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GENERAL CONCEPTS NEGOTIABLE INSTRUMENT (NI) A written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law, Professors Sundiang and Aquino) Functions: (Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.) 1. To supplement the currency of the government. 2. To substitute for money and increase the purchasing medium. Legal tender – That kind of money which the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. Note: A NI although intended to be a substitute for money, is not legal tender. However, a check that has been cleared and credited to the account of the creditor shall be equivalent to delivery to the creditor of cash. (Sec. 60, NCBA) Features: (Reviewer on Commercial Law, Professors Sundiang and Aquino) 1. Negotiability – That attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. (Firestone Tire vs. CA, 353 SCRA 601) 2. Accumulation of Secondary Contracts – Secondary contracts are picked up and carried along with NI as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. Applicability: General Rule: The provisions of the NIL are not applicable if the instrument involved is not negotiable. Exception: In the case of Borromeo vs. Amancio Sun, 317 SCRA 176, the SC applied Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares which was signed in blank to facilitate future assignment of the same shares. The SC observed that the situation is similar to Section 14 where the blanks in an instrument may be filled up by the holder, the signing in blank being with the assumed authority to do so. The NIL was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. (Michael Osmeña vs. Citibank, G.R. No. 141278, March 23, 2004 Callejo J.) Kinds of NI 1. PROMISSORY NOTE (PN) An unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184) 2. BILL OF EXCHANGE (BE) An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) CHECK - A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the most common form of bill of exchange. OTHER FORMS OF NI 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer 2. Trade acceptance 3. Bonds, which are in the nature of promissory notes 4. Drafts, which are bills of exchange drawn by one bank upon another 5. Debenture All of these must comply with Sec. 1, NIL. Note: Letters of credit are not negotiable because they are issued to a specified person. Instances when a BE may be treated as a PN a. The drawer and the drawee are the same person; or b. Drawee is a fictitious person; or c. Drawee does not have the capacity to contract. (Sec. 130) d. Where the bill is drawn on a person who is legally absent; e. Where the bill is ambiguous (Sec. 17[e]) Parties to a NI 1. Promissory Note a. Maker – one who makes promise and signs the instrument b. Payee – party to whom the promise is made or the instrument is payable. 2. Bill of Exchange a. Drawer – one who gives the order to pay money to a third party b. Drawee – person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill c. Payee – party in whose favor the bill is drawn or is payable. DISTINCTIONS
Unconditional promise Involves 2 parties Maker is primarily liable Only one presentment: for payment
BILL OF EXCHANGE
Unconditional order Involves 3 parties Drawer is only secondarily liable Two presentments: for acceptance and for payment
Only NI are governed by the NIL. Transferable by negotiation or by assignment.
Application of the NIL is only by analogy. Transferable only by assignment
Negotiable Instruments and other Commercial Documents. for payment if dishonored by the party primarily liable. there would be fraud. paid or both and that they will pay if the instrument is dishonored. (Notes and Cases on Banks. Negotiable Instruments and other Commercial Documents. Negotiable Instruments and other Commercial Documents. Aquino) BILLOF EXCHANGE Not necessarily drawn on a deposit. Aquino) Transferee acquires a derivative title only. Negotiable Instruments and other Commercial Documents. Timoteo B. (Notes and Cases on Banks. the instrument better than his predecessors.NEGOTIABLE INSTRUMENT Subject is money Is itself the property with value NEGOTIABLE DOCUMENT OF TITLE Subject is goods The document is a mere evidence of title – the things of value being the goods mentioned in the document Has all the Does not have these requisites of Sec. may rights to the document better acquire rights over than his predecessors. Timoteo B. Aquino) Requires clean title. . Aquino) Solvency of debtor is not guaranteed under Art. Otherwise. (Notes and Cases on Banks. A transferee can be a A transferee remains to be an HDC if all the assignee and can never be a HDC requirements are complied with A holder in due course All defenses available to prior takes the NI free from parties may be raised against the personal defenses last transferee Solvency of debtor is in the sense guaranteed by the indorsers because they engage that the instrument will be accepted. one that is free from any infirmities in the instrument and defects of title of prior transferors. Timoteo B. 1 requisites of NIL A holder of NI may Intermediate parties are not run after the secondarily liable if the secondary parties document is dishonored. 1628 of the NCC unless expressly stipulated. (Notes and Cases on Banks. A holder. The drawee need not be a bank CHECK It is necessary that a check be drawn on a bank deposit. if a holder A holder can never acquire in due course. Timoteo B.
The NI must be burdened with the terms and conditions of that agreement to destroy its negotiability. 1 of the NIL. the instrument is rendered non-negotiable. or b) A statement of the transaction which gives rise to the instrument Where the promise or order is subject to the terms and conditions of the transaction stated. Timoteo B. 2. Commercial Law Bar Reviewer. afterwards. What appears on the face of the instrument c. Unconditional Promise or Order to pay a sum certain in money Unconditional promise or order Where the promise or order is made to depend on a contingent event. or at a fixed or determinable future time. Must be presented for payment within a reasonable time after its issue. and 5. (Gopenco.) But an order or promise to pay out of a particular fund is NOT unconditional. 1) Key: WUPOA 1. it is conditional. if indorsed specially. it will always remain so payable regardless of manner of indorsement. With respect to the signature. NEGOTIABLE WAREHOUSE RECEIPT If payable to bearer. (Cesar Villanueva. p. Must be payable to Order or to bearer. May be payable on demand or at a fixed or determinable future time Death of the drawer of a check. (Sec. 3) FUND FOR REIMBURSEMENT Drawee pays the payee from his own funds. 212 SCRA 448) The acceptance of a bill of exchange is not important in the determination of its negotiability. Particular fund indicated is NOT the direct source of payment but only the source of reimbursement.the drawee pays directly from the particular fund indicated. Negotiable Instruments and other Commercial Documents. does not revoke the authority of the drawee to pay. he must be named or otherwise indicated therein with reasonable certainty. 4. Must be Payable on demand. Must contain an Unconditional promise or order to pay a sum certain in money. Should contain words or terms of negotiability. Aquino) b. Must be in Writing and signed by the maker or drawer. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved (PBCOM vs.1 of the NIL d. it will be converted into a receipt deliverable to order. The indorsee. NEGOTIABILITY Form of NI: (Sec. Particular fund indicated is the direct source of payment. with the knowledge of the bank. The unconditional nature of the promise or order is not affected by: a) An indication of a particular fund out of which reimbursement is to be made. 2004 ed. and the instrument involved is non-negotiable. A holder in due course may obtain title better than that of the one who negotiated the instrument to him. CA. the drawee pays himself from the particular fund indicated. Aruego. NEGOTIABLE INSTRUMENT If originally payable to bearer. Payment is subject to the condition that the fund is sufficient. . Whole instrument b. 3. the instrument in its entirety and by what appears on its face must be considered. Always payable on demand Determination of negotiability: a. It must comply with the requirements of Sec. even if holder in due course. It must be writing and signed by the maker or drawer Any kind of material that substitutes paper is sufficient. or a particular account to be debited with the amount. (Caltex Phils. with the knowledge of the bank. When the instrument is addressed to a drawee. 23) In determining the negotiability of an instrument. Commercial Law Review. obtains only such title as the person who caused the deposit had over the goods. v. revokes the authority of the banker to pay. PARTICULAR FUND FOR PAYMENT There is only one act. (Notes and Cases on Banks. cited in Aquino. Requisites enumerated in Sec. The happening of the event does not cure the defect. ASSIGNMENT Pertains to contracts in general Holder takes the instrument subject to the defenses obtaining among the original parties Governed by the Civil Code NEGOTIATION Pertains to NI Holder in due course takes it free from personal defenses available among the parties Governed by the NIL II. May be presented for payment within reasonable time after its last negotiation. 102 SCRA 530) REQUISITES OF NEGOTIABILITY a.Death of a drawer of a BOE. it is enough that what the maker or drawer affixed shows his intent to authenticate the writing.
d. (Notes and Cases on Banks. Aquino) Parties are bound because they took the instrument knowing that there is an extension clause c. Where issued. On or before a fixed or determinable future time specified therein. (Sec. With exchange. (Pandect of Commercial Law and Jurisprudence. b. or to him or his order. Negotiable Instruments and other Commercial Documents. b. a. but not the year of payment is given. Where no period of payment is stated. b. To extend the time of payment or b. The instrument may be made payable to the order of: a. By stated installments. With cost of collection or attorney’s fees. A payee who is not the maker. Right of recourse is expressly reserved. Justice Jose Vitug. 39 SCRA 587) Treasury warrants are non-negotiable because there is an indication of the fund as the source of payment of the disbursement. Postpone the holder’s right to enforce the instrument Binds the person secondarily liable (and therefore cannot be discharged from liabilities if: a. On or at a fixed period after the occurrence of a specified event. Timoteo B. drawer or drawee b. A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical computation. or c. Aquino) ACCELERATION CLAUSE A clause that renders whole debt due and demandable upon failure of obligor to comply with certain conditions. Payable to Order or to Bearer Payable to Order The instrument is payable to order where it is drawn payable to the order of a specified person. Instrument is still negotiable (Notes and Cases on Banks. which is certain to happen. Automa –tically upon or after a specified act or event.6 (e)). Payable on Demand or at fixed or determinable future time PAYABLE ON DEMAND a. Extension to a further definite time at the option of the maker or acceptor c.Postal money orders are not negotiable instruments. or c. 1997 ed. Education Co. Where expressed to be payable on demand. 7) PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME a. at sight or on presentation. Timoteo B. Negotiable Instruments and other Commercial Documents. (PNB vs.) d. Soriano. The drawer or maker c. 2) The dates of each installment must be fixed or at least determinable and the amount to be paid for each installment. One or some of several payees f. The certainty is however not affected although to be paid: a. or indorsed after maturity (only as between immediate parties). (Metrobank vs. a. EXTENSION CLAUSE Clauses in the face of the instrument that extend the maturity dates. 2 or more payees jointly e. (Sec. it is not negotiable due to its uncertainty. 8) The payee must be named or otherwise indicated therein with reasonable certainty. At a fixed period after date or sight. or b. (Sec. INSECURITY CLAUSE Provisions in the contract which allows the holder to accelerate payment if he deems himself insecure. With interest. He consents or b. accepted. Timoteo B. 4) If the day and the month. or e. Aquino) EXTENSION CLAUSE Stated on the face of the instrument EXTENSION UNDER SEC. By stated installments with an acceleration clause. (Sec. Zulueta. Some of the restrictions imposed by postal laws and regulations are inconsistent with the character of negotiable instruments. 101 Phil 1071. though the time of happening is uncertain. Sec. At the option of the holder. Negotiable Instruments and other Commercial Documents. 194 SCRA 169) Payable in sum certain in money An instrument is still negotiable although the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in money. (Phil. 120(f) Agreement binding the holder. CA. (Notes and Cases on Banks. c. vs. The drawee d. The holder of an office for a time being Instrument is still negotiable Instrument is rendered nonnegotiable because the holder’s whim and caprice prevail without the fault and control of the maker .
222 SCRA 466) HOW NEGOTIATION TAKES PLACE a. Notice of dishonor l. Timoteo B. Negotiation – the transfer of the instrument from one person to another so as to constitute the transferee as holder thereof. Allows the creditor the option to require something in lieu of money. d. Waives the benefit of law intended to protect the debtor. Discharge MODES OF TRANSFER a. (Sec. or b. 128) OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY a. f. Presentment for payment j. (Sec. Authorizes confession of judgment on default. b. Instrument undated – consider date of issue. c. Authorizes the sale of collateral securities on default. 191) Steps: GENERAL RULE: If some other act is required other than or in addition to payment of money. the holder may treat it as either at his election. Conflict between written and printed provisions – written provisions prevail. it has to be indorsed. it can NO LONGER be negotiated further by mere delivery. (Reviewer on Commercial Law. g. (Sesbreño vs. When the name of the payee does not purport to be the name of any person. the instrument is not negotiable. or c. 383) FICTITIOUS PAYEE RULE It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. (Notes and Cases on Banks. and such fact was known to the person making it so payable.30) b. 9) Note: An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. It does not specify the place where it is drawn or where it is payable. It does not specify the value given or that any ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY III. Issue b. if undated. 6) 1. value has been given. It designates a particular kind of current money in which payment is to be made. Any defense available against the transferor is available against the transferee. (The Law on Negotiable Instruments with Documents of Title. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. but if the words are ambiguous. If it is originally a BEARER instrument. c. It is not dated. or d. or e. Assignment – The transferee does not become a holder and he merely steps into the shoes of the transferor. 17) a. 5) EXCEPTIONS: a. Payment for interest is provided for – interest runs from the date of the instrument. (Sec. Presentment for acceptance. 2000 ed. Negotiation c. When it is payable to the order of a fictitious or non-existing person. (Sec. Professors Sundiang and Aquino) e. Dishonor by non-acceptance i. e. or d. c. b. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1. 1992 ed.” their liability is joint (each liable for his part) but if they sign “I promise to pay. 17) IV. reference will be made to the figures to fix the amount. Negotiable Instruments and other Commercial Documents. A check that is payable to the order of cash is payable to bearer. and The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. CA. he is considered an indorser. When it is expressed to be so payable. When it is payable to a person named therein or to bearer. Dishonor by non-payment k. Hector de Leon. The person to whose order the instrument is made payable may in fact be existing but he is till fictitious or non-existent under Sec.Payable to Bearer The instrument is payable to bearer: a. 2.) . (Ang Tek Lian vs. Reason: The name of the payee does not purport to be the name of any person. When the instrument is so ambiguous that there is doubt whether it is a bill or note. Acceptance h. in certain kinds of Bills of Exchange d. if the same is indorsed specially. CA. d.” the liability is solidary (each can be compelled to comply with the entire obligation). (Sec. If two or more persons sign “We promise to pay. It bears a seal. As opposed to an original order instrument becoming payable to bearer. When the only or last indorsement is an indorsement in blank. (Sec. Aquino) Assignment may be effected whether the instrument is negotiable or non-negotiable.) a. it will always be a BEARER instrument. Identification of Drawee Applicable only to a bill of exchange A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or more drawees in the alternative or in succession. Issuance – first delivery of the instrument complete in form to a person who takes it as a holder. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. (Sec. e. If one signs without indicating in what capacity he has affixed his signature. Discrepancy between the amount in figures and that in words – the words prevail. TRANSFER AND NEGOTIATION INCIDENTS IN THE LIFE OF A NI (1 Agbayani. 87 Phil. from issue thereof. b.
Where a person is under obligation to indorse in a representative capacity. (Sec. If payable to bearer. Every person whose signature appears thereon is presumed to have become a party thereto for value. . D. Prohibits further negotiation of the instrument. the negotiation takes effect as of the time when the indorsement is made. 48) CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT TRANSFER Every NI is deemed prima facie to have been issued for a valuable consideration. 44) RENEGOTIATION TO PRIOR PARTIES (Sec. QUALIFIED – Constitutes the indorser a mere assignor of the title to the instrument. ABSOLUTE – One by which indorser binds himself to pay: 1. he may indorse in such terms as to negative personal liability. Upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid (Sec. (Sec. 41) H. Subsequent Negotiation 1. such party may reissue and further negotiate the same. 109 Phil. 706) F. But mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec. 46) 3. The indorser whose indorsement is struck out. May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement (Sec. EXCEPTION: Where instrument has been paid in part. Value previously given c. "at the indorser's own risk". 24) What constitutes value: a. 49) d. 27) V. (Sec. 34) B. 191) RIGHTS OF HOLDERS IN GENERAL (Sec. BLANK – Specifies no indorsee: 1. 45) 2. (Sec. (Sec. 38) It is made by adding to the indoser's signature words like "sans recourse. 32) Kinds of Indorsement: A. when it either: a. 2. not otherwise a party to an instrument.” “without recourse". But for the purpose of determining whether the transferee is a holder in due course. a NI may be negotiated by indorsement completed by delivery Note: In both cases. 64) Other rules on indorsement. places thereon his signature in blank before delivery (Sec. If payable to order.b. (Sec. 51) a . (Sec. Lien arising from contract or by operation of law. JOINT – Indorsement payable to 2 or more persons (Sec. G. 36) 1. (Sec. all must indorse unless authority is given to one. HOLDERS HOLDER A payee or endorsee of a bill or note who is in possession of it or the bearer thereof. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. CONDITIONAL – Right of the indorsee is made to depend on the happening of a contingent event. 31) GENERAL RULE: Indorsement must be of the entire instrument. (Sec. Incomplete negotiation of order instrument Where the holder of an instrument payable to his order transfers it for value without indorsing it. etc. Sima Wei. c. 39) E. Indorsement Legal transaction effected by the affixing one's signature at the: a. 35) C. the transfer vests in the transferee such title as the transferor had therein and he also acquires the right to have the indorsement of the transferor. STRIKING OUT INDORSEMENT The holder may at any time strike out any indorsement which is not necessary to his title. and all indorsers subsequent to him. (Development Bank vs. Where an instrument is payable to the order of 2 or more payees who are not partners. Back of the instrument or b. delivery must be intended to give effect to the transfer of instrument. (Sec. An antecedent or pre-existing debt b. 2. it may be indorsed as to the residue. SPECIAL – Specifies the person to whom or to whose order. are thereby relieved from liability on the instrument. (Sec. 219 SCRA 736) c. or Vests the title in the indorsee in trust for or to the use of some other persons. Tan Kim. Payment to him in due course discharges the instrument The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. or b. IRREGULAR – A person who. the instrument is to be payable (Sec. a negotiable instrument may be negotiated by mere delivery. (Chan Wan vs. Upon no other condition than failure of prior parties to do so. Instrument becomes payable to bearer and may be negotiated by delivery (Sec. Upon due notice to him of such failure. Reason: To avoid circuitousness of suits. 50) Where an instrument is negotiated back to a prior party. Party required to pay may disregard the conditions. May sue thereon in his own name b. Presumed to have been made at the place where the instrument is dated except when the place is specified. RESTRICTIVE – An indorsement is restrictive. 34) 2. "indorser not holder". Constitutes the indorsee the agent of the indorser. 41) 4. Negotiation is deemed prima facie to have been effected before the instrument is overdue except if the indorsement bears a date after the maturity of the instrument. (Sec.
53) Note: “without receiving value therefor. 2003) Well-entrenched is the rule that the consideration necessary to support a surety obligation need not pass directly to the surety. No. The principal debtor is insolvent. Hence. 3.R.e. (De Ocampo vs. (Spouses Eduardo Evangelista vs. The liability is immediate and direct. an AP. (Secs. a consideration need not pass directly to the surety. Aquino) . 4. vs. Became a holder before it was overdue and without notice that it had been previously dishonored. Court of Appeals. 29) Rights & Legal Position: 1.. The purpose is to lend his name or credit. vs. 58) ACCOMMODATION A legal arrangement under which a person called the accommodation party. Negotiable Instruments and other Commercial Documents. 2. it cannot be stated that the payee acquired the check without the knowledge of said defect in the holder’s title and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. drawer.R. 2. 4. the presumption that he is a prima facie holder in due course applies in his favor. without any consideration. (Stelco Marketing Corp. It can enforce the instrument and sue under it in his own name. the distinction between a HDC and one who is not a HDC is immaterial. 138074. 148864. CA. the instrument is discharged. (Romeo Garcia vs. However. 2. the holder is deemed not a holder in due course. 154127. 2. has all the rights of such former holder in respect of all prior parties to the latter. Accommodation Party (AP) Requisites: Rights of a HDC: 1. and who is not himself a party to any fraud or illegality affecting the instrument. some or all of the requisites under Sec. Hence. in effect. i. the 4 condition. 2003) Holder Not In Due Course One who became a holder of an instrument without any. 3 SCRA 596) 2. Timoteo B. Sellner. He made the payment by virtue of judicial demand. (Sec. No. or b. acceptor. he has the right to sue the accommodated party for reimbursement. lack of notice of infirmity in the instrument or defect in the title of the persons negotiating it. 42 Phil. The accommodation party must sign as maker. Holder to whom cashier’s check is not indorsed in due course and negotiated for value is not a holder in due course. AP is generally regarded as a surety for the party accommodated. or indorser. and At the time he took it. Prior parties can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the instrument Note: If there are no defenses. 210 SCRA 51) Rights of APs as against each other: May demand contribution from his coaccommodation party without first directing his action against the principal debtor provided: a. (Sec. Gatchalian. 2. With respect to demand instruments. Dionisio Llamas. G.” means without receiving value by virtue of the instrument. 348 SCRA 450) Liability: Liable on the instrument to a holder for value notwithstanding such holder at the time of the taking of the instrument knew him to be only an accommodation party. The relation between an accommodation party is. August 21. Where a holder’s title is defective or suspicious that would compel a reasonable man to investigate. When AP makes payment to holder of the note. (Cely Yang vs. (Sec. 51 and 57) 1. August 15. 52) SHELTER RULE A holder who derives his title through a holder in due course. The weight of authority sustains the view that a payee may be a holder in due course. Inc. Court of Appeals. December 8. a consideration moving to the principal alone being sufficient.R. th As regards. Instrument is complete and regular upon its face. this presumption arises only in favor of a person who is a holder as defined in Section 191 of the NIL. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promissory and debtor from the beginning. lends his name and credit to another called the accommodated party. IAC) Rights of a holder not in due course: 1. No. May sue on the instrument in his own name. (Sec. 29) 4. Holds the instrument free from any defect of title of prior parties and free from defenses available to parties among themselves. G. (Agro Conglomerates. he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (Sec. For value and in good faith. (Notes and Cases on Banks. May receive payment and if payment is in due course. and May enforce payment of the instrument for the full amount thereof against all parties liable thereon.Holder In Due Course (HDC) A holder who has taken the instrument under the following conditions: KEY: C O V I 1. G. 3. He must not receive value therefor. and Every holder of a negotiable instrument is deemed prima facie a holder in due course. Mercator Finance Corp. 384) Effects: The person to whom the instrument thus executed is subsequently negotiated has a right of recourse against the accommodation party in spite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties. if it is negotiated an unreasonable length of time after its issue. one of principal and surety – the accommodation party being the surety. 2003) GENERAL RULE: Failure to make inquiry is not evidence of bad faith. EXCEPTIONS: 1. has no application. 3. 52 of the NIL. (Clark vs. (Mesina v.
c. Engages to pay according to the tenor of the instrument. Engages that the instrument will be accepted or paid by the party primarily liable. B. the person who breached the same may either be liable or barred from asserting a particular defense. Warrants all subsequent HDC a. 2. Secondarily Liable (Sec. valid and subsisting. That the instrument is genuine and in all respect what it purports to be b. as the case may be. the genuineness of his signature and his capacity and authority to draw the instrument. If he signs for accommo-dation of the payee. (Sec. B. he is liable to the payee and subsequent parties. 1. not otherwise a party to an instrument. The instrument is. places his signature thereon in blank before delivery.) DRAWER GENERAL INDORSER IRREGULAR INDORSER A. and C. Primarily Liable (Sec. and C. according to its tenor. Admits the existence of the drawer. 60 and 62. B. ACCEPTOR OR DRAWEE A. Negotiable Instruments Law. NIL) MAKER A. Engages to pay according to the tenor of his acceptance. he will pay to the party entitled to be paid. (Campos and Lopez-Campos. NIL) WARRANTIES OF PARTIES Impose no direct obligation to pay in the absence of breach thereof. Admits the existence of the payee and his capacity to indorse. and B.127) . Negotiable Instruments Law. Engages that if the instrument is dishonored and proper proceedings are brought. Engages that the instrument will be accepted or paid. at the time of endorse-ment. All prior parties had capacity to contract d. or both.) A person. and C. 61. B. 1994 ed. A. PARTIES WHO ARE LIABLE PRIMARY AND SECONDARY LIABILITY OF PARTIES Makes the parties liable to pay the sum certain in money stated in the instrument. A bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof and the drawee is not liable unless and until he accepts the same (Sec. he will pay to the party entitled to be paid. 1994 ed. If the instrument is dishonored and necessary proceedings on dishonor be duly taken. If instrument payable to order of maker or drawer or to bearer. In case of breach. Admits the existence of the payee and his capacity to indorse. If instrument payable to the order of a 3rd person. He has good title to it. Does not require presentment and notice of dishonor. he is liable to all parties subsequent to the payee.VII. 64) A. Conditioned on presentment and notice of dishonor (Campos and Lopez-Campos. he is liable to all parties subsequent to the maker or drawer. 64 and 66. C. Admits the existence of the payee and his capacity to indorse.
One who signs his assumed or trade name is liable. EXCEPTIONS: 1. 4. duress. The forger is liable. Want of authority of agent. Minority (available to the minor only). 5. 2. 8. 3. Sambok.k.3. but only by the parties entitled to raise them.k. 6. GENERAL RULE: One whose signature does not appear on the instrument shall not be liable thereon. The principal who signs through an agent is liable. Timoteo B. Aquino) As respect one another. Acquisition of the instrument by unlawful means. 5. Absence or failure of consideration. D. Ultra vires acts of a corporation 9. Negotiable Instruments and other Commercial Documents. and B. Fraud in factum or fraud in esse contractus. All prior parties had capacity to contract. 10. 7. He has no knowledge of any fact which would impair the validity of the instrument or render it valueless. Insanity where the insane person has a guardian appointed by the court. whether in due course or not. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee. 3.a. One who indorses in a separate instrument (allonge) or where an acceptance is written on a separate paper is liable. Acquisition of instrument by force. 2. (Notes and Cases on Banks. and 5. Filling up of blank contrary to authority given or not within reasonable time. 120 SCRA 864) ORDER OF LIABILITY There is no order of liability among the indorsers as against the holder.a absolute defenses) 1. Execution of instrument PERSONAL DEFENSES Those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. 8. 2. 6. Insertion of wrong date in an instrument. Warranties extend to immediate transferee only. indorsers are liable prima facie in the order in which they indorse unless the contrary is proven (Sec. Every person negotiating instrument by delivery or by a qualified endorsement warrants that: A. B. 3. Limited Liability (Sec. DEFENSES REAL DEFENSES Those that attach to the instrument itself and are available against all holders. Metropol Financing v. 7. Duress amounting to forgery. valid and subsisting . at the time of his indorsement. Warranties same as those of qualified indorsers. VII. 65. Marriage in the case of a wife. (a.68) QUALIFIED INDORSER PERSON NEGOTIATING BY DELIVERY A. (a. Want of delivery of incomplete instrument. He has good title to it. Material Alteration. or fear. Acquisition of the Warrants that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless Warrants that the instrument is. He is free to choose to recover from any indorser in case of dishonor of the instrument. Want of delivery of complete instrument. partial or total. 4. C. and warranties 1. equitable defenses) PERSON NEGOTIATING BY MERE DELIVERY OR BY QUALIFIED INDORSEMENT No secondary liability. but is liable for breach of warranty GENERAL INDORSER There is secondary liability. Fraud in inducement. Instrument is genuine and in all respects what it purports to be. 4.
28) Personal defense to the prejudiced party and available against any person not HDC. e. (PNB vs. 256 SCRA 491) EFFECTS OF CERTAIN DEFENSES A. Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued. The instrument must be filled up strictly in accordance with the authority given and within reasonable time 3. Date. 11. As against an immediate party and remote party who is not a HDC. if an altered instrument is negotiated to a HDC. and 3. 125) A serial number is an item which is not an essential requisite for negotiability under Sec. authorized. presumption of a valid and intentional delivery is rebuttable. 2. PRESCRIPTION Refers to extinctive prescription and may be raised even against a HDC. (Sec. or assented to the alteration and subsequent indorsers. (Sec. 2. and 16. But the minor is not liable and the defense is personal to him B. Any other change or addition which alters the effect of the instrument in any respect. Under the Civil Code. The issuance or indorsement of negotiable instrument by a corporation without consideration and for the accommodation of another is ultra vires. F. HDC may enforce the instrument as if filled up according to no. instrument for an illegal consideration. either for principal or interest. Medium or currency in which payment is to be made. c. and which does not affect the rights of the parties. Illegality of contract where the form or consideration is illegal. 117 SCRA 594) C. Intoxication (according to better authority). it does not matter whether it is favorable or unfavorable to the party making the alteration. INCOMPLETE AND UNDELIVERED NI (Sec. 13. the prescriptive period of an action based on a written contract is 10 years from accrual of cause of action. However. Forgery. 14.the effect is the same as where the alteration is made by a party which a HDC can recover on the original tenor of the instrument. Alteration by a stranger (spoliation). Sum payable. COMPLETE BUT UNDELIVERED NI (Sec. Want of authority of agent where he has apparent authority. I. 124) Changes in the following constitute material alterations: a. 9. H. and g. hence its alteration is not material. Holder has prima facie authority to fill up the instrument. d. D. Mistake. 2. Note: Since no distinction is made. b. E. 15) If completed and negotiated without authority. CA.between public enemies. 22) Note: A corporation cannot act as an accommodation party. f. 15. Between immediate parties and those who are similarly situated. This is a real defense. Negotiation in breach of faith. Number or relations of the parties. Illegality – if declared void for any purpose 12. (Crisologo-Jose v. MATERIAL ALTERATION Any change in the instrument which affects or changes the liability of the parties in any way. That which adds a place of payment where no place of payment is specified. CA. 12. Effects: 1. it is conclusively presumed that there was valid delivery. FRAUD FRAUD IN FACTUM OR FRAUD IN INDUCEMENT The person who signs the instrument intends to sign the same as a NI but was induced by fraud FRAUD IN ESSES CONTRACTUS OR FRAUD IN EXECUTION The person is induced to sign an instrument not knowing its character as a bill or note G. MINORITY Negotiation by a minor passes title to the instrument. 16) 1. (Sec. 2.22). The intent of the law is to preserve the integrity of the negotiable instruments. delivery must be coupled with the intention of transferring title to the instrument. 1. INCOMPLETE BUT DELIVERED NI (Sec. 10. Negotiation under circumstances that amount to fraud. . ABSENCE OR FAILURE OF CONSIDERATION (Sec. NIL. Insanity where there is no notice of insanity on the part of the one contracting with the insane person. 14) 1. Time or place of payment. he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. ULTRA VIRES ACTS A real defense but the negotiation passes title to the instrument. Alteration by a party – Avoids the instrument except as against the party who made. 11. As to HDC. not a valid contract against a person who has signed before delivery of the contract even in the hands of HDC but subsequent indorsers are liable. (Sec.
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