court on behalf of the person giving it, and to confess Audgement in favor of some particular person therein named in action debt. 'onfession of Audgement before maturity1 a note which contain a provision authoriIoing confession of Audgement at any time thereafter, whether due or not is not negotiable.
%ote: confession of Audgement is void in the 0hilippines because: 1+ enlarge the field of fraud> !+ under this instrument the promissor bargains away hi right to a day in court> #+ effect is to stri*e down the right of appeal. (#) -% =!s t$! b!&!. t +. %&2 *%- &t!&)!) .+( t$! %)=%&t%'! +( ,(+t!#t +& +. t$! +b* '+(; +( ()) ' =!s t$! $+*)!( %& !*!#t +& t+ (!9u (! s+1!t$ &' t+ b! )+&! & * !u +. ,%21!&t +. 1+&!23 But &+t$ &' & t$ s s!#t +& s$%** =%* )%t! %&2 ,(+= s +& +( st ,u*%t +& +t$!(- s! **!'%*3 S!#3 C3O1 ss +&s; s!%*; ,%(t #u*%( 1+&!23 - T$! =%* ) t2 %&) &!'+t %b*! #$%(%#t!( +. %& &st(u1!&t %(! &+t %..!#t!) b2 t$! .%#t t$%t: (%) t s &+t )%t!); +( gen rule: omission of date does not render the instrument non1negotiable e(p: when date is necessary to fi( date of maturity
(b) )+!s &+t s,!# .2 t$! =%*u! ' =!&< +( t$%t %&2 =%*u! $%) b!!& ' =!& t$!(!.+(; +( '!& (u*!: &+ =%*u! s,!# . !) )+!s &+t %..!#t NI; R!%s+&: =%*u! s ,(!su1!)
(#) )+!s &+t s,!# .2 t$! ,*%#! -$!(! t s )(%-& +( t$! ,*%#! -$!(! t s ,%2%b*!; +( ()) b!%(s % s!%*; +( (!) )!s '&%t!s % ,%(t #u*%( : &) +. #u((!&t 1+&!2 & -$ #$ ,%21!&t s t+ b! 1%)!3 But &+t$ &' & t$ s s!#t +& s$%** %*t!( +( (!,!%* %&2 st%tut! (!9u ( &' & #!(t% & #%s!s t$! &%tu(! +. t$! #+&s )!(%t +& t+ b! st%t!) & t$! &st(u1!&t3 S!#3 D3W$!& ,%2%b*! +& )!1%&)3 - A& &st(u1!&t s ,%2%b*! +& )!1%&): (%) W$!& t s s+ !",(!ss!) t+ b! ,%2%b*! +& )!1%&)< +( %t s '$t< +( +& ,(!s!&t%t +&; +( (b) I& -$ #$ &+ t 1! .+( ,%21!&t s !",(!ss!)3 W$!(! %& &st(u1!&t s ssu!)< %##!,t!)< +( &)+(s!) -$!& +=!()u!< t s< %s (!'%()s t$! ,!(s+& s+ ssu &'< %##!,t &'< +( &)+(s &' t< ,%2%b*! +& )!1%&)3 S!#3 E3W$!& ,%2%b*! t+ +()!(3 - T$! &st(u1!&t s ,%2%b*! t+ +()!( -$!(! t s )(%-& ,%2%b*! t+ t$! +()!( +. % s,!# . !) ,!(s+& +( t+ $ 1 +( $ s +()!(3 It 1%2 b! )(%-& ,%2%b*! t+ t$! +()!( +.: (%) A ,%2!! -$+ s &+t 1%:!(< )(%-!(< +( )(%-!!; +( (b) T$! )(%-!( +( 1%:!(; +( (#) T$! )(%-!!; +( ()) T-+ +( 1+(! ,%2!!s B+ &t*2; +(
(!) O&! +( s+1! +. s!=!(%* ,%2!!s; +( (.) T$! $+*)!( +. %& +.. #! .+( t$! t 1! b! &'3 W$!(! t$! &st(u1!&t s ,%2%b*! t+ +()!(< t$! ,%2!! 1ust b! &%1!) +( +t$!(- s! &) #%t!) t$!(! & - t$ (!%s+&%b*! #!(t% &t23
N+t!: payable to order means that a person promises to pay to the order of a specific person or to the duly authoriIed agent of that person. T$!(! s % &!#!ss t2 +. ,%2 &' t$! ,%2!!: reason: if there is no payee where the instrument is to be payable to his order no one could indorse the instrument. 'onse3uently, it is useless to consider it negotiable.
S!#3 F3W$!& ,%2%b*! t+ b!%(!(3 - T$! &st(u1!&t s ,%2%b*! t+ b!%(!(: (%) W$!& t s !",(!ss!) t+ b! s+ ,%2%b*!; +(
!"3 0ay to bearer 01
(b) W$!& t s ,%2%b*! t+ % ,!(s+& &%1!) t$!(! & +( b!%(!(; +( E"3 P%2 t+ $%&s!*1+(%&% +( b!%(!(
(#) W$!& t s ,%2%b*! t+ t$! +()!( +. % . #t t +us +( &+&-!" st &' ,!(s+&< %&) su#$ .%#t -%s :&+-& t+ t$! ,!(s+& 1%: &' t s+ ,%2%b*!; +( 2hen it is payable to the order of a fictitious person or non1e(isting person it is payable to bearer if such fact was *nown to the person ma*ing it so payable. 5lements: 1+ the payee named must be fictitious or non e(isting> !+ it must be *nown to the person ma*ing it so payable. The name is fictitious when it is feigned or pretended and a non1e(isting person one who does not e(ist in the sense that he was not intended to be the payee by the drawer %ote: if the agent has no authority to e(ecute the instrument himself the *nowledge of the principal is controlling. If principal has no *nowledge the instrument will not apply as to the principal. ngTe*Lian v. ' : <eld: under the %IL a chec* drawn payable to cash is payable to bearer and the ban* masy pay to the person presenting it for payment.
()) W$!& t$! &%1! +. t$! ,%2!! )+!s &+t ,u(,+(t t+ b! t$! &%1! +. %&2 ,!(s+&; +( (!) W$!& t$! +&*2 +( *%st &)+(s!1!&t s %& &)+(s!1!&t & b*%&:3 S!#3 153T!(1s< -$!& su.. # !&t3 - T$! &st(u1!&t &!!) &+t .+**+- t$! *%&'u%'! +. t$ s A#t< but %&2 t!(1s %(! su.. # !&t -$ #$ #*!%(*2 &) #%t! %& &t!&t +& t+ #+&.+(1 t+ t$! (!9u (!1!&ts $!(!+.3 S!#3 113D%t!< ,(!su1,t +& %s t+3 - W$!(! t$! &st(u1!&t +( %& %##!,t%&#! +( %&2 &)+(s!1!&t t$!(!+& s )%t!)< su#$ )%t! s )!!1!) ,( 1% .%# ! t+ b! t$! t(u! )%t! +. t$! 1%: &'< )(%- &'< %##!,t%&#!< +( &)+(s!1!&t< %s t$! #%s! 1%2 b!3 T$ s ,(+= s +& %,,* !s t+ t$(!! #%s!s: 1)t$! &st(u1!&t #+&t% &s t$! )%t! +. t$! ssu!; 7) %##!,t%&#! s )%t!); 4) &)+(s!1!&t s )%t!)
S!#3 173A&t!-)%t!) %&) ,+st-)%t!)3 - T$! &st(u1!&t s &+t &=%* ) .+( t$! (!%s+& +&*2 t$%t t s %&t!-)%t!) +( ,+st-)%t!)< ,(+= )!) t$ s s &+t )+&! .+( %& **!'%* +( .(%u)u*!&t ,u(,+s!3 T$! ,!(s+& t+ -$+1 %& &st(u1!&t s+ )%t!) s )!* =!(!) %#9u (!s t$! t t*! t$!(!t+ %s +. t$! )%t! +. )!* =!(23 Limitation on ante dating or post1dating: when it is done for fraudulent and illegal purposes.
S!#3 143W$!& )%t! 1%2 b! &s!(t!)3 - W$!(! %& &st(u1!&t !",(!ss!) t+ b! ,%2%b*! %t % . "!) ,!( +) %.t!( )%t! s ssu!) u&)%t!)< +( -$!(! t$! %##!,t%&#! +. %& &st(u1!&t ,%2%b*! %t % . "!) ,!( +) %.t!( s '$t s u&)%t!)< %&2 $+*)!( 1%2 &s!(t t$!(! & t$! t(u! )%t! +. ssu! +( %##!,t%&#!< %&) t$! &st(u1!&t s$%** b! ,%2%b*! %##+() &'*23 T$! &s!(t +& +. % -(+&' )%t! )+!s &+t %=+ ) t$! &st(u1!&t & t$! $%&)s +. % subs!9u!&t $+*)!( & )u! #+u(s!; but %s t+ $ 1< t$! )%t! s+ &s!(t!) s t+ b! (!'%()!) %s t$! t(u! )%t!3 .ate is not necessary for the negotiability of the instrument. <owever date may be necessary to determine the date of maturity but not for negotiability. o o .ate is important to determine when interest is to run .ate is necessary to determine whether a party has acted within reasonable time.
5ffects of inserting a wrong date: *nowingly inserting the wrong date in an undated instrument will avoid the instrument as to the party inserting the wrong date.
Insertion of the wrong date does not avoid the instrument in the hands of a holder in due course
CHAPTER 4: I&t!(,(!t%t +& +. I&st(u1!&ts

EFFECTS OF BEING AN ADOPTED STATUTE 1. !. #. Interpretation of 'ourts of the @nited States of the provisions of %IL can be applied in this Aurisdiction. If there is no provision of the %IL or the 'ode of 'ommerce, the provisions of the the %egotiable Instruments Law )@.S.+ or the /ill of 5(change ct of 1FF! can be applied. ,pinions and comments of authorities or legal writers on the provisions of the @niform %egotiable Instruments Law or the /5 1FF! may also be applied in this Aurisdiction.
EFFECT OF IMPLIED REPEALS ON THE CODE OF COMMERCE The %IL impliedly repealed the provisions of the code of commerce on promissory notes and bills but there are provisions in the 'ode of 'ommerce involving %egotiable Instruments e.g. crossed chec*s. RULES THAT APPLY IN CASES OF AMBIGUITY Sec. 1B. 'onstruction where instrument is ambiguous. 1 2here the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: a+ 2here the sum payable is e(pressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable> but if the words are ambiguous or uncertain, reference may be had to the figures to fi( the amount> b+ 2here the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof> c+ 2here the instrument is not dated, it will be considered to be dated as of the time it was issued> d+ 2here there is a conflict between the written and printed provisions of the instrument, the written provisions prevail> e+ 2here the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election> f+ 2here a signature is so placed upon the instrument that it is not clear in what capacity the person ma*ing the same intended to sign, he is to be deemed an indorser> g+ 2here an instrument containing the word JI promise to payJ is signed by two or more persons, they are deemed to be Aointly and severally liable thereon.
OTHER RULES In case of ambiguity, the ambiguity shall be construed against the party who caused the vagueness.
RELATED PRO6ISIONS: (AGBAYANI COMMENTARY) SECTION 1D: W$!& s!#t +& %,,* #%b*!3 1 it shall not be availed of if the terms of the instrument in 3uestion are clear and admit of no doubt. 1 only when the instrument in 3uestion is ambiguous, doubtful or obscure, or when there are omissions therein that the rules stated in this section apply. Su1 ,%2%b*! !",(!ss!) & -+()s %&) . 'u(!s3 1 sum payable in words must prevail. 1 :easons: )1+ the figures in the margin do not form part of the instrument and are simply for convenience or reference> and )!+ it is easier to change the figures or to commit a mista*e in regards to them than when the sum is written out in words. W$!& -+()s %1b 'u+us3 1 when the words are ambiguous or uncertain, reference may be had to the figures to fi( the amount. P%21!&t +. &t!(!st3 1 applies when interest is stipulated but the date when interest begins to be paid is not specified. 1 will earn interest from the date of the note or the date of its issue, at the legal rate. I&st(u1!&t &+t )%t!)3 1 if the instrument is date, will be presumed to be its true date. 1 the presumption is prima facie, or rebuttable between the parties. 1 proof may be adduced to show a different fate as to the true date of the issue, acceptance, or endorsement. 1 if the instrument is not dated, the date of its issue will considered its date. 1 it was held that an undated acceptance of an undated bill of e(change is payable on demand and will be considered to be dated as of the time it is e(ecuted. C+&.* #t b!t-!!& -( tt!& %&) ,( &t!) ,(+= s +&3 1 the handwritten words will prevail. 1 written words are deemed to e(press the true intention of the ma*er because they are written by himself and printed forms are printed without any particular contract in view. I&st(u1!&t & %1b 'u+us3 1 there is a drawee and acceptor. 1 the payee or the holder may treat it wither as a bill or note. C%,%# t2 +. ,%(t2 s '& &' &+t #*!%(3 1 deemed to be an endorser. T-+ +( 1+(! ,!(s+&s s '& &'3 1 JI promise to pay to ' or order 01,""" )Sgd.+ and /J 1 and / are deemed to be Aointly and severally liable, not merely Aointly liable. The holder of the instrument can collect the whole amount of the instrument from either one of them.
1 inclusion of the other co1signer in the complaint as co1defendant is unnecessary. 1 J2e promiseJ 1 Aoint liability
CHAPTER ?: T(%&s.!( %&) N!'+t %t +&

MODES OF TRANSFER 1. !. %egotiation: The Transfer of the instrument from one person to another as to constitute the transferee a holder thereof. ssignment: The transferee is an assignee who merely steps into the shoes of the transferor. NEGOTIATION %egotiable Instruments Law %egotiable Instruments only <older course ;5S in due ASSIGNMENT 'ivil 'ode 'ontracts in general or other assignable rights. -ere assignee %5=5:
App3ic/13e (/w Type o4 tr/ns/ction N/ture o4 tr/ns4eree Possi1i3ity to 1eco0e / .o3der in due course Ri5.ts /cquired
A6/i3/1i3ity o4 person/3 de4enses
The transferee holder may ac3uire rights more than that of the transferor if he is a holder in due course The transferee1 holder may be free from personal defenses if he is a holder in due course
Transferee merely steps in to the shoes of the transferor
Transferee is always subAect to personal defenses.
HOW NEGOTIATION TA/ES PLACE . ISS@ %'5 Issuance is the first delivery of the instrument complete in form to a person who ta*es it as a holder )Sec. 1E1+. Issue: the delivery is the final act essential to the consummation of the instrument as an obligation. /. S@/S5D@5%T %5G,TI TI,%
Section #". W./t constitutes ne5oti/tion2 1 n instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. a+ If payable to bearer, it is negotiated by delivery> b+ if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Indorsement of /earer Instrument
Section C". Indorse0ent o4 instru0ent p/y/13e to 1e/rer2 1 2here an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery> but the person indorsing specially is liable as indorser to only such holders as ma*e title through his indorsement. '. I%',-0L5T5 %5G,TI TI,% ,4 ,:.5: I%ST:@-5%T Two :ules under Section CE: 1. !. 2here the holder of the instrument payable to his order transfers is for value without indorsing it, the transfer vests in the transferee such title as transferor had therein, and the transferee ac3uires in addition, the right to have the indorsement of the transferor. 4or the purpose of determining whether the transferee is a holder in due course, the negotiation ta*es effect as of the time the indorsement is actually made.
The transaction is an e3uitable assignment and the transferee ac3uires the instrument subAect to the defenses and e3uities available among prior parties. In addition, the presumption of sufficiency of consideration and title that is enAoyed by the holders will not be enAoyed by the transferee contemplated under Sec. CE. .. I%.,:S5-5%T Section #1. Indorse0ent7 .ow 0/de2 1 The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. 2here indorsement should be placed: 1. !. ,n the instrument itself> ,n a separate piece of paper attached to the instrument called $allonge&.
,ther rules on indorsement: Indorsement must be of the entire instrument e(cept when there was a previous partial payment )Sec. #!+. Sec #! further disallows negotiation of two or more indorsees severally.
9inds of Indorsement 1. !. /lan* Indorsement: no indorsee is specified and it is done by affi(ing the indorser6s signature. Special Indorsement: .esignates the indorsee. )e.g. pay to $(&+
%ote: the holder may convert a blan* indorsement into a special indorsement by writing over the signature of the indorser in blan* any contract consistent with the character of the indorsement )Sec. #H+. #. C. H. Dualified Indorsement: constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser6s signature the words $without recourse.& Such an indorsement does not impair the negotiable character of the instrument. 'onditional Indorsement )Sec. #E+: the party re3uired to pay the instrument may disregard the condition and ma*e payment to the indorsee or his transferee whether the condition has been fulfilled or not. :estrictive indorsement )Sec. #G+: n indorsement is restrictive which either: a. 0rohibits the further negotiation of the instrument> or b. 'onstitutes the indorsee the agent of the indorser> or c. =ests the title in the indorsee in trust for or to the use of some other persons.
:ights of a :estrictive indorsee )Sec. #B+:
Negotiable Instruments Law (Aquino and Agbayani Notes) 1! Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
1. !. #. To receive payment of the instrument> To bring any action thereon that the indorser could bring> To transfer his rights as such indorsee, where the form of the indorsement authoriIes him to do so. In case of transfer, all subse3uent indorsees ac3uire only the title of the firs indorsee under the restrictive indorsement.
%egotiation by 0rior 0arty 2here an instrument is negotiated bac* to a prior party, such party may reissue and further renegotiate the same. /ut he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable )Sec. H"+. <owever, he may stri*e out the intervening indorsements because they are not necessary for his title and he is liable to them because of his initial indorsement )Sec. CF+. 'onsideration for issuance and subse3uent transfer 5very negotiable instrument is deemed prima facie to have been issued for a valuable consideration> and every person whose signature appears thereon to have become a party thereto for value )Section !C+. Therefore it is up to the party who alleges that there was absence of consideration to prove such fact. The presumption will operate if there was negotiation. 'onsideration is not presumed if there was transfer without indorsement )/0I vs. ' , G.:. %o. 1#G!"!, Kanuary !H, !""B+. <owever, Section !F provides that $absence or failure of consideration is a matter of defense 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 li3uidated amount or otherwise.& RULES ON WHAT CONSTITUTES 6ALUABLE CONSIDERATION FOR PURPOSES OF ISSUANCE AND NEGOTIATION OF NEGOTIABLE INSTRUMENTS: Section !H. 8/3ue9 w./t constitutes2 L =alue is any consideration sufficient to support a simple contract. n antecedent or pre1e(isting debt constitutes value> and is deemed such whether the instrument is payable on demand or at a future time. Section !G. W./t constitutes .o3der 4or 6/3ue2 1 2here value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Section !B. W.en 3ien on instru0ent constitutes .o3der 4or 6/3ue2 L 2here the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the e(tent of his lien. 2hat 'onstitutes =alue: The simple contract referred to Section !H refers to onerous contracts. rt 1#H" 'ivil 'ode: In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other> in remuneratory ones, the service or benefit which is remunerated> and in contracts of pure beneficence, the mere liberality of the benefactor. Ty vs. 0eople )C#E S': !!"+: =aluable consideration consists in either rights, interest, profit or benefit accruing to the party who ma*es the contract or some forbearance, detriment, loss, or some responsibility to act, or labor, or service given, suffered or underta*en by the other party. It is enough that the oblige foregoes some right or privilege or suffers some detriment. There is valuable consideration if the parties resort to what is *nown as discounting. I% discounting, the instrument is negotiated to another because the transferee will pay the amount of the instrument. <owever, the transferee charges or deducts a certain percentage from the principal as its compensation. $Love and affection& do not constitute valuable consideration. lien is also valuable consideration )please see Sec. !B+.
Negotiable Instruments Law (Aquino and Agbayani Notes) 1" Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!
5ffect if value was previously given n e(ceptional case where a transferee who did not give valuable consideration for the instrument may nevertheless be considered a holder for value is contemplated under Sec. !G of the %IL.

S!#t +& 7?3 P(!su1,t +& +. C+&s )!(%t +& s D s,ut%b*!3 1 negotiable instrument was given or endorsed for a sufficient consideration. 1 it is disputable in the sense that the said presumption is satisfactory if not contradicted. C+&s )!(%t +& &!!) &+t b! %**!'!) +( ,(+=!)3 1 it is unnecessary to aver or prove consideration, for consideration is imported and presumed from the fact that it is a negotiable instrument. 1 any allegation which sets forth the e(istence of valuable consideration for the transfer of an instrument by endorsement is sufficient, notwithstanding the failure to allege specifically the amount and nature of the consideration which was in fact paid to the endorser. M!(! &t(+)u#t +& +. &st(u1!&t s su.. # !&t3 1 prima facie entitles the plaintiff of a recovery and unless such prima facie case is overcome by evidence produced by the defendant the plaintiff is entitled to recover. 1 the person claiming that a payee or an indorsee did not give valuable consideration given. E..!#t +. *%#: +. #+&s )!(%t +&. 1 the instrument is without effect and the payment of said note is not demandable. S!#t +& 7@3 6%*u%b*! #+&s )!(%t +& & '!&!(%*3 1 consideration: inducement to a contract that is, the cause, motive, price or impelling influence which induces a contracting party to enter into a contract. 1 consist either in some right, interest, profit or benefit accruing to the party who ma*es the contract, or some forbearance, detriment., loss or some responsibility to act, or labor, or service given, suffered or underta*en by the other side. 1 an obligation to give, to do or not to do, in favor of the party who ma*e the contract, such as the ma*er or indorser. P(!-!" st &' )!bt< T$ () ,!(s+&>s ,(!-!" st &' )!bt< B%&: #(!) ts< E"#$%&'! +. &!'+t %b*! ,%,!(s 1 sufficient consideration. C+&s )!(%t +& %s t+ su(!t2 +( 'u%(%&t+(3 1 it is unnecessary to prove consideration between the surety and the creditor. L+=! +( %..!#t +&3 1 is good consideration, but does not constitute such valuable consideration as is sufficient itself to support the obligation of a bill or note, as between the parties. S!#t +& 7C3 M!%& &' +. $+*)!( .+( =%*u!3 1 one who gives valuable consideration for an instrument issued or negotiated. 1 not limited to one who is *nown to have given valuable consideration for the instrument he holds. 1 any holder of an instrument for which value has been given at any time S!#t +& 7D3 A,,* #%t +& +. S!#t +& 7D3 1 if ma*er has defenses against endorser, such as absence of consideration, even a holder in due course can collect from ma*er only the e(tent of the lien. R!%s+& .+( t$! (u*!3 1 holder in due course is only a holder in due course for that amount only. 2here defenses are real, non1e(istent. 1 if the defenses are real, holder in due course can collect nothing because ma*er can interpose those defense against the holder in due course as to the whole amount of the instrument. S!#3 7E3 E44ect o4 w/nt o4 consider/tion2 : bsence or failure of consideration is a matter of defense 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 li3uidated amount or otherwise.
S!#3 7F. (i/1i3ity o4 /cco00od/tion p/rty2 1 n accommodation party is one who has signed the instrument as ma*er, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of ta*ing the instrument, *new him to be only an accommodation party. S!#3 453 2hat constitutes negotiation. 1 n instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery> if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. M!t$+) +. T(%&s.!(3 # methods of transfer: )1+ by assignment> )!+ by operation of law> )#+ by negotiation, which may either be by indorsement completed by delivery or by mere delivery. Ass '&1!&t3 It is the method of transferring a non1negotiable instrument whereby the assignee is merely placed in the position of the assignor and ac3uires the instrument subAect to all defences that might have been set up against the original payee. M+)! +. %ss '&1!&t3 lthough some sort of written assignment is customarily employed, it may be written either on the instrument itself or on a separate piece of paper. E..!#t +. %ss '&1!&t +. &+&-&!'+t %b*! &st(u1!&ts3 The party holding the right drops out of the contract and another ta*es his place. The assignee is substituted in place of the assignor. The assignee and every subse3uent person to whom the instrument comes by assignment may be considered as the person who made the instrument in the first instance and as having said and done everything in ma*ing the instrument which the original assignor said or did. The assignee ta*es the contract subAect to e3uities, that is, to defenses to the contract which would avail in favor of the original party up to the time the notice of the assignment is given to the person against whom the contract is sought to be enforced. Ass '&1!&t +. &!'+t %b*! &st(u1!&ts3 person ta*ing a negotiable instrument by assignment in a separate paper ta*es it subAect to the rules applying to assignment. nd where the hold of a bill payable to order transfers it without indorsement, it operates as an e3uitable assignment. T(%&s.!( b2 +,!(%t +& +. *%-3 The full title to a bill or note may pass without either assignment, indorsement, or delivery, that is, by operation of law: )1+ by the death of the holder, where the title vests in his personal representative, or )!+ by the ban*ruptcy of the holder, where the title vests in his assignee or trustee, or )#+ upon the death of a Aoint payee or indorsee, in which case the general is that the title vests at once in the surviving payee or indorsee. N!'+t %t +&3 @sually, where the instrument is payable to order, it is negotiated by the indorsement of the holder completed by deliver, and where it is payable to bearer, by mere delivery. Is )!* =!(2 t+ ,%2!! &!'+t %t +&? The 4irst 6iew is that the issuance or delivery to the payee is not negotiation because negotiation refers to an e(isting negotiable instrument and, before delivery to the payee, the instrument is incomplete. The second 6iew is that $under this section and Section 1E1, an instrument is negotiated when it is delivered to the payee or to an indorsee> negotiation is not confined to transfer after delivery to the payee. This seems to be the better view, as delivery to the payee of the instrument constitutes him the holder thereof. S!#3 413 Indorsement> how made. 1 The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. N%tu(! +. &)+(s!1!&t3 n indorsement is not only a mode of transfer, it is also a contract. The indorsement of a bill or note implies an underta*ing from the indorser to the person in whose favor it is made and to every other person to whom the bill or note may afterwards be transferred, e(actly similar to that which is implied by drawing a bill e(cept that, in the case of drawing a bill, the stipulation with respect to the drawer6s responsibility and underta*ing do not apply. W$!(! &)+(s!1!&t -( tt!&3 The indorsement may be written )1+ on the instrument itself, or )!+ upon a paper attached thereto, which is called an $allonge&. /ut the allonge must be tac*ed or pasted on the instrument so as to become a part of it, and where the separate paper is only temporary attached, and where the separate paper is only temporarily attached, it cannot be considered as allonge. H+- &)+(s!1!&t s -( tt!&3 Indorsement does not prove itself. It must be shown that the means was intended as an indorsement. S!#3 473 Indorsement must be of entire instrument. 1 The indorsement must be an indorsement of the entire instrument. n indorsement which purports to transfer to the indorsee a part only of the amount payable, or which
purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. /ut where the instrument has been paid in part, it may be indorsed as to the residue.
I&)+(s!1!&t 1ust b! +. t$! !&t (! &st(u1!&t3 operate as negotiation thereof.
ccordingly, an indorsement of a part of the instrument does not
E..!#t +. ,%(t %* &)+(s!1!&t -$!& u&%ut$+( A!)3 It does not operate as an indorsement, but it may constitute a valid assignment binding between the parties. The person to whom the instrument is indorsed would not be considered an indorsee but merely as assignee and would therefore ta*e the instrument subAect to the defenses available between the original parties. E"#!,t +&3 /ut where the instrument has been paid in part, it may be indorsed as to the residue. T(%&s.!( +. t-+ +( 1+(! &)+(s!!s s!=!(%**23 n indorsement which purports to transfer the instrument to two or more indorsees severally does not operate as a negotiation of the instrument. S!#3 44 9inds of indorsement. 1 or 3ualified or conditional. n indorsement may be either special or in blan*> and it may also be either restrictive
/ &)s +. &)+(s!1!&t3 )1+ special, )!+ in blan*, )#+ absolute, )C+ conditional, )H+ restrictive, )G+ 3ualified, )B+ Aoint, )F+ successive, )E+ irregular, )1"+ facultative. S!#3 4? Special indorsement> indorsement in blan*. 1 special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. n indorsement in blan* specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. H+- .u(t$!( &!'+t %t!)3 )1+ 2here the instrument is originally payable to order and it is negotiated by the payee by special indorsement, it can be further negotiated by the indorsee by indorse0ent co0p3eted 1y de3i6ery> )!+ 2here the instrument is originally payable to order and it is negotiated by the payee by blan* indorsement, it can be further negotiated by the holder by 0ere de3i6ery> )#+ 2here the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if the original bearer negotiated it by special indorsement. S!#3 4@ /lan* indorsement> how changed to special indorsement. 1 The holder may convert a blan* indorsement into a special indorsement by writing over the signature of the indorser in blan* any contract consistent with the character of the indorsement. L 1 t%t +& u,+& #+&=!(s +& +. b*%&: &)+(s!1!&t3 The holder must not write any contract not consistent with the indorsement, that is, the contract so written must not change the contract of the blan* indorser. S!#3 4C 2hen indorsement restrictive. 1 n indorsement is restrictive which either:
)a+ 0rohibits the further negotiation of the instrument> or )b+ 'onstitutes the indorsee the agent of the indorser> or )c+ =ests the title in the indorsee in trust for or to the use of some other persons. /ut the mere absence of words implying power to negotiate does not ma*e an indorsement restrictive. I&)+(s!! %'!&t +. t$! &)+(s!(3 This is *nown as the $agency type& of restrictive indorsement. E..!#t +. +1 ss +& +. -+()s +. &!'+t %b * t23 @nder the law, mere absence of words implying power to negotiate does not ma*e an indorsement restrictive. /ut while the omission of words of negotiability in the indorsement does not affect the negotiability of the instrument, such omission in the body thereof will render the instrument non1negotiable. S!#3 4D 5ffect of restrictive indorsement> rights of indorsee. 1 right: restrictive indorsement confers upon the indorsee the
)a+ to receive payment of the instrument> )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 authoriIes him to do so. /ut all subse3uent indorsees ac3uire only the title of the first indorsee under the restrictive indorsement.
:estrictive indorsee may receive payment. :estrictive indorsee may bring any action. :estrictive indorsee may transfer his rights.
S!#3 4E Dualified indorsement. 1 3ualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorserMs signature the words Jwithout recourseJ or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. H+- 9u%* . !) &)+(s!1!&t s 1%)!3 3ualified indorsement is made by adding to the indorser6s signature the words $without recourse&, $sans recours&, $indorser not holden&, $with intent to transfer title only, and not to incur liability as indorser&, or $at the indorsee6s own ris*&. E..!#t +. 9u%* . !) &)+(s!1!&t3 It constitutes the indorser a mere assignor of the title to the instrument. ;Wit.out recourse< means without resort to a person who is secondarily liable after the default of the person who is primarily liable. 8u%* . !) &)+(s!( $%s * 1 t!) s!#+&)%(2 * %b * t23 <e is secondarily liable on his warranties as an indorser under Section GH, that is, the 3ualified indorser is liable if the instrument is dishonoured by non1acceptance or non1payment due to )1+ forgery> )!+ lac* of good title on the part of the indorser> )#+ lac* of capacity to indorse on the part of the prior parties> )C+ the fact that, at the time of the indorsement, the instrument was valueless or not valid and he *new of that fact. E..!#t +. 9u%* . !) &)+(s!1!&t +& &!'+t %b * t23 of the instrument. 3ualified indorsement does %,T impair the negotiable character
S!#3 4F 'onditional indorsement. 1 2here an indorsement is conditional, the party re3uired to pay the instrument may disregard the condition and ma*e payment to the indorsee or his transferee whether the condition has been fulfilled or not. /ut any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subAect to the rights of the person indorsing conditionally. Abs+*ut! &)+(s!1!&t3 ,ne by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so and upon due notice to him of such failure. C+&) t +&%* &)+(s!1!&t3 n indorsement subAect to the happening of a contingent event, that is, an event that may or may not happen, or a past event un*nown to the parties. R '$t t+ ) s(!'%() #+&) t +&s G Ob* '%t +&s +. #+&) t +&%* &)+(s!!3 The ma*er - ; disregard the condition and pay the indorsee even if the condition has not been fulfilled. Such payment will discharge him from liability on the instrument. <owever, the indorsee does not immediately ac3uire ownership over the sum. The indorsee must hold it in trust while the condition is not fulfilled. It is only upon the fulfilment of the condition that such ownership over the proceeds of the note is absolutely ac3uired by the conditional indorsee. E..!#t +. #+&) t +&%* &)+(s!1!&t +& &!'+t %b * t23 conditional indorsement does not render an instrument non1 negotiable. /ut if the condition is on the face of the instrument, ma*ing the order or promise to pay conditional, the condition renders it non1negotiable as the promise or order therein would not be unconditional. S!#3 ?5 Indorsement of instrument payable to bearer. 1 2here an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery> but the person indorsing specially is liable as indorser to only such holders as ma*e title through his indorsement. A,,* #%t +&3 This section applies only to instruments which are originally payable to bearer. It does %,T apply to instruments originally payable to order, even when they become payable to bearer because the only or last indorsement is in blan*. N!'+t %t +& +. &st(u1!&t ,%2%b*! t+ b!%(!( but s,!# %**2 &)+(s!)3 n instrument which is originally payable to bearer is always payable to bearer. <ence, even when specially indorsed, it can be negotiated by mere delivery.
S!#3 ?1 Indorsement where payable to two or more persons. 1 2here an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. A,,* #%t +&3 This section applies only to instruments payable to two or more payees Aointly )and+. It does %,T apply to instruments payable to two or more payees severally?solidary )or+. H+- &)+(s!1!&t +. B+ &t ,%2!!s 1%)!3 2here the instrument is payable to two or more payees, all payees must each indorse in order to negotiate the instrument. If only one indorses, he passes only his part of the instrument. Such an indorsement would not operate as such because it would not be an indorsement of the entire instrument. 5N'50TI,%S: )1+ where the payee or indorsee indorsing has authority to indorse for the others, and )!+ where the payees or indorsees are partners. S!#3 ?7 5ffect of instrument drawn or indorsed to a person as cashier. 1 2here an instrument is drawn or indorsed to a person as JcashierJ or other fiscal officer of a ban* or corporation, it is deemed prima facie to be payable to the ban* or corporation of which he is such officer, and may be negotiated by either the indorsement of the ban* or corporation or the indorsement of the officer. P(!su1,t +& s ) s,ut%b*!3 0roof may be adduced to show that the bill is payable to the cashier personally as real creditor to the ma*er. <owever, as to public corporations, a town treasurer has no authority to indorse the said instrument since $corporation& in this section does not include cities and towns. S!#3 ?4 Indorsement where name is misspelled, and so forth. 1 2here the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thin*s fit, his proper signature. S!#3 ?? Indorsement in representative capacity. 1 2here any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. H+- %'!&t 1ust &)+(s!3 <e must indorse in the same manner as an agent of the ma*er, drawer or acceptor should in order to escape personal liability as re3uired under Section !". <e must )1+ add the words describing himself as an agent> )!+ disclose his principal> and )#+ must be duly authoriIed. S!#3 ?@ Time of indorsement> presumption. 1 5(cept where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. I1,+(t%&#!3 In order that one may be a holder in due course, the instrument must be negotiated to him before it becomes overdue. The indorsement without date establishes pri0/ 4/cie presumption that the instrument was negotiated before maturity. S!#3 ?C 0lace of indorsement> presumption. 1 5(cept where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. I1,+(t%&#!3 The place of indorsement sometimes is material because an indorsement is governed by the laws of the place where it is indorsed, although the instrument is drawn or made in a different place. S!#3 ?D 'ontinuation of negotiable character. 1 n instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. W$!& &!'+t %b*! &st(u1!&t (!&)!(!) &+&-&!'+t %b*!3 @nder this section, an instrument originally negotiable can be rendered negotiable only by: )1+ restrictive indorsement> or )!+ by a discharge thereof by payment or otherwise. R '$t +. $+*)!( &+t & )u! #+u(s!3 The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subAect to defenses as if it were non1negotiable. S!#3 ?E Stri*ing out indorsement. 1 The holder may at any time stri*e out any indorsement which is not necessary to his title. The indorser whose indorsement is struc* out, and all indorsers subse3uent to him, are thereby relieved from liability on the instrument. W$!& $+*)!( 1%2 +( 1%2 &+t st( :! +ut &)+(s!1!&t3 holder may stri*e out any indorsement which is not necessary to his title. /ut where an instrument is transferred by a special indorsement, the holder has no right to stri*e out the name of the person mentioned in such indorsement and insert his own name in place thereof. The holder who ac3uires title subse3uent to the succeeding special indorsement must trace his title not only through the blan* indorsement but through the special indorsement as well.
E..!#ts +. st( : &' +ut3 )1+ The indorser whose indorsement is struc* out is relieved from his liability on the instrument, and )!+ all subse3uent indorsers are also relieved from their liability on the instrument. S!#3 ?F Transfer without indorsement> effect of. 1 2here the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee ac3uires in addition, the right to have the indorsement of the transferor. /ut for the purpose of determining whether the transferee is a holder in due course, the negotiation ta*es effect as of the time when the indorsement is actually made. A,,* #%t +&3 This section applies only to instruments payable to order. This contemplates a case where there is delivery and payment of value but no indorsement. This operates as an e3uitable assignment. R '$ts +. t(%&s.!(!! .+( =%*u!3 )1+ The transferee ac3uires only the rights of the transferor. )!+ The transferee has also the right to re3uire the transferor to indorse the instrument. W$!& t(%&s.!(!! b!#+1!s $+*)!( & )u! #+u(s!3 The time for determining whether the transferee is a holder in due course is as of the time of actual indorsement, not at the time of the delivery. S!#3 @5 2hen prior party may negotiate instrument. 1 2here an instrument is negotiated bac* to a prior party, such party may, subAect to the provisions of this ct, reissue and further negotiable the same. /ut he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.
CHAPTER @: H+*)!(s
.efinition: holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof. 1. <older of an order instrument: 0 ;55 or I%.,:S55> !. <older of a bearer instrument: /5 :5: RIGHTS OF HOLDERS IN GENERAL Sec H1: 5very holder of a negotiable instrument may sue thereon in his own name> and payment to him in due course discharges the instrument. It is not necessary that the holder is a holder in due course before he can enforce payment especially if there are no defenses available to the parties. The only disadvantage of a holder not in due course is that the instrument is subAect to defenses as if it were non1negotiable. RE8UISITES OF A HOLDER IN DUE COURSE (SEC @7): holder is a holder in due course if he has ta*en the instrument under the following conditions: 1. That it is complete and regular upon its face> !. That he became the holder of it before it was overdue and without notice that it has been previously dishonoured, if such was the fact> #. That he too* it in good faith and for value> C. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. $o3der It is actually the first re3uirement under Section H! 7 to be a $holder.& If a possessor of a negotiable instrument is not a holder, he can never be a holder in due course. 'o0p3ete /nd Re5u3/r
n instrument is complete and regular upon its face if it contains no material or substantial alteration. If the alteration is not apparent, the firs re3uirement is still present because the instrument is still complete and regular $upon its face.& T/=in5 1e4ore O6erdue holder who ta*es an overdue instrument is put on in3uiry although he is not actually aware of any e(isting defense of a prior party. . Installment Instruments 2ith respect to instruments that are payable in installment, it is a general proposition under the @niform %egotiable Instruments Law in the @nited States and 'ommon Law that t$! t(%&s.!(!! +. %& &st%**1!&t &+t % $+*)!( & )u! #+u(s! %s t+ %&2 ,%(t +. t$! &+t! -$!& t$! t(%&s.!( $%s b!!& 1%)! %.t!( t$! 1%tu( t2 +. +&! +( 1+(! t$+u'$ *!ss t$%& %** +. t$! &st%**1!&t3 /. ,verdue Interest 0ayments The mere fact that interest on a note was overdue does not, in the absence of a stipulation ma*ing the principal due upon failure to pay interest, affect an indorsee with notice of dishonour or put him on in3uiry. /ut it is a material circumstance bearing on the 3uestion whether the indorsee ac3uired the note in good faith and without notice of defects of title. '. .emand Instruments Sec. H#: 2here an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. @nreasonable: regard has to be had in the nature of the instrument, the usage of trade or business )if any+ with respect to such instruments, and the facts of the particular case )Sec. 1E#+. Notice o4 In4ir0ity /nd e4ect
5ffect of %otice: destroy the due course holding of the instrument Sec. H#: To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual *nowledge of the infirmity or defect, or *nowledge of such facts that his action in ta*ing the instrument amounted to bad faith. I&. (1 t2: any irregularity in the instrument. D!.!#t =! T t*!: when the party obtained the instrument, or any signature thereto by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as to amount to a fraud. )Sec. HB+ Good */it. ,campo vs. Gatchalian: lthough good faith on the part of the holder is presumed, such presumption is destroyed if the payee or indorsee ac3uired possession of the instrument under circumstances that should have put it to in3uiry as to the title of the holder who negotiated the instrument. 'rossed 'hec*s: as to crossed chec*s, a person who ta*es a crossed chec* without ma*ing further in3uiries is not a holder in due course. The act of crossing a chec* serves as a warning to the holder that the chec* has been issued .+( % )!. & t! ,u(,+s! so that he must in3uire if he has received the chec* pursuant to that purpose. ):ule does not apply if the payee deposited the chec*+. $o3der 4or 8/3ue =alue is a consideration sufficient to support a simple contract.
holder is a holder for value if the instrument was indorsed to him by his immediate transferor to pay for a loan that was e(tended to the latter. The concept of value under the %IL is different from the concept of cause or consideration under the 'ivil 'ode. 2ith respect to holders, the holder is a holder for value only to the e(tent that the consideration agreed upon has been paid, delivered, or performed. Sec. HC: 2here the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the e(tent of the amount paid therefor by him. ccommodation 0arties holder for value under Sec. !E of the %IL is one who must meet all the re3uirements of the holder in due course under Sec. H! of the same law e(cept notice of want of consideration. Lac* of notice of any infirmity in the instrument or defect in title of the person negotiating it has no application. <owever, the inapplicability of the fourth re3uisite is limited to notice of absence of consideration, that is, notice of the fact that the party is a mere accommodation party who did not receive any consideration on the instrument. 0resumptions The prima facie presumption is that every holder is a holder in due course and it is up to the person who is resisting the claim to prove that the holder is not a holder in due course. )0lease see Sec. HE+ The presumption does not operate if a demand instrument is negotiated for an unreasonable length of time. holder cannot li*ewise be presumed a holder in due course if there is no proof whatsoever how the person who is claiming the rights of a holder in due course, ac3uired the instrument. The conclusion is further reinforced if the same person cannot e(plain how he ac3uired the instrument and there is no showing that he ac3uired it before it was dishonoured. 0ayee as a <older in .ue 'ourse It is possible for a payee to be a holder in due course under any circumstance in which he meets the re3uirements of Sec. H! of the %IL. The word $holder& in Sec. H! may be replaced by the definition in Sec. 1E1. RIGHTS OF A HOLDER IN DUE COURSE 1. holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. a. holder in due course is free from personal defenses. b. holder in due course is no free from real defenses holder no in due course is subAect to personal and real defenses. the law does not impose on a holder the obligation to in3uire into the infirmity in the instrument or defect of the title of the person negotiating it to him. <owever, failure to ma*e in3uiry, when circumstances indicate defect, renders the holder not a holder in due course. Gross negligence may amount to legal absence of good faith ).e ,campo vs. Gatchalian, # S': HEG+.
!. #.
SHELTER RULE General :ule: if a holder is not a holder in due course, he is subAect to the same defenses as if it were non1negotiable. 5(ception: a holder who is not a holder in due course but he derived from his title from a holder in due course.
Sec. HF: ( ( ( /ut a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. The rule is not applicable: 1. !. If he was a previous holder not in due course who repurchased the instrument either personally or through an agent. :eac3uisition of the instrument.
:ights of <older in /ills in Set /ill in set: one bill that is drawn in set. Sec. 1BF: where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. problem arises if different parts of the set are negotiated to separate persons who are holders in due course. Ri5.ts /6/i3/13e: Sec. 1BE: 2here two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. /ut nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 1F": 2here the holder of a set indorses two or more parts to different persons, he is liable on every such part, and every indorser subse3uent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Sec. 1F1: The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part of such accepted parts negotiated to different holders in due course, he is liable on every such part as if it was a separate bill. CONSUMER TRANSACTIONS "/c=5round 0rotection must be granted to consumers who transact with negotiable instruments to sellers who in turn, transact such instruments to finance companies who are deemed holders in due course. Thus, when consumers find defect in the products they buy, they cannot refuse payment of such instruments primarily due to the fact that such finance companies are holders in due course. Protection under P.i3ippine >urisprudence 'onsolidated 0lywood Industries vs. I4' Leasing and cceptance 'orporation1: finance companies are better able to bear the ris* of the dealer6s insolvency than the buyer. They are also in a better position to protect their interests against unscrupulous and insolvent dealers. Kuanita Salas vs. '
!
: finance companies are still holders in due course.
)Thus, the Supreme 'ourt appears to be inconsistent in their rulings regarding these transactions.+ Protection under 'onsu0er Act
1 2
:I 1CE S': 1F1 S':
CCF.
!EG
rt. 1CG of : B#EC effectively abolished the distinction between a holder in due course and one who is not with respect to transfer to ban*s and financing companies of instruments that cover consumer credit sales. RIGHTS OF A HOLDER IN BILLS IN SET S!#3 1DE3 B **s & s!t #+&st tut! +&! b **3 - W$!(! % b ** s )(%-& & % s!t< !%#$ ,%(t +. t$! s!t b! &' &u1b!(!) %&) #+&t% & &' % (!.!(!&#! t+ t$! +t$!( ,%(ts< t$! -$+*! +. t$! ,%(ts #+&st tut!s +&! b **3 B ** & s!t< )!. &!)3 O ,ne composed of various parts, each part being numbered, and containing a reference to other parts, all of which parts constitute but one bill. Pu(,+s!3 O To increase the probability of the bill reaching its destination.
S!#3 1DF3 R '$t +. $+*)!(s -$!(! ) ..!(!&t ,%(ts %(! &!'+t %t!)3 - W$!(! t-+ +( 1+(! ,%(ts +. % s!t %(! &!'+t %t!) t+ ) ..!(!&t $+*)!(s & )u! #+u(s!< t$! $+*)!( -$+s! t t*! . (st %##(u!s s< %s b!t-!!& su#$ $+*)!(s< t$! t(u! +-&!( +. t$! b **3 But &+t$ &' & t$ s s!#t +& %..!#ts t$! ( '$t +. % ,!(s+& -$+< & )u! #+u(s!< %##!,ts +( ,%2s t$! ,%(ts . (st ,(!s!&t!) t+ $ 13 Suppose /, payee, wants to raise 0C,""". In violation of his rights, he negotiates the first part of the bill to ' and the second part to ., both of whom are holders in due course. 2ho is the true owner of the bill8 If / negotiates to ' on Kanuary #, 1EH" and to . on Kanuary H, 1EH", ' is the true owner, as '6s title accrues first. /@T, if . succeeds in presenting his part of the bill for acceptance or payment, and N, the drawee, accepts or pays the second part in due course, N is protected and N can refuse to accept '6s part of the bill. S!#3 1E53 L %b * t2 +. $+*)!( -$+ &)+(s!s t-+ +( 1+(! ,%(ts +. % s!t t+ ) ..!(!&t ,!(s+&s3 W$!(! t$! $+*)!( +. % s!t &)+(s!s t-+ +( 1+(! ,%(ts t+ ) ..!(!&t ,!(s+&s $! s * %b*! +& !=!(2 su#$ ,%(t< %&) !=!(2 &)+(s!( subs!9u!&t t+ $ 1 s * %b*! +& t$! ,%(t $! $%s $ 1s!*. &)+(s!)< %s . su#$ ,%(ts -!(! s!,%(%t! b **s3 L %b * t2 +. $+*)!( -$+ &)+(s!s t-+ +( 1+(! ,%(ts3 (C+&t &u%t +& +. **ust(%t +& u&)!( &+t! 11DE) O / is liable on both parts as if there are two bills, on the first to ' and on the second to .. In other words, as a result of his negotiation of the two parts, / is liable for a total of 0C,""". /ut , the drawer, or N, the drawee, is liable only on one part or for 0!,""" unless the drawee accepts both parts. O Suppose that ' and . respectively negotiate the parts they have to 5, the first part, and f, the second part. ' is liable to 5 for the part he indorsed to 5 and . is liable to 4 for the part he indorsed to 4. Sec. 1F1. cceptance of bill drawn in sets. 1 The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. D(%-!! 1ust %##!,t +&*2 +&! ,%(t. O If he accepts both parts, and they are negotiated to holders in due course, he is liable on evey such part as if it were a separate bill, that is for a total of 0C,""". /ut he can as* reimbursement from , drawer only on one part, that is, 0!,""", because the order of the drawer to him is to pay only one part,
not both parts. S!#3 1E73 P%21!&t b2 %##!,t+( +. b **s )(%-& & s!ts3 - W$!& t$! %##!,t+( +. % b ** )(%-& & % s!t ,%2s t - t$+ut (!9u ( &' t$! ,%(t b!%( &' $ s %##!,t%&#! t+ b! )!* =!(!) u, t+ $ 1< %&) t$! ,%(t %t 1%tu( t2 s +utst%&) &' & t$! $%&)s +. % $+*)!( & )u! #+u(s!< $! s * %b*! t+ t$! $+*)!( t$!(!+&3 I**ust(%t +&3 Suppose that N accepts only the first part. Then, he pays the second part without re3uiring the first part to be surrendered to him. ,n the date of maturity, N would still be liable to the holder of the first part on which appears his acceptance. S!#3 1E43 E..!#t +. ) s#$%(' &' +&! +. % s!t3 - E"#!,t %s $!(! & +t$!(- s! ,(+= )!)< -$!(! %&2 +&! ,%(t +. % b ** )(%-& & % s!t s ) s#$%('!) b2 ,%21!&t +( +t$!(- s!< t$! -$+*! b ** s ) s#$%('!)3 E..!#t +. ) s#$%('! +. +&! ,%(t3 O SubAect to the e(ceptions in Sections 1F", 1F1, and 1F!, if one part is discharged, the whole bill is discharged. :eason: The bill constitutes only one bill. 5(ample: Suppose that N, acceptor, pays the first part of which he accepted. The second and third parts are also discharged.
RELATED PRO6ISIONS: (AGBAYANI COMMENTARY) S!#3 @1 :ight of holder to sue> payment. 1 The holder of a negotiable instrument may to sue thereon in his own name> and payment to him in due course discharges the instrument. R '$ts +. t$! $+*)!( & '!&!(%*3 )1+ <e may sue on the instrument in his own name, even if he be a holder only for collection, or as a pledge of the instrument. )!+ <e may receive payment and if the payment is in due course, the instrument is discharged. E..!#t +. ,%21!&t t+ t$! $+*)!(3 The payment in due course to the holder of an instrument discharges the instrument. S!#3 @7 2hat constitutes a holder in due course. 1 under the following conditions: )a+ That it is complete and regular upon its face> holder in due course is a holder who has ta*en the instrument
)b+ That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact> )c+ That he too* it in good faith and for value> )d+ That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. W$!(! &st(u1!&ts $!*) #+1,*!t! %&) (!'u*%(3 )1+ 2here the omission is immaterial )!+ 2here there is alteration in the instrument but the court, upon inspection, found that the alteration was not apparent )#+ lthough a printed name of a payee was stric*en out, and another payee6s name inserted in writing, but the same is a common practice by the holder ban*. W$!& &st(u1!&t s +=!()u!3 n instrument is overdue after the date of maturity.
s to acceleration clause 7 2hen the instrument contains an acceleration clause, *nowledge of the holder at the time of ac3uisition thereof of that one instalment or interest is unpaid, is notice that the instrument is overdue.
s to interest 7 ,ne who purchases in good faith an instrument upon which the interest is overdue is a holder in due course. A#9u s t +& & '++) .% t$3 Good faith refers to the indorsee or transferee, not to the seller of the paper. <e must %,T have *nowledge or notice of e3uities of any sort which could be set up against a prior holder of the instrument. The test for determining whether a holder ac3uires an instrument in good faith is not whether he was negligent, but whether his purpose was dishonest. 5ven gross negligence does not establish bad faith. subAective test of honesty, not an obAective test of due care. A#9u s t +& .+( =%*u!3 2here the holder gave no valuable consideration for the transfer of the instrument to him, he cannot be a holder in due course. rticle 1##H of the 'ivil 'ode: $e(cept in cases specified by law, lesion or inade3uacy of cause shall not invalidate a contract, unless there has been fraud, mista*e or undue influence.& /ut while inade3uacy of consideration is not of itself a sufficient ground for either legal or e3uitable relief, yet it may be shown as evidence of fraud. D!.!#ts +. t t*!3 e4ects are those defined by Section HH to cover all those *nown as e3uitable defenses. e4enses include those which are not covered by Section HH such as mista*e, absence and failure of consideration, minority and other forms of incapacity, lac* of authority, etc. In4ir0ities must include things that are wrong with the instrument itself. M%2 t$! )(%-!! b! % $+*)!( & )u! #+u(s!? The $holder& refers to one who has ta*en the instrument as it passes along in the course of negotiation towards the drawee and not the drawee, who, on the acceptance an payment of the instrument, thereby strips it of all negotiability and reduces it to a mere voucher or proof of payment. M%2 % ,*!)'!! b! % $+*)!( & )u! #+u(s!? The pledgee for value in good faith of a complete unmatured note, without notice of e3uities, is a holder in due course. S!#3 @4 2hen person not deemed holder in due course. 1 2here an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. A,,* #%t +&3 This section applies to instruments which are payable on demand. S!#3 @? %otice before full amount is paid. 1 2here the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the e(tent of the amount therefore paid by him. S!#3 @@ 2hen title defective. 1 The title of a person who negotiates an instrument is defective within the meaning of this ct when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. D!.!#t =! t t*! & '!&!(%*3 The title of a person in an instrument becomes defective either: )1+ in the ac3uisition, or )!+ in the negotiation thereof. In ac3uisition, the title becomes defective when he obtains the instrument or any signature thereto by: )1+ fraud, )!+ duress or force and fear, )#+ other unlawful means, or )C+ for an illegal consideration. In negotiation, the title of a person becomes defective when he negotiates it: )1+ with breach of faith, or )!+ under such circumstances amounting to fraud. S!#3 @C 2hat constitutes notice of defect. 1 To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual *nowledge of the infirmity or defect, or *nowledge of such facts that his action in ta*ing the instrument amounted to bad faith. N+t #! +. )!.!#t +. t t*! & '!&!(%*3 To constitute notice of defect or infirmity, the transferee must have actual *nowledge, either: )1+ of the defect or infirmity, or )!+ of such facts that his action in ta*ing the instrument amounts to bad faith. S!#3 @D :ights of holder in due course. 1 holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. R '$ts +. % $+*)!( & )u! #+u(s!3 (1) <e may sue on the instrument in his own name>
Negotiable Instruments Law (Aquino and Agbayani Notes) 31 Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011! (2) (3) (4)
<e may receive payment, and if the payment is in due course, the instrument is discharged> <e holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves> and <e may enforce payment of the instrument for the full amount thereof against all parties liable thereon.
S!#t +& @E3 W$!& subB!#t t+ +( ' &%* )!.!&#!s3 H I& t$! $%&)s +. %&2 $+*)!( +t$!( t$%& % $+*)!( & )u! #+u(s!< % &!'+t %b*! &st(u1!&t s subB!#t t+ t$! s%1! )!.!&#!s %s . t -!(! &+&-&!'+t %b*!3 But % $+*)!( -$+ )!( =!s $ s t t*! t$(+u'$ % $+*)!( & )u! #+u(s!< %&) -$+ s &+t $ 1s!*. % ,%(t2 t+ %&2 .(%u) +( **!'%* t2 %..!#t &' t$! &st(u1!&t< $%s %** t$! ( '$ts +. su#$ .+(1!( $+*)!( & (!s,!#t +. %** ,%(t !s ,( +( t+ t$! *%tt!(3 R '$ts +. $+*)!( &+t & )u! #+u(s! 1. <e may sue on the instrument in his own name> )!+ <e may receive payment, and if payment is in due course, the instrument is discharged. )#+ <e holds the instrument subAect to the same defences as if it were non1negotiable> )C+ /ut a holder not in due course who derives his title through a holder in due course and who is not a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. H+*)!( %#9u ( &' .(+1 $+*)!( & )u! #+u(s! R!9u s t!s: 1. That he derived his title from a holder in due course> and )!+ that he was not himself a party to any fraud or illegality affecting the instrument purchaser from a holder in due course is entitled to recover against prior parties even though he has notice of the defences, or notice of maturity of a negotiable certificate of deposit, or with *nowledge of the e3uities In order that a holder who derives his title form a holder in due course may recover on the instrument, it is incumbent upon him to show that the person through whom he derives his title was a holder in due course As t+ +&! &+t % $+*)!( & )u! #+u(s! (!%#9u ( &' .(+1 $+*)!( & )u! #+u(s!3 If the original payee of a note unenforceable for lac* of consideration repurchases the instrument after transferring it to a holder in due course, the paper again becomes subAect in the payee6s hands to the same defences to which it would have been subAect as if the paper had never passed through the hands of a holder in due course. The same is true where the instrument is retransferred to an agent of the payee.
S!#t +& @F3 W$+ s )!!1!) $+*)!( & )u! #+u(s!3 H E=!(2 $+*)!( s )!!1!) ,( 1% .%# ! t+ b! % $+*)!( & )u! #+u(s!; but -$!& t s s$+-& t$%t t$! t t*! +. %&2 ,!(s+& -$+ $%s &!'+t %t!) t$! &st(u1!&t -%s )!.!#t =!< t$! bu()!& s +& t$! $+*)!( t+ ,(+=! t$%t $! +( s+1! ,!(s+& u&)!( -$+1 $! #*% 1s %#9u (!) t$! t t*! %s $+*)!( & )u! #+u(s!3 But t$! *%st-1!&t +&!) (u*! )+!s &+t %,,*2 & .%=+( +. % ,%(t2 -$+ b!#%1! b+u&) +& t$! &st(u1!&t ,( +( t+ t$! %#9u s t +& +. su#$ )!.!#t =! t t*!3 I& -$+s! .%=+( ,(!su1,t +& %( s!s3 The presumption e(pressed in this section arises only in favor of a person who is a holder in the sense defined in Section 1E1, that is, a payee or indorsee who is in possession of the draft, or the bearer thereof. In order to be a holder, one must be in possession of the note or the bearer thereof. <owever, when the instrument is not payable to the holder thereof or to bearer, there is said to be a defect in the title of the holder and the rule that a possessor of the instrument is prima facie a holder in due course does not apply. P(!su1,t +& &+t %,,* #%b*! -$!& t$! $+*)!(Is t t*! -%s )!.!#t =! +( sus, # +us3 s holder6s title was defective or suspicious, it cannot be stated that the payee ac3uired the chec* without *nowledge of said defect in holder6s title, and for this reason, the presumption that he is a holder in due course or that it ac3uired the instrument in good faith does not e(ist.
R!%s+& .+( t$! (u*!3 The guilty ma*er or holder of an instrument vitiated by fraud or illegality will naturally see* to put it in the hands of some other person in order to cut off the defense to which the instrument is subAect, and a presumption arise against the bona fide of the transfer
CHAPTER C: P%(t !s -$+ %(! L %b*!

NATURE OF LIABILITY 0rimary and Secondary Liability The holder is the person or entity who is given the right to demand the performance of the obligation reflected in the negotiable instrument, that is, the obligation to pay a sum certain in money. The passive subAect )obligor?debtor+ against whom the holder can enforce the right represented in the instrument are the persons who are primarily liable and the persons secondarily liable. 1. 0rimarily liable: the person, who, by the terms of the instrument, is absolutely re3uired to pay the same. !. Secondarily liable: if he engages that, on due presentment, the instrument shall be accepted or paid, or both as the case may be, according to its tenor, and that if it be dishonoured and the necessary proceedings on dishonour are duly ta*en, he will pay the amount thereof to the holder, or to any subse3uent indorser who may be compelled to pay it. In other words, the person secondarily liable promises to pay if the person primarily liable refuses or fails to pay. Liability vs. 2arranty Liability: the primary or secondary liability of the parties ma*es them liable to pay the sum certain in money stated in the instrument. 2arranty: affirmations of fact on the part of the parties that impose no direct obligation to pay in the absence of breach thereof. n action on the indorser6s special contract of indorsement is conditioned on presentment, and notice of dishonour> his liability for breach of warranty is not so conditioned. 4urthermore, the action on the special contract cannot be brought until the maturity of the instrument while the action for breach of warranty, occurring as it does at the time of the transfer, may be brought at any time. 2ho is Liable for 2hat8 Pri0/ry (i/1i3ities MA/ER 1. 5ngages to pay according to the tenor of the instrument> !. dmits the e(istence of the payee and his capacity to indorse. ACCEPTOR )Sec. G! 7 as to the warranties+ 1. 5ngages to pay according to the tenor of his acceptance> !. dmits the e(istence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument> #. dmits the e(istence of the payee and his capacity to indorse. )%./.: The acceptor does not become liable until he accepts the bill or unless he certifies the chec*.+ !econd/ry (i/1i3ity
DRAWER 1. dmits the e(istence of payee and his capacity to indorse> !. 5ngages that the instrument will be accepted or paid by the party primarily liable> #. 5ngages that if the instrument is dishonoured ad proper proceedings are brought, he will pay to the party entitled to be paid. 0ayment without cceptance
Instruments that are payable on demand: acceptance is an unnecessary step. This is especially true in the case of chec*s. Duestion: 2hether or not the drawee ban* that pays the value of the chec* but does not accept the same is still liable for the warranties of an acceptor under Sec. G!8 0%/ vs. %ational 'ity /an* of %ew ;or*: the drawee does not warrant if it does not accept the chec*s. The warranty is in favor of the holders of the instrument after acceptance and when the drawee ban* cashes or pays the chec*, the cycle of negotiation is terminated and it is illogical therafter to spea* of subse3uent holders who can invo*e the warranty provided in Sec. G! against the drawee. 0%/ vs. ' : P cceptance6 and Ppayment6 are, within the purview of the law, essentially different things, for the former is a promise to perform the act, while the latter is the actual performance thereof. The actual payment of the amount of chec* implies not only an assent to said order of the drawer and recognition of the drawer6s obligation to pay the aforementioned sum, but also, a compliance with such obligation. Thus, the warranties of an acceptor under Sec. G! of the %IL apply to the drawee who paid without prior acceptance. 45/T' vs. Gold 0alace Kewellery 'ompany: 0ayment of the negotiable instrument includes acceptance. ctual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. 'onse3uently, under this view, Sec. G! applies to the drawee that paid without accepting the chec*. WARRANTIES OF INDORSERS G!&!(%* I&)+(s!( Sec. GG: 5very indorser who endorses without 3ualification, warrants to all subse3uent holders in due course: 1. That the instrument is genuine and in all respects what it purports to be> !. That he has a good title to it> #. That all prior parties had capacity to contract> C. That the instrument is, at the time of the indorsement, valid and subsisting. The general indorser also engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor> and if it be dishonored and the necessary proceedings on dishonour be duly ta*en, he will pay the amount thereof to the holder, or to any subse3uent indorser who may be compelled to pay it. 8u%* . !) I&)+(s!( Sec. GH: 5very person negotiating an instrument by delivery or by a 3ualified indorsement warrants: 1. That the instrument is genuine and in all respects what it purports to be> !. That he has a good title to it> #. That he has no *nowledge of any fact which would impair the validity of the instrument or render it valueless. %ote: the warranty of persons negotiating by mere delivery e(tends to the immediate transferee only. :ule on the Liabilities of gents General %ote: am ma*er, drawer, acceptor, or indorser may act through an agent. <owever, an agent incurs all the liabilities as such ma*er, drawer, acceptor, or indorser $unless he discloses the name of his principal and the fact that he is acting only as an agent.&
(i/1i3ities o4 A5ents: Sec. 1F: %o person is liable on the instrument whose signature does not appear thereon, e(cept as otherwise e(pressly provided. /ut one who signs in a trade or assumed name will be liable to the same e(tent as if he had signed in his own name. Sec. 1E: the signature of any party may be made by a duly authoriIed agent. %o particular form of appointment is necessary for his purpose> and the authority of the agent may be established as in other cases of agency. Sec. !": 2here the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authoriIed> but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not e(empt him from personal liability. Sec. !1: signature by $procuration& operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. A Person w.o s.ou3d si5n t.e instru0ent General %ote: a person must sign the instrument before he can be made liable under the same instrument. This is consistent with Sec. 1F of %IL which provides that $no person is liable on the instrument whose signature does not appear thereon.& %ecessarily, the party must sign in his own name. 5(ceptions: the following person who did not sign on their own names are still liable: 1. ,ne who signs in a trade or assumed name )Sec. 1F+> !. ,ne who signs through an agent or an authoriIed representative )Sec. 1E+> #. Incapacitated persons who sign through their legal guardian> C. 4orgers of signatures )Sec. !#+> H. 0ersons whose signatures were forged but who are precluded from setting up the defense of forgery )Sec. !#+> G. In case of constructive acceptance )Sec. 1#B+> Sec. 1#B: 2here a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within !C hours after such delivery, or within such other period as the hodler may allow, to return the bill accepted or non1accepted to the holder, he will be deemed to have accepted the same. B. F. Indorsers who sign on a separate piece of paper *nown as an allonge> 0ersons who negotiate by mere delivery. They are liable for breach of warranty although they did not sign.
Tr/den/0e or Assu0ed N/0e If a person uses a trade name or an assumed name and he signs using such, he is liable as if he signed using his real name. AGENT 2hen a person signs through his authoriIed agent, the effect is that the same as the situation where he personally signed the instrument. If the agent signs in the manner prescribed by the %IL, the agent is not personally liable and the only person who is liable is the principal. <owever, two things must be present: 1. <e must indicate that he is signing as a mere agent> and !. <e must indicate the name of the principal. Per Procur/tion signature by procuration operates as notice that the agent has but a limited authority to sign and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. LIABILITIES OF ACCOMODATION PARTIES
Sec !E: an accommodation party is one who signed the instrument as ma*er, drawer, acceptor, or indorser, without receiving the value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of ta*ing the instrument, *new him to be only an accommodation party. Requisites under !ec &?: 1. !. #. <e must be a party to the instrument, signing as a ma*er, drawer, acceptor, or indorser> <e must not receive value therefor> and <e must sign for the purpose of lending his name or credit to some other person.
The accommodation party lends his name to the accommodated party. <e lends his name to enable the accommodated party to obtain credit or to raise money. <e receives no part of the consideration for the instrument but assumes liability to the other parties thereto. It is not a valid defense that the accommodation party did not receive any valuable consideration when he e(ecuted the instrument. !urety o4 Acco00od/ted P/rty /y lending his name, the accommodation party, is in effect, a su(!t2 +. t$! %##+11+)%t!) ,%(t23 Thus, if he is an accommodation indorser, he is secondarily liable as an accommodation indorser and he cannot ma*e the holder recover directly from the accommodated party. <is only recourse is to see* reimbursement from the accommodated party. Irre5u3/r Indorser lthough the law does not state that all irregular indorsers are accommodation parties, they are usually accommodation parties. .efinition of an Irregular Indorser: person, not otherwise a party to an instrument, who placed thereon his signature in blan* before delivery. 0rof. ,gden: the irregular or anomalous indorser is one who indorses the instrument in an unusual, singular or peculiar manner> it is irregular and an anomaly in the law.
Liabilities of an irregular indorser: 1. !. #. If the instrument is payable to the order of a third person, he is liable to the payee and to all subse3uent parties. If the instrument is payable to the order of the ma*er or drawer, or is payable to bearer, he is liable to all parties subse3uent to the payee. If he signs for accommodation of the payee, is liable to all parties subse3uent to the payee.
(i/1i3ity /0on5 t.e0se36es solidary accommodation party may see* reimbursement from the accommodated party or other accommodation parties subAect to the following rules: 1. !. Aoint and several accommodation party such as an accommodation ma*er may demand from the principal debtor reimbursement for the amount that he had paid to the payee> Aoint and several accommodation ma*er who pays on the said promissory note may directly demand reimbursement from his co1accommodation ma*er without first directing his action against the principal debtor provided that: a. <e made payment by virtue of a Audicial demand, or b. principal debtor is insolvent.
Liabilities of 'orporations The rule on the liability of an accommodation party under Sec. !E of the %IL does not apply to corporations.
corporation cannot act as an accommodation party. The issue or indorsement of a negotiable paper by a corporation without consideration and for the accommodation of another is u3tr/ 6ires2 /y way of e(ception, an officer or agent of a corporation shall have the power to e(ecute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authoriIed to do so. If a corporation is not liable, the holder may turn to its officers for relief. 0ersonal liability of the officers and directors may attach in the following instances: 1. <e assents: a. To a patently unlawful act of the corporation, or b. 4or bad faith or gross negligence in directing its affairs, or c. 4or conflict of interest, resulting in damages to the corporation, its stoc*holders or other persons !. <e consents to the issuance of watered down stoc*s or who, having *nowledge thereof, does not forthwith file with the corporate secretary his written obAection thereto> #. <e agrees to hold himself personally and solidarily liable with the corporation> or C. <e is made by a specific provision of law, to personally answer for his corporate action.

S!#t +& C53 L %b * t2 +. 1%:!(3 H T$! 1%:!( +. % &!'+t %b*! &st(u1!&t< b2 1%: &' t< !&'%'!s t$%t $! - ** ,%2 t %##+() &' t+ ts t!&+(< %&) %)1 ts t$! !" st!&#! +. t$! ,%2!! %&) $ s t$!& #%,%# t2 t+ &)+(s!3 M%:!( ,( 1%( *2 * %b*!3 The engagement of the ma*er is to pay absolutely the note according to its tenor. The ma*er6s liability is primary and unconditional. nd one who has signed as ma*er is presumed to have acted with care and to have signed the document in 3uestion with full *nowledge of its contents unless, of course, fraud is proved
L %b * t2 +. t-+ +( 1+(! 1%:!(s3 2hen two or more ma*ers sign Aointly and severally, each of them is individually liable for the payment of the full amount of their obligation even if one of them did not receive part of the value given therefor, a he would be considered an accommodation party. P%2!!Is !" st!&#! !t#3 side from engaging to pay the instrument according to its tenor, the ma*er also admits the e(istence of the payee and his then capacity to indorse. The ma*er conse3uently is precluded from setting up the following defences: )1+ that the payee is a fictitious person because, by ma*ing the note, he admits that the payee e(ists> and )!+ that the payee as insane, a minor, or a corporation acting ultra vires because, by ma*ing the note, he admits the then capacity of the payee to indorse.
S!#t +& C13 L %b * t2 +. )(%-!(3 T$! )(%-!( b2 )(%- &' t$! &st(u1!&t %)1 ts t$! !" st!&#! +. t$! ,%2!! %&) $ s t$!& #%,%# t2 t+ &)+(s!; %&) !&'%'!s t$%t< +& )u! ,(!s!&t1!&t< t$! &st(u1!&t - ** b! %##!,t!) +( ,% )< +( b+t$< %##+() &' t+ ts t!&+(< %&) t$%t . t b! ) s$+&+(!) %&) t$! &!#!ss%(2 ,(+#!!) &'s +& ) s$+&+u( b! )u*2 t%:!&3 H! - ** ,%2 t$! %1+u&t t$!(!+. t+ t$! $+*)!( +( t+ %&2 subs!9u!&t &)+(s!( -$+ 1%2 b! #+1,!**!) t+ ,%2 t3 But t$! )(%-!( 1%2 &s!(t & t$! &st(u1!&t %& !",(!ss st ,u*%t +& &!'%t = &' +( * 1 t &' $ s +-& * %b * t2 t+ t$! $+*)!( D(%-!( s!#+&)%( *2 * %b*!3 The drawer does not engage to pay the bill absolutely. <e engages merely that the bill will be accepted or paid or both, according to its tenor, and that he will pay only when: )1+ it is dishonored> and )!+ the necessary proceedings of dishonour are duly ta*en. In the absence of due presentment, the drawer is not liable
T+ -$+1 )(%-!( s!#+&)%(2 * %b*!3 The secondary liability of the drawer is in favor of: )1+ the holder, or )!+ if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer will be liable to that indorser so compelled to pay The law allows the drawer to negative or limit his liability by e(press stipulation.
S!#t +& C73 L %b * t2 +. A##!,t+(3 H T$! %##!,t+(< b2 %##!,t &' t$! &st(u1!&t< !&'%'!s t$%t $! - ** ,%2 t %##+() &' t+ t$! t!&+( +. $ s %##!,t%&#! %&) %)1 ts: (%) T$! !" st!&#! +. t$! )(%-!(< t$! '!&u &!&!ss +.
$ s s '&%tu(!< %&) $ s #%,%# t2 %&) %ut$+( t2 t+ )(%- t$! &st(u1!&t; %&) (b) T$! !" st!&#! +. t$! ,%2!! %&) $ s t$!& #%,%# t2 t+ &)+(s! A##!,t+( ,( 1%( *2 * %b*!3 The acceptor engages to pay absolutely according to the tenor of his acceptance. <is liability is not subAect to any condition. /efore acceptance, the drawee is not liable on the bill. The e(ecution of mortgage does not constitute any novation of the obligation represented by said accepted bills unless it is so e(pressly stated in said mortgage. It is to be noted that while the ma*er of a note engages to pay according to the tenor of the note, an acceptor engages to pay according to the tenor of his acceptance, not of the bill he accepts. This is an important distinction, for the tenor of the acceptor6s acceptance may be different from the tenor of the bill, as the acceptor may accept the bill with 3ualifications
W$!(! +( ' &%* t!&+( s %*t!(!) b!.+(! %##!,t%&#!3 Suppose the bill is originally for 01""". /efore the drawee N accepts it, it is altered by the payee to 0C""". Then N accepts it. <ow much N is liable to a holder in due course8
6 !- t$%t %*t!(!) t!&+( s t!&+( +. %##!,t%&#!3 ccording to one view, N is laible for 0C""". The reason is that the of N6s acceptance is for pC""". -oreover, he would be a party who has himself assented to the alteration. 6 !- t$%t +( ' &%* t!&+( s t!&+( +. %##!,t%&#!3 Section G! should be paraphrased to state that the liability of the acceptor depends upon the terms of his acceptance, that is, whether it is a general or a 3ualified acceptance or an acceptance for honor. n author suggests that all three of these acceptance contracts are within the purview of Section G! that the acceptor, by accepting the instrument, engages that he will pay it not according to the tenor of the bill since this would deny him the right to 3ualify the acceptance or to accept for honor but according to the tenor of his accecptance. E..!#t +. S!#t +& 17?3 It seems that this refer to the original tenor of the instrument ta*en from the standpoint of the person principally liable.
A)1 ss +& +. )(%-!(Is !" st!&#!< !t#3 The acceptor, by his acceptance, admits: )1+ the drawer6s e(istence, )!+ the genuineness of the drawer6s signature> and )#+ the capacity and authority of the drawer to draw the instrument. /ut he does not admit the genuine of the indorsers. <e also admits the e(istence of the payee and his then capacity to indorse.
E..!#t +. %##!,t+(Is %)1 ss +&s3 )1+ precluded from setting up the defense that the drawer is non1e(istent or fictitious because of his admission of the drawer6s e(istence> )!+ %either can he claim that the drawer6s signature is a forgery since he admits its genuineness> )#+ %either can the drawee escape liability by alleging want of consideration between him and the drawer.
S!#t +& C43 W$!& ,!(s+& )!!1!) &)+(s!(3 H A ,!(s+& ,*%# &' $ s s '&%tu(! u,+& %& &st(u1!&t +t$!(- s! t$%& %s % 1%:!(< )(%-!(< +( %##!,t+(< s )!!1!) t+ b! &)+(s!( u&*!ss $! #*!%(*2 &) #%t!s b2 %,,(+,( %t! -+()s $ s &t!&t +& t+ b! b+u&) & s+1! +t$!( #%,%# t23 W$!& ,!(s+& )!!1!) &)+(s!(3 In the absence of any indication in what capacity a person whose signature is written on the instrument intends to be bound, he shall be deemed an indorser. /ut one ma*ing a note payable to his own order does not, by indorsement thereof, assume liability as indorser I&) #%t +& t+ b! b+u&) +t$!(- s!3 nd one who signs otherwise than as ma*er, drawer, or acceptor, will not be deemed an indorser if he indicates by appropriate words his intention to be bound in some other capacity. A)1 ss b * t2 +. ,%(+* != )!&#!3 Secition G# is a statutory command that the legal effect of a blan* indorsement cannot be changed by parol proof or by evidence from other source. So that, under this section, one who indorses in blan* cannot show by parol that he signed merely as agent for a prior party and was not individually liable. <e is an indorser. lso the intent to be bound in some other capacity than as an indorser must be indicated in the indorsement or on the face of the instrument and cannot be shown by parol.
S!#t +& C?3 L %b* t 2 +. ((!'u*%( &)+(s!(3 H W$!(! % ,!(s+&< &+t +t$!(- s! % ,%(t2 t+ %& &st(u1!&t< ,*%#!s t$!(!+& $ s s '&%tu(! & b*%&: b!.+(! )!* =!(2< $! s * %b*! %s &)+(s!(< & %##+()%&#! - t$ t$! .+**+- &' (u*!s: (%) I. t$! &st(u1!&t s ,%2%b*! t+ t$! +()!( +. % t$ () ,!(s+&< $! s * %b*! t+ t$! ,%2!! %&) %** subs!9u!&t ,%(t !s3 (b) I. t$! &st(u1!&t s ,%2%b*! t+ t$! +()!( +. t$! 1%:!( +( )(%-!(< +( s ,%2%b*! t+ b!%(!(< $! s * %b*! t+ %** ,%(t !s subs!9u!&t t+ t$! 1%:!( +( )(%-!(3 (#) . $! s '&s .+( t$! %##+11+)%t +& +. t$! ,%2!!< $! s * %b*! t+ %** ,%(t !s subs!9u!&t t+ t$! ,%2!!3 I((!'u*%( &)+(s!(3 In order that a person may be considered an irregular indorser, the following re3uisites must be present: )1+ he must not otherwise be a party to the instrument, that is, he must not be a ma*er, drawer, acceptor, or regular indorsee thereon> )!+ he must sign the instrument in blan*> and )#+ he must sign before delivery. R!%s+& .+( us! +. t!(13 Such a party so signing is called an irregular or anomalous indorser because he indorses in an unsual, singular or peculiar manner. M!%& &' +. Jb!.+(! )!* =!(2K3 .elivery seems to include not only the original delivery to the payee but also every delivery from the party accommodated to a subse3uent party. A,,* #%t +& +. S!#t +& C?3 2here a person puts his signature after delivery, this section does not apply. It is Section 1B)f+ and Section G# which will apply. This section deals only with the liability of the irregular indorser to the payee but does not fi( the rights if various irregular indorsers as between themselves. S!#t +& C@3 W%((%&t2 -$!(! &!'+t %t +& b2 )!* =!(2 %&) s+ .+(t$3 H E=!(2 ,!(s+& &!'+t %t &' %& &st(u1!&t b2 )!* =!(2 +( b2 % 9u%* . !) &)+(s!1!&t -%((%&ts: (%) T$%t t$! &st(u1!&t s '!&u &! %&) & %** (!s,!#ts -$%t t ,u(,+(ts t+ b!; (b) T$%t $! $%s '++) t t*! t+ t; (#) t$%t %** ,( +( ,%(t !s $%) #%,%# t2 t+ #+&t(%#t; ()) T$%t $! $%s &+ :&+-*!)'! +. %&2 .%#t -$ #$ -+u*) 1,% ( t$! =%* ) t2 +. t$! &st(u1!&t +( (!&)!( t =%*u!*!ss3 But -$!& &!'+t %t +& s b2 )!* =!(2 +&*2< t$! -%((%&t2 !"t!&)s & .%=+( +. &+ $+*)!( +t$!( t$%& t$! 11!) %t! t(%&s.!(!!3 T$! ,(+= s +&s +. sub) = s +& (#) +. t$ s s!#t +& )+ &+t %,,*2 t+ % ,!(s+& &!'+t %t &' ,ub* # +( #+(,+(%t +& s!#u( t !s +t$!( t$%& b **s %&) &+t!s3 A,,* #%t +& +. S!#t +& C@3 This section treats of the warranties of: )1+ a person negotiating by mere delivery, and )!+ a person negotiating by 3ualified indorsement. The first refers to instrument payable to bearer, either originally or when the only or last indorsement is in blan*. /ut one indorsing in blan* is not referred to here, as he negotiates by indorsement completed by delivery, not only by delivery. The second refers to instrument payable to order. person negotiating by mere delivery becomes liable to the holder only when the holder cannot obtain payment from the person primarily liable by reason of the fact that any of the warranties of the person negotiating by delivery is or becomes false.Q
W%((%&t2 %s t+ '!&u &!&!ss3 The party negotiating by mere delivery is liable to the holder when the latter cannot collect from the ma*er because the instrument is altered or the ma*er6s signature is forged. W%((%&t2 %s t+ '++) t t*!3 The party negotiating by delivery is also liable to the holder if his title is defective as he ac3uired the instrument by means of fraud for which reason the holder cannot collect from the ma*er or acceptor. W%((%&t2 %s t+ #%,%# t2 t+ #+&t(%#t3 The party negotiating by delivery is also liable to the holder if the ma*er is a minor or an incompent. W%((%&t2 %s t+ '&+(%&#! +. #!(t% & .%#ts3 Suppose that the ma*er was insolvent at the time of the negotiation of the instrument. The fact renders the instrument valueless, and for this reason, the holder cannot collect on the instrument against the insolvent ma*er. )1+ If the party negotiating by delivery *new that the ma*er was insolvent,, and he concealed that fact, he would be liable because he warrants that he is ignorant of any fact that would render the instrument valueless, and it turns out that he *new it. )!+ the party negotiating by delivery would also be liable, if he *new but concealed that the instrument is not valid for want of consideration. T+ -$+1 -%((%&t !s !"t!&)3 In favor of no holder other than the immediate transferee.
W%((%&t !s &+t !"#*us =!3 The four warranties e(pressed in this section are not e(clusive but may be e(tended by analogy to li*e situations L %b * t2 +. 8u%* . !) I&)+(s!(3 The only difference is that while the person negotiating by mere delivery is liable only to his immediate transferee, the person negotiating by 3ualified indorsement is liable to all parties who derive their title through hi indorsement. N%tu(! +. L %b * t23 3ualified indorser or a person negotiating by mere delivery are secondarily liable, and that their secondary liability is limited, namely, to their warranties. In other words, they are secondarily liable only when the person primarily liable cannot pay because of a violation of any of the four warranties but they will not be liable if the person primarily liable cannot pay for any other reason than the violation of the four warranties. S!#t +& CC3 L %b * t2 +. '!&!(%* &)+(s!(3 H E=!(2 &)+(s!( -$+ &)+(s!s - t$+ut 9u%* . #%t +&< -%((%&ts t+ %** subs!9u!&t $+*)!(s & )u! #+u(s!: (%) T$! 1%tt!(s %&) t$ &'s 1!&t +&!) & sub) = s +&s (%)< (b)< %&) (#) +. t$! &!"t ,(!#!) &' s!#t +&; %&) (b) t$%t t$! &st(u1!&t s< %t t$! t 1! +. $ s &)+(s!1!&t< =%* ) %&) subs st &'; A&) & %)) t +& $! !&'%'!s t$%t< +& )u! ,(!s!&t1!&t< t s$%** b! %##!,t!) +( ,% )< +( b+t$< %s t$! #%s! 1%2 b!< %##+() &' t+ ts t!&+(< %&) t$%t . t b! ) s$+&+(!) %&) t$! &!#!ss%(2 ,(+#!!) &'s +& ) s$+&+u( b! )u*2 t%:!&< $! - ** ,%2 t$! %1+u&t t$!(!+. t+ t$! $+*)!(< +( t+ %&2 subs!9u!&t &)+(s!( -$+ 1%2 b! #+1,!**!) t+ ,%2 t3 A,,* #%t +& +. S!#t +& CC3 This section deals with the liability or warranties of one negotiating by general indorsement. It has been held that this section includes an indorser for collection. L %b * t2 +. '!&!(%* &)+(s!(3 It will be noted that the first three warranties of a general indorser are the same as those of 3ualified indorser or of a person negotiating by mere delivery. The fourth warranty of a general indorser is that the instrument is, at the time of his indorsement, valid and subsisting. F+u(t$ -%((%&t2 +. '!&!(%* &)+(s!( %&) 9u%* . !) &)+(s!(< ) st &'u s$!)3 2hile the 3ualified indorser or person negotiating by mere delivery warrants that he is ignorant of any fact that will render the instrument valueless or impair its validity, the general indorser warrants that the instrument he is indorsing is valid and subsisting regardless of whether he is ignorant of that fact or not. /ut the fourth warranty of a general indorser does not run in favor of holders who are parties to the illegal transaction. T+ -$+1 -%((%&t !s !"t!&)3 )1+ subse3uent holders in due course. )!+ 0ersons who derive their title from holders in due course. )#+ Immediate transferees, even if they are not holders in due course. ,therwise, the transferee of a 3ualified indorser would have greater rights than the transferee of a general indorser W%((%&t !s )+ &+t !"t!&) t+ )(%-!!3 The indorser of a chec* does not warrant the genuineness of the drawer6s signature to the drawee who pays it since the drawer is not a holder in due course under section H! nor a holder under section 1E1. Ot$!( * %b * t2 +. t$! '!&!(%* &)+(s!(3 Same as the secondary liability of a drawer. This is to say that the general indorser is liable if the instrument is dishonored. nd it has been held that the law does not re3uire that the reason for the dishonour be established. W$!& ,%(+* != )!&#! %)1 ss b*! %s t+ !"t( &s # %'(!!1!&t +. &)+(s!(s3 It has, however, been held that any prior or contemporaneous conversation in connection with a note or its indorsement may be proven by parol evidence, and that an e(trinsic agreement between indorsers and indorsee which cannot be embodied in the instrument without impairing its credit is provable by parol provided that such e(trinsic agreement should not vary, alter or destroy the obligations attached by law to the indorsement. L %b * t2 +. &)+(s!( %&) %ss '&+( #+1,%(!)3 Li*e the 3ualified indorser and a person negotiating by delivery, but not li*e the general indorser., an assignor is not responsible for the insolvency of the principal debtor. ,n the other hand, unli*e a 3ualified indorser and a person negotiating by delivery, but li*e the general indorser, the assignor warrants the e(istence and legality of the credit assigned and will, therefore, be liable to the assignee in case the assignee cannot collect from the principal debtor where the credit assigned is illegal or non1e(istent. S!#t +& CD3 L %b * t2 +. &)+(s!( -$!(! ,%,!( &!'+t %b*! b2 )!* =!(23 H -$!(! % ,!(s+& ,*%#!s $ s &)+(s!1!&t +& %& &st(u1!&t &!'+t %b*! b2 )!* =!(2< $! &#u(s %** t$! * %b * t2 +. %& &)+(s!(
S!#t +& CE3 O()!(s & -$ #$ &)+(s!(s %(! * %b*!3 H As (!s,!#ts +&! %&+t$!(< &)+(s!(s %(! * %b*! ,( 1% .%# ! & t$! +()!( & -$ #$ t$!2 &)+(s!; but != )!&#! s %)1 ss b*! t+ s$+- t$%t< %s b!t-!!& +( %1+&' t$!1s!*=!s< t$!2 $%=! %'(!!) +t$!(- s!3 L+ &t ,%2!!s +( B+ &t &)+(s!!s -$+ &)+(s! %(! )!!1!) t+ &)+(s! B+ &t*2 %&) s!=!(%**23 A,,* #%t +& +. S!#t +& CE3 This rule applies only with respect to an indorser or as against another but not as against a holder in due course. @nder this rule, every indorser is liable to all indorsers subse3uent to him but not those prior to him whom he in turn ma*es liable. L %b * t2 %s %'% &st $+*)!(3 The rule that indorsers are liable in the order they indorse is only as between or among themselves but not as against the holder. s to the holder they are liable in any order. L+ &t %&) s!=!(%* * %b * t2 +. B+ &t ,%2!!s3 Koint payees or Aoint indorsees are deemed to indorse Aointly and severally. E..!#t +. *%#: +. &+t #! +. ) s$+&+u( !t#3 ,ne of the Aoint indorsers cannot escape liability because proper notice of dishonour was not given to his Aoint indorser. 'onse3uently, when the holder e(pressly releases the first indorser, the second indorser will be discharged. S!#t +& CF3 * %b * t2 +. %& %'!&t +( b(+:!(3 W$!(! % b(+:!( +( +t$!( %'!&t &!'+t %t!s %& &st(u1!&t - t$+ut &)+(s!1!&t< $! &#u(s %** t$! * %b * t !s ,(!s#( b!) b2 S!#t +& C@ +. t$ s %#t< u&*!ss $! ) s#*+s!s t$! &%1! +. $ s ,( &# ,%* %&) t$! .%#t t$%t $! s %#t &' +&*2 %s %'!&t3 A,,* #%t +&3 This section seems to refer to instruments which are payable to bearer. The liability and warranties of the agent are those stated in Section GH.
CHAPTER D: D!.!&s!s
REAL DEFENSES 6S3 PERSONAL DEFENSES: 1. !. :eal defenses: those wherein the facts disclose an absence of one or more of the essential elements of a contract, or where the admitted contract is vitiated for all purposes for reasons of public policy. 0ersonal defenses: those wherein the facts present a true contract but where, for various reasons, such as fraud, duress, mista*e, prior breach of contract by the holder, discharge before maturity, and the li*e, the defendant is e(cused from his obligation to perform.
Types of :eal and 0ersonal .efenses REAL DEFENSES -inority )available only to the minor+. 4orgery %on1delivery of complete instrument -aterial lteration act of PERSONAL DEFENSES 4ailure or bsence of 'onsideration Illegal consideration %on1delivery of complete instrument 'onditional delivery complete instrument 4raud in inducement 4illing up blan* not within authority .uress or Intimidation 4illing up blan* beyond of
U3tr/ 8ires 'orporation
4raud in */ctu0 or Esse 'ontr/ctus Illegality 7 if declared void for any purpose
=icious force or violence 2ant of authority 0rescription .ischarge in Insolvency reasonable time Transfer in breach of faith -ista*e Insertion of wrong date nte1dating or post dating for illegal or fraudulent purpose. MINORITY AND OTHER CAUSES OF INCAPACITY Sec. !!: the indorsement or assignment of the instrument b corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. %inority %egotiation by a minor passes title to the instrument. The minor himself is not liable and the defense is available only to the minor himself. U3tr/ 8ires Acts .efinition: an ultra vires act is one committed outside the obAect for which a corporation is created as defined by the law of its organiIation and therefore beyond the power conferred upon it by law. U3tr/ 8ires 6s2 I33e5/3 Act 1. !. n ultra vires act is merely voidable which may be enforced by performance, ratification, or estoppels n illegal act is void and cannot be validated.
NON-DELI6ERY AND CONDITIONAL DELI6ERY Non e3i6ery o4 Inco0p3ete Instru0ent
Sec. 1C. /lan*s> when may be filled. 1 2here the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blan*s therein. nd a signature on a blan* paper delivered by the person ma*ing the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. /ut if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Sec. 1H. Incomplete instrument not delivered. 1 2here an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. %ote: In section 1C of the %IL, there is prima facie authority to fill up the incomplete instrument because there was delivery. In Section 1H, no such authority is presumed because there was no delivery. Unde3i6ered /nd e3i6ered 'o0p3ete Instru0ents
Sec. 1G. .elivery> when effectual> when presumed. 1 5very contract on a negotiable instrument is &#+1,*!t! %&) (!=+#%b*! u&t * )!* =!(2 +. t$! &st(u1!&t .+( t$! ,u(,+s! +. ' = &' !..!#t t$!(!t+3 s between immediate parties and as regards a remote party other than a holder in due course,
the delivery, in order to be effectual, must be made either by or under the authority of the party ma*ing, drawing, accepting, or indorsing, as the case may be> and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But -$!(! t$! &st(u1!&t s & t$! $%&)s +. % $+*)!( & )u! #+u(s!< % =%* ) )!* =!(2 t$!(!+. b2 %** ,%(t !s ,( +( t+ $ 1 s+ %s t+ 1%:! t$!1 * %b*! t+ $ 1 s #+&#*us =!*2 ,(!su1!)3 nd where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Out3ine o4 t.e Ru3es under !ec2 1@ 1. !. #. C. H. G. B. negotiable instrument must be delivered. If the instrument has not been delivered, the contract concerning the instrument is incomplete and revocable. Thus, there must be delivery whenever the instrument is issued or negotiated. .elivery must be either by or under the authority of the party ma*ing, drawing, accepting, or indorsing the instrument. If the instrument is no longer in the hands of the ma*er or the drawer, he is presumed to have already delivered the instrument to another )payee+ for the purpose of issuing the same s between immediate parties and remote parties who are not holders in due course, the delivery of a complete instrument may be established to be conditional or for a special purpose and not for the purpose of transferring title. s between immediate parties and remote parties who are not holders in due course, it may be established that there was no delivery at all of the complete instrument. s to holders in due course, it cannot be established that there was no delivery. .elivery is conclusive as to the holder in due course if he is in possession of a complete instrument. s to holders in due course, it cannot be established that the delivery was conditional or for a special purpose. s to him, delivery is conclusively presumed to be unconditional and for the purpose of transferring title without any reservation or condition.
Ot.er Notes 1. .elivery means transfer of possession of the negotiable instrument by one person to another with the intention to transfer title to the instrument. This is involved in the issuance of the instrument, negotiation of the instrument and in other forms of transfer. Transferee ac3uires no right if the instrument was not delivered to him. 2ithout delivery, transfer is incomplete. The delivery of the negotiable instrument for purposes of issuance or negotiation position of the parties in the chain of negotiation may be made personally by the person who is supposed to transfer li*e the ma*er, drawer, or indorser or to his authoriIed agent?representative. )as to agents?representatives, they must be authoriIed.+ If the instrument is no longer in the hands of the ma*er or the drawer, he is presumed to have already delivered the instrument to another )payee+ for the purpose of issuing the same. If the instrument is no longer in the hands of the indorser, he is presumed to he is presumed to have delivered the same for purposes of transferring title. Immediate parties do not refer to the position of the parties in the chain of negotiation but Pimmediate6 refers to persons who are familiar with the circumstances regarding the transfer. 2ith respect to the holder, the most important thing to consider is whether or not the holder who is trying to collect based on the instrument is a holder in due course or not. The fact that the party is an immediate party or a remote party is important under Sec. 1G in order to determine if it can be established as against them if the delivery was conditional or for a special purpose.
!.
#.
C.
H.
FILLING UP BLAN/S BEYOND AUTHORITY )See Sec. 1C+ 7 applies to an incomplete but delivered instrument. The defense available to parties primarily liable against the holders is classified as a personal defense which is available against the holder who is not a holder in due course. Out3ine o4 Ru3es under !ec2 1,:
Negotiable Instruments Law (Aquino and Agbayani Notes) 43 Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011! 1. 2.
#. person in possession of an instrument that is wanting in a material particular has pri0/ 4/cie authority to complete it by filling up the blan*s therein strictly in accordance with the authority given and within reasonable time. If a person delivers a blan* paper to another person containing his signature for the purpose of converting it into a negotiable instrument, the person to whom the instrument is delivered has pri0/ 4/cie authority to fill it up for any amount. If the holder of the instrument, after it was filled up, is a holder in due course, the holder may enforce the instrument as if it has been filled up strictly in accordance with the authority given and within a reasonable time.
MATERIAL PARTICULAR 5(ample: an instrument that does not state the amount to be paid is not a complete instrument and a material particular is missing. %ot limited to the matters mentioned as re3uisites under Sec. 1 of the %IL. It may include any detail that affects the tenor of the instrument or the rights of the parties. It also includes matters mentioned in Sec. 1!H. Sec. 1!H: any alteration which changes: a. The date> b. The sum payable, either for principal or interest> c. The time or place of payment> d. The number or the relations of the parties> e. The medium or currency in which payment is to be made> f. ,r which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. Pri0/ */cie Aut.ority Incomplete Instrument If the ma*er or drawer delivers an instrument to the payee although it is wanting in material particular, the payee is deemed to have pri0/ 4/cie authority to fill it up. The moment the instrument is completed, the presumption is that the instrument was completed with prior authority from the ma*er or the drawer and that the person who completed the instrument did not e(ceed in his authority. Sec. 1C also presumes that the instrument was completed in accordance with the authority that it was given. !. Signed ban* piece of paper If a person delivers a blan* piece of paper containing his signature to another person for the purpose of converting it into a negotiable instrument the person to whom the instrument is delivered has prima facie authority to fill it up with any amount. :e3uisites for presumption to operate: i. There must be delivery of a paper to another person> ii. The paper that was delivered was a blan* paper containing the signature of the person who will deliver> iii. The delivery was for the purpose of converting the paper into a negotiable instrument. <older in .ue 'ourse If the holder is an <.', then the last sentence of Sec. 1C still applies even if what was delivered was a blan* piece of paper signed by the person delivering the same but without authority to convert it into a negotiable instrument. 1.
#.
4raud *r/ud in Induce0ent 6s2 *r/ud in execution FRAUD IN INDUCEMENT FRAUD IN E0ECUTION
The person who signs the instrument intends to sign the same as a negotiable instrument but was induced to do so only through fraud 'onsent is vitiated by fraud ,nly a personal defense Notes If fraud is committed in the performance of a collateral obligation, the nature of fraud is similar to fraud in inducement and the defense is li*ewise a personal defense. In the defense of fraud in 4/ctu09 the person who signs the instrument lac*s the *nowledge of the character or essential terms of the instrument. The defense is not available if the party involved had reasonable opportunity to obtain such *nowledge. */ctors to 1e considered in deter0inin5 presence o4 re/son/13e opportunity: 1. !. #. C. H. G. ge and se( of the obligor> Intelligence, education, and business e(perience> bility to read and understand the language used> The representations made to him and his reason to rely on them or to have confidence in the person ma*ing them> him, or any other information> The apparent necessity or lac* of it, for acting without delay. 2hen a person is induced to sign an instrument not *nowing its character as a note or a bill. The person who signs the instrument does not *now that he is signing a negotiable instrument. real defense.
MATERIAL ALTERATION lteration must be material before it can be considered a defense. ,therwise, it is not a defense at all. <owever, a material alteration is only a Ppartial6 real defense because the holder in due course can enforce it according to its original tenor. )See Secs. 1!C and 1!H for application of rules on application+ Sec. 1!C. lteration of instrument> effect of. 1 2here a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, e(cept as against a party who has himself made, authoriIed, or assented to the alteration and subse3uent indorsers. /ut when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. 'oncept o4 A3ter/tion 0%/ vs. ' )!HG S': CE1+: n alteration is said to be material if it alters the effect of the instrument. It means an unauthoriIed change in an instrument that purports to modify in any respect the obligation of any party or an unauthoriIed addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are re3uired to be stated in Sec. 1 of the %egotiable Instruments Law. )according to Kustice =itug, an innocent alteration and spoliation will not avoid the instrument, but the holder may enforce it only according to its original tenor. In addition, there is no alteration if only serial numbers were altered. Ot.er Notes: n alteration that totally prevents recovery constitutes a material alteration 7 it cannot be enforced by the holder in due course according to its original tenor.
lteration of the amount payable is material alteration. If the negotiable instrument involved is a chec*, and the same was deposited by the holder in a collecting ban*, the collecting ban* will suffer the loss in case of material alteration because the warranties of the collecting ban* are that of a general indorser. E..!#t +. %*t!(%t +& +& ,%2!! -$+ s % $+*)!( & )u! #+u(s!: the collecting ban* cannot debit the account of a payee who is a holder in due course if the collecting ban* returned the amount of the altered chec* to the drawee ban*. It is the drawee ban* that should bear the loss and if the collecting ban* reimbursed the drawee ban* the amount of the altered chec*, the collecting ban* would only be considered as acting on its own and should be responsible for its own action. :easons by the Supreme 'ourt:# B. 1. !. 0resence or absence of any third person who might read or e(plain the instrument to The payment of a chec* by the drawee includes its acceptance contemplated under Sec. G!. ctual payment is greater than acceptance. 0ayee is thus protected in Sec. G!. /y paying the collecting ban*, the drawee, recogniIed and complied with its obligation to pay in accordance with the tenor of his acceptance. In other words, the drawee is liable on its payment of the chec* according to the tenor of the chec* at the time of payment, which was raised the amount. The payee of the altered chec* may be a holder in due course. payee who is a holder in due course, who relied on the drawee ban*6s clearance and payment of the draft and not being negligent, the payee is amply protected by Sec. G!. It further reasserts the usefulness, stability and currency of negotiable paper without seriously endangering accepted ban*ing practices. The preferential treatment given to the paying ban* by common law Aurisdictions cannot be applied in this Aurisdiction, absent any similar provision in our law. If the collecting ban* cannot be considered to have acted as the representative of the drawee ban* when it debited respondent6s account, because the drawee ban* had no right to recover what it had paid. The collecting ban* cannot invo*e the warranty of the payee?depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under Section #G, is a restrictive indorsement.
#. C. H. G. B.
A&+t$!( = !- - t$ (!s,!#t t+ !"t!&t +. (!#+=!(2 +. $+*)!( & )u! #+u(s!: It is worth noting that there is a view to the effect that even if the payee in the said case is a holder in due course who is entitled to protection, the protection should be in accordance with Sec. 1!C of the %egotiable Instruments Law. O,,+s t! = !- (!'%() &' * %b * t2 +. ,%2!! %&) #+**!#t &' b%&:: it also should be pointed out that the obligation to return the amount of the altered chec* is an obligation that is fi(ed by Aurisprudence and statutory provisions. It is not a mere voluntary act but is one dictated by law and Aurisprudence. <ence, the view is that as between the drawee1ban* and the collecting ban*, it is the collecting ban* that shall be responsible for the loss in case of alteration. There is also Aurisprudence to the effect that the collecting ban*6s right of recourse is against the depositor1payee> that the payee will shoulder the loss because he has the same warranties of a general indorser when he signs the chec* for deposit. )Tim 3 agrees with this view+ nte1dating or 0ost1dating Sec. 1!. nte1dated and post1dated. 1 The instrument is not invalid for the reason only that it is ante1 dated or post1dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered ac3uires the title thereto as of the date of delivery.
3
45/T' vs. Gold 0alace Kewellery 'ompany, G.:. %o. 1GF!BC,
ugust !", !""F.
In ot.er words: If the post1dating or the ante1dating is for an illegal or fraudulent purpose, a personal defense is available against the holder. INSERTION OF A WRONG DATE Insertion of a wrong date may be a personal defense. If a wrong date is inserted, the holder in due course has the right to regard the wrongfully inserted date as the true date. Sec. 1#: 2here an instrument e(pressed to be payable at a fi(ed period after date is issued undated, or where the acceptance of an instrument payable at a fi(ed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subse3uent holder in due course> but as to him, the date so inserted is to be regarded as the true date. ABSENCE OR FAILURE OF CONSIDERATION bsence or failure of consideration is a matter of defense as against any person not course. 0artial failure of consideration is a defense pro t/nto, whether the failure is li3uidated amount or otherwise. <ence, the personal defense of failure of consideration seller who received the negotiable instrument because of his promise to deliver goods, with such promise. DURESS AND INTIMIDATION To constitute duress, there must be an actual or threatened e(ercise or power possessed by the party benefited thereby, for the purpose of obtaining the note )or bill+, such as to deprive the ma*er of that 3uality of mind essential to the ma*ing of a contract. .egree of duress is relative depending on the circumstances of the parties and of the situation. Threats to a feeble and old person might be duress to one while it may not be so to another. vailable even though there may be some consideration to support the instrument. The fact that the defendant did not act as a reasonable man would in resisting the coercion e(ercised upon him will not li*ewise prevent him from setting up the defense of duress. .uress is a real defense or if it is vicious or if it is what is referred to as $duress amounting to forgery.& )e(. person who e(erts force is practically writing the note itself by holding the hands of another.+ Illegality G!&!(%* Ru*!: illegality of the transaction that gave rise to a particular transaction is only a personal defense. E"#!,t +&: 2hen the law which declares the transaction illegal li*ewise declares that the negotiable instrument or document issued in connection thereto is void against any party. PRESCRIPTION 5(tinctive prescription is considered a real defense that may be raised even against a holder in due course. P(!s#( ,t =! P!( +): 1" years from the time the cause of action accrued. 2ith respect to chec*s, the action of the depositor against his drawee ban* commences to run from the time he is given notice of payment. FORGERY AND WANT OF AUTHORITY Gener/3 Ru3es Sec. !#. 4orged signature> effect of. 1 2hen a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or a holder in due ascertained and is present if the failed to comply
to give a discharge therefor, or to enforce payment thereof against any party thereto, can be ac3uired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Cut-O.. Ru*!: Section !# does not avoid the instrument and only the forged signature is rendered inoperative. ccording to the cut1off rule, the parties prior to the forged signature are cut1off from the parties after the forgery in the same sense that prior parties cannot be held liable and can raise the defense of forgery. The only instance when prior parties are liable is if they are precluded from setting up the defense of forgery either because of their warranties, representations or their negligence. Gampesaw vs. ' )!1F S': GF!+: party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. If a person6s signature is forged as a ma*er of a promissory note, he cannot be made to pay because he never made the promise to pay. ,r where a person6s signature as a drawer of the chec* is forged, the drawee ban* cannot charge the amount thereof against the drawer6s account because he never gave the ban* the order to pay. Persons Prec3uded 4ro0 !ettin5 up *or5ery 1. !. 0arties who warrant or admit the genuineness of the signature in 3uestion> and Those who by their acts, silence, or negligence are stopped from setting up the defense of forgery. These include acts or omission that amount to ratification, e(press or implied.
2arranty
Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of certain signatures on the instrument. They are precluded from setting up the defense of forgery in certain cases. )e(. Sec. G! %IL+ %egligence
drawer who can otherwise recover from the drawee may be barred from doing so because of its negligence or may have to suffer reduction of the amount. Included therein is one6s failure to comply with the rules or agreement or on the return of chec*s. <owever, negligence cannot be imputed to the drawer by the mere fact that the person responsible for the forgery is his employee or even an independent auditor. 5stoppel 5(ample: if the drawer opportunity and :atification the drawer was already informed that a chec* bearing his forged signature is being encashed, will be deemed to have ratified the forgery if he failed to act on such information despite to do so.
*or5ery in Notes -a*er6s Signature
2here the ma*er6s signature is forged, the ma*er is not liable to all subse3uent parties whether the instrument is an order instrument or a bearer instrument. )See Sec. !#+ <owever, indorsers after the forgery are still secondarily liable to the holder. These indorsers warrant that the instrument is genuine and in all respect what it purports to be. <ence, they can no longer claim that the instrument is not genuine. Indorser6s Signature
,n ,rder Instruments: 2here the indorsement of the payee is forged in a note payable to order, the instrument cannot be enforced against the payee and the ma*er. The payee6s forged signature is wholly inoperative and no right to enforce payment can be obtained against any party prior to the forgery. The indorsers after the forgery are liable because they warrant that they have good title to the instrument.
,n /earer Instruments: In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. <ence, the ma*er may still be liable to a holder in due course even if an indorsement was forged after the issuance of the note. The rule is consistent with Sec. G" which provides that the underta*ing of the ma*er is to pay the instrument $according to its tenor&. The $tenor& of the instrument is that he engages to pay any bearer of the instrument. *or5ery in "i33s o4 Exc./n5e .rawer6s Signature
2here the drawer6s signature is forged, the drawer is not liable whether or not the instrument is payable to bearer or payable order. There is no right to enforce payment against the drawer under the forged signature. This is true even if the instrument is a bearer instrument because the drawer was never a party to the instrument 7 he did not promise to pay anybody. In addition, the drawer6s account cannot be debited if his signature in a chec* was forged. .rawee1 cceptor6s 2arranties: drawee ban* cannot recover the amount because by accepting the instrument, he warrants all those mentioned in Sec. G#. %egligence of .rawee: It can be further e(plained that the liability of the drawee in case the drawer6s signature was forged can also be traced to the drawee6s negligence. Indorser6s Signature O& O()!( I&st(u1!&ts: 2here the instrument of the payee in a bill of e(change was forged after delivery of the instrument by the drawer to the said payee, the subse3uent holder cannot enforce payment thereof against the drawee, the drawer, or the payee. 0arties prior to the forgery can raise the defense of forgery. 0arties after the forgery are cut1off from the parties prior to the forgery. <ence, indorsers after the forgery may still be secondarily liable to the holder but indorsers prior to the said forgery are not liable. If the instrument involved is a chec*, the drawee cannot charge the account of the drawer if the payee6s or any indorser6s signature is forged. The drawee, in turn has the right of recourse against the collecting ban*. ,ther notes: 1. !. #. C. The payee can claim against the collecting ban*. The drawer cannot opt to recover from the collecting ban*. There is no privity of contract between the drawer and the collecting ban*. The last indorser will be liable for the amount indicated in the negotiable instrument even if a previous indorsment was forged. 2hen the collecting ban* is made liable, the collecting ban* may recover from its depositor who had not given value for the money paid to him has no right to retain the money he received.
O& B!%(!( I&st(u1!&ts: the same rule that is applicable to forged indorsement in a bearer promissory note applies to forged indorsement in a bearer bill of e(change. The holder of a bearer instrument can still recover from the drawer if a special indorsement was forged because the forged signature is unnecessary for his title.
CHAPTER E ENFORCEMENT OF LIABILITY

STEPS TO CHARGE THE PARTIES LIABLE P!(s+&s ,( 1%( *2 * %b*! persons who are absolutely re3uired to pay the instrument )Sec.1E1+
P(+1 ss+(2 &+t! 1 ma*er B ** +. !"#$%&'! - acceptor
The liability of persons primarily liable automatically attaches the moment they ma*e or accept the instrument as the case may be. e44ect: no further act is necessary in order that liability may accrue .ow 3i/1i3ity is en4orced: by presenting the instrument for payment P!(s+&s s!#+&)%( *2 * %b*! those who promise to pay if the person primarily liable refuses or fails to pay> those who $engage that, on due presentment, the instrument shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly ta*en, he will pay the amount thereof to the holder, or to any subse3uent indorser who may be compelled to pay it. .rawer Indorsers The liability of persons secondarily liable cannot be enforced immediately. There are necessary steps to be ta*en. If the said steps are not complied with, they are discharged from the instrument or their obligation is e(tinguished.
St!,s & E&.+(# &' L %b * t2 +& ,(+1 ss+(2 &+t!: ( &)+(s!() 1. !. 0resentment for payment must be made within the re3uired period to the ma*er %otice of dishonor should be given
St!,s & E&.+(# &' L %b * t2 +& b ** +. !"#$%&'!: ()(%-!( %&) &)+(s!() 1. !. a. b. #. a. b. 0resentment for acceptance If dishonored by non1acceptance: %otice of dishonor should be given to the indorsers and drawers If the bill is a foreign bill, there must be protest for dishonor by non1acceptance If the bill is accepted: 0resentment for payment to the acceptor should be made If the bill is dishonored upon presentment for payment i. %otice of dishonor must be given to person secondarily liable ii. If the bill is a foreign bill, protest for dishonor by non1acceptance must be made
PRESENTMENT FOR PAYMENT (S!#s3 D5-EE) P(!s!&t1!&t H production of a bill of e(change to the drawee for his acceptance or to the drawee or acceptor for payment or the production of a promissory note to the party liable for payment of the same P(!s!&t1!&t .+( ,%21!&t 7 consists of: a. 0ersonal demand for payment at the proper place b. To e(hibit the bill or note is re3uired and to receive payment and surrender it if the debtor is willing to pay R!9u s t!s: Who: by the holder, or by some person authoriIed to receive payment on his behalf When: at a reasonable hour on a business day Where: at a proper place as herein defined To Whom: to the person primarily liable on the instrument, of if he is absent or inaccessible, to any person found at the place where the presentment is made
E44ect i4 t.e , requisites /re not co0p3ied wit.: as if no presentment for payment was done persons secondarily liable are discharged13 W$+ 1%:!s ,(!s!&t1!&t .+( ,%21!&t a. b. <older Some person authoriIed to receive payment on his behalf )e(amples: )1+ collecting ban*> )!+ agent> )#+ heirs> )C+ successors1in1interest+
73 W$!& ,(!s!&t1!&t s 1%)! a. .ate of presentment Instrument %,T payable on demand on the day it falls due or on the maturity date fi(ed Instrument payable on demand 0romissory note 7 within a reasonable time after its issue /ill of e(change 7 within a reasonable time after last negotiation $reasonable time& so much time as is necessary under the circumstances for a reasonable prudent and diligent man to do conveniently what the contract or duty re3uires should be done, having a regard for the rights and possibility of loss, if any, to the other party $last negotiation& last transfer for value N+t!: Subse3uent transfers between ban*s for purposes of collection are not negotiations contemplated herein $stale chec*& one which has not been presented for payment within a reasonable time after its issue )after 1F" days or G months+> valueless
Instrument payable at a ban* must be presented during ban*ing hours E"#!,t +&: person to ma*e payment has no funds there to meet it at any time during the day> said person may present at any hour before the ban* is closed b. Time of presentment $ow is t.e ti0e co0puted e(cluding the day from which the time is to begin to run and by including the date of payment
Instrument is payable at a fi(ed time payable at the time fi(ed therein without grace .ay of maturity of instrument falls on a Sunday or a holiday payable on -onday or succeeding business day .ay of maturity falls on a Saturday or instrument becomes payable on a Saturday i. Instrument payable at a fi(ed or determinate future time 7 ne(t succeeding business day ii.Instrument is payable on demand 7 Saturday, before 1!noon or -onday at the option of the holder N+t!: ,n the day of payment, the party liable is entitled to the whole of that day within which to ma*e payment Su11%(2 W$!& P(!s!&t1!&t .+( P%21!&t s M%)! D%t! I&st(u1!&t &+t ,%2%b*! +& ,n the day instrument falls due T 1! t the time fi(ed without
)!1%&) grace
I4 d/y o4 0/turity 4/33s on / !und/y or / .o3id/y payable on -onday or succeeding business day I4 d/y o4 0/turity 4/33s on / !/turd/y or instru0ent 1eco0es p/y/13e on / !/turd/y ne(t succeeding business day I&st(u1!&t ,%2%b*! +& )!1%&) 0romissory note 2ithin a reasonable time after its last issue 2ithin a reasonable time after last negotiation .ay of maturity falls on a Saturday or instrument becomes payable on a Saturday Saturday, before 1!nn or -onday at the option of the holder
/ill of e(change
43 W$!(! ,(!s!&t1!&t s 1%)! 0lace of presentment: )Sec. B#+ a. b. c. 2here a place of payment is specified in the instrument, and it is thee presented 2here no place of payment is specified but the address of the person to ma*e payment is given in the instrument and it is there presented 2here no place of payment is specified and no address is given, and the instrument is presented at the usual place of business or residence of the person to ma*e payment
d. In any other case if presented to the person to ma*e payment wherever he can be found, or if presented at his last *nown place of business or residence P%2%b*! %t % s,!# %* ,*%#! )Sec.B"+ $Rif the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are e3uivalent to a tender of payment& ma*er?acceptor is still liable to pay presentment for payment for person primarily liable is %,T necessary e44ect: if holder will not present the instrument at the special place, he loses his right to the payment of interest $place of payment& a house, ban*, counting room, store or place of business, where the holder can present a note, where the ma*er can deposit or provide funds to meet it, and where a legal offer to pay can be made ?3 T+ -$+1 ,(!s!&t1!&t .+( ,%21!&t s 1%)!: a. To the person primarily liable on the instrument or if he is absent or inaccessible to any person found at the place where presentment is made b. 0erson primarily liable is dead and no place of payment is specified: personal representative, if such there be and if with the e(ercise of due diligence, he can be found c. 0ersons primarily liable are partners and no place of payment is specified, presentment may be made to any one of them d. There are several persons primarily liable and are not partners and no place of payment is specified, presentment must be made to them all N+t!s: Letters b1d are not applicable if place is specified. In such case, presentment must be made to any person found in the specified place. lthough the indorser himself be the personal representative of the deceased person primarily liable, presentment for payment is still necessary. E"$ b t +& +. t$! &st(u1!&t )Sec.BC+ $ The instrument must be e(hibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. $ Purpose: a. To determine the genuineness of the instrument and the right of the holder to receive payment b. To enable him to reclaim possession upon payment $ W.en excused: a. 2hen the debtor does not demand to see the instrument but refuses payment on some other grounds b. 2hen the instrument is lost or destroyed $ W.en unnecess/ry: a. ,mission to contest it b. dmission of the authenticity of the note implicit from the averment that substantial payments were made thereon c. 5(press waiver of demand, presentment, protest, and notice of protest and non1payment in the note N+t!: .emand by telephone is %,T sufficient because e(hibition of the instrument is %,T possible. W$!& )!*%2 +. ,(!s!&t1!&t .+( ,%21!&t s !"#us!): ) rt. F1+ $ 2hen delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence. $ %ote: 2hen the cause of delay ceases to operate, presentment must be made with reasonable diligence. D s$+&+( b2 &+&-,%21!&t +. &st(u1!&t:
1. !. It is duly presented for payment and payment is refused or cannot be obtained 0resentment is e(cused and the instrument is overdue and unpaid
E..!#t +. ) s$+&+( b2 &+&-,%21!&t: n immediate right of recourse to all parties secondarily liable thereon accrues to the holder )necessary condition: notice of dishonor was given to them+
Su11%(2 +. Ru*!s %s t+ ,(!s!&t1!&t .+( P%21!&t G!&!(%* Ru*!s: 1. 0resentment for payment is %,T necessary to charge persons primarily liable. !. 0resentment for payment is necessary in order to charge the drawer and indorsers )Sec.B"+ E"#!,t +&s: a. 2hen drawer need not be given notice )Sec.BE+ where drawer has %, right to e(pect or re3uire that the drawee or acceptor will pay the instrument e(amples: .rawer ordered stop payment of a chec* .rawer6s balance is less than the amount of the chec* b. 2hen indorser need not be given notice )Sec.F"+ where the instrument was made or accepted for his accommodation and he has no reason to e(pect that the instrument will be paid if presented c. 2hen presentment for payment is e(cused )Sec.F!+ 2here after the e(ercise of reasonable diligence, presentment cannot be made 2here drawee is a fictitious person /y waiver of presentment, e(press or implied 2hen the instrument has been dishonored by non1acceptance )Sec.1H1+
d.
NOTICE OF DISHONOR bringing either verbally or by writing to the *nowledge of the drawer or indorser of an instrument, the fact that a specified negotiable instrument upon proper proceedings ta*en, has not been accepted or has not been paid, and that the party notified is e(pected to pay it. purpose: to charge persons secondarily liable 1urden o4 proo4: holder must prove notice was given to drawer or indorser as the case may be F+(1 +. N+t #! )Secs. EHSEG+ may be verbal or in writing contents: a. b. c. d. N+t!s: Sufficient description of the bill or note Statement that the instrument has been dishonored upon presentment for acceptance for payment Statement that the instrument has been protested if protest is re3uired n announcement of the intention to loo* to the party addressed for payment
If the written notice lac*s any of the aforementioned matters that should be stipulated in the contents, the person given notice may orally state that there was dishonor to complete or validate the notice of dishonor. If there is misdescription, the notice is still valid and effective e(cept if a party was in fact misled. 4or purposes of /0 !!, notice of dishonor must be in writing> verbal notice is not enough. If notice of dishonor is in writing, it can be delivered personally to the person to whom notice should be given or it may be sent to him by mail. )Sec.EG+
13 W$+ ' =!s &+t #! +. ) s$+&+( a. 0rincipal b. gent, either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not. 73 W$!& s &+t #! +. ) s$+&+( ' =!& Ru3e: %otice may be given S S,,% S the instrument is dishonored W.ere p/rties Aperson 5i6in5 /nd person to recei6e noticeB reside in s/0e p3/ce A!ec21C)B If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following If given at his residence, it must be given before the usual hours of restC on the day following. If sent by mail, it must be deposited in the post office in ti0e to re/c. .i0 in usu/3 course on t.e d/y 4o33owin5 W.ere p/rties reside in di44erent p3/ces
2ithin the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision.
If sent by mail, it must be deposited in the post office in ti0e to 5o 1y 0/i3 t.e d/y 4o33owin5 t.e d/y o4 dis.onor or if there be no mail at a convenient hour on last day, by the ne(t mail thereafter
43 W$!(! &+t #! +. ) s$+&+( s ' =!& Ru*!s: )Sec.1"F+

4
%&sual 'ours o( rest) any o( t'e 'ours w'en t'e member o( t'e 'ouse'old are attending t'eir ordinary a((airs
a. b. c. d. 2here a party has added an address to his signature, notice of dishonor must be sent to that address If no address, either to the post office nearest to his place of residence or to the post1office where he is accustomed to receive his letters If he lives in one place and has his place of business in another, notice may be sent to either place If he is soAourning in another place, notice may be sent to the place where he is so soAourning
?3 T+ -$+1 &+t #! +. ) s$+&+( s ' =!& a. The indorsers or drawers themselves> or b. gent of the indorsers or drawer c. 2ith respect to corporations, notice should be given to those who are duly authoriIed by the board to bind the corporation.
S,!# %* # (#u1st%&#!s: a. 2here party )drawer?indorser+ is dead Ru3e: %otice should be given to the party6s personal representative Requisites: $ 0erson who should give notice *nows that the person to receive notice is dead $ 0erson who is supposed to receive notice has a personal representative $ 0ersonal representative could be found after the e(ercise of reasonable diligence %otice to partners Ru3e: %otice to one partner will bind the partnership
b.
c. %otice to persons Aointly liable Ru3e: %otice should be given to each of them unless one has authority to receive such notice for the others d. %otice to ban*rupt Ru3e: %otice may be given either to the party himself or to his trustee or assignee W% =!( +. N+t #! +. D s$+&+( 2aiver means the person who is ma*ing the waiver renounces the benefit of the act or matter in his favor W.en done: either before the time of giving notice has arrived or after the omission to give due notice )Sec.1"E+ To w.o0 1indin5: 2here the waiver is embodied in the instrument itself, it is binding upon all parties, but where it is written above the signature of an indorser, it binds him only. )Sec.11"+ Su11%(2 +. Ru*!s %s t+ &+t #! +. ) s$+&+(: G!&!(%* Ru*!s: 1. %otice of dishonor need %,T be given to persons primarily liable !. %otice of dishonor is necessary to charge drawers or indorsers E"#!,t +&s: a. 2hen notice is waived Sec. 1"E: %otice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice and the waiver may be e(press or implied. b. 2hen dispensed with
Sec.11!: %otice of dishonor is dispensed with when after the e(ercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. c. 2hen notice need not be given to drawer Sec. 11C: %otice of dishonor is %,T re3uired to be given to the drawer in either of the following cases: 2here the drawer and drawee are the same person 2hen the drawee is a fictitious person or a person not having capacity contract 2hen the drawer is the person to whom the instrument for payment is made 2here the drawer has no right to e(pect or re3uire that the drawee or acceptor will honor the instrument 2here the drawer has countermanded payment d. 2hen notice need not be given to indorser Sec.11H: %otice of dishonor is %,T re3uired to be given to an indorser in either of the following cases: 2hen the drawee is a fictitious person or person not having capacity to contract and the indorser was aware of that fact at the time he indorsed the instrument 2here the indorser is the person to whom the instrument is presented for payment 2here the instrument was made or accepted for his accommodation e. 2here due notice of dishonor by non1acceptance has been given Sec. 11G: 2here due notice of dishonor by non1acceptance has been given, notice of a subse3uent dishonor by non1payment is not necessary unless in the meantime the instrument has been accepted. f. s to a holder in due course without notice Sec. 11B: n omission to give notice of dishonor by non1acceptance does not preAudice the rights of a holder in due course subse3uent to the omission. PRESENTMENT FOR ACCEPTANCE production of a bill of e(change to the drawee for his acceptance G!&!(%* Ru*!: 0resentment for acceptance is %,T necessary in order to render any party to the bill liable. E"#!,t +&s: )Sec.1C#+ 1. 2here the bill is payable after sight or in any other case where presentment for acceptance is necessary in order to fi( maturity of the instrument !. 2here the bill e(pressly stipulates that it shall be presented for acceptance #. 2here the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In the above # circumstances where presentment for acceptance is necessary, the following are the re3uisites to charge persons secondarily liable: 1. !. -a*e presentment for acceptance %egotiate the bill within a reasonable time
P(!s!&t1!&t .+( %##!,t%&#!< $+- 1%)! 13 a. b. 73 a. b. W$+ 1%:!s ,(!s!&t1!&t .+( %##!,t%&#! <older ny person in his behalf W$!& ,(!s!&t1!&t .+( %##!,t%&#! s 1%)! t a reasonable hour on a business day> and /efore the bill is overdue
/ys present0ent 0/y 1e 0/de:
0ayable at a fi(ed date on the day of maturity .ay of maturity is Sunday ne(t succeeding business day .ay of maturity is Saturday or payable at Saturday before 1!nn provided it is not
holiday
43 W$!(! ,(!s!&t1!&t .+( %##!,t%&#! s 1%)! ?3 T+ -$+1 ,(!s!&t1!&t .+( %##!,t%&#! s 1%)! a. .rawee or some person authoriIed to accept or refuse in his behalf b. ! or more drawees, not partners all of them unless one has authority to accept or refuse for all *. .rawee is dead personal representative d. .rawee is ban*rupt, insolvent or made an assignment for the benefit of his creditors drawee himself or his trustee or assignee
W$!(! ,(!s!&t1!&t .+( %##!,t%&#! s !"#us!): )Sec.1CF+

1. !. #.
2here the drawee is dead, or has absconded or is a fictitious person or a person not having capacity to contract by bill 2here after the e(ercise of reasonable diligence, presentment cannot be made 2here although presentment has been irregular, acceptance has been refused on some other ground )e(ample: presentment is made on a Sunday but acceptance is refused on the ground that drawer has no funds in the hands of the drawee+
1. 2hen it is duly presented for acceptance and such an acceptance is refused or cannot be obtained !. 2hen presentment for acceptance is e(cused and bill is not accepted N+t!s: If bill is dishonored by non1acceptance, holder must give: )1+ notice of dishonor by non1 acceptance> and )!+ protest )in case of foreign bill+. ,therwise, drawers and indorsers are discharged. )Sec.1H"+ If bill is dishonored by non1acceptance, no presentment for payment is necessary to hold drawers and indorsers liable. )Sec. 1H1+ /ut if after previous non1acceptance, bill is subse3uently accepted, presentment for payment is necessary. If bill is accepted for honor, presentment for payment is necessary to charge acceptor for honor. ACCEPTANCE signification by the drawee of his assent to the order of the drawer )Sec.1#!+ / &)s +. %##!,t%&#!: 13 A#tu%* %##!,t%&#! :e3uisites: a. b. c. In writing Signed by the drawee -ust not e(press that drawee will perform his promise by any other means than the payment of money d. -ust be communicated or delivered to holder N+t!s: n oral acceptance is not binding on the drawee. cceptance by telegram has been held sufficient.
D s$+&+( b2 &+&-%##!,t%&#! )Sec.1CE+
cceptance is not re3uired for chec*s for they are payable on demand. 2ithout signature of drawee, he would not be bound. cceptance must be e(pressed to be payable in money only. cceptance is incomplete until delivery or notification. The acceptor or drawee who has not communicated his acceptance or transmitted the accepted bill to the holder, may revo*e an acceptance before delivery and cancel the written acceptance. Is ,%21!&t !9u =%*!&t t+ %##!,t%&#!? %,. /ccept/nce a promise to perform an act p/y0ent actual performance W$!(! %##!,t%&#! 1%2 b! -( tt!& a.,n the bill itself b.,n a separate paper i. cceptance as to an e(isting bill ii. cceptance as to a non1e(isting bill re3uisites: The contemplated drawee shall describe the bill to be drawn and promise to accept it /ill shall be drawn within a reasonable time after such promise is written <older shall ta*e the bill upon the credit of the promise
2. C+&st(u#t =! %##!,t%&#! )Sec.1#B+

a. 2here the drawee to whom the bill is delivered destroys it b. 2here the drawee refuses, within !C hours c. fter such delivery, or within such time as is given him, to return the bill accepted or not accepted N+t!s: The bill is at all times the property of the holder and he is entitled to have it when he wants it. -ere failure to return the bill within !C hours is an acceptance. W$!& %##!,t%&#! 1%2 b! 1%)!: a./efore the bill has been signed by the drawer b.5ven when the bill is otherwise incomplete c. 5ven when the bill is overdue d.5ven after it has been dishonored by non1acceptance or non1payment 43 G!&!(%* %##!,t%&#! one that assents without 3ualification to the order of the drawer )Sec.1#E+ acceptance to pay at a particular place
4. 8u%* . !) %##!,t%&#! )Sec.1C1+

a. 'onditional> that is to say, which ma*es payment by the acceptor dependent on the fulfillment of a condition stated therein 5(ample: $ ccepted, if ; marries T. Sgd. N& 0artial> that is to say, an acceptance to pay part only of the amount for which the bill is drawn 5(ample: /ill is for 01""". $ ccepted for 0H"" only.& Local> that is to say, an acceptance to pay only at a particular place 5(ample: $ ccepted. 0ayable at 0%/ only.& Dualified as to time 5(ample: /ill is payable #" days after sight. $ ccepted, payable G" days after sight.& cceptance of some, one or more of the drawees but not all
b.
c.
d.
e.
5(ample: The drawees of a bill are N and ; and it is accepted only by N. E..!#t +. t%: &' % 9u%* . !) %##!,t%&#! drawer and indorsers are discharged 2hy8 .rawers and indorsers warrant tht the bill would be paid as drawn, or as indorsed by them, and a 3ualified acceptance would vary their contract without their consent. Exception: If the drawers and indorsers e(pressly or impliedly gave their consent to the 3ualified acceptance. PROTEST a formal statement in writing made by a notary under his seal of office at the re3uest of a holder of a bill or note, in which it is addressed that the same was on a certain day presented for payment )or acceptance+, and such payment )or acceptance+ was refused, whereupon the notary protests against all parties to such instrument and declares that they will be held responsible for all loss or damage arising from its dishonor. all the steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser. necessary only for foreign bills. F+(! '& b ** 7 a bill of e(change that is not drawn and?or payable in the 0hilippines W$!& ,(+t!st s (!9u (!): 1. 2here the foreign bill is dishonored by non1acceptance !. 2here the foreign bill is dishonored by non1payment #. 2here the bill has been accepted for honor, it must be protested for non1payment before it is presented for payment to the acceptor for honor C. 2here the bill contains a referee in case of need, it must be protested for non1payment before it is protested for payment to the referee in case of need H. 2hen the bill is dishonored by acceptor for honor P(+t!st & #%s! +. &*%&) b **s $ 0rotest is %,T necessary in inland bills. /ut, it is not prohibited and is discretionary on the part of the holder. $ dvantage of protest in inland bills: The certificate of the notary public is generally made prima facie evidence of the facts relating to presentment, demand, non1payment, and notice of dishonor, which are set forth in the certificate. -ain purpose of protest: to furnish to the holder legal testimony of presentment, demand, and notice of dishonor to be used in an action against the drawer and indorsers. :easons for re3uiring protest: 1. 4or uniformity in international transactions because most countries re3uire it !. In order to furnish authentic and satisfactory evidence of the dishonor to the drawer, who from his residence abroad, may e(perience difficulty in verifying the matter and may be forced to rely on the representation of the holder. P(+#!)u(! .+( ,(+t!st 13 H+- ,(+t!st s 1%)! Sec. 1H#. The protest must be anne(ed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary ma*ing it and must specify: a. b. c. d. The time and place of presentment The fact that presentment was made and the manner thereof The cause or reason for protesting the bill The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found 73 W$+ 1%:!s ,(+t!st Sec. 1HC: 0rotest may be made by:
a. b. %otary public> or ny respectable resident of the place where the bill is dishonored in the presence of two or more credible witnesses 43 W$!& ,(+t!st s 1%)! Sec. 1HH: 2hen a bill is protested, such protest must be made on the day of its dishonor unless delay is e(cused as herein provided. 2hen a bill has been duly noted, the protest may be subse3uently e(tended as of the date of the noting. $duly noted& 7 notary public Aots down a note on the bill, or a paper attached thereto, or in his registry boo*, consisting of his initials or signature and those matters re3uired to be stated in Sec.1H#. the noting must be made on the day of dishonor but it may be e(tended into a formal protest afterwards. ?3 W$!(! ,(+t!st s 1%)! Sec. 1HG: General :ule: bill must be protested at the place where it is dishonored
5(ception: e(cept that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by non1acceptance, it must be protested for non1payment at the place where it is e(pressed to be payable, and no further presentment for payment to ro demand on the drawee is necessary. N+t!: 2here a bill has already been protested for non1acceptance, protest for non1payment is merely optional. P(+t!st .+( b!tt!( s!#u( t2 one made by the holder against the drawer and indorsers where the acceptor has been adAudged a ban*rupt or insolvent or has made an assignment for the benefit of creditors before the bill matures. merely optional on the part of the holder when made: a. b. c. fter acceptance /efore the date of maturity 2hen the acceptor has been adAudged ban*rupt or insolvent or has made an assignment for the benefit of creditors purpose: to inform drawer and indorsers of the fact that acceptor is insolvent and may not pay the bill, and to enable them to ma*e necessary arrangements so that they will not be held liable thereon and prevent loss of re1e(change.
CHAPTER F DISCHARGE OF NEGOTIABLE INSTRUMENTS

CONCEPT D s#$%('! release from further liability, obligation or from the binding effect of the negotiable instrument As to p/per: puts an end to it as a contractual obligation As to t.e p/rties: ,perates as a release of some or all of them from further obligation and liability under the instrument. INSTRUMENT< HOW DISCHARGED3
S!#3 11F: negotiable instrument is discharged:
1. /y payment in due course by or on behalf of the principal debtor J,%21!&t & )u! #+u(s!K@ re3uisites: a. b. c. d. J,( &# -ust be made by or on behalf of the principal debtor?accommodated party 0ayment must be made to the holder 0ayor must be in good faith and without notice that holder6s title is defective 0ayment is made at or after the maturity date of the instrument ,%* )!bt+(K person ultimately bound to pay the debt
P%21!&t b2 % t$ () ,!(s+& General :ule: Instrument is %,T discharged. 5(ception: 0ayment for honor. N+t!: If a person paid the holder with the intention of ac3uiring title over the instrument, payor is %,T a third person. !. /y payment in due course by the party accommodated where the instrument is made or accepted for his accommodation s between the accommodation party and the accommodated party, the latter is the one ultimately liable, hence a principal debtor. #. /y the intentional cancellation by the holder thereof how made: a. b. c. Tearing the instrument /urning the instrument 2riting across the instrument the word $cancelled& If cancellation is unintentional, made under a mista*e, or without the authority of holder, cancellation is inoperative )instrument is %,T discharged+. $#%&#!**%t +&K signifies not only the drawing of criss1cross lines but also tearing, obliterations, erasures or burning. Bu()!& +. ,(++.: lies on the party who alleges that the cancellation was made unintentionally, under a mista*e, or without authority. C. /y any other act which will discharge a simple contract for the payment of money rt. 1!#1: 5(tinguishment of obligations a. 0ayment b. Loss of the thing due c. 'ondonation or remission of the debt d. 'onfusion or merger of rights e. 'ompensation f. %ovation g. nnulment?rescission h. 4ulfillment of resolutory condition i. 0rescription H. 2hen the principal debtor becomes the holder of the instrument at or after maturity in his own right re3uisites: a.
5
:eac3uisition must be made by principal debtor
Sec.88:
b. In his own right c. t or after the date of maturity $in his own right& not in a representative capacity )e.g. ma*er is agent or ma*er is holder as e(ecutor or administrator+ 2hen instrument is reac3uired before maturity Instrument is %,T discharged -erely constitutes a negotiation bac* to principal debtor who may in turn renegotiate the instrument )Sec.H"+ P!(s+&s s!#+&)%( *2 * %b*! +& t$! &st(u1!&t< $+- ) s#$%('!) S!#3 175: person secondarily liable on the instrument is discharged: a. b. c. d. e. f. N+t!s: /y any act which discharges the instrument /y the intentional cancellation of his signature by the holder /y the discharge of a prior party /y a valid tender of payment made by a prior party /y a release of the principal debtor unless the holder6s right of recourse against the party secondarily liable is e(pressly reserved /y any agreement binding upon the holder to e(tend the time of payment or to postpone the holder6s right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is e(pressly reserved.
%o consideration is necessary to support a discharge by intentional cancellation of an indorser6s signature by the holder. .ischarge of prior party discharges party subse3uent thereto. reason: subse3uent parties cannot e(ercise their right of recourse against discharged prior party. application: discharge of prior party must arise from the acts of holder> it does %,T cover discharge by operation of law li*e discharge by reason of ban*ruptcy, discharge of party not given due notice of dishonor, discharge by statute of limitations. J=%* ) t!&)!( +. ,%21!&tK act by which one produces and offers to a person holding a claim or demand against him the amount of money which he considers and admits to be due in satisfaction of such claim or demand without any stipulation or condition. J(!*!%s! +. ,( &# ,%* )!bt+(K G!&!(%* Ru*!: .ischarges the instrument and parties secondarily liable are deprives of their right of recourse 5(ception: 2hen the holder6s right of recourse against party secondarily liable is e(pressly reserved. :eason: the effect of such reservation is the implied reservation of their right of recourse against person primarily liable N+t!: The release must be a voluntary act of holder, not by operation of law and is for value. s to effect of release to accommodation ma*er?acceptor: :ule: <e is %,T discharged by the release of the principal debtor E"t!&s +& +. t 1! G!&!(%* Ru*!: 0ersons secondarily liable are discharged
reason: an agreement to e(tend time of payment varies the original underta*ing of the parties secondarily liable. ssurance of drawer and indorsers is payment according to the tenor of the instruments. E"#!,t +&s: 1. e(tension is consented to the by the party secondarily liable !. where holder e(pressly reserves his right of recourse against person secondarily liable R!9u s t!s: 1. !. it must be a binding contract, supported by valuable consideration and for a definite period must be made with the principal debtor not with a third party E..!#ts +. ,%21!&t b2 &)+(s!( )Sec.1!1+ Instrument is %,T discharged but indorser who paid is discharged Indorser is remitted to his former rights against parties prior to him Indorser can stri*e out his indorement and all subse3uent indorsements rationale: indorsement of paying party subse3uent indorsements are %,T necessary for his title indorser can renegotiate the instrument !"#!,t +&s:
1. !. #. C.
a. where it is payable to the order of a #rd person and has been paid by the drawer
when it is made or accepted for accommodation and has been paid by the party accommodated R!&u&# %t +& b2 $+*)!( )Sec.1!!+ J(!&u&# %t +&K act of surrendering a right or claim without recompense but it can be applied with e3ual propriety to the relin3uishing of a demand upon an agreement supported by consideration. F+(1: 1. -ust be e(press !. In writing T 1! +. 1%: &' (!&u&# %t +& b2 $+*)!(: 1. /efore maturity !. t maturity #. fter maturity W$!& t ) s#$%('!s &st(u1!&t: 1. !. 2hen it is absolute and unconditional 2hen it is made in favor of the person primarily liable #. 2hen it is made at or after maturity b.
CHAPTER 15 CHEC/S
C$!#: a bill of e(change payable on demand drawn on a ban* )Sec.1FH+ essence: payable on demand )because the contract between the ban*er and the customer is that the money is needed on demand+ /INDS OF CHEC/S: 13 C%s$ !(Is #$!#: one drawn by the cashier of a ban* in the name of the ban* against the ban* itself payable to a third person or order
e0/nd dr/4t does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts it. '/s.ierDs c.ec= is a primary obligation of the ban* which issues it and constitutes its written promise to pay upon demand a bill of e(change drawn by a ban* on itself and accepted in advance by the act of its issuance
N/ture /nd use: /y its very nature, a cashier6s chec* is the ban*6s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the chec*. cashier6s chec* by its peculiar character and general use in the commercial world is regarded substantially to be as good as the money which it represents )Tan vs. ' + 73 M%&%'!(Is #$!#: a chec* drawn by the manager of a ban* in the name of the ban* against the ban* itself payable to a third person similar to cashier6s chec* as to effect and use 43 M!1+(%&)u1 #$!#: a chec* on which is written the word $memorandum&, $memo&, and $mem& signifying that the drawer engages to pay the bona fide holder absolutely and not upon a condition to pay upon presentment and non1payment a chec* given by a borrower to a lender for the amount of a shot loan with the understanding that it is not to be presented at the ban* but will be redeemed by the ma*er himself when the loan falls due and which understanding is evidence by writing the word $memorandum&, $memo& or $mem& on the chec* given by the drawer to the payee more in the nature of a memorandum of indebtedness than as payment drawer may be sued the same as upon a promissory note ?3 T(%=!*!(Is #$!#: instrument purchased from ban*s, e(press companies, or the li*e, in various denominations which can be used li*e cash upon second signature by the purchaser has the characteristics of a cashier6s chec* of the issuer re3uires the signature of the purchaser at the time he buys it and also at the time he uses it @3 C!(t . !) #$!#: one drawn by a depositor upon funds to his credit in a ban* which a proper officer of the ban* certifies will be paid when duly presented for payment C!(t . #%t +& almost similar to acceptance discharges at the instance of the holder an agreement whereby the ban* against whom a chec* is drawn, underta*es to pay it at any future time when presented for payment ban* debits the drawer6s account at the time of certification and sets aside funds out of the drawer6s control effect: same as though the money had been paid by the ban* to the holder and redeposited by him in his own credit )payee?holder becomes the depositor of the ban*+
N+t!s: /an* is not obligated to the depositor to certify chec*s. .rawee is not liable to the holder for the refusal of the ban* to certify a chec* The refusal of a ban* does not dispense with the re3uirement of presentment for payment since a chec* is of right presentable only for payment at the ban* on which it is drawn
J#!(t . #%t +& s !9u =%*!&t t+ %##!,t%&#!K drawee ban* is bound on the instrument upon certification drawee ban* incurs liabilities under Sec. G! )liability of acceptor+
RELATED PRO6ISIONS: (AGBAYANI COMMENTARY) S!#3 11F3 Instrument; how discharged2 1 negotiable instrument is discharged:
)a+ /y payment in due course by or on behalf of the principal debtor> )b+ /y payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation> )c+ /y the intentional cancellation thereof by the holder> )d+ /y any other act which will discharge a simple contract for the payment of money> )e+ 2hen the principal debtor becomes the holder of the instrument at or after maturity in his own right. PAYMENT BY PRINCIPAL DEBTOR U I& +()!( t+ ) s#$%('! t$! &st(u1!&t, the payment must be a p/y0ent in due course, and second, a p/y0ent 0/de 1y t.e princip/3 de1tor U I. ,%21!&t s 1%)! b!.+(! t$! )%t! +. 1%tu( t2< the instrument is not discharged as the payment is not in due course M W$!(! ,%21!&t s 1%)! b2 % ,%(t2 -$+ s &+t % ,( 1%(2 +b* '+( +( %& %##+11+)%t +& ,%(t2< his payment only conceals his own liability and those who are obligated after him. ll prior parties primarily or secondarily liable on the bill, are liable to such a payer, and the payer may cancel indorsements subse3uent to his own and reissue the paper, and it will be valid as against the prior parties PAYMENT BY THIRD PERSONS U If payment is made by a third person, the instrument is not discharged because payment is not made by the person principally liable U %ot any one who desires may pay the instrument and then recover of the ma*er. <e must be a person who has in some way made himself liable for the payment of the instrument. U E"#!,t +&: where an instrument has been protested and someone voluntarily ma*es payment supra protest or for honor. nd if the instrument was to give money in payment, the instrument is discharged. SUMMARY OF DISCHARGE BY PAYMENT 1. 0ayment by a person ultimately liable, whatever his position in the paper, is a discharge of the instrument !. 0ayment by an accommodation party isn6t a discharge of the instrument, whatever his position thereon and whether the indorsement be regular or anomalous #. 0ayment by the drawer or indorser is not a discharge of the instrument VV0:I%'I0 L .5/T,: U 0erson ultimately bound to pay the debt PAYMENT BY CHEC/ OR OTHER NEGOTIABLE PAPER 1. 2hen they actually have been cashed or !. 2hen, through the fault of the creditor, they have been impaired U creditor isn6t bound to accept a chec* in satisfaction of his demand because a chec*, even if good when offered, doesn6t meet the re3uirements of legal tender WAI6ER OF OBLECTION TO TENDER OF PAYMENT BY CHEC/
U It is the general rule that an obAect to a tender must, to be available to the creditor, be made in good time and that the grounds for obAection must be specified> and that an obAection to tender on one ground is a waiver of all other obAections which could have been made at that time U It is ordinarily re3uired of one to whom payment is offered in the form of a chec*, that he ma*es his obAection at the time of the offer of by chec* instead of an offer of payment in money U 0ayment by chec* has become so generally recogniIed as acceptable in business transactions that it has been held that o0ission to 0/=e o1Eection to / c.ec= /s tender p/y0ent is regarded as a waiver of the right to demand payment in money U :eason for the ruleLto afford the debtor the opportunity to secure t.e speci4ic 0oney w.ic. t.e 3/w prescri1es shall be accepted in payment of debts PAYMENT BY ACCOMMODATED PARTY U The one ultimately liable on the accommodation instrument is the latter U <ence, his payment in due course discharges the instrument as if payment was made by the principal debtor under paragraph )a+. INTENTIONAL CANCELLATION U The cancellation must be intentional and made by the holder U There must be an intention to cancel a negotiable instrument by the holder thereof as such intention is an essential element of discharge on a negotiable instrument and a negotiable note in a torn condition is presumed cancelled by the holder thereof WILL AN E0TENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR DISCHARGE THE INSTRUMENT? U %o, according to the maAority view U /ecause while it isn6t omitted in Section 1!", it is omitted in Section 11E U Shows the legislative intent to that an e(tension of time by the holder will not discharge the instrument PRINCIPAL DEBTOR AC8UIRES INSTRUMENT U :eac3uisition must be by the principal debtor and in his own right at or after the date of maturity U In his own rightLnot in a representative capacity WHEN INSTRUMENT REAC8UIRED BEFORE MATURITY U reac3uisition by the principal debtor in his own right but before maturity will not discharge the instrument U It will merely be a negotiation bac* to the principal debtor DISCHAGE BY OPERATION OF LAW U If a Audgment is obtained on a bill or note, the bill or note is thereby e(tinguished and merged in the Audgment. U /ut the Audgment alone, without actual satisfaction, is not e(tinguishment as between plaintiff and other parties not Aointly liable with the original defendant, whether those parties be prior or subse3uent to the defendant U discharge in ban*ruptcy, unless otherwise provided by statute, releases a ban*rupt from all his provable debts, and therefore will discharge the ban*rupt on all bills accepted, or notes made by him but will not discharge the other parties S!#3 1753 When persons secondarily liable on the instrument are discharged. : the instrument is discharged: )a+ /y any act which discharges the instrument> )b+ /y the intentional cancellation of his signature by the holder> )c+ /y the discharge of a prior party> )d+ /y a valid tender or payment made by a prior party> )e+ /y a release of the principal debtor unless the holderMs right of recourse against the party secondarily liable is e(pressly reserved> )f+ /y any agreement binding upon the holder to e(tend the time of payment or to postpone the holderMs right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is e(pressly reserved. EFFECT OF SECTION 175 IS A SURETYSHIP person secondarily liable on
U Generally the courts regard this provision as e(clusive, as a complete codification of the law of discharge of secondary parties by the si( methods therein set forth ACTS THAT DISCHARGE INSTRUMENT U ny of the acts that will discharge an instrument under Section 11E will discharge a party secondarily liable thereon, such as payment in due course by the ma*er. This will discharge the indorsers in the note. DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED 1. .ischarge by reason of ban*ruptcy !. .ischarge of a party not given due notice of dishonor #. .ischarge by the statute of limitations 6ALID TENDER OF PAYMENT U If . an indorser validly tenders payment and 4 unAustifiably refuses to do accept, . is discharged U Tender of payment: act by which one produces and offers to a person holding a claim or demand against him the amount of money which he considers and admits to be due, in satisfaction of such claim or demand without any stipulation or condition VV:5L5 S5 -@ST /5 'T ,4 <,L.5:
VV:5L5 S5 -@ST /5 4,: = L@5 EFFECT OF RELEASE ON ACCOMMODATION MA/ER OR ACCEPTOR U General rule is that he is not discharged by the holder6s release of the principal debtor even if the release be made with *nowledge of the true relation of the parties and, conversely, the release of the accommodation ma*er or acceptor does not discharge the principal debtor through the latter occupies the position of a party secondarily liable on the instrument E0TENSION OF TIME U If the holder agrees to e(tend the time of payment, t.e indorsers /re disc./r5ed U E"#!,t +&s- )1+ where the e(tension of time is consented to by the party secondarily liable, he is not discharged> )!+ where the holder e(pressly reserves his right of recourse against the party secondarily liable, the latter is not discharged. RE8UISITES OF AGREEMENT FOR E0TENSION OF TIME 1. It must be a binding contract, supported by valuable consideration and for a definite period !. It must be made with the principal debtor and not with a third par S!#3 1713 Right of party who discharges instrument. 1 2here the instrument is paid by a party secondarily liable thereon, it is not discharged> but the party so paying it is remitted to his former rights as regard all prior parties, and he may stri*e out his own and all subse3uent indorsements and against negotiate the instrument, e(cept: )a+ 2here it is payable to the order of a third person and has been paid by the drawer> and )b+ 2here it was made or accepted for accommodation and has been paid by the party accommodated.
E0CEPTION TO THE RIGHT TO RENEGOTIATE U 2here a drawer of a certified chec* was re3uired to ta*e up the chec* because of the failure of the drawee ban*, the instrument is not discharged and he is subrogated to the rights of the payee.
S!#3 1773 Renunciation by holder. - The holder may e(pressly renounce his rights against any party to the instrument before, at, or after its maturity. n absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. /ut a renunciation does not affect the rights of a holder in due course without notice. renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. APPLICATION OF SECTION 177 1. pplies only to renunciation by the unilateral act of the holder without consideration and in cases where the instrument is not delivered up to the person intended to be released
!. :enunciationLact of surrendering a right or claim without recompense but it can be applied with e3ual propriety to the relin3uishing of a demand upon an agreement supported by a consideration FORM OF RENUNCIATION U It must be in writing and must be e(press U <owever, if the instrument is delivered to the person primarily liable, the renunciation may be ,: L. TIME FOR MA/ING RENUNCIATION 1. /efore maturity !. t maturity #. fter maturity
WHEN RENUNCIATION DISCHARGES INSTRUMENT 1. 2hen it is absolute and unconditional !. 2hen it is made in favor of the person primarily liable #. -ade at or after maturity
S!#3 1743 Cancellation; unintentional; burden of proof. - cancellation made unintentionally or under a mista*e or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mista*e or without authority. U U MEANING OF CANCELLATION Signifies not only the drawing of criss1cross lines but also tearing, obliterations, erasures or burning It may be made by any other means by which the intention to cancel the instrument may be evident
WHEN CANCELLATION IS INOPERATI6E 1. 2hen made unintentionally !. 2hen made under mista*e #. 2hen made without the authority of the holder VV/@:.5% ,4 0:,,4 IS @0,% T<5 05:S,% 2<, 'L I-S T< T T<5 ' %'5LL TI,% IS I%,05: TI=5
S!#3 17?3 Alteration of instrument; effect of2 1 2here a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, e(cept as against a party who has himself made, authoriIed, or assented to the alteration and subse3uent indorsers. /ut when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.
RIGHTS OF ONE NOT HOLDER IN DUE COURSE U 2here an instrument has been materially altered, it is avoided in the hands of one who is not a holder in due course as against a prior party who has not assented to the alteration WHERE INSTRUMENT NOT A6OIDED AS TO HOLDER NOT IN DUE COURSE 1. party who has made the material alteration !. party who has authoriIed the material alteration #. party who has assented to the material alteration C. ny subse3uent indorsers RIGHTS OF HOLDER IN DUE COURSE NOT A PARTY TO THE ALTERATION U <e may enforce the instrument in its original tenor U <e could recover the altered tenor to any party who has made, authoriIed or assented the alteration, or any subse3uent indorser of the instrument VV%, .ISTI%'TI,% /5T255% 4: @.@L5%T %. I%%,'5%T LT5: TI,%
RIGHT TO COLLECT ORIGINAL CONSIDERATION
U 2hen the alteration wasnMt fraudulently done, the holder may recover the original consideration
NN2<5:5 .: 255 / %9 0 ;S LT5:5. -,@%T, .: 25: < S T<5 :IG<T T, < =5 <IS '',@%T .5/IT5. 2IT< ',::5'T -,@%T ,%L; U s between the ban* and its depositors, the payment of forged or altered chec*s by it is made at its peril and cannot be charged against the depositors account @%L5SS some negligent act or misconduct of his has contributed to induce such payment, the ban* itself being free from negligence. VV/ %9S :5 /,@%. /; T<5 !C1<,@: 'L5 :I%G <,@S5 :@L5 2IT<I% !C <,@:S ,4 LT5: TI,% ,4 '<5'9S %. -@ST %,TI4; T<5 ',LL5'TI%G / %9S
S!#3 17@3 What constitutes a material alteration. : )a+ The date> )b+ The sum payable, either for principal or interest> )c+ The time or place of payment: )d+ The number or the relations of the parties>
ny alteration which changes:
)e+ The medium or currency in which payment is to be made> )f+ ,r which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.
WHEN ALTERATION IS MATERIAL U If it alters the effect of the instrument
U 5(amples of - T5:I L LT5: TI,%: )1+ substituting the words $or bearer& for $order&> )!+ writing $protest waived& above blan* indorsements> )#+ a change in the date from which interest is to run> )C+ adding the words $with interest& with or without a fi(ed rate> )H+an alteration in the maturity of a note, whether the time for payment is thereby curtailed or e(tended> )G+ n instrument is payable to $0%/&, the plaintiff added the word $-arion&> )B+ stri*ing out the name of the payee and substituting that of the person who actually discounted the note
U 5(amples of I-- T5:I L LT5: TI,%: )1 +changing $I promise to pay& to $we promise to pay& where there are two ma*ers> )!+ adding the word $annual& after the interest clause> )#+ adding the date of maturity as a marginal notation> )C+filling in the date of actual delivery where the ma*ers of a note gave it with the date in blan*, $AulyR.&> )H+ where there is a blan* for the place of payment, filling in the blan* with the place desired
CHAPTER 17 LETTERS OF CREDIT AND TRUST RECEIPTS

LETTER OF CREDIT C+11!(#! H branch of human activity the purpose of which is to bring products to the consumer by means of e(changes or operations which tend to supply and e(tend them to him, habitually, with intent to gain, at the proper time and place, and in good 3uality and 3uantity. C+11!(# %* t(%&s%#t +&s 7 those entered into by merchants to pursue activities as merchants M!(#$%&ts H one whose business is buying and selling goods for profit> a person or entity that holds itself out as having e(pertise peculiar to the goods in which it deals, and is therefore held by the law to a higher standard than a consumer or other non1merchant is held W.o /re 0erc./ntsF AArt219 'ode o4 'o00erceB 1. Those who having capacity to engage in commerce, habitually devote themselves to it !. 'ommercial or industrial companies which may be created in accordance with e(isting legislation Ess!&t %* (!9u s t!s +. % 1!(#$%&t: Filipino indi idual Legal capacity to engage in commerce <abitually engages himself therein single act of a party or person may be considered a habitual act. #. -ust be at least 1F years old ): GF"E+ C. -ust have free disposition of his property Filipino association 1. 'ommercial or industrial company !. 'reated in accordance with e(isting legislations #. 2ith legal capacity to engage in commerce C. <abitually engaged therein Ru*! +& M &+(s 1. !. Gener/3 Ru3e: -inors may not engage in commerce Exceptions: 1. 2hen the minor continues the business of his parents or predecessors through a guardian !. Investment in stoc*s of a corporation minor at least B years old may open a ban* savings account or time deposit and withdraw the same without assistance of his parent or guardian )0. B#C+ P!(s+&s ) s9u%* . !) & !&'%' &' & #+11!(# %* t(%&s%#t +&s A3 1. !. #. B3 1. Abs+*ut!*2 D s9u%* . !) 0ersons suffering the penalty of civil interdiction 0ersons declared as ban*rupt 0ersons dis3ualified by special laws or provisions R!*%t =!*2 D s9u%* . !) Kustices of the S', Audges, and officials of the department of public prosecutors in actual service
!. #. C. H. G. B. F. E. dministrative, economic or military heads of districts, provinces or posts 5mployees engaged in the collection and administration of public funds of the State, appointed by the government Stoc* or bro*ers of any class Those who by virtue of laws or special provisions, may engage in commerce in a determinate territory -embers of 'ongress 0resident, =ice10resident, members of 'abinet and their deputies or assistants -embers of 'onstitutional 'ommission 0resident, =ice10resident, members of the 'abinet, 'ongress, Supreme 'ourt and the 'onstitutional 'ommission, ,mbudsman with respect to any loan, guaranty or other form of financial accommodation for any business purpose by any government1owned or controlled ban* to them
C+11!(# %* #+&t(%#t H an agreement between two or more merchants or non1 merchants binding themselves to give or to do something in commercial transactions M%#%( +*% =3 Asu&# +&: rt. 1C of the 'ode of 'ommerce )a Spanish law+ providing for the relative dis3ualification of Audges is political in nature as it regulates the relationship between the government and certain public officers and employees li*e Austices and Audges. @pon the transfer of sovereignty from Spain to @S and later on @S to 0hilippines, said provision must be deemed abrogated because where there is change of sovereignty, political laws of the former sovereign, whether compatible or not with those of the new sovereign are automatically abrogated. There being no e(plicit re1enactment by the new sovereign, dis3ualification should be considered to have since lost its legal and binding force on Audges. <ence, the 'ourt ruled in the said case that there was no violation of the said rule when suncion associated himself with a company as a stoc*holder while being concurrently a '4I Audge. L+s! B!( & =3 Lu)'! F!* "b!(t+ B%(t!: The 'ourt ruled that /arte committed an impropriety in acting as a bro*er in the sale of a real estate. This is so since while Sec. 1C of the 'ode of 'ommerce had already been abrogated as ruled in -acariola v. suncion, the 'ode of Kudicial 'onduct which too* effect on ,ctober !", 1EFE, refrained Audges from entering into financial and business dealings that tend to reflect adversity o the court6s impartiality. L!tt!( +. C(!) t a letter issued by one merchant to another for purpose of attending to a commercial transaction ) rt. HGB, 'ode of 'ommerce+G !odern concepts: an engagement by a ban* or other person made at the re3uest of a customer that the issuer will honor drafts or other demands for payment upon compliance with th conditions specified in the credit )0rudential /an* v. I '> /an* of 'ommerce v. Serrano+ one wherein the ban* merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the ban* the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon
6
Not favored by Dean Sundiang
one issued by a ban* in order to aid a person who may not have a capital for the importation of goods and merchandiseB a re3uest by one ban* )addressed usually to another ban*+ to advance money or credit to a third person, upon fulfillment of certain conditions, usually by the latter on the promise of the issuer ban* to repay the same> issuer in turn loo* for the person applying for the same for satisfaction
C+&) t +&s +. % *!tt!( +. #(!) t: ) rt. HGF, 'ode of 'ommerce+ 1. !. to be issued in favor of a definite person and not to order to be limited to a fi(ed and specified amount or to one or more undetermined amounts, but within a ma(imum the limits of which has to be stated e(actly
W$!& )+!s t$! *!tt!( +. #(!) t b!#+1! =+ ) ) rt. HB!, 'ode of 'ommerce+ if the bearer of a letter of credit does not ma*e use of it within the period agreed upon with the drawer If there is no period stipulated,
wit.in six 0ont.s counted from the date 7 in any point in the 0hilippines wit.in 1& 0ont.s G outside the 0hilippines
B%s # ,%(t !s t+ % *!tt!( +. #(!) t 1. /uyer 7 procures the letter of credit and obliges himself to reimburse the issuing ban* upon receipt of the documents of title !. /an* )issuing?opening+ 7 underta*es to pay the seller upon receipt of the draft and proper documents of title and to surrender the documents to buyer upon reimbursement #. Seller )payee?beneficiary+ 7 who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing ban* to recover payment "ther parties: 0aying ban* 7 ban* on which the drafts are to be drawn 'onfirming ban* 7 notifies the beneficiary, assumes the direct obligation to the seller> has primary liability %otifying ban* 7 correspondent ban* of the issuing ban*, assumes no liability e(cept to notify and?or transmit to the beneficiary the e(istence of a letter of credit, chec* authenticity of creditF %egotiating ban* 7 correspondent ban* which buys or discounts a draft under the letter of credit> liability is dependent upon the stage of negotiation "e4ore ne5oti/tion 7 no liability to seller A4ter ne5oti/tion G has contractual relationship with seller T$(!! #+&t(%#ts & % *!tt!( +. #(!) t 1. !. 'ontract between buyer and seller governed by the contract of sale e(ecuted by them 'ontract between issuing ban* and buyer governed by the terms of application and agreement for the issuance of letter of credit
7 8
Definition of Dean Relationship bet een notifiying ban! and issuing ban!: agency
#. 'ontract between issuing ban* and seller Governed by the terms of the letter of credit itself I&)!,!&)!&#! P( &# ,*! a ban*, in determining compliance with the terms of a letter of credit is re3uired to e(amine only the shipping documents presented by the seller and is precluded from determining whether the main contract is actually accomplished or not assures the seller of prompt payment independent of any breach of the main sales contract the contract of sale between buyer and seller is independent from the letter of credit itself> the issuing ban* need only to determine the tender documents presented by seller and has the obligation to pay upon compliance with the terms of the letter of credit wor*s to the benefit of both issuing ban* and beneficiary?seller Ru*! +. st( #t #+1,* %&#! the documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit, i.e. they must include all documents re3uired by the letter of credit F(%u) !"#!,t +&: e(ists when the beneficiary for the purpose of drawing on the credit, fraudulently presents to the confirming ban* documents that contain e(pressly or by implication material representations of fact that to his *nowledge are untrue e44ect: court may issue inAunction to bar payment by the issuing ban* require0ents o4 inEunction: a. b. c. There is clear proof of fraud 4raud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement Irreparable inAury might follow if inAunction is not granted or recovery of damages would seriously be damaged
/ &)s +. L!tt!( +. C(!) t 1. !. #. C. H. G. 'onfirmed letter of credit 7 whenever beneficiary stipulates that the obligation of the opening ban* shall also be made the obligation of a ban* to himself @nconfirmed letter of credit 7 obligation only of the issuing ban* Irrevocable letter of credit 7 obligates the issuing ban* to honor drafts drawn in compliance with the credit and can neither be cancelled nor modified without the consent of all parties including in particular the beneficiary?e(porter :evocable letter of credit 7 can be cancelled at anytime before payment> intended to serve as a means of arranging payment but not as a guarantee of payment :evolving letter of credit 7 valid for several transactions over a given period of time such as a wee* or month %on1revolving letter of credit 7 one that is valid for one transaction only
TRUST RECEIPTS LAW
T(ust R!#! ,ts L%- (PD 11@) /an* becomes entruster of the goods while the buyer1importer is the entrustee. The goods will in effect be released by the ban* to the buyer by the delivery of the documents of title or bill of lading covering the goods. /uyer as entruster is obligated to sell the goods and to apply the proceeds thereof to the payment of the loan e(tended by the entruster1ban*, buyer will only get the balance of the proceeds of the sale after ma*ing such application.
Purposes: A!ection &B 1. !. #. To encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade To regulate trust receipt transactions in order to assure the protection of rights and the enforcement of the obligations of the parties involved therein To declare the misuse and?or misappropriation of goods or the proceeds realiIed from the sale of goods, documents or instruments released under trust receipts as a criminal offense punishable under rt.#1H of the :0'
T(ust (!#! ,t t(%&s%#t +& transaction between an entruster and entrustee whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter6s e(ecution and delivery to the entruster of a trust receipt wherein the entrustee binds himself to hold the specified goods, documents, or instruments with the obligation to turn over to the entruster the proceeds thereof to the e(tent of the amount owing to the entruster or the goods, documents, or instruments themselves if they are unsold and not otherwise disposed of. P%(t !s t+ % t(ust (!#! ,t t(%&s%#t +&: A!ec2)9 P 1. !. 11-B
5ntrustee 7 person having or ta*ing possession of goods, documents, instruments under a trust receipt transaction and any successor1in1interest of such person 5ntruster 7 person holding title over the goods, documents, or instruments subAect of a trust receipt transaction and any successor1in1interest of such person
R '$ts +. t$! !&t(ust!(: )Sec.B+ 1. To receive the proceeds of the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the e(tent of the amount owing to the entruster !. To the return of the said goods, documents or instruments in case they could not be sold #. To cancel the trust in case the entrustee defaults, ta*e possession of the goods, documents or instruments and sell the same at public or private sale
Ob* '%t +&s +. t$! !&t(ust!! A!ec2?B
1. To $+*) the goods, documents or instruments in trust for the entruster and to dispose
of them strictly in accordance with the terms of the trust receipt
Negotiable Instruments Law (Aquino and Agbayani Notes) Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011! 2. To (!#! =! the proceeds of the sale of the goods, documents or instruments in trust 3. 4. 5. 6.
for the entruster and to turn over the same to the entruster to the e(tent of the amount owing to the entruster To i&su(! the goods for their total value against loss from fire, theft, pilferage or other casualties To :!!, the goods, documents or instruments or the proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster To (!tu(& the goods, documents, or instruments to the entruster in case they could not be sold or upon demand of the entruster To +bs!(=! all other terms and conditions of the trust receipt

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Negotiable Instruments Law (Aquino and Agbayani Notes) 1 Abad.Avila.Cancino.Concepcion.Chu.Layno.Mercado.Prinsipe.Reyes H. (2S A.Y. 2010 2011!

CHAPTER 1: GENERAL CONSIDERATIONS

FUNCTIONS OF NEGOTIABLE INSTRUMENTS: (SEC-PF)

Indication of a 0articular 4und for 0ayment vs. 4und for :eimbursement

Requisite #): PA#A"(E ON

!"3 0ay to bearer 01

CHAPTER 4: I&t!(,(!t%t +& +. I&st(u1!&ts

CHAPTER ?: T(%&s.!( %&) N!'+t %t +&

A6/i3/1i3ity o4 person/3 de4enses

Transferee merely steps in to the shoes of the transferor

Transferee is always subAect to personal defenses.

:ights of a :estrictive indorsee )Sec. #B+:

RELATED PRO6ISIONS: (AGBAYANI COMMENTARY)

I&)+(s!1!&t 1ust b! +. t$! !&t (! &st(u1!&t3 operate as negotiation thereof.

ccordingly, an indorsement of a part of the instrument does not

: finance companies are still holders in due course.

:I 1CE S': 1F1 S':

CHAPTER C: P%(t !s -$+ %(! L %b*!

RELATED PRO6ISIONS: (AGBAYANI COMMENTARY)

U3tr/ 8ires 'orporation

NON-DELI6ERY AND CONDITIONAL DELI6ERY Non e3i6ery o4 Inco0p3ete Instru0ent

45/T' vs. Gold 0alace Kewellery 'ompany, G.:. %o. 1GF!BC,

ugust !", !""F.

*or5ery in Notes -a*er6s Signature

CHAPTER E ENFORCEMENT OF LIABILITY

P(+1 ss+(2 &+t! 1 ma*er B ** +. !"#$%&'! - acceptor

43 W$!(! &+t #! +. ) s$+&+( s ' =!& Ru*!s: )Sec.1"F+

W$!(! ,(!s!&t1!&t .+( %##!,t%&#! s !"#us!): )Sec.1CF+

D s$+&+( b2 &+&-%##!,t%&#! )Sec.1CE+

2. C+&st(u#t =! %##!,t%&#! )Sec.1#B+

4. 8u%* . !) %##!,t%&#! )Sec.1C1+

CHAPTER F DISCHARGE OF NEGOTIABLE INSTRUMENTS

:eac3uisition must be made by principal debtor

RIGHT TO COLLECT ORIGINAL CONSIDERATION

ny alteration which changes:

WHEN ALTERATION IS MATERIAL U If it alters the effect of the instrument

CHAPTER 17 LETTERS OF CREDIT AND TRUST RECEIPTS

Not favored by Dean Sundiang

TRUST RECEIPTS LAW

Ob* '%t +&s +. t$! !&t(ust!! A!ec2?B

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or5ery in Notes -aer6s Signature