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A REVIEWER BY
LEX SOCIETAS VERITAS. VNITAS. VIRTVS .
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
INTRODUCTION ORIGIN Agbayani: The Negotiable Instrument Law is a creature of the law merchant, from which it was imported into England and crystallized in the English common law. It was codified in that country in 1882 by what is known as the Bills of Exchange Act. In the United States there was, prior to the drafting of the Negotiable Instrument Law, a codification of the law in some states but there was nothing looking towards a codification for all the states of the Union. The earliest codification for an individual state is found in the California Code of 1372. At a conference of commissioners from nineteen states held in 1895, a resolution was adopted requesting the committee on commercial laws to procure a draft bill relating to commercial paper based on the Bill of Exchange Act. In 1896, the draft, as amended, was adopted by the conference and recommended for general enactment by the state Legislatures. Campos: The use of negotiable instruments originated from the merchants and traders of the Middle Ages, more specifically among the Florentine and Venetian merchants along the Adriatic Sea. The bill of exchange was devised to facilitate the contract of cambium and to avoid the risks of transporting money. Sebastian: The Negotiable Instrument Law is a compilation of commercial practice developed in Europe. It was necessary for traders to come up with a substitute medium of exchange because trade was flourishing. There was hardly enough government coins to sustain the production of mint. In those days, bank notes (or paper bills) were non-existent. Due to scarcity of coins, promissory notes and bills of exchange came about. This compilation of rules have evolved from ancient trading practices. In 1882, UK enacted the Bill of Exchange Act. On or about that time, the US also codified a verbatim reproduction of the Uniform Negotiable Instrument Law. The Americans brought the Negotiable Instrument Law to the Philippines which we copied verbatim. It has not been amended since 1911. PURPOSE Agbayani: 1) To produce uniformity in the laws of the different states upon this important subject, so that the citizens of each state might know the rules which would be applied on their notes, checks and other negotiable paper in every other state in
which the law was enacted, since it was impossible for the commercial purchaser in any state to know all the details affecting the negotiability of paper governed by the laws of all the other states. 2) To preserve the law as nearly as possible as it then existed. Sebatian: Rules in Negotiable Instruments Law are universally the same. Thus, it enables trade with other people anywhere he goes or transacts. CONCEPT OF NEGOTIABILITY Sebastian: An instrument is negotiable when it transfers from one hand to another. It is not just a mere transfer but a deliberate and with intention to give or transfer. Where there is proper negotiation, the person who holds it as a consequence of delivery is called a “holder”. Therefore, negotiation is the transfer of a negotiable instrument for the purpose of making the transferee the holder of the negotiable instrument. Non-Negotiable Instrument to specified person transfer by assignment Transferee is assignee. Assignee is similar to a subrogee. Therefore, assignee only acquires the totality of the right of the transferor. Negotiable Instrument to order or bearer transfer by negotiation Transferee is holder. Unlike an assignee, a holder is in due course is free from all personal defenses available among the parties. Thus, one of the big advantages of a holder is that he can get rights better or superior to those rights of his immediate transferor. Negotiability pertains only to a special class of contracts – negotiable instruments takes it free from personal defenses available among the parties consideration is presumed and need not be alleged and proved Indorser is not liable on his indorsement unless there be presentation for payment at maturity and prompt notice of dishonor in case of dishonor A general indorser is secondarily liable for any cause for which the
Assignability more comprehensive term and pertains to contracts in general subject to the defenses obtaining among the original parties it is necessary to allege and prove consideration to maintain an action on a common law instrument
assignor in good faith does not warrant the solvency of the debtor
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
unless it has been expressly stipulated or unless the insolvency was prior to the assignment and of common knowledge
party primarily liable on a negotiable instrument does not or cannot pay. He warrants the solvency of the person primarily liable. The qualified indorser and the person negotiating by mere delivery have limited secondary liability.
Campos: The Negotiable Instruments Law divides negotiable instruments into two main groups: the promissory note and the bill of exchange. The first evidences a promise to pay money, while the bill of exchange is an order made by one person to another to pay money to a third person. The most commonly used for of bill of exchange is the check, wherein the one who issued it order his bank to pay the person named on the check. A check is always payable on demand. Promissory Note – A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixe or determinable future time, a sum certain in money to order or to bearer. (Sec. 184) Agbayani: A promissory note is essentially a promise in writing to pay on demand or at a fixed or determinable future time a sum certain in money. Non-Negotiable I promise to pay X P 100.00 on September 1, 2012. (sgd.) Maker In this note the person paid is specified. Negotiable I promise to pay X, or order P 100.00 on September 1, 2012. (sgd.) Maker This note can pass from hand to hand; and was intended to circulate. This note can be negotiated by X prior to due date. X may indorse this note by writing “Pay to Y or order. (sgd.) X”.
There are two contracts in a negotiable instrument. First there is the issuance of a negotiable instrument and the second is the underlying transaction. The underlying transaction is the reason for the issuance of the negotiable instrument. However, in transferring the negotiable instrument, you only look at the issuance of the negotiable instrument and there is no need to consider the underlying transaction. APPLICATION OF THE LAW Ang Tiong v. Ting – Having arisen from a bank check which indisputably a negotiable instrument, the present case is, therefore, in so far as the indorsee is concerned vis-à-vis the indorser, governed by the Negotiable Instrument law (see Secs. 1 and 185). Article 2071 of the new Civil Code is hereby completely irrelevant and can have no application whatsoever. Agbayani: An instrument which does not comply with the requirement of the Negotiable Instrument Law is a simple contract in writing and is merely an evidence of such intangible rights as may have been created by the assent of the parties. If, however, it conforms to the requirements of the Negotiable Instruments Law, the instrument is itself the contract and not just a mere evidence of rights. It is a mercantile specialty. Campos: The Negotiable Instruments law applies only to negotiable instruments, to those instruments which conform with the requisites laid down by section one of the law. Should any of said requisites be absent the instrument would not be negotiable and would therefore not governed by the Negotiable Instruments Law but by general law on contracts. Sebastian: For the Negotiable Instrument Law to apply, the instrument must comply with the requisites under Section 1. Otherwise, the Civil Code shall apply. TYPES OF NEGOTIABLE INSTRUMENTS Agbayani: The Negotiable Instruments Law deals with three kinds of negotiable instruments, namely: (1) promissory notes, (2) bills of exchange, and (3) checks, which are also bills of exchange, but of a special kind.
Campos: There are usually two parties to a promissory note: the promissor, called the maker; and the payee, the person to whom the promise to pay is made. Bills of Exchange – A bill of exchange is 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) Agbayani: A bill of exchange is essentially an order or a command in writing addressed to someone requiring him to pay a sum certain in money. (Agbayani) Campos: The person who gives the order to pay in a bill of exchange is referred to as the drawer; the addressee of the order is the drawee, and the person to whom the payment to be made is the payee. Sebastian: A bill of exchange is similar to a promissory note with one difference, it is an order to pay. The function of a bill of exchange is that it is a substitute for money. It allows making payment without even touching the actual money.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
. LEX SOCIETAS VERITAS. "Bearer" means the person in possession of a bill or note which is payable to bearer. Another type of bill of exchange is a draft which is exactly like a check. VNITAS. including holders in due course. Definition and meaning of terms. 192. Sec. actual or constructive. "Bank" includes any person or association of persons carrying on the business of banking. Checks always drawn upon a bank or banker always payable on demand not needed to be presented for acceptance drawn on a deposit death of a drawer of a check. with knowledge by the banks. Short title. a check is a special draft which is directed to a bank.In this Act. to a person who takes it as a holder. whether incorporated or not. "Holder" means the payee or indorsee of a bill or note who is in possession of it. by its terms. . "Written" includes printed. DISTINCTIONS AMONG VARIOUS TYPES OF INSTRUMENTS Bill of Exchange an order or command to pay an order not because it is payable to order but because. Therefore. complete in form. "Value" means valuable consideration. While a personal defense is one that can be raised except against a holder in due course. (Sec. 185) Sebastian: A check is only one of the many types of bills of exchange. "Bill" means bill of exchange. "Person" includes a body of persons. unless the contract otherwise requires: "Acceptance" means an acceptance completed by delivery or notification. "Instrument" means negotiable instrument. from one person to another. "Indorsement" means an indorsement completed by delivery. it need not be directed to a bank. is absolutely required to pay the same. It is an order to pay given to a person which is not necessarily a bank. or the bearer thereof. Sec. "Issue" means the first delivery of the instrument. "Action" includes counterclaim and set-off. whether incorporated or not. "Delivery" means transfer of possession. VIRTVS. it orders or commands the drawee to pay money to a payee or bearer Bill of Exchange may not be drawn against a bank may be payable on demand or at a fixed or determinable future time must be presented for acceptance need not drawn on a deposit death of a drawer of an ordinary bill of exchange does not revoke the authority of the banker to pay may be presented for payment within a reasonable time after its last negotiation Promissory Note a promise to pay a promissory note does not become a bill by reason that it is payable to order GENERAL PROVISIONS Sec. All other parties are "secondarily" liable. however.This Act shall be known as the Negotiable Instruments Law. Persons primarily liable on instrument. 191. . and "writing" includes print. revokes the authority of the banker to pay must be presented for payment within a reasonable time after its issue CONCEPT OF REAL AND PERSONAL DEFENSES Sebastian: A real defense is one raised against all persons. and "note" means negotiable promissory note. 3 .NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Checks – A check is a bill of exchange drawn on a bank payable on demand. Rules governing bills of exchange are slightly modified when we talk of checks.The person "primarily" liable on an instrument is the person who. 190. by the terms of the instrument.
Where the day. he must be named or otherwise indicated therein with reasonable certainty. LEX SOCIETAS VERITAS. and the facts of the particular case. he must be named or otherwise indicated with reasonable certaintly. . how computed. “I authorize (drawee) to pay…” is a nonnegotiable instrument. Sec. . by the rules of the law merchant. Application of Act. Sebastain: If the instrument is addressed to a drawee. . Otherwise the instrument would not be negotiable. 193. and (e) Where the instrument is addressed to a drawee. VIRTVS.Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof. 1. 195. Repeals. Reasonable time.This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed.In determining what is a "reasonable time" regard is to be had to the nature of the instrument. or at a fixed or determinable future time 4) it must be payable to order or to bearer Bill of Exchange 1) 2) 3) 4) 5) it must be in writing and signed by the drawer it must contain an unconditional order to pay a sum certain in money it must be payable on demand. . 4 . And. when last day falls on holiday. or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday. The authority to pay is different from a direct instruction to pay. 198. an acceptance may supply the omission of a designation. (c) Must be payable on demand. (b) Must contain an unconditional promise or order to pay a sum certain in money. VNITAS.An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer.All acts and laws and parts thereof inconsistent with this Act are hereby repealed. the act may be done on the next succeeding secular or business day. This suggests that there are two types of negotiable instruments. Time. Promissory Note 1) it must be in writing and signed by the maker 2) it must contain an unconditional promise to pay a sum certain in money 3) it must be payable on demand. the drawee’s name may be omitted and be filled in under implied authority like any other blank. 197. 194. 196. or at a fixed or determinable future time. FORMS OF NEGOTIABLE INSTRUMENTS Sec.The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. Sec. the usage of trade or business with respect to such instruments. (d) Must be payable to order or to bearer. Sec. Therefore. Time when Act takes effect. Form of negotiable instruments. Cases not provided for in Act.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sec. This requirement is only applied in bills of exchange where there is a drawee. what constitutes. But under Section 14. Sec. . Sec. . or at a fixed or determinable future time it must be payable to order or bearer the drawee must be named or otherwise indicated with reasonable certainty Agbayani: The name of the person on whom a bill is drawn should appear on its face.
MUST BE IN WRITING Agbayani: In order to be negotiable. which is also a contract. and (a) Where the law requires a document to be in writing. subject to the precautions set by law. (2) by considering the whole of the instrument. no delivery. ambiguity arises. storage and display. there would be nothing to be negotiated or passed from hand to hand. must be examined and compared with the requirements of Section 1. SIGNATURE Agbayani: The full name may be written. the medium of the negotiable instrument should be transferrable from hand to hand. in a negotiable instrument. The drawer/maker would also want evidence of the note or the bill or evidence of an indorsement. and not as a maker or drawer. VIRTVS. If it appears on the instrument that it lacks one of the requirements. The payee and the successive indorsees negotiate the instrument by signing on the back. The law solves this by considering such a person as an indorser. engraved. it would be clear in what capacity the parties signed. However. at least. and it is not clear from the instrument in what capacity he signs. Campos: “In writing” includes “print” and it includes not only what is written with pen or pencil. but also what has been typed. Campos: The fact that an instrument does not meet the foregoing requisites will not affect its validity. The negotiability of an instrument is to be determined: (1) by Section 1. But in such case. the holder must prove that what is written is intended as a signature of the person sought to be charged. Delivery is necessary. it must be shown to have been adopted and used by the party as his signature. Legal Recognition of Electronic Documents. – Electronic documents shall have the legal effect. Therefore. no issuance. typewritten. to determine whether an instrument is negotiable or not. only the instrument itself. Thus. it is only logical that the negotiable instrument is in writing in such a way that it can be transferrable from hand to hand. although in checks the bank’s name sometimes appears across the top. Sebastian: If the instrument is not in writing. At least. It will be valid and binding so long as the intention to make the instrument the maker’s or drawer’s is shown. However. the signature usually is by writing the signers’ name. Campos: The signature is binding whether it is in one’s handwriting. of the maker or drawer is necessary. Sebastian: An electronic signature is equivalent to the functional signature. The maker of a note or the drawer of a bill must sign the instrument and his signature is usually written at the lower right hand corner thereof. where the name is not signed. generally. But. . for. if the instrument were not in writing. They distinguish the negotiable instrument from the ordinary nontransferrable written contract. so long as it is intended or adopted as the signature of the signer or made with his authority. once a party to an instrument deviates from the commercial usage with respect to the place of signature. the surname should appear and. apart from the addition of any endorsement and any authorized change.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: The formalities required are essential for the security of mercantile transactions. that requirement is met by an electronic document if the said electronic document maintains its integrity and reliability and can be authenticated so as to be usable for subsequent reference. and (3) by what appears on the face of the instrument and not elsewhere. The name may be printed. In other words. lithographed or photographed. in that (i) The electronic document has remained complete and unaltered. only the customary signature. The drawee’s name is usually written on the lower left hand corner. Thus. Sebastian: In civil law. Sebastian: Identification of the maker or drawer is not an element of negotiability. form is an essential ingredient for its negotiability. the only consequence being that it will be governed not by the Negotiable Instruments Law but by the general law on contracts. or any change which arises in the normal course of communication. As long as the parties to the bill or note comply with these long established and recognized customs. engraved. and no other. there would be nothing to be negotiated from hand to hand. it is not negotiable. VNITAS. But it may consist of initials or even numbers. Garcia v Lacuesta (90 Phil 489) – Where a cross appearing in a document is not the usual signature of a person. The reason for this requisite is not limited to the presentation of an instrument that can be passed from hand to hand. photographed or lithographed. and (ii) The electronic document is reliable in the light of the purpose for 5 LEX SOCIETAS VERITAS. validity or enforceability as any other document or legal writing. form is not an essential ingredient for the validity of a contract. that cross cannot be considered as a valid signature. or printed. The requirement lacking cannot be supplied by using a separate instrument in which that requirement which is lacking appears. there must be a writing of some kind. stamped.
although it is not necessary to use the word “promise.” It is enough (1) that the words of equivalent meaning are used. Electronic Commerce Act of 2000) Presumption Relating to Electronic Signatures. existed under which (a) A method is used to identify the party sought to be bound and toindicate said party’s access to the electronic document necessary for his consent or approval through the electronic signature. 9. they may also be used to imply a promise. Instead of promise. There should be an express promise on the face of the instrument to pay the money. to have executed or provided the electronic signature. except the rules relating to authentication and best evidence. The words “order” and “bearer” are usually referred to as words of negotiability. What is important is that it appears therefrom that the person intended to make it his own. in the light of all the circumstances. For evidentiary purposes. Electronic Commerce Act of 2000) Agbayani: The signature of the maker or drawer is usually written at the bottom right hand corner. or (2) that the promise is implied from promissory words contained in the instrument. not necessary that the word “order” be used. the 6 Order to Pay A bill is an instrument demanding a right.” “due” and the like may be used. But a promise to pay cannot be implied from the mere existence of a debt. Any words which are equivalent to an order or which show the drawer’s will that the money should be paid. Mere acknowledgement of a debt does not constitute a promise. A mere admission that the debt is due is not sufficient because such admission it only evidences the existence of a debt.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW which it was generated and in the light of all the relevant circumstances. (b) Said method is reliable and appropriate for the purpose for which the electronic document was generated or communicated. (c) It is necessary for the party sought to be bound. The location of the signature is not material. LEX SOCIETAS VERITAS. It is.” “shall pay. not alterable by the parties interested in the electronic document. and (d) The other party is authorized and enabled to verify the electronic signature and to make the decision to proceed with the transaction authenticated by the same. (Sec. . A mere authorization to pay or request to pay is not negotiable because it gives a discretion to the drawee to pay or not to pay. however. it shall be presumed that (a) The electronic signature is the signature of the person to whom it correlates. 8. VNITAS. Campos: The instrument must contain a promise or an order to pay. (Sec.” “will pay. (c) Where the law requires that a document be presented or retained in its original form. (b) Paragraph (a) applies whether the requirement therein is in the form of an obligation or whether the law simply provides consequences for the document not being presented or retained in its original form. in order to proceed further with the transaction. That no provision of this Act shall apply to vary any and all requirements of existing laws on formalities required in the execution of documents for their validity. there must be other words expressing the intention to pay or from which may be implied such as an intention to pay.” “good. In addition to the acknowledgement of indebtedness. This Act does not modify any statutory rule relating to the admissibility of electronic data messages or electronic documents. including any relevant agreement. an electronic document shall be the functional equivalent of a written document under existing laws. VIRTVS. . (Sec. and (ii) That document is capable of being displayed to the person to whom it is to be presented: Provided. the words “agree. However.An electronic signature on the electronic document shall be equivalent to the signature of a person on a written document if that signature is proved by showing that a prescribed procedure. that requirement is met by an electronic document if (i) There exists a reliable assurance as to the integrity of the document from the time when it was first generated in its final form.In any proceedings involving an electronic signature. However. Electronic Commerce Act of 2000) Legal Recognition of Electronic Signatures. are sufficient to make the instrument a bill of exchange. and (b) The electronic signature was affixed by that person with the intention of signing or approving the electronic document unless the person relying on the electronically signed electronic document knows or has notice of defects in or unreliability of the signature or reliance on the electronic signature is not reasonable under the circumstances. . 7. PROMISE TO PAY AND ORDER TO PAY Agbayani: Promise to Pay The promise to pay must be on the instrument itself.
corporate stock. In a bill of exchange. Sec. Once conversion is made. So also. it must be for a specified amount of money. creditors may be required. an instrument is not negotiable if payable in personal property like merchandise. and. Thus. or (b) by stated installments. wares. must be stated in the body of the instrument. Payment of Interest and the Usury Law (Act 2655) Agbayani: The addition of interest does not make the sum uncertain because. foreign bills. . or in labor or services. In order to be negotiable. On the other hand. cannot be made payable in goods. the conversion should not have been made by the obligor. by mere mathematical computation. Under the Civil Code. An instrument cannot function properly as a substitute for money unless the amount for which it stands for is specified and definite. The bill makes an order for the settlement of an obligation. Any expression equivalent to a promise is sufficient. words which are equivalent to an order are sufficient. Campos: The amount payable must be certain. The sum is certain although it is payable in installments as long as the latter are “stated” – (1) the amount of each installment and (2) due date of each installment. an instrument otherwise negotiable would not be affected thereby. or even gold. in fact. Thus. checks. an instrument must be payable in money. although it is to be paid: (a) with interest. It constitutes an obligation. order to pay is a directive to pay/settle an obligation but. If a contract contains a stipulation that payment is to be made in a currency other than Philippine currency. the amount to be paid on the maturity is ascertainable. . Since negotiable instruments are intended to be substitutes for money. an instrument is not negotiable if it is made payable in bonds. Sebastian: A promise to pay is a written commitment of the maker to pay a sum of money to the payee or payee’s order. it instructs another person to make the payment. 2. Under the Negotiable Instruments Law. or merchandise. One cannot draw a negotiable instrument that is not payable in money. or (e) with costs of collection or an attorney's fee. However. All other commodities may rise and fall in value but in theory. An agreement to pay interest does not however render the sum uncertain. CONCEPT OF A SUM CERTAIN IN MONEY Agbayani: The amount of money to be paid must be determinable by inspection and must be stated plainly on the phase of the instrument. the instrument ceases to be negotiable. In this case. An instrument which contains an order or promise to do an act in addition to the payment of money is not negotiable. or (c) by stated installments. or shares of stock. where an instrument entitles holder to demand something else in lieu of money.The sum payable is a sum certain within the meaning of this Act. In this case. Neither will an acceleration provision based on default render the sum uncertain. VNITAS. A mere request or authority to pay does not constitute an order. Sebastian: “a sum certain” is a definite amount.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW word “promise” is not absolutely necessary. The real reason for the requirement that negotiable instruments must be payable in money is obviously is that money is the one standard of value in actual business. or in property. upon default in payment of any installment or of interest. or (d) with exchange. What constitutes certainty as to sum. like the denomination of money. A negotiable instrument must be equal to money. to properly perform such function they must necessarily be capable of being transformed into money if the holder so wishes. scrip. creditors are not required to accept payments from third parties. whether at a fixed rate or at the current rate. But the negotiability of such instrument will not be affected by such stipulation. state paper. the whole shall become due. 7 LEX SOCIETAS VERITAS. A note or bill. money always remain measures this rise and fall and remains the same. such stipulation will be ineffective and the obligation can be discharged only in legal tender. if it is to be negotiable. the drawee of the bill is the debtor to the drawer. This rule helps to retain simplicity of form which is absolutely necessary to the free use of negotiable instrument in the place of money. not a commodity. The exact amount thereof can be computed without looking beyond the instrument. It must definite because negotiable instruments are substitutes for money. in case payment shall not be made at maturity. at least. with a provision that. The instrument is by its nature demanding a right. negotiable character is not affected because it remains to be payable in money. But if the order or promise gives the holder an election to require something to be done in lieu of money. VIRTVS.
fluctuation of the exchange rate does not make the sum represented uncertain. the instrument should express the specific denomination of money when it is payable in the money of a foreign country in order that the courts may be able to ascertain its equivalent value. you can determine how much you will pay simply by computing for it. VNITAS. undertaking to pay an obligation in foreign currency. 8183) Legal Tender The payment of debts in money shall be made in the currency stipulated. and if it is not possible to deliver such currency. Foreign Currency Uniform Currency Act All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. not the certainty of amount. the instrument is considered to be dishonored/defaulted. although the obligation may be silent upon this point. then in the currency which is legal tender in the Philippines. However. LEX SOCIETAS VERITAS. Sebastian: If no interest is specified in the instrument. This last qualification is required in order to comply with the requisite that the instrument. 8 . whether at a fixed rate or at the current rate because the rate of exchange between two places at a particular date is a matter of common commercial knowledge. 2212. unlike in the Civil Code where monetary obligations may only be settled by paying in legal tender. Nonetheless. Where an instrument is drawn and payable in the same country. the lack of source of currency is not a ground for the negotiable instrument to lose its negotiability. (Art. an instrument containing such a stipulation would not thereby render non-negotiable. otherwise. what matters in the value of money. so a provision for payment of exchange may be disregarded. civil law will apply. But if the currency is not available. A. in Negotiable Instruments Law. Exchange is the difference in value of the same amount of money in different countries. However. (Art. 1249. Thus. although the fulfillment of the instrument can be frustrated. The exchange may be at the current rate or at a fixed rate. all foreign currency obligations are automatically converted to legal tender. at any point. Consequently. the interest shall be the legal rate. After the Uniform Currency Law. you can be made to pay in foreign currency with only a single defense available – stipulation to pay in a currency that is not locally available. without difficulty. In Negotiable Instruments Law. you can write an instrument ordering to pay a sum in foreign currency. although it is to be paid by stated installments. if not payable on demand. If the drawer cannot produce the foreign currency. it is not negotiable. But the installments: (1) must be stated and (2) the maturity of each installment must be fixed or determinable. Currency of Payment Agbayani: A bill or note may be made payable in denominations of foreign money. the legal interest will be paid when the debtor incurs delay. With Exchange Agbayani: The sum payable is a sum certain even if it is to be paid with exchange. currency or coins. A negotiable instrument can be denominated in any currency. Civil Code) Sebastian: Payment under the Negotiable Instruments Law can be in any legal currency. (R. Enforcement of such currency should also be paid in foreign currency. Default Interest Interest due shall earn legal interest from the time it is judicially demanded. Effect of Installment Payments Agbayani: The sum payable is a sum certain within the meaning of this act. there can be no exchange. Unlike the Civil Code. Therefore. ascertain the exact amount necessary to discharge the paper. it can be converted to legal tender. But this was repealed by RA 8183.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: Payment of interest does not make the sum uncertain because it can be calculated arithmetically. VIRTVS. the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. Sebastian: A promise to pay in one currency but the medium of payment is another does not make the amount payable uncertain because. Civil Code) Agbayani: When interest is stipulated but not specified. which is 12% for loans and forbearance of money. The provision on payment with exchange naturally applies only to instruments drawn in one country and payable in another. must be payable at a fixed or determinable future time. Where interest is not stipulated. or at least easily ascertained by any one so that the parties can always.
it will not affect the certainty of the sum payable at maturity and. or (2) a past event which is unknown to the parties. except at his own peril. the action derived from the original obligation shall be held in the abeyance. In the absence of an agreement. The legality of such a stipulation is expressly recognized in Section 2. the instrument will no longer be negotiable. subject to the exceptions provided in the law.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW An acceleration clause is a provision that upon default in payment of any installment or of interest. The obligation is not extinguished and remains suspended until payment by commercial document is actually realized. The validity and negotiable character of an instrument are not affected by the fact that it designates a particular kind of current money in which payment is to be made. Heffron: When the installment payments should start should also be specified. The promise or order must also be unconditional or absolute. is not legal tender. and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. A check. as he would acquire the instrument after it is overdue. therefore will not affect negotiability of the instrument in which it is stipulated. Since the tranferee would not be a holder in due course. whether a manager’s check or ordinary check. it is held not to be for the payment of money and is not negotiable. be made to conceal usury. VNITAS. Installments do not need to be equal. Civil Code) Agbayani: Legal tender is 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. However. What is important is that there is no doubt on the due date and amount due on each installment and the total amount due at the end. 1249. The purpose of a stipulation in the note for reasonable attorney’s fee is to safeguard the lender against future loss or damage by being compelled to retain counsel to institute judicial proceedings to collect his debt. and impliedly in the New Civil Code. VIRTVS. After the date of maturity. This means that it must not be subject to a condition. a debtor has no right. specifically and absolutely. either express or implied. It may. an instrument subject to an event that is certain to happen is negotiable. even if the amount to be paid after the date of maturity becomes uncertain by the payment of attorney’s fees and costs of collection. of course. Effect of Payment of Unliquidated Amounts But in the absence of stipulation. payment means the discharge of a debt or obligation in money and unless parties so agree. When the installment is to paid and how much the installment should be specified. even when added to a contract for the payment of the highest rate of interest permissible. But that is a matter of proof to be determined in each case. even though the time of its happening is not known. in the sense that any transferee acquiring it would not be a holder in due course. as if it were non-negotiable. . Legal Tender The delivery of promissory notes payable to order. But where the instrument is made payable in the paper or currency of a particular bank. Thus. An instrument containing an acceleration clause would not render it non-negotiable. UNCONDITIONALITY OF PROMISE OR ORDER TO PAY Agbayani: It is not enough that there be a promise or an order. or when through the fault of the creditor they have been impaired. Such a stipulation is not void as usurious. It is distinguished from an even that is certain to happen. Although such stipulation will make the sum payable after maturity uncertain. In the meantime. the whole shall become due. (Art. A condition is (1) a future event that may or may not happen. cannot be recovered. or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed. Even treasury certificates are not legal tender except for those payment of taxes and public debts. the installment schedule should clearly be stated. he would hold the instrument subject to defenses. It can be in various amounts per installments. Sebastian: Payment in installments does not destroy negotiability of the instrument because certainty is not destroyed. attorney’s fees and expenses other than judicial costs. LEX SOCIETAS VERITAS. when writing an installment note. and without reference to the currency or value of the paper. Consequently. the negotiability will not be impaired as the uncertainty occurs after maturity. to substitute something in lieu of cash as medium of payment of his debt. 9 Payment of Attorney’s Fees Agbayani: An instrument may stipulate that cost of collection and/or attorney’s fees shall be paid by the debtor in addition to the principal in case the instrument shall not be paid at maturity.
or (b) A statement of the transaction which gives rise to the instrument. it is no longer negotiable. however. In the second case. 3. in a bill the drawer instructs the drawee to pay the payee). The instrument is still negotiable but the lack of funds will mean that the drawee will refuse payment. operate like money. unless the reference to the fund clearly indicates an instrument that such fund alone should be the source of payment. Reimbursement here refers to whoever pays the holder of the instrument (i. it means that there are no “ifs” or “buts”.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Campos: As a rule. the parties signed the following written agreement on the same paper: “It is herein provided and agreed that the above note is to be paid from the proceeds obtained from the sale of lots in the town of Vanors. the particular fund indicated is not the direct source of payment. Sebastian: Reimbursement does not affect negotiability because it has nothing to do with the note. In the first case. The latter is not expressly qualified by such transaction. the drawee may refuse to accept or pay the bill. the particular fund indicated is the direct source of payment. afterwards (2) the drawee pays himself from the particular fund indicated. On the other hand. the existence of the account or its sufficiency is the condition. But an order or promise to pay out of a particular fund is not unconditional. McGrail – Agbayani: After making a note which was negotiable in form. Source of Funding or Reimbursement Agbayani: An unqualified order or promise to pay is unconditional though coupled with an indication of a particular fund out of which reimbursement is to be made. This is true. this will be non-negotiable because the instrument becomes conditional. therefore. Sebastian: The US Court said that the promise to pay is unconditional because the provision was not considered to be part of the note which had a separate signature.e.e. the payment is subject to the condition that the funds indicated are sufficient. the order or promise is not subject to the sufficiency of the funds. It may. if the drawer has no money in the hands of the drawee out of which reimbursement could be made. In other words. By simply identifying the source of reimbursement. Neither does the recital of the transaction for which the instrument was issued make the promise or order conditional. Fund for Reimbursement Fund for Payment There are two cases: (1) the drawee pays the payee from his own funds. But if the instrument stipulates a specific account as source of payment. courts usually decide in favor of negotiability. The fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one. Thus. It depends upon the tenor of the terms of the order. the instrument may or may not become a substitute for money. There is only one act. then the order in the bill is unconditional. when a particular fund is indicated out of which the payment is to be directly made. But the funds indicated may or may not by sufficient. the order would be conditional. When promise is unconditional. But whether a bill of exchange is negotiable or not does not depend upon the drawee’s willingness and ability to pay. Meaning. namely. VIRTVS. 10 LEX SOCIETAS VERITAS. and that one-forth of the proceeds of al sales of the lots are to be applied to the payment of said note and interest and until the same is paid. i. Information is merely given that the instrument was issued in connection with the transaction. or a past event unknown to the parties which could either give rise to an obligation or it could terminate/resolve an obligation. . But an order or promise to pay out of a particular fund is conditional. The promise/order to pay can never be conditional be cause if there is a condition. be argued that. Where the payment to the payee is directly from the funds indicated. Van Tassel v.An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount. where the fund is merely for purpose of subsequent reimbursement. It is only the source of reimbursement. (1) the drawee pays directly from the particular fund indicated. A note is an outright and direct promise to pay. A condition is a future or uncertain event. If the bill absolutely requires the drawee to pay. Sec. If a promise to pay is unconditional. the instrument is still negotiable because the existence of the source of reimbursement is not conditional. VNITAS.” The promise to pay is unconditional. . Sebastian: An instrument is a substitute for money and must. the instrument will only be paid if the account exists or if it is sufficiently funded. The order or promise is upon the general credit of the drawee or maker.
the instrument in this case is non-negotiable because the instrument specified the source of payment. the instrument is not negotiable. VNITAS. Determinable future time. But where the promise or order is made subject to the terms and conditions of the transaction stated. A determinable future time is expressed under (a). Yakima Savings – Agbayani: A country bond payable “out of Yakima County Road Refunding Bond Fund and secured to be paid by taxes and assessments. (b) and (c). the date of maturity is determined by counting the period from the date of its issuance. 4. the security. VIRTVS. negotiability is not impaired because “debiting is merely the source of payment. there must be a definite day on which one will be able to collect on an instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Keck v. From the time the drawee sees the instrument. CONCEPT OF FUTURE OR DETERMINABLE FUTURE TIME Agbayani: An instrument. Presentment is necessary because it is essential to check if the signature of the maker/drawer is authentic and the drawee has every right to scertain wether or not the order to pay is genuine. then.” Statement of Underlying Transaction Agbayani: As a rule. unless there is a valid acceleration provision. A bank or drawee is not liable to an instrument until it accepts it. will never run out of money. though the time of happening be uncertain.An instrument is payable at a determinable future time. However. Before such time. e. Campos: The requirement as to certainty of time of payment is for the purpose of informing the holder of the instrument of the date when he may enforce the payment thereof. taxes. and the happening of the event does not cure the defect. However. The drawee is not a party to the transaction until the instrument is accepted. must be payable either (1) on demand or (2) at a fixed or determinable future time. . Sebastian: After sight refers to a bill of exchange. the instrument is rendered nonnegotiable. to be safe. the reference to the collateral contract must show that the obligation to pay is burdened with the condition of the contract.” etc. afterwards. To destroy negotiability of the instrument. If the instrument is a promissory note. or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen. On or Before a Specific Date 11 LEX SOCIETAS VERITAS. An instrument payable upon a contingency is not negotiable. Sebastian: Theoretically.. within the meaning of this Act. If it is not either. Sebastian: Even if reimbursement of the payment is to be debited from a particular account. Payable After Date or After Sight Agbayani: After sight means after the drawee has seen the instrument upon presentation for acceptance. Sebastian: To be negotiable. . the mere fact that a transaction gives rise to the instrument is stated in the instrument will not make the promise or order conditional. instruments are not issued without any transaction upon which they are based. Sebastian: A note that tells the maker is a debtor and the payee is a creditor does or that the maker makes a promise to pay based on a loan agreement does not destroy its negotiability. what constitutes. A bank may dishonor an instrument for insufficient funds but it may still honor it. the particular account indicated will be debited.g. The test whether it is payable at a determinable future time is when the time to pay is ascertainable without the need to negotiable further with the maker as to the date. By accepting it. which is expressed to be payable: (a) At a fixed period after date or sight. Sec. A usance draft is an instrument payable at a fixed period after sight. Ideally. he cannot compel the maker of the note or the acceptor of the bill to pay. was held negotiable because it was not restricted to the road fund. This is used in banks. or (b) On or before a fixed or determinable future time specified therein. the order of the maker was accepted and becomes the party liable on the bill of exchange. a negotiable instrument should be payable on a fixed date but it may be payable at a determinable future time. Particular Account to be Debited Agbayani: An instrument containing an indication of a particular account to be debited with the account is not rendered non-negotiable because the instrument is to be paid first and. resulting in an overdraft facility. to be negotiable. he can either accept the instrument or reject it.
therefore. with the holder’s right to declare the note due immediately on failure to make good the depreciation. and consent that the time of its payment may be extended without notice. Sebastian: Time extension does not destroy negotiability provided that it is at the option of the holder/creditor. it is clear. and not obligatory upon him. Security Bank of Sioux City v. Extension of Due Date Sebastian: By simply not making a demand for the presentment of the negotiable instrument. or 3) contain provisions for acceleration where holder deems himself insecure. CA – At the outset. but leaves the matter of extension optional with the holder. the sureties and indorsers should not be discharged.e. A contingency is. 1951. and the sureties hereon severally waive presentment for payment. guarantors of this note. if the contract is made certainly to be performed at some definite time in the future. its negotiability is not destroyed. the instrument is no longer negotiable in its full commercial sense because the holder can no longer be a holder in due course since there is already a default (i. These provisions clearly provide for flexibility in fixing the time of payment. Rehabilitation Finance Corporation v. In other words. Section 3060-a4 expressly says that a note that is payable at a determinable future time. Illustrations of the latter class are those instruments that: 1) contain acceleration clauses on the maker’s default in payment of installments or of interest. an uncertain future event. provided only that there shall certainly come a time when the note is.e. is negotiable. The obvious purpose of the provision taken as a whole was merely to relieve the holder of the paper from the burdens made necessary by the rigid requirements of the mercantile law in order to secure the continued liability of the indorsers and sureties upon the paper. . What destroys negotiability is the option of extension being given to the debtor because the certainty of the date is made uncertain. or on the happening of an extrinsic event. and the note of its face fixes the time when it becomes due.” Although the full amount of said obligation was not demandable prior to October 31. they recognize the right of the parties to an instrument to contract for their mutual benefit. indorsers. The contingency will render a note non-negotiable under the last clause of the section clearly means an even which may or may not happen. Therefore what was meant by the stipulation as to the extension of time was simply that in case the holder and the maker should agree upon an extension.” In First National Bank of Pomeroy v. 1951. These provisions (1) make it possible for the maker to pay the instrument at an earlier date or (2) make it possible the holder to require payment of the instrument at an earlier date. Gunderson – The promissory note in suit contains the following language: “The makers. Bilstad – The notes in suit provided for an extension of time for one year on the condition therein named. by its terms. in view of the provision of the note relative to the payment in ten (10) annual installments. VIRTVS. death). a provision that the maker shall supply additional collateral in case of depreciation in the value of the original deposit. which is certain to happen. Effect of Acceleration Clause and Material Adverse Change Clause (MAC) Agbayani: There are certain notes containing acceleration provisions. the Court held that this phrase does not express an agreement to extend time. due. as a contingency may never happen. or that is payable on or before a fixed period after the occurrence of a specified event. The event described herein is that it will certainly happen but you just don’t know when (i. The only uncertainty as to the time or fact of payment was whether they should be paid at a particular time in one year. therefore the fact that they have that right does not affect the negotiability of the paper. the note is already past due). can mean nothing else than a time that can be certainly determined after the execution of the note. that the makers or debtors were entitled to make a complete settlement of the obligation at any time before said date. A determinable future time as used in the second.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: The phrase “on or before” gives the person liable a chance to pay on any other day before the due date. and say in effect that. Buttery. in notes secured by collateral. or at the date named in the next year. 12 LEX SOCIETAS VERITAS. The time at which they eventually become due was therefore fixed and certain. all defenses on the ground of any extension of time of payment being hereby expressly waived. in law. 2) contain. State Bank of Halstad v. VNITAS. The holder and maker of any note may at anytime agree upon an extension. An illustration of the first class is the so-called ‘payable on or before a certain date’ note. a note payable only upon the happening thereof may never come due. it should be noted that the makers of the promissory note quoted above promised to pay the obligation evidenced thereby “on or before October 31. Fixed Period After the Occurrence of a Specified Event Sebastian: The phrase “on or after” means it cannot be on or before. protest and notice of dishonor. Payment date is still certain because it merely stipulates the debtor has the option to make a pre-payment at any time before the absolute due date. and.
PAYABLE TO ORDER OR TO BEARER Agbayani: An instrument is not negotiable unless made payable to a person or his “order” or to “bearer” or unless words of similar or equivalent import ar e used such as “assigns” or “assignees. It is used to accelerate installments payable when there is default in payment of one of the installments. one loses the benefit of the term.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW The first is covered by Section 2(b). It merely gives the holder to make a pre-emptive strike to collect the value of the note before things go sour. But negotiability is not destroyed by acceleration of the collateral. A note secured by a mortgage. When the change in circumstance is adverse. There is a conflict of authority with regards to the second. Its function is to accelerate/advance the performance of obligation prior to the stipulated due date. The function of the mortgage is to strengthen the enforceability of the note. VIRTVS. The rule is that an acceleration by operation of law also does not affect negotiability. The better view of the two maintain that these cases holding an instrument payable at a fixed time but accelerable at the option of the payee or holder still negotiable because such instruments are certainly payable on or before a fixed time specified therein. an acceleration clause. it is used when the obligation is to be performed in installments. then the negotiable character of the instrument is not affected. Where there is a breach of the collateral arrangement. It is also possible that the note is current but the acceleration clause is triggered by a collateral default. If one installment is missed. When somebody lends money.” Where the instrument is payable only to a specified person. For instance a note is payable at a future time and the maker dies today. However. However. Where the holder’s right to exercise the option is unconditional. but gives a higher level of comfort that you can still recover in case of default. the negotiability of the instrument is not affected. with or without the MAC clause. There is also a conflict of authority with regards the third. The longer the period of the payment. In effect. where the option given to the holder to accelerate the maturity of an installment note upon failure of the maker to pay any installment when due does not affect the negotiability of the instrument. there is a probability that the other installments will be missed. It is used to deter a default. whether such option is absolute or conditional. creditor is entitled to call in the obligation. VNITAS. it refers to an obligation that is suspended by a term.” or “holder. . The better view of the two maintain that the stipulation in question does not render the instrument containing it non-negotiable because from the standpoint of expediency as encouraging circulation and of business custom on account of their common acceptance by the commercial world. Campos: The instrument in order to be considered negotiable must contain the so called “words of negotiability” – must be payable to order or bearer. its negotiability is not impaired because. the time of payment is rendered uncertain and the instrument would not be negotiable. whether such acceleration provision renders the instrument non-negotiable depends on the nature of the provision. default is not the only source of accelerating the obligation. It is not unusual to find a negotiable instrument with an acceleration clause that is triggered by a mere feeling of insecurity on the part of the creditor. Campos: Where the option to accelerate the maturity of the instrument is on the maker. But where the acceleration is at the option of the holder. In many cases. default of one installment is indicative of inability to continue with further payments on a timely basis. a creditor has right to accelerate. there is still a due date of the instrument. Sebastian: Every time we use an acceleration clause. there will be a breach of the note. it is not payable to order. Acceleration of the maturity of the instrument by operation of law does not affect its negotiability. The obligation is not immediately to be performed. This is known as Material Adverse Change Clause (MAC). it does not lose negotiability because the collateral arrangement is a separate undertaking from the obligation under the note. The holder may file a claim against the estate of the deceased regardless of the due date on the note. These 13 LEX SOCIETAS VERITAS. the greater is the risk taken by the creditor. The theory behind an acceleration clause is this: when a payment obligation is staggered on a monthly/ installment basis. In summary. one will be required to pay the obligation immediately and lose the benefit of the term. but at some future time. such clauses should be interpreted as not affecting negotiability. If at any time there is a material adverse change in the nature of the undertaking. a collateral default or an insecurty of the holder will not affect negotiability. Recourse against the collateral is secondary. If a negotiable instrument carries an acceleration clause where the ground is a MAC. Once there is default. his concern is to recover what he lent. If the option can be exercised by the holder only upon the happening of a specified event or act over which he has no control.
being merely accelerable on the nonperformance of an optional act. Sebastian: “order” or “bearer” are critical words that define negotiability. Negotiability of Secured Instruments Agbayani: A promise of the maker to furnish additional collateral will render the note non-negotiable. the negotiability is impaired. When it is conjunctive. Before the date of maturity. Hence. there must be no obligation other than the payment of money. An authorization however. Thus. thus rendering the time of payment uncertain. before and until the date of maturity. On the other hand. 10 however. when the instrument ceases to be negotiable in the full commercial sense. Bearer means payable to whoever has possession of the instrument. Additional provisions not affecting negotiability. hence. but any term which clearly indicates an intention to conform to the legal requirements is sufficient. This consent is indispensable since the maker assumes greater risks under a negotiable instrument than under a non-negotiable one. or (d) gives the holder an election to require something to be done in lieu of payment of money.An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. and the other is not in the nature of payment of a sum of money. Agbayani: The general rule is that an instrument must not contain an order or promise to do ay act in addition to the payment of money. . which empowers the holder to sell the collateral before the maturity of the note renders it non-negotiable because it gives the holder an option to accelerate the maturity of the instrument. The moment there is union between the negotiable instrument and the mortgage.” Under this note. not only may the instrument state that the note is secured by the pledged or mortgaged property. Order means payable to payee or who payee identifies. non-negotiable.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW words serve as an expression of consent that the instrument may be transferred. VNITAS. . the instrument is rendered non-negotiable. for then the instrument would be payable not in money only but in money and the additional act promised or ordered to be performed. If the person is specified without these words. These words connote that the instrument is transferrable from one person to another. When you introduce a collateral default in a negotiable instrument. Sebastian: Consider this: “I promise to pay X or order P1. the instrument is no longer negotiable. Campos: The negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes the sale of collateral securities in case the instrument be not paid at maturity. bear in mind that the payment obligation in the negotiable instrument must never be subject to the conditions of the mortgage. PROVISIONS NOT AFFECTING NEGOTIABILITY Sec. Otherwise.000. However. no additional act is to be performed except the payment of the money. the instrument need not follow the language of the law. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) authorizes the sale of collateral securities in case the instrument be not paid at maturity. The sale of collateral securities in case the instrument is not paid at maturity enhances the enforcement of the instrument. If it does. the instrument is non-negotiable but not necessarily void. negotiability is impaired. This is a separate undertaking and 14 LEX SOCIETAS VERITAS. 5. failure to furnish it accelerates the instrument which are clearly negotiable. Test of Negotiability Agbayani: The test of negotiability is whether or not the promise would give rise to a cause of action for breach of contract if the additional act is not done. the promise to pay is to pay money only. the payment is subject to the terms of the mortgage. Effect of Conjunctive Obligations Sebastian: In a negotiable instrument. VIRTVS. The negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes the sale of collateral securities in case the instrument is not paid be paid at maturity because the additional act to be performed is to be executed after the date of maturity. as that would be an additional act to the promise to pay money. Under Sec. Otherwise. or (b) xxx (c) waives the benefit of any law intended for the advantage or protection of the obligor. Sebastian: If he breach if the additional act results to a cause of action for breach of contract. they are to be distinguished from those instruments in which the holder may demand collateral and. but also that the collateral may be sold for discharging the instrument itself. an isntrument will still be negotiable if it merely says that is secured by a mortgage or holder has a right to accelerate in case colateral default. the instrument would be non-negotiable.000 subject to the terms and conditions of the mortgage. the instrument would be rendered non-negotiable. But nothing in this section shall validate any provision or stipulation otherwise illegal.
their omission will not affect the negotiability of the instrument.The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated. or (c) does not specify the place where it is drawn or the place where it is payable. When the note is secured by a collateral. otherwise negotiability is destroyed. still the instrument is not rendered non-negotiable. Inc. the same section of the Negotiable Instruments Law concludes with these words: “But nothing in this section shall validate any provision or stipulation otherwise illegal. or (b) does not specify the value given. . the instrument still remains to be negotiable provided that the right to choose between payment of money or the performance of the additional act is in the hands of the holder. It must be remembered that the holder must make sure that the other act that will substitute payment of money is not illegal. Confession of Judgment Sebastian: Confession of judgment has 2 forms: 1) cognotiv actionem – a stipulation whereby defendant authorizes plaintiff or his counsel to confess judgment for the sum being claimed by the plaintiff. Thus. . We are further of the opinion that provisions in notes authorizing attorneys to appear and confess judgments against makes should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction. Acts Exercisable at Option of the Holder Agbayani The last exception to the general rule is that the negotiable character of an instrument otherwise negotiable is not affected by a provision which gives the holder an election to require something to be done in lieu of payment of money. such clauses shall not affect the negotiable character of the instrument. Sebastian: If something is not included in Section 1. particular money. Benefits intended for the advantage or protection of the obligor are the rights to (1) presentment for payment. Waiver of Debtor’s Rights Agbayani: Another exception is that the negotiable character of an instrument otherwise negotiable is not affected by a provision which waives the benefits of any law intended for the advantage or protection of the obligor. the decision is rendered by the court immediately because the debtor is empowered to confess to a judgment on his behalf. In this case. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. VIRTVS. Thus. Confession of judgments are void under Philippine Law. the instrument is still negotiable. the payment obligation under the note should not be based on the collateral. or (d) bears a seal. 2) relicta verificatione – after a plea of not guilty is made. seal. Omissions. 6. PNB v Manila Oil Refining and By-Products Co. But if the choice to pay money or to do the additional act is in the hands of the debtor. cases where the date is necessary to fix the date of maturity. in jurisdictions were judgment notes are recognized. however. Sebastian: If the option is given to the holder. foreclosure of a security has nothing to do with negotiability. the instrument is rendered non-negotiable.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW has nothing to do with the enforcement of the instrument. Moreover. cannot be taken to sanction judgments by confession because it is a portion of a uniform law which merely provides that. because they enlarge the field of fraud. Effect of Omission of Date Agbayani: Even where the instrument is not dated. even if there is an additional act. and because of the effect of the instrument is to strike down the right of appeal accorded by statute. VNITAS. All of these may be waived. 15 LEX SOCIETAS VERITAS. (43 Phil 444) – Section 5(b) of the Negotiable Instrument Law providing that the negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes a confession of judgment if the instrument cannot be paid at maturity. one withdraws it and judgment is immediately promulgated. because under these instruments the promissory bargains away his right to a day in court.” The judgment note was held to be void as against public policy. or that any value had been given therefor. The Court was of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our law. and (3) protest. (2) notice of dishonor. OMISSION IN A NEGOTIABLE INSTRUMENT Sec. or (e) designates a particular kind of current money in which payment is to be made. a holder can demand novation provided that option was given to him. There are. Under this.
Thus. and allows any holder to insert the true date. As a matter of fact. whether or not the instrument is negotiable. the Civil Code provision will apply. there is a presumption that for every issuance of an instrument. the law authorizes that the value given need not be specified. INSTRUMENTS PAYABLE ON DEMAND Sec. even if the instrument is sealed.” Effect of Omission of Place Campos: The purpose of specifying a certain place of payment is to fix the place at which the holder must present the instrument for payment. When payable on demand. if not. VNITAS. the drawee cannot use personal defenses. Under paragraph (b). still the instrument is not rendered nonnegotiable. Particular Kind of Current Money Agbayani: As already stated under Section 1. even assuming there is no place of payment written. to be no statute of this kind in the Philippines. Section 73.” without specifying what the value is. . at the place of business or residence of the person to make payment. the written date is conclusively presumed to be the date of issue on the instrument. if the instrument is negotiable. Where Instrument Bears a Seal Agbayani: At common law. Sebastian: Place of issuance is important to know so that one will know where to file a criminal case. 16 LEX SOCIETAS VERITAS. make presentment at the usual place of business or residence. the holder may not be considered a holder in due course. value was given. though not essential. It is also important to know so that one does not have to look for the person who issued the check. the drawee may interpose personal defenses.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Campos: The validity and negotiable character of an instrument are not affected by the fact that it is not dated. Sebastian: Whether or not an instrument is sealed will not affect its negotiability because a seal is irrelevant in our jurisdiction since we do not have any law on seals. It is presumed to exist unless otherwise shown. where in the court will fix the date of issuance under Article 1197 of the Civil Code. If the holder was a holder in due course. still the negotiability of the instrument is not affected. all that is stated in the instrument is that it is being issued for “value received. Hence. the false date will be conclusively be a correct date. . as the instrument would still be considered payable in money. the value given under such contract must be specified. that is no longer true. Consideration in Civil Law likewise applies: “the cause need not be stated in the contract. However. feature of the instrument. Under the Negotiable Instrument Law. or on presentation. however. the law fills in the gap and considers the date of issue as the date of the instrument. Where an instrument is issued. which means that such date was on which the instrument was delivered to him by the drawer or maker. or at sight. even where the value given is not specified. the remedy to the missing date of issuance is under Section 13. whichpertains to presentment. this does not mean that the date is irrelevant. However. If it is not dated. one may still determine the due date. or (b) In which no time for payment is expressed. However. This presumption persists until proven otherwise. Relate this provision with Section 13 where the date is necessary to fix the date of maturity. a sealed instrument is rendered non-negotiable and becomes subject to the rule governing contracts under seal. the fact alone will not make non-negotiable. 7. Thus. the law again fills in the gap by providing that presentment should be made at the address of the person who is to pay. A date in a bill or note is not essential to make it negotiable. Nevertheless. Regardless. If he is. says that you can present at the (1) address of the person who is to make payment if such is indicated. where a statute requires that a particular contract specify the value given. and the date is necessary to fix the maturity of the instrument. If the instrument is non-negotiable. if such address is stated. as to a holder in due course. There seems. Sebastian: Looking at Section 24. under the last paragraph of this section. Effect of Omission of Value Agbayani: Usually. however. If no place is mentioned. accepted. It is an important. or indorsed when overdue. provided that it is current money or foreign money which has a fixed value in relation to the money of the country in which the instrument is payable. it is not even necessary to state that value has been received because consideration is presumed.An instrument is payable on demand: (a) When it is so expressed to be payable on demand. The holder has the authority to insert a date in the instrument but the date must be the true date of issue. VIRTVS. or (3) make presentment wherever you can find him or last known address. or (2) if there is no address. even if the money in which the instrument is to be payable is not legal tender. If the holder is not a holder in due course. if the instrument was transferred to another person past the due date of the instrument. Sebastian: Even if the date is not an element of negotiability.
” it is deemed payable on demand. In a bill of exchange. the instrument can no longer be negotiated as to make the parties who acquire the instrument after the date of maturity holders in due course because they become holders thereof with notice that it is already overdue. it is essential that he brings the instruments. . depending upon how the instrument is delivered. or drawee. Where a blank for time for payment is unfilled. It must be remembered that after the date of maturity. Agbayani: Instead of “on demand” the words “on sight” or “on presentation” may be used. This indicates the negotiability of the instrument and if this is missing. as regards the person so issuing. Under this section. are not ordinarily used in promissory notes. 15 or 16. or (b) The drawer or maker. or (c) The drawee. drawer. there are only two ways by which an instrument may be made payable to order. but will merely “step into the shoes” of the person designated in the instrument and will thus be open to all defenses available against the latter. or indorsing it. Moreover. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument. Where blank for name of payee is unfilled. VIRTVS. INSTRUMENTS PAYABLE TO ORDER Sec. natural or legal. . If the drawee accepts. or (e) One or some of several payees. it is useless to consider it negotiable. As far as the maker is concerned. VNITAS. the payee must be named or otherwise indicated therein with reasonable certainty. no one could indorse the instrument. Consequently. The payee of an instrument payable to order must be a person in being. payable on demand. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person whom he has indorsed and delivered the same. Then he should pay. the instrument cannot be negotiable.The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. The last paragraph of Section 7 means that the instrument is payable on demand only as between the immediate parties. and ascertained at the time of issue. the instrument in order to be considered negotiable must contain so-called words of negotiability. 15 and 16. the latter must inspect the instrument and check if it is genuine. Without the words “or order” or “to the order of”. he issues an instrument that is intended to pass from hand to hand. the instrument has been held to be payable on demand. a note payable “on ______” was held payable on demand. however. it may properly be considered an incomplete instrument and may fall under the provisions of Sections 14. Where the instrument is payable to order. However. It may be drawn payable to the order of: (a) A payee who is not maker. or (d) Two or more payees jointly. or (f) The holder of an office for the time being. When the payee or holder demands for payment. Campos: There must always be a specified person named in the instrument. The words “at sight”. it may be considered by Sections 14. If he fails to. If there is no payee. depending upon how it is delivered. the payee or holder must make a demand before he is paid. 8. Designation of Payee Agbayani: Under the last paragraph of this section. Without the words “to order” or “to the order of” the instrument is payable only to the person designated therein and is therefore non-negotiable. where the instrument is payable to order. that instrument is dishonored by non-acceptance. neither is he designated with reasonable certainty.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW it is. he must accept it. If he does not accept the instrument. accepting. 17 LEX SOCIETAS VERITAS. However. the law requires that the payee must be named or otherwise indicated with reasonable certainty. The drawer’s liability is secondary and he can only be ran after if the drawee dishonored the instrument. the instrument is not payable to order because the payee is not named. Sebastian: When an instrument is payable to order. It means the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed or delivered the same. This indicates that the ultimate payee of the instrument need not be the payee because he can transfer his rights to another person. Sebastian: An instrument payable on demand is payable at any time on demand of the payee or holder. At that particular time. the promise to pay is towards the payee or at his instruction. the drawee may dishonor his demand. before the drawee can be liable. Agbayani: Among others. as this can be determined from the face of the instrument itself. drawer will become liable to the payee or holder. When a promissory note expresses “no time for payment. The moment the payee or holder brings the instrument to the drawee. the instrument is payable only to the person designated therein and is therefore non-negotiable. When payable to order. A negotiable instrument is a substitute for money and the due date need not be expressed.
If the instrument is a bill. the drawer. that person is ultimately liable for the note and. if he thinks fit. will be liable primarily and secondarily. the payee is not considered fictitious. also warrants that if he cannot pay.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Campos: In Sec. 43. and such fact was known to the person making it so payable. When the instrument is made payable to the holder for the time being. the instrument becomes bearer instrument.” The third view is the most acceptable because the payee is certain and easily determinable and such interpretation is most probably what the lawmaker had in mind in using the words “for the time being. or (b) When it is payable to a person named therein or bearer. then the instrument is not a bearer instrument but an order one. VIRTVS. or one who never existed. . 9. the true test of fictitious person arises not from the existence of the individual. as an indorser. there is no one who can indorse it. if the drawee cannot pay. there are 2 liabilities created – one as maker and one as indorser. the drawee is not liable for the instrument. If the maker or drawer is not aware that the person he named as payee is fictitious or non-existent. but it will depend on the intention of the drawer or maker. so in effect it cannot be validly negotiated. . his proper signature. Sebastian: The concept of a fictitious person is not limited to a fictional person or a person who does not exist at all. When the last indorsement is an indorsement in blank. therefore.” Sebastian: An instrument wherein the maker/drawer and the payee are one in same person is not void under the Negotiable Instruments Law.” The name of the payee being misspelled or wrongly designated does not affect the negotiability of the instrument. If the name of the payee was wrongly spelled. VNITAS. When a transaction arose from a feigned transaction. If the instrument is a note. The theory is that since the payee is not capable of indorsing and since the maker or drawer knew of this fact. forgery of an indorsement cannot be raised as a defense by the maker or drawer. Clearly. Until the drawee accepts. As a consequence. it is not payable to bearer. one must write the misspelled name and there after indorse it to the correctly spelled name. INSTRUMENTS PAYABLE TO BEARER Sec. Campos: That the payee is a fictitious or non-existing person must be known to the maker or drawer. depending upon the intention of the one making or drawing the instrument. he must have intended the instrument to be transferred by mere delivery. When payable to bearer. Concept of a Fictitious Person Agbayani: The words “fictitious person” are not limited to persons having no real existence. it is payable to who is in physical possession.The instrument is payable to bearer: (a) When it is expressed to be so payable. and. not issued to a fictitious person. who is the payee and indorerser at the same time. present for payment and collect the proceeds of the instrument. Bearer instruments need not to be indorsed because it is negotiated by mere delivery. Thus. or (d) When the name of the payee does not purport to be the name of any person. An existing person may be considered a fictitious payee. he may indorse the instrument as therein described. Who is in physical possession of the instrument can indorse. the payee is certain. he will pay as an indorser. Thus. in both instances. 18 LEX SOCIETAS VERITAS. the person who can indorse such instrument is the incumbent person occupying the office at a particular time. adding. Obviously. or (c) When it is payable to the order of a fictitious or non-existing person. A check payable to a deceased person is not necessarily a check issued to a fictitious person. drawer intended that the payee will have a right to the instrument. or (e) When the only or last indorsement is an indorsement in blank. The words “fictitious person” mean to be a person who has no right to the instrument because the drawer or maker of it so intended. A fictitious person can include one who actually exists but has no right to the instrument simply because the drawer or maker did not intend that person did not intend for that person to have a right to that instrument. If the maker/drawer believes that the payee is alive. 8(f). the intention of the issuer controls. it does not matter whether the name of the payee used by the drawer or maker be that of one living or dead. it is provided that “where the name of the payee is wrongly designated or misspelled. Thus. Such an instrument is capable of 3 interpretations: (3) xxx The payee may be the person who happens to be secretary at any particular moment – thereby making the instrument a “floating promise. Under Sec. A person who actually exists can be construed as a fictitious person depending on the intention of the maker or drawer. Assuming there is acceptance. the person is in effect telling the drawee to pay him. The name is fictitious when it is feigned or pretended and a non-existent person is one who does not exist in the sense that he was not intended to be the payee by the drawer. Sebastian: When an instrument is payable to bearer.
the estate of Pedro O.The instrument is not invalid for the reason only that it is ante-dated or post-dated. not as of the date written on the instrument. . and the uniform understanding of the parties is that. However. such date is deemed prima facie to be the true date of the making. or indorsement. . Sebastian: Although the law does not require that a negotiable instrument be in a document written in the language known to the drawer or maker. payable on demand on or after April 15. Ante-dating and Post-dating of Instrument Sec. provided this is not done for an illegal or fraudulent purpose.The instrument need not follow the language of this Act. such as. The person to whom the instrument is delivered acquires title or ownership over it. Sebastian: I do not like how this statement was phrased by the Supreme Court. an instrument may be valid and negotiable though written in a foreign language. Triphonoff v. Date. Agbayani: An instrument is ante-dated when the date written thereon is earlier than the true date of its issuance or delivery. include the exercise during the juridical administration thereof of those rights and the fulfillment of those obligations of his which survived after his death. Agbayani: This legal provision applies to three cases: 1) the instrument contains the date of issue – the date placed is deemed prima facie the true date of the making or drawing of the instrument 2) in an accepted bill of exchange and the acceptance is dated – the date placed is deemed prima facie the true date of acceptance 3) in an indorsed instrument and the indorsement is dated – the date placed is deemed prima facie the true date of indorsement Sebastian: The date on the instrument is presumed to be the true and correct date. but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof.Where the instrument or an acceptance or any indorsement thereon is dated. it is an instrument payable to order. An instrument is post-dated when the date written thereon is later than the true date if its issuance or delivery. VIRTVS. The drawing of a postdated check is an everyday occurrence in the commercial world. drawing. when a check is postdated. Terms. 11. which of course. We incline to the belief that the instrument was a check. even though it be negotiated beforehand. an instrument needs to be in a language known to the drawer or maker because all contracts require an intelligent consent. presumption as to. but as to the date of actual delivery. evading the Usury Law. Limjoco v. this presumption is conclusive. The only limitation is that the ante-dating or post-dating is not done for illegal and fraudulent means. DATE OF A NEGOTIABLE INSTRUMENT Relevance Sec. Nazareno v. it is payable on the day it purports to be drawn. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. But as to a holder in due course. Intestate Estate of Fragante – Within the philosophy of the present legal system and within the framework of the Constitution. as the case may be. it is not necessary to use the exact words of law. The contention of the defendants is that the instrument was not a check. signing a note written in a foreign language not known to the drawer or maker may be a personal defense. Sweeney – It makes no difference whether a check be postdated or antedated. However. 10. Court of Appeals – The estate of a deceased person is a juridical entity that has a personality of its own. An ante-dated or post-dated instrument is not rendered invalid or non-negotiable by that fact alone. It may be negotiated before or after the date given as long as it is not negotiated after its maturity. 19 LEX SOCIETAS VERITAS. .NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW If the instrument is made payable to the estate of a deceased person. Therefore. which would authorize the holder to present the same for acceptance prior to the time when it would be payable. Agbayani: It is advisable to use the words of the law in order to avoid uncertainty and doubt. This conclusion is in harmony with cases wherein it is held that a postdated instrument of this nature is a check. EXACT WORDS OF LAW NEED NOT BE USED Sec. . when sufficient. Indeed. acceptance. VNITAS. 12. Agbayani: The estate of a deceased person is a juridical person in a limited way. and not a bill of exchange. Fragante should be considered an artificial or juridical person for the purposes of the settlement and distribution of his estate. this is a disputable presumption and any person who has an interest in that instrument is free to dispute such presumption. it is still payable according to its express terms. for the reason that it was not payable on demand and that the same was not negotiable. 1911. Ante-dated and post-dated.
The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course. actual or constructive. . after completion. is negotiated to a holder in due course. to a person who takes it as a holder. In the case of the dishonesty committed by the author of the dishonesty. But if any such instrument. However.Where an instrument expressed to be payable at a fixed period after date is issued undated. The first step is to write the instrument. a valid delivery by him is presumed. or where the acceptance of an instrument payable at a fixed period after sight is undated. once the instrument is no longer in the possession of the person who has signed it. Filling in the missing element of date is delegated to the holder. namely: (1) the act of writing the instrument completely and in accordance with Section 1. It does not refer to any other element of a negotiable instrument. There are two types of delivery. Take note that this section only refers to a missing date. the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. from one person to another. and the instrument shall be payable accordingly. that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion. 13. he can recover from the maker because only the negotiability of the instrument is avoided but not the whole instrument. If there is no date. Blanks. Campos: Delivery of the instrument means transfer of possession. it must be filled up strictly in accordance with the authority given and within a reasonable time. such delivery must be intended to give effect to the instrument. Moreover. INCOMPLETE BUT DELIVERED INSTRUMENTS Sec. Agbayani: Under Section 6. As to a holder in due course. and as to the holder in due course. COMPLETION AND DELIVERY OF INSTRUMENTS Agbayani: There are two steps in the execution of a negotiable instrument. The second step is delivery. the date appearing on the instrument is conclusively the date of issuance. until the contrary is proved. if the maker gives the instrument to another for mere safekeeping. Having written the instrument and complied with Section 1. When date may be inserted. the date is not necessary for the negotiability of the instrument. This is the more important step in giving life to the negotiable instrument. and (2) the delivery of the instrument with the intention of giving effect to it. but as to him. the negotiable instrument is not yet complete. The two instances when date is critical is when the instrument is payable after a fixed date or payable after sight. The instrument may then be enforced as a debt instrument under the Civil Code. the date so inserted is to be regarded as the true date. the instrument comes to life. is called the issue or issuance of the instrument. It is called issuance when the delivery is from the author to the first transferor. If the instrument is avoided as to the author of the dishonesty. VNITAS. Sebastian: there are two steps necessary to make a negotiable instrument. Sebastian: The date of the instrument is not essential for negotiability. there can be no liability on said instrument. . any holder may insert therein the true date of issue or acceptance. Is called deliveries when the delivery is from the payee to the first endorser. however.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: Ante/postdating a check does not affect negotiability unless its objective is unlawful. there is no delivery within the meaning of the above provision. It may thus be accomplished by manual transfer of possession or by any other act manifesting intent to transfer of possession. the date may be necessary to determine the date of maturity.Where the instrument is wanting in any material particular. it is valid and effectual for all purposes in his hands. . Upon delivery. provided the instrument is complete. VIRTVS. Insertion of Date Sec. the instrument is avoided as to him. Thus. 14. The date here pertains to the due date of the instrument. In order. the presumption is conclusive. And a signature on a blank paper delivered by the person making 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. However. when may be filled. The first delivery of the instrument complete in form. and 20 LEX SOCIETAS VERITAS. Without the initial delivery of the instrument from the maker to the payee. one will never know when the due date is.
not even a holder in due course. The authority to fill in the blanks or to complete the instrument is limited as to time. Sec. the usage of trade or business (if any) with respect to such instruments. a third fact (3) that such person had authority to fill up the blank. In such case. name of the payee or the name of the drawer). VNITAS.” This contemplates a delivered instrument. the law presumes agency to fill up the blanks. in the hands of 21 LEX SOCIETAS VERITAS. the maker or drawer made a delivery. The insertion of a wrong date. such defense is available only against holders who are not holders in due course. Either one of the missing material particulars may be corrected by Section 14. two conditions must be present before the presumption of authority to complete may arise: (1) delivery of the instrument. because the interest involved is that of the issuer. In determining what is reasonable time. it should be noted that whether unreasonable time has elapsed or not would be immaterial. place of payment. but the innocent party may enforce the same notwithstanding the improper date. “any person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. Authority to Complete the Instrument Agbayani: The material particular referred to here may be: (1) a particular omission of which will render the instrument non-negotiable (e. and from such possession. Campos: This provision merely raises a personal defense. The law presumes from two facts: (1) want of a material particular in the instrument. by one having knowledge of the true date of issue. 14 is broad enough to include the matter of filling in blanks for the time of payment. The law merely requires that it be in the possession of a person other than the drawer or maker. Sebastian: The holder is presumably given the authority to fill the missing element. its subsequent conversion into a negotiable instrument will not render the person signing liable to anybody. However. incomplete but delivered. The defense is not available against a holder in due course because under the law. specially to all missing requirements necessary to make it a negotiable instrument. but signed. the law provides that there is prima facie authority to fill it up for any amount. Agbayani: Bills and notes are sometimes executed in blank and delivered to another to fill in and negotiate either for his own benefit or that of the maker. and (2) the delivery must have been for the purpose of converting it into a negotiable instrument. Thus if the paper or writing is delivered without such intention.g. and the time of payment. It will be noted that the law does not seem to require the delivery of the instrument with intent to have it converted into a negotiable paper. However. if the used had expressly fixed the time within which completion may be made. i. therefore. The first kind involves a writing which although containing blanks. It is believed that it includes authority to fill in other blanks. the name of the payee. Such instruments are. will avoid the instrument as to him. the defense of parties prior to completion is that it is not filled up within a reasonable time. Such “reasonable time” must be reckoned from the time of the issuance of the instrument and not from the time of each successive negotiation. place of payment). together with the fact that the instrument is wanting in a material particular. but may be corrected by Section 13. and (2) a blank paper or a paper so far incomplete that it does not constitute an instrument within the meaning of the definition of this term. or (2) a particular omission of which will not render the instrument non-negotiable (e.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Mere possession by a person is not enough. The second kind of writing is one which is so far incomplete that it is not an instrument. 13 deals with more particularity on some aspects of this right. date. in this case. the person to who it is delivered is presumed given the authority to fill it up. What is presumed is given that the instrument is incomplete. The law thus presumes the existence of the authority to fill the instrument up to any amount from the following two facts: (1) a signature on a blank paper and (2) that the person signing in blank delivers it in order that the paper may be converted into a negotiable instrument. the authority extends to the insertion of the date. Rights of a Holder in Due Course Agbayani: Under this section. Section 193 provides that “regard is to be had to the nature of the instrument. As to a signed blank paper. An instrument that is non-negotiable at inception may become negotiable because of Section 14. rate of interest.e. the correction of the missing date cannot be corrected by Section 14. According to Sec. While Sec. in order to be enforceable against a party prior to completion. It covers two kinds of writings: (1) incomplete instruments. 14. VIRTVS. is so far completed that it is an instrument. and the facts of the particular case. Sebastian: The missing element here must be a material particular. Consequently. and not an undelivered instrument which is covered by Section 15. since otherwise it would not be such an instrument.g. it must be filled in within a reasonable time. where the writing recites enough of the formalities to make evident the intention to make the writing operate as negotiable instrument. . the amount. Whether it is an incomplete instrument or a mere signed blank paper therefore. and (2) possession thereof by a person.. The presence of such intention must be proven by the possessor of the instrument.” However.
and Section 16 does not apply in the case of an incomplete instrument completed and negotiated without authority. The law does not make any distinction between a holder in due course and who is not because the law used the phrase “any holder” which includes a holder in due course. where the custody of the incomplete instrument has been entrusted to another. Agbayani: An incomplete instrument is not valid against the party before its delivery. Instruments Delivered in Blank Agbayani: One who is not a holder in due course cannot enforce the instrument against a party prior to the completion of the instrument if the instrument is not filled up strictly in accordance with the authority given and within reasonable time. and (3) must deliver the sheet. The defense of “want of delivery of a mechanically incomplete instrument” is. there is a prima facie presumption of delivery which the maker may rebut by proof of non-delivery. be a valid contract in the hands of any holder. The conclusive presumption of delivery under Sec. The law provides that in order that one who is not a holder in due course may enforce mechanically incomplete but delivered instrument. Under Section 16. .NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW such a holder. a personal or equitable defense. Furthermore. the delivery is conclusively presumed where an instrument is in the hands of the holder in due course. In determining what is a “reasonable time” or an “unreasonable time. It may be filled up in accordance with the instructions and within a reasonable time. Section 16 applies to a mechanically completed instrument not delivered. while Section 15 applies to a mechanically incomplete instrument not delivered. 15. VNITAS. the two requisites must exist. the usage of trade or business (if any) with respect to such instrument and the facts of the particular case. if completed and negotiated without authority. the invalidity of the instrument is only with reference to the parties whose signatures appear on the instrument prior to delivery. Incomplete instrument not delivered. as against any person whose signature was placed thereon before delivery. However.” The defense is. thus. the instrument may not be enforced. the instrument may be valid. Thus. In this case. a real defense. INCOMPLETE AND UNDELIVERED INSTRUMENTS Sec. however. the complete but delivered instrument is “valid and effective for all purposes in his hands. . so as to give rise to a conclusive presumption of delivery in favor of a holder in due course. in which the presumption of valid delivery is note merely prima facie but conclusive. After which. The requirements for a blank sheet to become a negotiable instrument is that (1) the maker must sign a blank sheet of paper. the parties negotiating after completion are liable on the completed instrument because they are estopped or precluded from claiming that the note was not filled up strictly in accordance with the authority given. (2) with intent to convert to a negotiable instrument. But where an incomplete and undelivered instrument is in the hands of a holder in due course. The non-delivery of an incomplete instrument is a valid defense. otherwise. In other words. 22 LEX SOCIETAS VERITAS. this is a personal defense. The implication is that when one or both of the requisites are absent. If an instrument contains all the requisites for making it a negotiable one. VIRTVS. not only between the original parties but also against a holder in due course. Sebastian: This is a real defense. it should be considered as complete though it in fact may have blanks as to nonessentials. Although an instrument was completed not in accordance with the authority given. The provision of Section 16 that a valid delivery is in the hands of a holder in due course must be read in connection with Section 15. who wrongfully completes and negotiates it to a holder in due course. Sebastian: A holder in due course can enforce the instrument against parties prior to completion regardless of the validity of the elements filled up by the prior holders. delivery to the agent or custodian is a sufficient delivery to bin the drawer or maker. Campos: This contemplates an instrument which is not only undelivered but also incomplete. be distinguished from the presumption where an undelivered mechanically complete instrument is in the hands of a holder in due course. although possession of an incomplete instrument raises prima facie presumption of delivery. and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. the instrument cannot be enforced. it will not.” regard is had to the nature of the instrument. As to parties whose signatures appear on the instrument after delivery. therefore. 16 cannot apply. the term is very relative.Where an incomplete instrument has not been delivered. a real defense exists and not even a holder in due course can recover on the instrument. This presumption must. the instrument may be enforced againt prior parties. for the law is specific that it is not a valid contract in the hands of any holder. Sebastian: Another incomplete instrument in this section is a blank piece of paper that is signed.
As between immediate parties and as regards a remote party other than a holder in due course. the delivery may be shown to have been conditional. Is this holding inconsistent with the last sentence in the Pavilis case? Linick v A. completed and negotiated. the maker or drawer can revoke. Agbayani: The law provides that every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. It means privity. The loss did not result from completion and negotiation of the check by one entrusted with its possession. a valid and intentional delivery by him is presumed until the contrary is proved. in such case. and. in order to be effectual. complete in form. the delivery. and. yet we cannot say under the facts and circumstances of the instant case that defendant was negligent. even when in the hands of an innocent holder. the latter may recover. there are cases where Section 15 is not applied where the doctrine of estoppel is involved. Nutting & Co. Before delivery. The drawer owes the duty to use due care in the execution of checks. the criterion is whether or not the party in question knows of the conditions or limitations placed upon the delivery or the fact that the instrument was not 23 LEX SOCIETAS VERITAS. COMPLETE BUT UNDELIVERED INSTRUMENTS Sec. Also. Section 15 will not be applicable. not proximity. when effectual. The depositor-plaintiff’s acts in this respect are a bar and an estoppel in her suit against the drawee bank. But where the instrument is in the hands of a holder in due course. Delivery and issuance may be made either by the maker or drawer himself or through a duly authorized agent. that. Campos: How does this case compare with Pavilis case? The court in effect holds that mere signing of a check in blank is negligence which will make the drawer liable to the drawee bank in case it is successfully encashed without having been validly delivered. arise in respect to an instrument until it is delivered. Pavilis v Farmers Union Livestock Commission – The check in controversy was an incomplete instrument when stolen and cannot be enforced in the absence of conduct on the part of the drawer creating an estoppel. Weiner v Pennsylvania Co. and enabled the thief to commit the fraud. The depositor’s act made the loss possible and caused it.J. and that without any confidence. and may be made either to the payee himself or to his duly authorized agent. if as a result of negligence such instrument comes into the hands of a holder in due course. one cannot enforce the instrument whose signature appeared before delivery. And where the instrument is no longer in the possession of a party whose signature appears thereon. to a person who takes it as a holder. The possession of such a note by the payee or indorsee is prima facie evidence of delivery. . . properly speaking. – The delivery of a promissory note by the maker is necessary to a valid inception of the contract. cancel or tear up the instrument. but by force of fraud. must be made either by or under the authority of the party making. there can be no recovery upon it. but it does not follow as a legal conclusion that signers of checks in blank assume the risk of liability in all cases where such instruments are wrongfully taken. a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. and we are not concerned with a breach of duty as between a depositor and drawee. The payee named in the instrument acquires no right until the instrument is delivered to him. This is too much to be expected. the subsequent completion and negotiation. thus preventing any recovery on her part. And no rights. 16. It does not appear that that the defendant company had reason to mistrust its employee and anticipate the wrongful taking by him of a check signed in blank. but if it appears that the note has never been actually delivered. To hold that a person is negligent in having in his possession a check signed in blank would require something more than the exercise of ordinary care. or negligence. VIRTVS. as the case may be. when presumed. VNITAS. In other words. Delivery. – In the instant case the plaintiff signed the check in blank.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW As a rule. and not for the purpose of transferring the property in the instrument. in order to find out if delivery was intended.Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. drawing. But if the incompleteness is cured by the authority given by the maker to an agent. or for a special purpose only. While there can be no question that the provisions of the Negotiable Instruments Law do not prevent an inquiry into the question of the negligent custody of an incomplete instrument. is neither fair nor compatible with public interest. it was put in circulation. The term immediate parties is confined to those who are immediate. or fault of the maker. in the sense of knowing or being held to know the conditions or limitations placed upon the delivery of the instrument. accepting. Issue is the first delivery of the instrument. Delivery and issuance are used interchangeably. and to place the burden of loss or its chance on the depository if it does not interview the maker. thus putting it in the power of an unauthorized person to fill it in and present it for payment. To hold otherwise would require the bank to communicate with the drawer as each check was presented. or indorsing.
it may proved that: 1) no delivery was made. a valid and intentional delivery by him is presumed until the contrary is proved. unconditional or for a specific purpose only. the presumption is rebuttable as against an immediate party or a remote party who is not a holder in due course and. If B files an action on the note without any additional proof. if the instrument is no longer in the possession of a party who has signed it. there is no contract. B cannot enforce the note against A. As already stated. VIRTVS. the delivery was conditional or for a special purpose and not for the purpose of transferring the property in the instrument. maker. Thus. but this fact is conclusively presumed. Sebastian: Delivery is the transfer of possession. Presumption of Delivery as to Holder In Due Course Agbayani: Where the instrument is in the hands of a holder in due course. Under the law where the instrument is no longer in the possession of a party whose signature appears thereon. that she told others that she wanted the plaintiffs to have the property and that 24 LEX SOCIETAS VERITAS. as against him. for immediate and remote parties. if a complete instrument is stolen from the maker or drawer. the instrument is rendered non-negotiable. under Section 15. What is conclusive is only the delivery. They are remote when they have no knowledge and there is no privity of contract. as against an immediate party who is not a holder in due course. If the holder is a holder in due course. Consequently. If the party in question knows. such maker or drawer cannot set up a defense of non-delivery because it is a personal defense available only between immediate parties and as regards remote parties who are not holders in due course. When a person delivers an instrument. when the instrument is no longer in the possession of the party who signed. Delivery of an instrument is a prerequisite for liability.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW delivered but stolen. acceptor or endorser. from one person to another. Delivery for Special Purposes Agbayani: The following is an example of delivery for a special purpose: “A delivers a complete note payable to bearer signed by him to B for (1) safekeeping or (2) for collection only. there is a prima facie presumption that the party who signed it intentionally delivered it. endorsing. actual or constructive. Immediate parties are those parties who has knowledge of the circumstances surrounding the delivery of the instrument. Delivery Subject to Conditions Agbayani: The following is an example of a conditional delivery: “A makes a complete note in favor of B. The presumption may be raised against remote parties because of the guaranties made under Section 65 and 66. In respect to a holder in due course. if he does not know. a delivery is presumed until the contrary is proved. In Re Marten’s Estate – Every contract on a negotiable instrument for the purpose of giving effect thereto. This was the common law rule. must be done by making or endorsing under the authority of the person making. In so far as this provision protects the holder in due course. it was not authorized. 2) if the delivery was made. and negotiated to a holder in due course. the delivery can be conditional. the presumption is that it was delivered validly and intentionally. 3) if the delivery was made or authorized. In other words. and A can show that the delivery was conditional and if the condition is not fulfilled. he is not an immediate party even if he is the next party physically. but is not delivered. However. relative to the analogous situations. he is an immediate party. Whipple. Otherwise. he cannot be held liable by B. to be effectual. Campos: Non-delivery of a complete instrument is only a personal defense. This provision is subject to the application of estoppel. Obviously. VNITAS. with the understanding that it is not to become binding on A until it is also signed by C. On the other hand. there is already a conclusive presumption of delivery. It does not preclude the maker from interposing any other defenses. he is an immediate party even if he is physically remote. are reviewed in the recent case of Orris v. It must be remembered that the bills or notes dealt with in this section are mechanically complete. drawing or accepting. a valid delivery thereof by all parties to him is conclusively presumed.” It is to be noted that what is conditional here is the delivery. as A can prove that the note was delivered only for a special purpose. Our decisions. . the presumption will exist in his favor only until the contrary is proven. an incomplete and undelivered instrument is not valid even in the hands of a holder in due course as against a party prior to delivery. However. delivery must be made by the drawer. or under their authority. A presumption is said to be conclusive when contrary proof is barred. the presumption is rebuttable. As a general rule. But as B knows of the condition placed upon the delivery. not the promise or order to pay. For delivery to be effectual. it is a personal defense. However. where in we state: “All there is to show delivery in the case is that the deed was prepared and executed by Miss Aken. during the lifetime of the decedent. the instrument is not merely prima facie deemed delivered. If the instrument is complete in all its particulars. the note here sued upon could not be made the basis of a valid claim against the estate unless there was a legal delivery of same.
complete but undelivered Possession gives rise to a Possession gives rise to a conclusive presumption of prima facie presumption of delivery. Where the intention is for some other things. She put the deeds in her safety deposit box and retained the key. VNITAS. We do not think these admitted facts show a legal delivery of the deed in question. incomplete but delivered HIDC NOT HIDC Holder can enforce the Holder can enforce instrument as completed instrument as completed against parties prior or only against parties subsequent to completion. Between immediate parties. delivery must be made with intention to pass title. SUMMARY OF INSTRUMENTS RULES ON DELIVERY OF NEGOTIABLE Sebastian: Delivery of a negotiable instrument is necessary. VIRTVS. delivery which the maker or drawer may rebut by proof of non-delivery.” The position taken by this court in the Orris case is controlling here. Possession gives rise to a Possession does not give prima facie presumption of rise to any presumption of delivery which the maker or delivery. 25 . subsequent to the completion but not against those prior thereto. drawer may rebut by proof of non-delivery.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW she prepared papers for providing. then it is not the delivery contemplated by law. incomplete and undelivered Holder can enforce instrument as contemplated only against parties subsequent to the delivery but not against those prior thereto. LEX SOCIETAS VERITAS.
The agency may be oral or written. or when there are omissions therein that the rules stated in the section apply. unless specific provisions of the general law. require otherwise. but if the words are ambiguous or uncertain. LIABILITY OF PERSONS SIGNING AN INSTRUMENT SIGNING UNDER A TRADE OR ASSUMED NAME Sec. the party may sign personally or through an agent. the written provisions prevail. Agbayani: The rules stated in this section shall not be availed of if the terms of the instrument in question are clear and admit of no doubt. Agbayani: As already stated.The signature of any party may be made by a duly authorized agent. the holder may treat it as either at his election. . Thus. Continental Illinois Bank v. 17. 19. Liability of person signing in trade or assumed name. There is no particular form required by the law and the agency may be proved by oral or written evidence. the sum denoted by the words is the sum payable. (c) Where the instrument is not dated. 18. the obligation is a joint and several one. if there is no signature. Construction where instrument is ambiguous. doubtful or obscure.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW RULES OF CONSTRUCTION Sec. a person associated with him in a joint oil enterprise for the benefit of which money was borrowed. under Section 134 and 135. one whose name does not appear on the note cannot be held liable thereon even though the payee knew at the time of making the note that the obligation was that of a person other than the maker. without specifying the date from which interest is to run. . he is to be deemed an indorser. (d) Where there is a conflict between the written and printed provisions of the instrument. (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign. 3) Where a person sought to be charged signs on a paper separate from the instrument itself.No person is liable on the instrument whose signature does not appear thereon. and if the instrument is undated. So also. or where an acceptance is written on a paper other than the bill itself. The following are the exceptions to the general rule: 1) where a duly authorized agent signs for a person. SIGNING AS AN AGENT Sec. reference may be had to the figures to fix the amount. as an allonge. . a drawee who has accepted the bill of exchange is not liable on the instrument. they are deemed to be jointly and severally liable thereon. Another exception is where the person uses an assumed name or trade name – one may become a party to a negotiable instrument by any designation he desires. it will be considered to be dated as of the time it was issued. there can be no liability. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. . the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two. where a note was signed by one individual. Agbayani: The rule stated here is that a person whose signature does not appear on the instrument is not liable Thus. authority. (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note. Signature by agent. that person is liable. (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons. such as. VIRTVS. 2) Where a person sought to be charged forges the signature of another person. Sebastian: As a rule. It is only when the instrument in question is ambiguous. was not liable on the note since undisclosed principal may not be held liable on negotiable paper executed by the agent in his own name. they are deemed to be jointly and severally liable thereon. the statute of frauds. and the authority of the agent may be established as in other cases of agency. also. 26 LEX SOCIETAS VERITAS. the interest runs from the date of the instrument. the forger is liable even if his signature does not appear thereon. If an instrument worded in a singular is executed by several. except as herein otherwise expressly provided. (b) Where the instrument provides for the payment of interest. how shown. from the issue thereof. Clement – The Negotiable Instruments Law provides that where an instrument containing words “I promise to pay” is signed by two or more persons. No particular form of appointment is necessary for this purpose. VNITAS.Where the language of the instrument is ambiguous or there are omissions therein. although the allonge may be considered as part of the instrument.
but no liability. everyone having dealings with a public officer is supposed to know the legal limitations of his agency so that when the public officer. makes an unauthorized contract in the name of the public corporation. 21. VIRTVS.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: If the agent had authority to issue the instrument. Sec. does not exempt him from personal liability. imbeciles. but the mere addition of words describing him as an agent. [directors and officers] cannot perform acts beyond the scope of their authority. INDORSEMENT BY INFANT OR CORPORATION Sec. 22. Any person taking checks made payable to a corporation which can act only by agents. .Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity. and other incapacitated persons. does so at his peril and must abide by the consequences if the agent who indorses the same is without authority. Signature by procuration. that is. the bank makes itself responsible to the drug company for the amounts represented by the checks. he is not liable on the instrument if he was duly authorized. In the case of corporations. and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. . he cannot bind the principal and his transaction will become unenforceable unless the principal ratifies it. it is possible that the agent may or may not have the obligation to disclose his principal. a minor cannot give consent to contracts and a contract entered to him is voidable. They may give ownership. 2) adds words to his signature indicating that he signs as an agent. Effect of indorsement by infant or corporation. permitting them to make withdrawals. Such acts would be ultra vires acts. in exceeding their authority. Agbayani: Ordinarily. Therefore. the intention of the agent is the intention of the principal. Thompson – In stipulating that the indorsement of the instrument by an infant “passes property therein. and 3) disclose his principal. Sebastian: Under this section an agent is under the obligation to disclose the identity of his principal. When a bank accepts the indorsements on checks made out to a drug company of a salesman of the drug company and the indorsements of the saleman’s wife and clerk.” it was meant to provide that the contract of indorsement is not void. it passed to the drug company which thus suffered no loss. . Incapacity of the minor cannot be availed of by prior parties. depending on the nature of the instrument signed by the agent. notwithstanding that from want of capacity. PNB (58 Phil 684) – The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. in innocent mistake of law. or as filling a representative character. and. and that his indorsee has the right to enforce payment from all parties prior to the infant indorser. Sebastian: An indorsement by corporations or minors pass property regardless of lack of capacity but there will be no liability incurred. and credits the checks to the personal account of the salesman and his wife. they bind themselves. and so forth. or in a representative capacity. the corporation or infant may incur no liability thereon. Liability of person signing as agent. This section is also applicable to indorsements by lunatics. therefore. Insular Drug v. Agbayani: In order to escape personal liability on the instrument. an agent must: 1) be duly authorized. Murray v. The purchaser and indorsee of a not is not a bona fide holder as against an infant 27 LEX SOCIETAS VERITAS. 20. without disclosing his principal. Nevertheless.The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein. neither he nor the corporation is bound. a person who takes the instrument is bound at his peril to inquire into the extent and nature of the agent’s authority. and this applies to every person. Officers of the government and other public corporations are not held to the same rule of agency by which. for or on behalf of a principal. the indorsee acquires title to it and can enforce it against the maker or acceptor or other parties prior to the minor. SIGNATURE BY PROCURATION Sec. Such prior parties cannot escape liability by setting up a defense the incapacity of the indorser. effect of. If the agent did not have authority. if a minor or a corporation indorses an instrument. Agbayani: A signature per procuration constitutes a warning that the agent has but a limited authority. .A signature by "procuration" operates as notice that the agent has but a limited authority to sign. A salesman without authority to collect money belonging to his principal does not have implied authority to indorse the checks received in payment. VNITAS. unless it is pleaded and proved that after the money was withdrawn from the bank.
LEX SOCIETAS VERITAS. . Forged signature. particularly to the amount or name of the payee. VIRTVS. The signature in both cases is “wholly inoperative” and no one can gain title to the instrument through it. it is wholly inoperative. effect of. Since his signature does not appear on the instrument. if the forgery consists of alteration in the amount. Section 23 applies only to forged signatures or signatures made without the authority of the person whose signature purports to be. Consequently. VNITAS. but who does not have the authority to bind the alleged principal. drawer. Material alteration are those alterations made to material elements or those that are important to an instrument. Sebastian: Forgery is the affixing of the counterfeit signature of maker. The intent to defraud distinguishes forgery from innocent alterations and spoliation. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. with intent to defraud. amount. Campos: Forgery is a real defense. unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. indorser. alteration of date can be a forgery as when making it appear that the instrument is not yet past due. FORGERY Sec. Agbayani: By forgery is meant the counterfeit making or fraudulent alteration of any writing. It may consist in the signing of another’s name. or to give a discharge therefor. or the alteration of an instrument in the name. who takes with constructive notice of the incapacity. Such alterations are covered by Section 124. description of the person and the like. or drawee. or a material alteration of an instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW indorser. and 2) Where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the apparent signer. can be acquired through or under such signature. or to enforce payment thereof against any party thereto. Section 23 does not apply. not even by a holder in due course. Section 23 deals with two sets of situations: 1) Where the signature on the instrument is affixed by one who purports to be an agent. In some cases. and that the latter may disaffirm and recover the note from the possession of the former. 28 . It is not necessary that the forger attempt to imitate or simulate the signature being forged. and no right to retain the instrument. 23. he cannot be held liable thereon by anyone.When a signature is forged or made without the authority of the person whose signature it purports to be.
This is a functional equivalent of unenforceable contract in Civil Law. what is controlling is that one though the person in front of him is the person entitled to the instrument. X obtains from Y a note payable to the order of Juan Cruz.” This is forgery depending upon whom Y intended to pay. the other is induced to enter into a contract which. The indorser can also claim under this. Thus. maker. B issues to A a check. FRAUD IN CIVIL LAW There is fraud when. Any other person’s signature that is forged is irrelevant. there is fraud in factum. Fraud in factum. which in fact is only glass. Then X indorses the note. but to whom Y issued the note on the belief that X was Juan Cruz. generally. indorser. The test is whether or not the signature is procured in such manner as to be voluntary by the maker. there was want of intention to execute an instrument or to indorse. when in fact he is not. Where a signature is affixed on a blank paper w/o intent to create an instrument. such person cannot claim any authority to affix any signature. and (2) material alteration under Section 124. Here. he would not have agreed to. one cannot raise this defense if he is charged with negligence. VIRTVS. Fraud in factum is a real defense. there is want of intent. what is usually forged is the signature. then X’s signature of “Juan Cruz” would be a forgery. Sebastian: There is fraud in factum if there was no intention to issue an instrument. The counterfeiting of the signature may be done (1) by an authorized agent of the person whose signature is forged. FRAUDULENT IMPERSONATION Agbayani: Suppose that X represents himself to be Juan Cruz. it is a real defense. then there is forgery by an agent. you know for what purpose is that signature. If it is. Sebastian: There must be violence or intimidation that results in the affixing of a genuine signature to an instrument. Thus. If it is not done by an agent. The check is not a forgery. Although the signature is mechanically genuine. the person does not even represent himself to be the agent of the person whose signature is forged. drawee and indorser are the only people who can sign in the negotiable instrument. 1338. Thus. however. While the signature was genuine. The fraud here amounts to fraud. However. Although. signing “Juan Cruz. FRAUD IN INDUCEMENT Agbayani: Fraud in inducement does not amount to forgery and is only a personal defense. In this case. named at that time Juan Cruz. it must be determined if the agent acted within or outside the scope of his authority. FRAUD IN FACTUM Agbayani: Fraud in factum or fraud in esse contractus amounts to forgery and is a real defense. If Y intended that proceeds of the note will go to X. there is an intention of B to issue an instrument. as where A takes B’s hand and forces him to sign his name. The following is an illustration of fraud in factum: B obtains the signature of A by telling A that it is only for autograph instrument. without them. through insidious words or machinations of one of the contracting parties. an essential element is that the person whose signature appears on the instrument should have exercised ordinary diligence and did not contribute to the imposition of the forgery. By this misrepresentation. . If it is done by an authorized agent. Material alteration is a form of forgery. 29 LEX SOCIETAS VERITAS. An indorsee is not obliged to ask the genuineness of the note because his protection is the warranty of an indorser. Sebastian: In fraudulent impersonation. it was surrounded by circumstances with violence or intimidation. Forgery can be invoked even if the signature is authentic. or payee.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Fraudulent alteration is merely one of the two forms of forgery. The two general types of forgeries are the (1) counterfeiting of signature. But if Y intended that the proceeds of the note will go to the real Juan Cruz and not X. The following is an illustration of fraud in inducement: A sells to B what he represents to be as a diamond ring. there is no intention to issue an instrument. and something is written to make it appear that the signatory is a drawer. then X’s signature of the name “Juan Cruz” is not a forgery. But where it amounts to forgery. Here. He is not primarily laible but will still be covered under the warranties under Section 66. The person raising the defense must present competent proof that the signature affixed was without negligence on his part. the person dealing with him. or (2) by a person who is a total stranger. (Art. Civil Code) DURESS AMOUNTING TO FORGERY Agbayani: Ordinarily. duress is merely a personal defense. VNITAS. When an agent affixes the signature of the person to an instrument without being empowered to do so. The fraud here is in inducing B to issue the check. The maker/drawer. then there is liability. there is no intention to issue the instrument to the person to who it was given to. will never apply to a check because when you sign a check.
in paying the paper. carries out the intention that the drawer entertained at the time of the delivery of the paper to the impostor. A holder in due course’s action against the forger is not limited to Section 66. to be. and b) rights can be acquired trough or under the signature forged or made without authority. thus. Procedural Requirement in Proving Forgery Sebastian: The person raising the defense of forgery must deny the document under oath. and 3) that. in the illustration. ratherthan on the drawer. or was more particularly identified. Sebastian: Fraudulent inducement is not a form of forgery and is merely a personal defense. VIRTVS. (2) to give discharge therefore or (3) to enforce payment thereof against any party thereto. the signature becomes wholly inoperative and there can be no right to retain. If the signature is completely inoperative. the loss falls on the drawee or the purchaser. First. The person whose signature is forged. X’s signature of “Juan Cruz” would ordinarily not constitute a forgery but the signature of an assumed name. anybody whose signature appears prior to the forgery cannot be held liable by the last person who holds the instrument. in taking it upon the indorsement of the impostor in the name of which the payee was described. 30 LEX SOCIETAS VERITAS. Y here may be said to have a double intent. And. In the absence of negligence on the drawer’s part. then the intended beneficiary of the instrument does not acquire anything under the counterfeit signature. (Theory of Actual Intent) Another theory invoked is the maxim that as between two innocent persons. can be acquired through or under such signature forged or made without authority. although that intention was conceived in consequence of fraud of the impostor as to his identity and ownership of the property which represented the consideration. no rights or liabilities are incurred. second. he intends to make the instrument payable to Juan Cruz who he believes X.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW The person raising this defense must demonstrate that he is not guilty of negligence or that it was not his negligence that allowed the commission of the forgery. the person before him. (Theory of Estoppel) There is a distinction between cases where the paper is delivered to the impostor as payee and cases where the paper is delivered to the impostor upon his representation. although the latter is a fictitious person. and not the payee himself. Sebastian: When there is forgery. the one whose act was the cause of the loss should bear the consequences. VNITAS. When the signature is wholly inoperative. it would ordinarily be held that X is the indented payee. and therefore. the genuineness of the instrument is conclusively admitted. A negotiable instrument is a contract between 2 or more people. as between the drawer and drawee or between the drawer and a holder in due course. or at least a person who has no connection with the transaction. 2) that no right (1) to retain the instrument. in case the negotiation is by correspondence. A holder in due course can then enforce payment under breach of warranties under Section 66 against the indorsers after the forgery. the stranger. the signature forged or made without authority: a) the signature forged or made without authority is operative. nevertheless. he intends to make the instrument payable to the person who he believes the stranger to be. in the belief that he is agent of the person named as payee. as against a party precluded from setting up the forgery or want of authority. Second. description or title. The first is the controlling intent except where the name of the payee was already known to the maker or drawer. The doctrine of actual intent does not apply because the drawer did not regard the individual to whom he delivered the check as the payee but merely as the agent of the payee. except if the party is precluded from interposing the defense of forgery. Consequently. he intends to make the instrument payable to X. To use the illustration. or the holder. no right to discharge the instrument or right to enforce payment. the maker or drawer of the instrument may be said to have a double intent. Theory of Double Intent Agbayani: In these fraudulent impersonation cases. as the case may be. by some designation. where the impostor represented himself to be the agent of the payee. There must be an unbroken chain of legitimate transactions and any forgery breaks the legitimate transactions. It is axiomatic that one does not become a party unless consent is given to a contract. His action is one for specific performance. he intends to make the instrument payable to the person before him or to the person writing at the other end of the line. First. The theory commonly invoked in throwing the loss on the drawer is that the drawee. incurs no liability under that instrument because the signature is wholly inoperative. . in which case the second becomes the controlling intent. If he forgets to deny it under oath. EFFECTS OF FORGERY Agbayani: Section 23 lays down three fundamental rules as to the effect of a forged signature: 1) that the signature forged or made without authority is wholly inoperative.
2) The instrument can be enforced by holders to whose title over the instrument the forged signature is not necessary. Forgery of an irrelevant signature is not a defense. 3) While a forged signature is wholly inoperative. rendered inoperative. a drawee. A bank is bound to know the signatures of its customers. VNITAS. by accepting the bill.e. while forgery of a relevant signature is a real defense. These warranties are given by persons negotiating the instrument by mere delivery (i. whether qualified or general. By making them. the holder can enforce the instrument against a person whose signature is not neessary for the instrument. Unreasonable delay. 3) The instrument can be enforced against those who are precluded from setting up the defense of forgery. or omission. Persons in Estoppel Agbayani: The rule of estoppel as stated in the New Rules of Court. Warranties need not to be stated in the instrument. and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. nor the genuine signatures are. LEX SOCIETAS VERITAS. the person against whom it is sought to be enforced must not be precluded from claiming forgery. and that it is valid and subsisting at the time of his indorsement. Representations and warranties enhance the acceptability of the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW EXTENT OF EFFECTS OF FORGERY Agbayani: It must be noted. or omission. intentionally and deliberately led another to believe that his or another’s signature in an instrument is genuine. bearer instruments). Sebastian: 1) Only the forged signature or made without authority is wholly inoperative and the other signatures are vaild. a valid delivery to all prior parties is conclusively presumed. Sebastian: By way of Section 62. uon the part of one having the opportunity and duty to speak. act. Sebastian: Unlike an indorser. act. Campos: A general indorser subsequent to the forgery warrants among other things that the instrument is genuine. be permitted to set up the forgery of such signature or signatures. he warrants its genuineness. estops the former from 31 PARTIES BARRED FROM SETTING UP THE DEFENSE OF FORGERY Sebastian: Persons who are precluded from setting up the defense of forgery are (1) those who warrant or admit the instrument’s genuineness and (2) those who are barred on account of silence. in any litigation arising out of such declaration. acts or negligence. he cannot. an acceptor admits the genuineness of the signature. VIRTVS. an indorsement of an instrument which on its face is payable to bearer. The common rule to all is that he who made the loss happen should bear the risk and loss. Acceptors Agbayani: Under Section 62. Indorsers Agbayani: Indorsers. and if it pays a forged check. (1) the forgery was committed thru their negligence or (2) they delayed in notifying the forgery to the parties involved. warrant that the instrument indorsed by them is genuine in all respects what it purports to be. in disclosing the forgery upon commercial paper to the one who ought to be apprised thereof. the warranties made are under Section 65 or warranties made by a qualified indorser. Remember that to a holder in due course. such as. such as. 62. admits the genuineness of the signature of the drawer. one becomes a general indorser and warrants that the instrument is genuine in all respect what it purports to be under Section 66. however. that: 1) Only the signature forged or made without authority is stated by law to be inoperative but neither the instrument itself is. after his discovery of the forgery. Campos: An acceptor is precluded from claiming that the drawer’s signature is forged because under Sec. and to act upon such belief. 2) The insturment can be enforced by the holder whose title to the instrument does not require the forged signature. applied to forgery in negotiable instruments may be stated thus: Whenever a party has. by his own declaration. . the instrument becomes more like money and more acceptable. even against those whose signatures are forged. it must be considered as making the payment out of its own funds. Meaning. Persons Negotiating by Delivery Agbayani: Persons negotiating by mere delivery also warrant the instrument negotiated by them is genuine in all respects what it purports to be. Sebastian: By merely affixing your signature.
whether the holder is in due course or not. the drawee has no defense against the LEX SOCIETAS VERITAS. The basis of the rule of estoppel is that one cannot lead another to believe that his or another’s signature in an instrument is genuine. Because of these. Forged Indorsement of Note Payable to Bearer Agbayani: In case the note is originally payable to bearer. a drawer may be precluded from a defense of forgery of the payee’s indorsement if delivery by him to the payee is negligent. The reason is that the purported maker is not a party to the instrument as his forged signature is inoperative and no right to retain. the declaration was suppose to make the instrument more acceptable and negotiable. It is the responsibility of the person who incurred the loss due to forgery to report it within reasonable time because had the forgery been reported as early as possible. Forgery of Maker’s Signature Agbayani: Where the maker’s signature is forged. VNITAS. But theft is only a personal defense and cannot be used against a holder in due course. Not every declaration puts a person in estoppel. the transfer of the instrument could have been prevented. Thus. because of the forgery. the party whose indorsement is forged and parties prior to him including the maker. you are precluded from using forgery as a defense. 32 . It must be meant to be relied upon for the person to make the declaration to be “estoppable. the holder can file an action to all parties after the forgery in one suit. Estoppel may also apply when there is unreasonable delay on the part of the person who suffered the loss due to forgery and failed to report that the instrument was forged. FORGERY OF BILLS OF EXCHANGE Forged Indorsement of a Bill Payable to Order Agbayani: Where the indorsement is forged and the bill is payable to order. FORGERY OF NOTES Agbayani: Forgery of promissory notes may be further subdivided into forgery of an indorsement in the note and forgery the maker’s signature. he cannot be held liable by any holder. Sebastian: A bearer instruments need not be signed because they only need to be delivery to be negotiated. Sebastian: Negligence in delivery may also result to estoppel. The requisites are (1) that the delay be unreasonable and (2) that the one who ought to be apprised of the forgery must have been prejudiced. Thus. may be held liable by a holder in due course provided that the note was mechanically complete before the forgery. act or omission. VIRTVS. Instead. His cause of action would be enforcement of warranites under Section 66 or a criminal action for falsification of commercial document. Forged Indorsement of Note Payable to Order Agbayani: Where the indorsement is forged and the note is payable to order. Sebastian: Estoppel may arise from declaration.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW thereafter asserting the forgery as against the latter where the latter is prejudiced by such delay or failure. when the check is stolen the holder cannot make a claim against the maker because the instrument was not properly discharged. In fact. in the absence of preclusion from setting up forgery by warranty as in the case of indorserers or by estoppel as in the case of negligence. Warranties under Section 65 will apply. the party whose indorsement is forged and parties prior to him including the maker cannot be held liable by the holder. and to act upon such belief.” In this case. However. whether that holder is a holder in due course or not. the following are the rights and liabilities of the parties: drawer’s account cannot be debited Agbayani: In an action by the drawee against the drawer for the amount charged by the drawee against the account of the drawer where the drawee paid a check on a forged indorsement. the holder must first collect from his immediate indorser and the latter must first collect from his immediate indorser and so on and so forth until it reaches the forger. enforce or discharge the note. he cannot deny in any litigation arising out of such declaration. the holder can enforce the note against the maker because an indorsement is irrelevant in a bearer instrument. Sebastian: Normally. the law allows a shortcut where the holder can go after forger. By mere delivery a holder is already a holder in due course even if there was no indorsement. Persons Guilty of Negligence in Delivery Agbayani: The omission may consist in negligence in the delivery of the instrument. may be acquired against him. the holder can go after forger civilly for recovery of sum of money and/or criminally for theft or qualified theft. However.
he can also run after the collecting bank because the legal standing of the agent cannot stand higher that that of the principal. the drawer authorizes and directs the drawee to pay only to the payee or to the order of payee. VNITAS. it had no authority to do so. The drawee bank has no legal right to pay the money of the drawer on deposit with it to anyone except the drawer or its order. not negligence. or the drawee bank on the same forged signature gave rise to an obligation to return the amounts received. the payee can also recover from the forger. payee cannot recover from drawee Agbayani: The general rule is that an action cannot be maintained by a payee of the check against the drawee bank it is drawn unless the check has 33 LEX SOCIETAS VERITAS. and when the money had been collected on the check. Since theft of the check is a criminal offence. Sebastian: The collecting bank is liabile to the payee because when the collecting bank collected the instrument. the bank or other person or corporation. collecting bank is liable to payee Agbayani: The possession of the check on the forged or unauthorized indorsement is wrongful. the thief is required to make restitution. Since the drawee can also run after the forger. and the drawer may recover from the drawee for an instrument paid on a forged instrument. It’s authority to collect the check is based on the validity of the instrument. upon an unauthorized or forged indorsement of the payee’s signature and who collects the amount of the check from the drawee. who has obtained possession of a check. Sebastian: Since the payee did not receive the proceeds of the check because of the forged indorsement.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW drawer. and the act of the bank amounts to conversion of the check. if the collecting bank’s principal was a holder in due course. the drawee cannot collect from collecting bank because the former is already a party after the forgery. This is on the theory that the drawer owes the drawee an absolute and contractual duty to pay the check only to the person to whom it is made payable or upon his genuine indorsement. Sebastian: The drawee can recover from the collecting bank if the latter was the forger’s bank because the collecting bank is the agent of the forger. . a bank or other corporation or an individual. and the proceeds are held for the rightful owners of the payment and may be recovered by them. under a forged indorsement. The position of the bank or other corporation or person taking the check on the forged or unauthorized indorsement is the same as if he had taken the check and collected the money without indorsement at all. such as the collecting bank. can be held as for the moneys had and received. payee can recover from recipient of payment Agbayani: According to the general rule. In this case. It does not authorize or direct the drawee to pay the check to any other person. It must be remembered that when payment is made by way of a negotiable instrument. VIRTVS. The reason for this is the same as for the rule allowing the payee to recover from the recipient of the payment under a forged indorsement. payee can recover from drawer Agbayani: Payee can still recover from the drawer on the basis of his claim of debt upon which the check in the first place had been issued. Sebastian: The drawer cannot recover from the collecting bank because there is no privity of contract between them. notwithstanding that they have been paid to the person whom the check was obtained. the debt is not extinguished until the instrument is encashed except if the instrument lost its value on account of the creditor’s fault. is liable for the proceeds thereof to the payee or other owner. On this same ground. And the depository cannot relieve himself of this duty by an amount or degree of care he may have exercised to determine the indorsement is the genuine indorsement of the payee. Payment to depositor of forged signature of the payee. drawer cannot recover from collecting bank Agbayani: The drawer has no right to recover the amount paid from the collecting bank because the duty of the collecting bank to exercise care in collection is due only to the payee and the drawer suffers no damage since it can recover the amount paid from the drawee bank. his claim against the drawee subsists and he can recover from the latter. Sebastian: Drawee has an obligation to pay payee or order only. drawee cannot even raise the defense that he exercised extraordinary diligence because the cause of action of the drawer against the drawee is breach of contract. In such cases. drawee can recover from collecting bank Agbayani: The drawee may recover from the recipient of the payment. There is breach of contract if drawee does not. However.
the drawee who pays it without having detected the forgery cannot charge the amount thereof to the drawer’s account. Instead. when he learns about the forgery. a holder in due course can sue drawer. He should be allowed to shift that loss to the drawee only on a clear showing that the drawee’s delay in notifying him of the forgery caused him damage. Forged Signature of Drawer with Acceptance Agbayani: The drawee cannot set up the defense of forgery because when he accepted the bill. he should notify the holder to whom he paid as promptly as possible. if the drawee pays a forged bearer instruent. is that the instrument was not delivered. cannot recover from the one who received it. the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with if for the purpose of determining their genuineness and regularity. or does not show on its face that it is an assignment of a particular fund.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW been certified or accepted by the drawee bank. . he may lose his right to recover against the holder if his negligent delay operates to the latter’s prejudice. Forged Signature of Drawer without Acceptance Agbayani: As between equally innocent persons. there is no privity of contract between the drawee bank and the payee. who pays money on a check or draft the signature to which is forged. the drawee. Sebastian: In this case. the forger/indorser under warranties in Section 65 and the drawee bank. the drawee bank may run after the forger. Without acceptance or certification. this defense is only a personal defense. he is not a party to the bill. Further more. Neither is there an assignment pro tanto of the funds where the check is not drawn on a particular fund. Where the negligence of the drawee bank is the proximate cause of a collecting bank’s payment of a check with a forged indorsement. The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that there is no privity between the drawer and the collecting bank and the drawer owes to that bank no duty of vigilance. However. While the drawer generally owes no duty of diligence to the collecting bank. the drawee bank cannot run after parties subsequent to the forgery. drawee becomes liable to pay. a holder can collect from him since an acceptor cannot raise the defense of forgery being a party after the forgery. The purported drawer is not liable as his signature is inoperative and. A holder can also claim from the forger. No right to retain the bill. The forged signature is wholly inoperative and does not give the drawee the right to discharge it. he cannot be thereafter be heard to say that the signature is a forgery. Forged Indorsement of Bill Payable to Bearer Agbayani: The rules are the same as in forged indorsements of promissory notes. he stands to bear the loss and his remedy is against the forger. If drawee dishonors. Through certification. his signature does not really appear on the bill. or holder of the check. A holder in due course can claim against the drawee because delivery is conclusively presumed. therefore. give discharge therefor or enforce payment thereon may be acquired against him by any holder. the liability is determined under Section 66. Once drawee accepts. thus. Consequently. By certification the drawee undertakes to pay the check but does not accept it. being primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard of conduct. VNITAS. he is not liable thereon. the bank debits from drawers account and the drawer becomes liable to pay the bank. therefore. the check becomes a promissory note of the drawee because it makes an undertaking to pay the instrument. the former may be held liable to the latter bank. Until the drawee accepts. and therefore. We do not think that he who accepts a forged signature of a payee deserves that preferred treatment. and. But there can be one created if the drawee bank certified the check. if ever. The only defense of the drawer. he admitted the genuineness of the signature of the drawer. since his signature is inoperative. The drawee can recover the amount paid out by him since he makes no warranty as to the genuineness of any indorsement. Forgery of the drawer’s signature is not a defense available to the drawee bank. This rule is absolutely necessary to the circulation of drafts and checks and is based upon the 34 LEX SOCIETAS VERITAS. It is his neglect or error in accepting the forger’s signature which occasions the loss. But should he fail to act promptly. Sebastian: By acceptance. The drawee so paying is considered as being constructively negligent. Should he do so his right of recovery will not be affected by his subsequent knowledge of the forgery. VIRTVS. Likewise. Sebastian: Payee cannot recover from the drawee because there is no privity of contract. However. Campos: No exception lies in the case of the drawee’s acceptance or payment of a genuine bill where only an indorsement has been forged. he is not liable for breach of contract with drawer because the instruction was pay to bearer. Campos: Where the drawer’s signature is forged on a bill or check. The collecting bank. not available against a holder in due course.
Drawee does not have a liability to pay but he paid. Payment is the final act which extinguishes a bill. the drawee cannot recover from a holder in due course not chargeable with any act or negligence or disregard of duty. No one would dare handle it. In the case of the payment of a forged check even without former acceptance.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. he is estopped from raising forgery as a defense. An overdraft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank. did not close the transaction but it was possible at an indefinite time in the future to reopen the matter and recover the money. could not recover the money paid out on either bill. on all the principles of estoppel. “Acceptance” and “payment” are essentially different things. Acceptance is a promise to pay in the future and continues the life of the bill. each of which bore the forged signature of the drawer. it has accepted the check and therefore admitted the genuineness of the drawer’s signature. Sebastian: In this case. Agbayani: Where the drawee bank encashed a check in which the drawer’s signature is forged which shows marked variations from the genuine signature of the supposed drawer. The basis is that by paying the check. and should return to the drawer what it has debited the latter’s account. The test which determines whether a recover may be had is whether the defendant in equity and good conscience is entitled to retain the money to which the plaintiff asserts claim. if the paper proved to have been forged. for the former is a promise to perform an act. it is not only a question of payment under mistake but payment in neglect of duty which the commercial law places upon him. PNB v. It is expected to use reasonable prudence in accepting and cashing a check presented to it. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. we should focus on which party should the effect of negligence fall. through its payment by the drawee. said bank is negligent. by his own fault or negligence. Campos: The drawee who had paid an accepted bill as well as a non-accepted bill. and the result of his negligence must rest upon him. VNITAS. If the paper comes to the opportunity of ascertaining its character. Conditions would be intolerable if the retiring of commercial paper. If the stop order comes after the bank has certified or accepted the check. Campos: The responsibility of the drawee who pays a forged check. is absolute only in favor of one who has not. by paying the check. The basis of the general rule is not that the drawee is precluded from setting up forgery because. the drawee is presumed negligent or deemed constructively negligent. . he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the acceptance or certification. the loss must be borne by the one whose negligence was the proximate cause of the loss or who put it into the power of the third person to perpetrate the wrong. Actual payment of the amount of a check implies not only an assent to said order of the drawer and recognition of the drawee’s obligation to pay the aforementioned sum. the bank is under legal duty to pay the holder and will not be liable to the drawer for doing so. pronounces it valid and pays it. the negligence of the drawer was the proximate cause of the forgery. Quimpo – The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. But the payment of a forged check does not include or imply its acceptance in the sense that this word is used in Section 62. The drawee is bound to know the signature of the drawer and must therefore bear the loss in case it turns out to be forged. for the genuineness of the drawer’s signature. petitioner was negligent in encashing said forged check without carefully examining the signature which shows marked variation from the genuine signature of private respondent. Sebastian: Drawee here is a party after the forgery. National Bank v National City Bank – Agbayani: If the drawee accepts the paper after seeing it and then permits it to go into circulation as genuine. has been extended by the courts to cover the drawee of a bill who honors an overdraft. There is nothing inequitable in such rule. and it would pass out of use regardless of its convenience or necessity as a part of the life of business. It is also a general rule that the failure of the payor to exercise ordinary care to avoid mistake will not as a matter of law defeat his recovery. VIRTVS. Sebastian: In this case. but also. Obviously. and thus. When one or two innocent persons must suffer by the wrongful act of a third person. a compliance with such obligation. contributed to the success of the fraud or to mislead the drawee. The rule creating an exception to the doctrine of payment under mistake. whereas the latter is the actual performance thereof. 35 LEX SOCIETAS VERITAS.
generally. or to the discovery of forgeries therein because a depositor is not required and may not be expected to know the signatures of the payee and of the various indorsers. Campos: The bank is freed from liability only if the proximate cause of its wrongful payment is the negligence of the drawer. require one who first negotiatest the paper to take some precautions to learn whether or not it is genuine. Campos: If due to the drawer’s negligence. unreasonable delay in giving notice will bar recovery by the drawer from the drawee bank. he should not be permitted to retain the proceeds of the draft from the drawee whose sole fault was that he did not discover the forgery before he paid the draft. of the person drawing it. the same necessities of business which require the drawee to know the signature of the drawer. even if the cancelled checks were examined by him. or worse. VIRTVS. it must be considered as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. Therefore. are precluded from setting up the defense of forgery and may be held liable under their warranties or liabilities stated in Sections 65 or 66. through indifference. LEX SOCIETAS VERITAS. the examination would not disclose forgery. Likewise. Negligence of Drawer in Forgery of Indorsement of a Check Agbayani: But with a few possible exceptions the courts are generally agreed that the depositor’s duty does not extend to the examination and verification of the genuineness of the indorsements on the checks. and is in a better situation to judge the genuineness of the paper than are indorsees. Qualifications to the Foregoing Rules Agbayani: It must be remembered that the foregoing rules are qualified by the rules precluding the setting up the defense of forgery by warranty or by estoppel. and not discovering or reporting them promptly. Payee’s Negligence in Forgery of Drawer’s Signature Agbayani: The payee in a check or draft may be supposed to have knowledge of the circumstances under which it is drawn and. and if it pays a forged check. but not otherwise. 36 . that duty of verifying the genuiness of the indorsements rests on the depository cashing the check.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW San Carlos Milling v BPI – Agbayani: A bank is bound to know the signature of its customers. and the depositor may rely upon its proper performance of this duty at least in the absence of evidence that he was familiar with the signature of the payee. Liability of Party Negotiating After Forgery Agbayani: Parties negotiating by indorsement and delivery. then the drawee may properly charge the amount against the drawer’s account. assists the forger in committing the fraud. And there is a tendency to place a greater responsibility upon him and he is much more likely to be required to return the proceeds of paper than are the indorsees. Negligence of Drawer in Forgery of Indorsement Other than a Check Agbayani: The negligence of drawers in making possible forged indorsements by their swindling clerks. barred recovery from the drawee bank by the drawers. and if he. Without a doubt. the forgery is not discovered until it is too late for the bank to recover from the holder or the forger. and prevent his recovering money paid to an innocent holder of the paper. VNITAS. or by mere delivery subsequent to the forgery. as where there is negligence in delivery.
Endorser is liable to Holder. Collecting Bank Rule Drawee Bank may recover from Collecting Bank because Collecting Bank had no authority to pay the proceeds of the check to Forger. Since an endorser’s signature is forged. i. A forged signature is totally inoperative. the endorsers may be held liable on their statutory warranties. Forgery of Payee’s Signature Drawer vs. The claim of Payee against Drawer remains unpaid. A forged signature is wholly inoperative. Drawer instructed Drawee Bank to pay Payee and no one else.e. is not a party to the transaction. Drawer is not liable for the value of the check. Drawee Bank did not obey the instruction. he must discover the forgery within a reasonable period of time. The maker. Drawee Rule Reason Drawee Bank suffers the loss and must reimburse the account of Drawer. the transfer of title to a subsequent endorsee is inoperative. Drawee vs. However. Collecting Bank Rule Reasons Drawer has no cause of action against Collecting Bank. Reason By accepting the check. Forgery of Indorser’s Signature Note Payable to Order Rule Reason Endorser whose signature is forged and all prior parties. FORGERY OF BILLS OF EXCHANGE Forgery of Drawer’s Signature Bill Accepted Rule Drawee/Acceptor must pay the check. If the note is negotiated nevertheless by subsequent endorsement and delivery. The duly to observe due care is owed by the collecting bank to the payee. Collecting Bank has the legal duty to ascertain that the payee’s endorsement is genuine. Drawer Rule Reason Payee may recover from Drawer. VNITAS. whose signature is forged. the forgery must not have been caused by his own negligence. VIRTVS. There is no privity of contract between drawer and collecting bank. Reason Drawee Bank should have detected the forgery of Drawer’s signature because Drawer is its client. Bill Not Accepted Rule Drawee Bank cannot recover the proceeds of the check from Holder if he is a holder in due course. 37 .NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW SUMMARY OF RIGHTS AND LIABILITIES IN RELATION TO FORGERY FORGERY OF PROMISSORY NOTES Forgery of Maker’s Signature Rule Reason Exception Caveat The maker is not liable to any holder. Payee vs. LEX SOCIETAS VERITAS. Also. an acceptor undertakes to pay the instrument in accordance with the tenor of his acceptance.. The signature of the endorser and the delivery of the note are necessary to transfer title to the note. An endorser is liable under his warranties in Section 66. If Payee is not paid. he must not be guilty of negligence. including the maker are not liable to any holder. He may be made liable if the doctrine of estoppel finds application. if Drawee Bank dishonored the check Drawer generally enjoys protection against forgery. Reason Drawer vs.
because a valid and intentional delivery of the note is presumed by law as regards a holder in due course. Section 14 would apply. Forger Rule C (Collecting Bank) has a cause of action against Y (forger) for the recovery of the proceeds of the check.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Note Payable to Bearer Rule Endorser whose endorsement is forged and all prior parties including the maker ARE LIABLE TO A HOLDER IN DUE COURSE.e. Exception Qualificati on Payee vs. Reason (f) Payee vs. Forger holds the proceeds of the check in trust for Payee. At best. Reason LEX SOCIETAS VERITAS. There is no privity of contract between the payee and the drawee. VNITAS. then Section 15 will apply and it will not be valid in the hands of any holder unless completed and negotiated with authority.. If the note is incomplete. A forged endorsement is totally inoperative. which amount must be reimbursed by C to either the Payee or the Drawee. But if upon completion the note is negotiated to a holder in due course. 38 . Collecting Bank vs. VIRTVS. and Collecting Bank therefore holds the funds in trust for the payee. Collecting Bank’s collection of the proceeds of the check amounts to a conversion – i. Forger is not entitled to the proceeds of the check. Recipient of Payment Rule Reason Payee may recover from Forger. the note is valid and effectual for all purposes in his hands and he may enforce the note as if it was strictly filled up in accordance with the authority given. the unauthorized assumption and exercise of rights of ownership over goods and chattels belonging to another. Drawee Rule Reason Payee has no cause of action against Drawee Bank unless the check has been certified or accepted by the latter. provided the note is mechanically complete before the forgery. C was prejudiced by the withdrawal of funds by Y. Payee vs. If the note is incomplete and undelivered. Collecting Bank Rule Reason Payee may recover from the Collecting Bank. Collecting Bank’s collection of the proceeds of the check is unlawful. Section 16 is a defense available only against a holder who is not a holder in due course. The only defense available to resist the claim is want of delivery of a mechanically complete instrument under Section 16. The endorsement is not necessary to transfer title. in which case the possessor of the note must complete the instrument strictly in accordance with the authority given and within a reasonable time. and within a reasonable period of time.
(3) duress amounting to forgery and (4) fraudulent impersonation. The instrument may only be enforced up to the original tenor of the instrument. (f) Or which adds a place of payment where no place of payment is specified. but the cases that have been arisen under the Negotiable Instruments Law have continued to 39 LEX SOCIETAS VERITAS. . Both forgery and alteration are changes made to an instrument. Spoilation or a material alteration by a stranger. making the instrument payable to alternative payees. The enumeration therein is exclusive. What constitutes a material alteration. there is no material alteration. or assented to the alteration and subsequent indorsers. Material alteration is a personal defense to deny the liability according to the original tenor of the instrument. The instrument has nolegal existence prior to such issuance. VIRTVS. It may consist in erasing the original payee’s name and writing the name of another. Any other alteration not mentioned under Sec. Changing the payee’s name is obviously a material alteration. WHAT CONSTITUTES MATERIAL ALTERATION Agbayani: An alteration is said to be material if it alters the effect of the instrument. The instrument does not becomes wholly inoperative. id not avoid the instrument under common law. ALTERATION The forms of alteration are defined under Section 125. If the payee’s name is altered after the issunace. 125.Where a negotiable instrument is materially altered without the assent of all parties liable thereon. . 125 would be nonmaterial and would not affect the liability of any prior party on the instrument. except as against a party who has himself made. A holder in due course may still enforce the instrument according to Forgery is a real defense and parties prior to the forgery cannot be held liable. and by replacing it with “or”. The instrument is avoided except against the party who has himself made. Section 124 does not distinguish. 124. is not a material alteration because it does not change the legal effect of the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW ALTERATION Sec. Sebastian: Material alteration is any change in the details of the instrument that results in a change in the effect of such instrument. effect of. either for principal or interest. (e) The medium or currency in which payment is to be made. the forged signature becomes wholly inoperative. . The addition of a name. the alteration may consist in erasing the word “and” between the names of two payees. its original tenor. or any other change or addition which alters the effect of the instrument in any respect. is a material alteration. DEFINITION Campos: A material alteration changes the contract of the parties. But where the erasure is made before the issuance by the maker or drawer. (2) fraud in factum. Where the instrument is payable to joint payees. Campos: Section 125 specifies and defines what constitutes a material alteration. If the signature is altered. provided that he was not a party to the alteration. (b) The sum payable. is a material alteration. VNITAS. it is no longer alteration. no purchaser. Thus. authorized or assented to the alteration and subsequent indorsers. though innocent. the addition of words implied the by law. there being no other signatures at such time. it is avoided. either as a primary party or as second party. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration. It is a real defense when relied to deny liability according to the altered terms. or changing marginal figures to make them conform to the sum expressed in words. can derive title as regards the payee and prior parties. (c) The time or place of payment: (d) The number or the relations of the parties. Alteration of instrument. As to effect. authorized. Sec. he may enforce payment thereof according to its original tenor.Any alteration which changes: (a) The date. FORGERY The kinds of forgery are (1) mechanical falsification.
making it possible for another to alter the amount by inserting words and figures therein. The drawee bank can likewise charge the drawer’s account with the original amount. the acceptor engages to pay according to the tenor of his acceptance and is therefore estopped from recovering. one to whom a check is negotiated is under not duty to take it. However. The opposite view however asserts that under Section 62. Where the negligence of the drawer consists in failing to discover alterations previously made. Since Section 124 made no distinction. The instrument is not avoided as against: 1) a party who has made the alteration. otherwise it would be irregular and no holder thereof could be a holder in due course. A subsequent indorser is excepted from this rule because by the indorsement he warrants. can it recover back from the recipient-holder in due course the difference between the original and altered amount? Similarly. he cannot recover anything and the drawee bank cannot charge any part of the amount against the drawer’s account. unless they authorized or consented to the alteration. allows recovery by the drawee bank on the ground that the amount paid is under mistake and under Section 124. VNITAS. General rule denies the drawee bank’s right to charge against the drawer’s account the amount of an altered check. Where the date of payment is changed. Where the interest rate is altered. in a series of alterations of several checks. 40 LEX SOCIETAS VERITAS. the holder in due course may recover the original sum. If the holder is not one in due course. On the other hand. and whether it proves beneficial or prejudicial to the interests of prior parties. Material alteration is therefore a personal defense when used to deny liability according to the original tenor of the instrument. is guilty of materially altering the instrument because the original contractual relations of the original parties are changed as to the warranties made. even if the instrument was already made a bearer instrument by a blank indorsement. Thus. provided the original meaning can be ascertained. the rule is similar to that applicable to a forged check. that the instrument is in all what it purports to be and that it was valid and subsisting at the time of his indorsement. Suppose a drawee bank has cashed a check on which the amount has been altered. A holder in due course can enforce the instrument according to its original tenor regardless of whether the alteration was innocent or fraudulent because the law does not make any distinction. Some courts refuse to apply such estoppel against the drawer in favor of a holder in due course. the drawer cannot complain should the bank pay and charge the amount as altered against his account. the drawer’s negligence. The basis given for the difference lies in the fact that since a bank has the duty of honoring checks drawn against it by its depositors. the instrument will be avoided whether the material alteration was made with or without fraudulent intent. . Thus. VIRTVS. Sebastian: Material alterations are changes in the contractual relationship of the parties. On the other hand. the holder in due course can recover the principal sum with the original rate of interest. Campos: A material alteration avoids the instrument and discharges all parties. before or after alteration. The Uniform Commercial Code rejects this view and provides that the drawer is liable to a holder in due course for the terms as altered. However. EFFECTS OF MATERIAL ALTERATION Agabayani: Where a negotiable instrument is materially altered. It was his negligence which proximately caused its payment. the latter can charge the subsequent checks against the negligent drawer’s account. in spite of the drawer’s negli gence is allowed to recover only the original amount. who. which was the common law rule. one who altered the note making it a bearer instrument. The drawer therefore owes him no duty of diligence. a holder in due course may enforce the altered instrument according to its original tenor. 2) a party who authorizes or assented to the alteration. where the drawer of a check who in filling it out negligently leaves spaces. the original date of maturity controls in determining whether or not a holder is a holder in due course. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration. a holder in due course can recover only according to the original amount and not the altered tenor of the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW apply the common law rule – the spoliation does not affect the instrument. Thus. he may enforce payment thereof according to its original tenor. This presupposes that the alteration is not apparent on the face of the instrument. the law makes certain exceptions. it is avoided in the hands of one who is not a holder in due course as against any prior party who has not assented to the alteration. However. can it recover back the money it paid? The prevailing view. the drawer owes a corresponding duty to his bank to fill in his checks carefully. may estop him from setting up such alteration as against an innocent drawee bank who has paid the check. if the drawee bank has paid a check on which the payee’s name was changed. It is a real defense when relied on to deny liability according to altered terms. among other things. and 3) subsequent indorsers. or by a diligent observation of his record. and could thus have prevented the drawee bank from subsequently cashing other altered checks. Where the alteration is of the amount. there is a conflict of opinion as to whether such estoppel can apply in favor of a holder in due course. if the drawer could have discovered the alterations by a comparison between his cancelled checks and his check stubs.
The Circular has since been amended. There would be absolutely nothing to warn it about the defect. The instrument cannot be voided because Section 124 says that it is not avoided against subsequent holders. The basis of this rule is that a s between the holder and the drawee bank. Furthermore. It would be highly impractical to require the bank to check with each drawer the correctness of the terms of the check he has issued. by his acceptance in favor of the legal holder thereof. The words “according to the tenor of his acceptance” should thus be construed to mean the kind of acceptance – whether qualified.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW The arguments set forth by the majority view find strong support in the legal provisions. It will be recalled that the rule in forgery of the drawer’s signature is that the drawee bank cannot recover from the holder in whose favor it cashed such check. or any other part of the bill. and does not admit the genuineness of the indorsements. There is however one important and desirable effect of the minority view cannot be ignored – denying recovery to the drawee bank would tend to give stability to checks. 132 as the “signification of the drawee of his assent to the order of the drawer. even in the cases where his signature is admittedly genuine and his deposit is sufficient to cover the check. Section 124 avoids the instrument “except as against a party who has himself made. It is for this reason that Section 62 incorporates the acceptor’s warranty of the genuineness of the drawer’s signature. because of Section 124. is sustained by an unbroken current of authority. 62 the drawee bank by accepting or paying a check admits the genuineness of the drawer’s signature. Then. still the drawee would be estopped from recovering because under Sec. 62 should be related to this definition. the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted. or of any other person whose name appears upon it. Payment by the drawee bank of the altered check would therefore indeed be a mistake. and should be effective only to the extent of the original and not the altered tenor of the instrument.” An acceptor has not assented to the alteration because “assent” can only mean assent with knowledge of the facts. If the altreation is not apparent on the face of the check. Neither is he a subsequent indorser. 41 LEX SOCIETAS VERITAS. or general. Although it is bound to know the drawer’s signature. Acceptance is defined by Sec. When the bill is presented for acceptance. A drawee bank is bound to know the signature of its depositors. 124 expressly provides that a holder in due course can recover only according to the original tenor of the instrument. . it seems that the latter is in a better financial position to shoulder the loss. whether of the drawee of the same bill. the latter is in much better position to know the signature of the drawee since the latter is its customer. the justification for this rule is that payment on a check must at some time or another become final. Alteration of the payee’s name or of any other material terms of the check is an entirely different matter. In like manner. acceptance is definitely associated with the order of the drawer and not with what appears to be the drawer’s order after the alteration. it has no excuse for later trying to recover from the collecting bank. “Assent to the order of the drawer” means assent to the actual not the apparent order of the drawer. No mention of Section 62 or of Section 124 or of any provision of the Negotiable Instruments Law was made. the drawee banks would not disvoer the alteration until it is informed by the drawer after the latter has received the cancelled check.” Sec. Furthermore. there can be subsequent parties after the alteration that had nothing to do with the alteration. But would it be possible for them to do this with all checks drawn daily against them within the short period allowed by the clearing house rule referred to in the case? An acceptor of a bill of exchange. only admits the genuineness of the signature of the drawer. there can be no similar basis for holding the drawee bank responsible for non-apparent alterations. as between the holder and the drawee bank. the check looks regular on its face. authorized or assented to the alteration and subsequent indorsers. and thus all it would do and should be expected to do is to check the sufficiency of the drawer’s funds and the genuineness of his signature. As earlier stated. The drawee bank was denied recovery based on a Central Bank Circular regulating clearing of checks and limiting the period within which a drawee bank may return a spurious check. Our Supreme Court has in effect come to the same conclusion as the minority view but on an entirely different basis. Meaning. it would have to recredit the drawer with the amount of the check. and he affirms its genuineness by giving credit to the bill. it would be unfair to burden it with knowledge of the drawer’s handwriting. so when it honors checks on which the drawer-depositor’s signature is forged. Recovery of the the difference between the original and the altered amount from a holder in due course may be made. And many times checks are not filled in by hand but by typewriter or in print. In the case of the altered check however. Section 139 in defining general and qualified acceptance provides: “A general acceptance assents without qualification to the order of the drawer. Yet this is in effect the burden which the HSBC case places on drawee banks. When it receives an altered check through the clearing house. VNITAS. by acceptance. Sebastian: Parties prior to alterations cannot be made liable on the altered instrument. The drawee bank which has paid an altered check to a collecting bank bears the loss only if it is itself negligent in failing to return the check promptly after discovery. The final and perhaps strongest legal argument is that Sec. And even in the case where the forgery is so skillfully done that the drawee could not have detected it.” In both these provisions. Any other rule would affect the stability of commercial transactions. since it can and probably should insure itself against such eventualities. A qualified acceptance in express terms varies the effect of the bill as drawn. VIRTVS.
But as to parties subsequent. the bank can justify a payment on the depositor’s account only upon the actual direction of the depositor. the instrument is avoided as to parties prior to the alteration and thereby released from liability. Critten v Chemical National Bank – Campos: The relation existing between a bank and a depositor being that of debtor and creditor. by careless execution of the instrument. upon presentation. Agbayani: Paying bank must clear check with drawee bank before paying. The Court said that it was the duty of the bank to verify the check. and the instrument filled up with a larger amount of different terms than those which it bore at the time he signed it. owes to his bank the duty to exercise care in drawing his checks in order to avoid possible loss. 42 LEX SOCIETAS VERITAS. VNITAS. Banco Atlantico was not a holder in due course as defined in Section 52 because it was obvious that it had knowledge of the infirmity or defect of the check. if left alone to our judgment thereof. The rule is settled that the depositor owes his bank the duty of a reasonable verification of the returned checks. the depositor. left room for any alteration to be made. it may not even enforce payment according to the instrument’s original tenor. The collecting bank was not a holder in due course becase it was obvious that it had knowledge of the infirmity or defect of the check. he will be liable upon it as altered to any bona fide holder without notice. the issuing of the note could in no sense be considered the proximate cause of the loss. It would prevent the successful commission of continuous frauds by exposing the first forgeries. It was the negligence of Banco Atlantico (collecting bank) that gave rise to the loss. Banco Atlantico v Auditor General – Payment of checks by foreign bank to payee without previously clearing said checks by foreign bank to payee without previously clearing said checks with the drawee bank is contrary to normal and ordinary banking practice especially where drawee bank is a foreign bank and the amounts involved are large and bars recovery. Its negligence were manifested by paying cash to a check which was not cleared by the drawee bank. or by some affirmative act of negligence has facilitated the commission of a fraud by those into whose hands the check may come. the possibility that it might be raised or altered by the willful fraud or forgery of another was too remote to afford the basis of an action either in tort or in contract.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW When you change the contractual relationship of the parties. and the opportunity which he has afforded has been embraced. . usually with little opportunity for investigation. they already saw the alteration and thus it cannot be avoided as to them. by analogy. either by insertion or erasure. Campos: That duty is so to fill up his check as that when it leaves his hands as a signed document. to pay the check of its depositor. he should bear the loss. and we should so take it. Furthermore. or subject itself to the risk of damages. The language of the statute and its obvious purpose and intent are too manifest to leave room for cavil or doubt as to its meaning. This distinction is strongly emphasized because one who purchases a note is under no manner of compulsion and acts purely at his option or election. that where a negotiable note was delivered in completed form. and that in such case. In the hands of such holder a negotiable instrument may be enforced if a sum in excess of that authorized by the maker is inserted in a bank left for the amount of the instrument. Recovery could only be had against the defendant for the original face value of the draft. Sebastian: This case boils down to the doctrine of estoppel by negligence. because it was not the contract of the maker of the instrument. without defacing it or exciting the suspicion of a careful man. Sebastian: In this case. Since Banco Atlantico was not a holder in due course. it shall be properly and fully filled up so that tampering with its contents or filling in a sum different from what the customer meant it to cover shall be prevented. which requires prompt discharge. This case was covered by the law of the State of California which says that the holder in due course may only enforce an instrument only up to the original tenor of the instrument. When a drawer of a bill or the maker of a note has himself. on the other hand. Foutch v Alexandria Bank – We call attention to a distinction of essential importance recognized generally between bank checks and negotiable instruments of the note and bill class. under which circumstances it is not inappropriate to apply. Sebastian: Since Foutch was negligent. the maker was not held liable because the check was delivered complete in all its part. it would have been able to at least recover the original amount of the check. VIRTVS. the caveat emptor rule. that suit as upon a contract should not be maintained upon the note in its forged and altered state. whereas the Bank is under a direct and peculiar delicate obligation. The question of negligence cannot arise unless the depositor has in drawing his check left blanks unfilled. Saving Bank of Richmond v National Bank of Goldsboro – Campos: The liability against the drawer of the draft as forged exists only for the original amount thereof. Had the collecting bank been a holder in due course.
therefore. 24-HOUR CLEARING RULE Campos: Under Section 1 of the Circular. Its remedy is not against the collecting bank. Agbayani: When drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour clearing period. if the drawer discovers the alteration or forged indorsement say. to call the attention of the collecting bank to the alteration of the check in question until after the lapse of nine days. such an indorsement must be read together with the 24-hour regulations on clearing House Operations of the Central Bank. such as when he leaves spaces on the check which would allow the fraudulent insertion of additional numerals in the amount appearing thereon. which would be 10 years since the relationship between drawee bank and collecting bank would normally be evidenced by some written document. The reason for this is when the bill is presented for acceptance the acceptor looks to the handwriting of the drawer with which he is presumed to be acquainted. but was cleared by the drawee bank. Sebastian: Regardless of forgery/alteration or lack thereof. but against the party responsible for the alteration. he should notify and return the defective check to the collecting bank not later than 4pm of the next business day after it receives notice of the defect. the check was not returned to the collecting bank in accordance with the 24-hour clearing house period. the collecting bank or last indorser. bears the loss. VIRTVS. by his acceptance in favor of the legal holder thereof. the drawee bank can still return them even after 4:00 pm of the next day provided it does so within 24 hours from its discovery of the alteration or forged indorsement. This is irreversible. the clearing is conducted at 4:00 pm every business day. LEX SOCIETAS VERITAS. 43 . Thus. As to these. Agbayani: Banks are bound by 24-hour clearing house rule. Thus. Therefore. the collecting bank or last indorser. whether of the drawee of the same bill. negates whatever right it might have against the collecting bank. Campos: It is true that when an indorsement is forged. Once that 24-hour period is over. But the unqualified indorsement of the collecting bank on the check should be read together with the 24-hour regulation on clearing house operation. and must notify collecting banks within 24 hours of alteration of checks. Otherwise. VNITAS. an exception is made. as a general rule. As to the liability of the collecting bank on its clearing house endorsement. But as to altered checks and checks with forged indorsements. But the acceptor cannot be presumed to have such knowledge of the other facts upon which the rights of the holder may depend. the remedy of the drawee bank that negligently clears a forged and/or altered check for payment is against the party responsible for the forgery or alteration. Failure of the drawee bank. when a check is deposited and the drawee bank does not act within 24 hours. Marine National Bank v National City Bank – An acceptor of a bill of exchange by acceptance only admits to the genuineness of the signatures of the drawer. When an indorsement is forged. bears the loss. when the drawee bank fails to return a forged or altered check to the collecting bank within 24-hour clearing period. one year after the check’s clearing. when the drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour clearing period. Republic v CA – The 24-hour clearing house rule is a valid rule applicable to commercial banks. Unless an alteration is attributable to the fault or negligence of the drawer himself. the collecting bank will not be liable to return the amount to the drawee bank. The liability for the damages are directly attributable to the negligence that caused it.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: This case modifies the whole theory of negligence. as a general rule. and he affirms its genuineness by giving credit to the bill. the liability on such an indorsement has ceased. or of any other person whose name appears upon it. Metropolitan Bank v HSBC – In this case. or any other part of the bill. Thus. under banking laws. But the unqualified indorsement of the collecting bank on the check should be read together with the 24-hour regulation on clearing house operation. but in no case may return be made beyond the usual prescriptive period prescribed by law. collecting bank is absolved for liability. the drawee bank is considered to have conclusively honored the check. the collecting bank is absolved from liability. defective items must be returned by the drawee bank not later than 4:00 pm the next business day after the questioned check was presented for clearance. and does not admit the genuineness of the indorsements. the collecting bank is absolved from liability.
for consideration is imported and presumed from the fact that it is a negotiable instrument. The burden of proof is on the challenger that there was no valuable consideration. to do or not to do. in favor of the party who makes the contract. Agbayani: The presumption is disputable in the sense that the said presumption is satisfactory if not contradicted. it is considered as a manager’s check. An antecedent or pre-existing debt constitutes value. 26. Sebastian: In Negotiable Instruments Law. In onerous contracts the cause is understood to be. . Civil Code) Agabayani: Consideration means inducement to a contract that is. 25. Thus. who accepted the instrument because maker/drawer received value. and is deemed such whether the instrument is payable on demand or at a future time. Sebastian: The existence of consideration is only a prima facie presumption. in remuneratory ones. the holder is deemed a holder for value in respect to all parties who become such prior to that time. If the instrument was given as a gift. while there may not be any value that you paid for them. it is unnecessary to aver or prove consideration. . Therefore. price or impelling influence which induces a contracting party to enter into a contract. the cause. It should be valuable and has monetary equivalent. This gift check. the prestation or promise of a thing or service by the other. In writing and issuing a negotiable instrument. negotiation and acceptance of a negotiable instrument is not an exception to the law that there must be consideration. Presumption of consideration. it is unlikely to be dishonored because the check was drawn by the bank against itself. Consideration should be sufficient to support the contract. in an action based upon an instrument. and in contracts of pure beneficence. VIRTVS. Consideration for an instrument can be insufficient because Inadequacy does not create a defect of the contract. and (3) indorser. consideration is defined in Section.Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. inadequacy of consideration does not create a defect in the contract. 25. . such as the maker or indorser. PRESUMPTION OF CONSIDERATION AND HOW REBUTTED Sec. Those that are purely emotional cannot support a simple contract. This is usually the person who is being held liable under the instrument. who is presumed to have received value. One can deny liability under a check if it was issued without valuable consideration. Value. VNITAS. But if the gift check was issued by a bank. Persons whose signature is on the instrument are the (1) maker/drawer. Lesion is not a ground to set it aside except in Article 1361 of the Civil Code. This means that the person claiming the that a payee or an indorsee did not give valuable consideration for an instrument must prove that there really was no valuable consideration given.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW CONSIDERATION OF NEGOTIABLE INSTRUMENTS Sebastian: Consideration in the Civil Code is the same in Negotiable Instruments Law. (2) drawee. the instrument was not validly issued because there was no consideration. Mere introduction of the instrument sued on in evidence prima facie entitles the plaintiff of a recovery and unless it is overcome by evidence produced by the defendant the plaintiff is entitled to recover. what constitutes. . (Art. HOLDER FOR VALUE Sec. Valuable consideration means an obligation to give. And every contract must be supported by a valuable consideration. the party who is obligated under the gift check is the issuing bank itself. Liberality as a general rule cannot support a civil contract because consideration is measurable in money. Agbayani: One who gives valuable consideration for an instrument issued or negotiated to him is a holder for value. who also accepted the instrument for the same reason as the drawee. 1350. WHAT CONSTITUTES “VALUE” Sec. and every person whose signature appears thereon to have become a party thereto for value.Where value has at any time been given for the instrument. can the issuing bank cannot raise the defense of want of consideration when it is encahsed becaudr it received full value for the amount of the check when it was issued. motive. the mere liberality of the benefactor. when delivered. 24.Value is any consideration sufficient to support a simple contract. the service or benefit which is remunerated. consideration is presumed. for each contracting party. But the term is not limited to the one who 44 LEX SOCIETAS VERITAS. Other than that. What constitutes holder for value. If the gift check is not a personal check but one issued by the bank. The issuance.
neither can C recover from A. There is a failure of consideration. VIRTVS. there can be no recovery on the note. he is lending the bank. Because of Article 1980 of the Civil Code. . 28. B makes a promissory note payable to A as advance payment thereof. when a depositor deposit money in the bank. Agbayani: The reason for this seems to be that the holder who has a lien on the instrument is a holder in due course only up to the extent of his lien. there is consideration when you deposit the check (i. there is a partial failure of consideration which may be set up as a defense pro tanto by B against A or a holder not in due course (i. C can recover against A . This is important because the consideration for the negotiation of the note does not have to be paid simultaneously with the delivery of the note. If B negotiates the note to C. Effect of want of consideration. If C were ignorant of such defense and is a holder in due course. WANT OF CONSIDERATION VS FAILURE OF CONSIDERATION Sec. the bank did not become holder for value because when it received the check. the bank who receives deposit becomes owner of the money. . The person who has a lien is only a holder for value up to the extent of his lien because he was never meant to be the owner of the instrument. Under these rules. It refers also to any holder of an instrument for which value has been given at any time. Sebastian: Person who has a lien is considered to be a holder for value to the extent of his lien over the instrument. However. Absence of consideration means total lack of consideration. Partial failure of consideration means simply that part of the consideration did not materialize.e. Where the holder has a lien on the instrument arising either from contract or by implication of law. If the bank and depositer is related within the context of borrower and lender. When lien on instrument constitutes holder for value. Sebastian: When a holder deposits and indorses a check. a holder in due course.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW is known to have given valuable consideration for the instrument he holds.Absence or failure of consideration is a matter of defense as against any person not a holder in due course. It is also consistent with the provision that the validity and negotiable character of an instrument is not affected by the fact that it does not specify that any value has been given therefor. there is absence of consideration. the relationship between depositor and bank. so that A cannot recover from B. In consideration of this merchandise. the bank promises that upon demand. C can recover from A. However. The bank is the borrower and the depositor is the lender.e. Thus. he is a for value for all parties. he is deemed a holder for value to the extent of his lien. it is governed by Article 1980 of Civil Code. 27. he can still collect the whole amount of the instrument if there are no defenses at all. Failure of consideration means that something was agreed upon as consideration for a contract but for some reason the consideration did not materialize. A fails to deliver the merchandise. because A’s defense of absence of consideration is personal. whether the failure is an ascertained and liquidated amount or otherwise. In exchange. to do or to perform the consideration agreed upon implies that the giving of valuable consideration was contemplated but that it failed to pass Remedies are (1) rescission of the instrument as to value that was failed to receive or (2) specific performance Campos: This provision reiterates the rule laid down by Section 24 that every instrument is deemed prima facie to have been issued for a valuable consideration. A makes a promissory note payable to B as a gift. B is not liable to the extent of the price of the undelivered portion). it did not have to pay for the check. and partial failure of consideration is a defense pro tanto. the promise of the bank to pay you back). Lien Holder Sec. if A delivered part of the merchandise and failed to deliver the rest. this is wrong. For example. This is why all deposits are mutuum. Thus. a holder who has a lien on the instrument can only up to the extent of his lien if there are personal defenses (i. who knew that A failed to deliver. Once a holder pay for consideration for an instrument. the holder is holder for value.e. 45 LEX SOCIETAS VERITAS. Agbayani: Lack of Consideration total lack of any valid consideration embraces transactions where no consideration was intended to pass remedy is to annul the instrument Failure of Consideration neglect or failure of one of the parties to give. For example. While checks are negotiable instrument. But if B negotiates it to C. lack of consideration) against him but he cannot collect at all if there are real defenses available against him. the defendant has the burden of proving that there was no consideration for the instrument. in the Philippines. A enters into a contract to sell certain merchandise to B. VNITAS. When instrument is received and value was given for it. In the example above. it will pay the amount of your deposit. As between A and B.
at the time of taking the instrument. there was intent to consummate a contract and there was an instrument issued for the fulfillment of the contract. Sebastian: There was no consideration in this case because the check was meant to be a gift. Even if the note said that it was issued for valuable consideration. In the hands of a holder in due course therefore. there was no actual finding of failure of consideration and this was only assumed. Campos: Section 28 goes farther for it in effect provides that absence or failure of consideration is a personal defense available only against holders not in due course. There was only failure of consideration in this case. indorsed the same for purpose of lending their names and credit to the brewing company. (2) he must not receive value therefor. notwithstanding such holder.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: In lack of consideration. VIRTVS. can be interposed as a defense only against persons not holders in due course but not against holders in due course. there is no considration at all. acceptor. there was meant to be a consideration but it was never fulfilled. practically all accommodation notes are so drawn as to either express or imply a valuable consideration prima facie. drawer. as accommodation parties and indorsers of the notes in question. The 46 LEX SOCIETAS VERITAS. it was proven that there was no valuable consideration other than to protect the person from the claims of other persons. the instrument was void for lack of vlauable consideration. before its maturity. Such a person is liable on the instrument to a holder for value. Elgin National Bank v Goecke – Plaintiffs in error. An accommodation note showing on the face in express terms that it has been issued for no consideration would be of little or not use to the payee. An indorsee of a negotiable note who has taken it. the presumption of consideration is conclusive. . and for the purpose of lending his name to some other person. the note was issued for the purchase of fertilizers. de Papa – Agbayani: When it is shown that a promissory note is executed without just. or of false representations by the payee. Sebastian: An accommodation party does not lend his name but lends his credit because he exposes himself to liability so the accommodated party can get credit. 29. William Barco & Sons v Forbes – One who gives a note in renewal of another note. waives such defense and cannot set it up to defeat or to reduce the discovery on the renewal note. without receiving value therefor. if the defendant in error is a holder for value. Want or failure of consideration are only personal defenses. Dougherty v Salt – The note was the voluntary and unenforceable promise of an executory gift. However. . and that he holds it free from latent defenses on the part of the maker. failure of consideration was not necessary to proive since the holder cannot renegotiate the note.” Sebastian: In this case. While in failure of consideration. This case is a clear case of want of consideration. the same is without any effect and the payment of said note is not demandable. In the latter. is deemed a holder for a valuable consideration. with knowledge at the time of partial failure of the consideration for the original note. Maulini v Serrano – An accommodation party is one who has signed an instrument as maker. acceptor or indorser without receiving value therefor and for the purpose of lending his name to some other person. The acceptability of negotiable instrument would be greatly restricted if prospective purchasers were burdened with the need of determining whether such instruments are supported by consideration. this was merely a disputable presumption. It should be noted that the phrase ‘without value thereof’ means without receiving value by virtue of the instrument and not without receiving payment for lending his name. Osorio v Montenegro vda. or indorser. Agbayani: The following are the requisites for an accommodation party: (1) he must be a party to the instrument.An accommodation party is one who has signed the instrument as maker. Liability of accommodation party. LIABILITY OF AN ACCOMMODATION PARTY Sec. NATURE OF DEFENSE Agbayani: Whether total or partial. Therefore. Thus. knew him to be only an accommodation party. although the defendant in error at the time of taking the instrument knew plaintiffs in error to be accommodation parties. drawer. They are therefore liable to the defendant in error on the notes. Also. real or legal consideration. Sebastian: In this case. as the notes were indorsed to it before maturity and without notice of their restricted use and purpose. and for that reason. and “that it was executed so that the supposed creditor may help the supposed debtor protect the latter’s properties in the event of an expected litigation to be commenced by a third person against said debtor. and (3) he must sign for the purpose of lending his name or credit. VNITAS. as collateral security for a pre-existing debt and without any express agreement.
As between them. because of the provisions of Section 29. (2) When “the accommodation parties make payment to the holder of the notes. who requests it. He may look like one but he cannot invoke the protection of the surety under the Civil Code. an accommodation party cannot interpose the defense of want of consideration between him and the accommodated party against a holder for value even if the holder for value has notice of the fact that he is an accommodation party and therefore. an indorsement is made as a favor to the indorsee. unless the payment has been made by virtue of a judicial demand or unless the principal debtor is insolvent. 47 LEX SOCIETAS VERITAS. Article 2073 of the Civil Code comes in. or (2) to pay the instrument directly to the holder. the situation does not present one creating an accommodation indorsement. the indorser makes the indorsement for the accommodation of the maker. As between the accommodated party and accommodation party. and (2) a joint and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his co-accomodation maker without first directing his action against the principal debtor provides that (a) he made the payment by virtue of a judicial demand. Nor is it is not correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument. Sebastian: The broker was not an accommodating party because he never lent his credit line to the borrower so that the latter can borrow money from the lender. 2073. in the same proportion. without consideration. Reimbursement rights of accommodating parties are not governed by the Negotiable Instruments Law because the instrument has already been discharged and. however. If any of the guarantors should be insolvent. (Art. Each accommodation maker is individually liable for the instrument. RIGHTS OF ACCOMMODATION PARTIES AMONGST THEMSELVES Agbayani: (1) The accommodation party is generally regarded as a surety for the party accommodated. want of consideration.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW accommodation to which reference is made in [Section 29] is not one to the person who takes the note but one to the maker or indorser of the note. The real debtor is the accommodated party. the accommodation parties being the sureties. VNITAS. including the payer. and where the only consideration for such indorsement passes from the indorser to the indorsee. . APPLICATION OF “HOLDER FOR VALUE” Agbayani: In instruments which are not accommodation papers. However. not to the holder. the one among them who has paid may demand of each of the others the share which is proportionally owing from him. The accommodated party cannot recover from the accommodation party. VIRTVS. Sebastian: For accommodation makers. Sadaya v Sevilla – (1) A joint and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amount that he paid to the payee. namely. In cases of accommodation indorsement. Sebastian: An accommodation party is not liable as a surety. An accommodation note is one to which the accommodation party has put his name. the latter is secondary liable. not the better to secure payment. for the purpose of accommodating some other party who is to use it and is expected to pay it. which is a defense under Section 28. Civil Code) In case an accommodating party cannot recover reimbursement from his coaccomodating parties. The accommodation party who paid for the whole instrument cannot seek reimbursement from the other accommodation parties. Ang Tiong v Ting – An accommodation party liable to a holder for value as if the contract was not for accomodation. he knew that the indorser was only an accommodation party. When there are two or more guarantors of the same debtor and for the same debt. nor one where there is a consideration sufficient to sustain an action on the indorsement. The credit given to the accommodation party is sufficient consideration to bind the accommodation maker. or (b) a principal debtor is insolvent. he lends his name to the maker. the effect of this notice of want of consideration is to render the holder for value not a holder in due course because he has notice of a defense of prior parties. the understanding is that he accommodation party either is (1) to reimburse the amount which the accommodation party may be obliged to pay. but to relieve himself from a distasteful situation. each of them is the maker and each of them made a warranty. Such an indorsement is generally for the purpose of better securing the payment of the note – that is. he can still recover from the accommodated party because he is the principal debtor. they have the right to sue the accommodated party fore reimbursement since the relation between them is in effect that of principal and sureties. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. The provisions of this article shall not be applicable. therefore. his share shall be borne by the others. Where. has notice that he did not receive any consideration for the instrument which he signed.
by mere delivery. the mode of transfer is by negotiation which has two forms: (1) if it is a bearer instrument. A negotiation may be for value as in a sale. 30. VNITAS.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: Holder for value must be a holder in due course other than for the fact that he knew the accommodation party signed the instrument without receiving value therefor. the transfer is a mere assignment which constitutes the transferee as a mere assignee. Under the Negotiable Instruments Law. LEX SOCIETAS VERITAS. or by way of a gift. it is negotiated by the indorsement of the holder and completed by delivery. if payable to order. is the money so advanced to the accommodated party. not a holder. In either case. . DIFFERENCE FROM ASSIGNMENT Agbayani: Assignment is the method of transferring a non-negotiable instrument whereby the assignee is merely placed in the position of the assignor and acquires the instrument subject to all defenses that might have been set up against the original payee. subject to all defenses existing among prior parties. If payable to bearer.An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. it is negotiated by delivery. which may either be by indorsement completed by delivery or by mere delivery. If an instrument is transferred without negotiation. the rights acquired by the transferee in each case may be different. 48 . Sebastian: A transfer equivalent to negotiation is when it makes a transferee a holder of the instrument. there will be a valid transfer. Campos: A negotiation is the transfer of a negotiable instrument made in such manner that the transferee becomes a holder and thus possibly a holder in due course capable of acquiring a better title to the instrument than that of his transferor. or the bearer thereof. as regards both makers. (3) by negotiation. and (2) if it is an order instrument. VIRTVS. namely: (1) by assignment. NEGOTIATION WHAT CONSTITUTES NEGOTIATION Sec. A holder is a payee or indorsee of a bill or not who is in possession of it. and it cannot be said that the note is lacking consideration as to the accommodating party because he himself received none of the money It is enough that value was given for the note at the time of its creation. But other than that. Transfer is a broader term than negotiation. its is by indorsement then delivery. What constitutes negotiation. Transfer thus includes both an ordinary assignment and a negotiation. a holder for value must meet the elements under Section 52. (2) by operation of law. However. Acuña v Veloso and Javier – Where one of the signers of a joint and several promissory note affixes his signature thereto for the accommodation of a comaker and a third person advances the face value of the note to the accommodated party at the time of the creation of the note. the consideration for the note. Agbayani: There are three methods of transfer. The initial issuance of the instrument constitutes negotiation pursuant to Sections 30 and 191.
first. where the title vests in his personal representative. And since negotiation is defined being such transfer of an instrument as to constitute the transferee the holder thereof. if a bill. I will pay it. or (2) by bankruptcy of the holder. states to every person who follows him: “This instrument will be paid by the maker. An indorsement consists of the signature of the indorser usually on the back of the instrument. Negotiation is not confined to transfer after delivery to the payee. if the original assignor said or did something which under the ordinary law of such contract would prevent him from enforcing the contract or asserting his right against the other party to the original contract. if a note. But if and when the drawee accepts. The primary party is the one who is absolutely and unconditionally required to pay the instrument when it falls due. Hence. provided these two conditions are complied. An indorsement has double significance: 1) It constitutes a transfer or sale of the instrument to the indorsee or transferee 49 LEX SOCIETAS VERITAS. that a notice of such dishonor be given to the secondary party sought to be charged. Their liability is conditioned on 2 factors: (1) that a demand or presentment be duly made on the primary party and (2) should the said party dishonor such instrument. INITIAL DELIVERY OF INSTRUMENT Agbayani: Under Section 3o and 191. in which case the general rule is that the title vests at once in the surviving payee or indorsee. as an assignor. Consequently. by such negotiation becomes the holder of the instrument. the holder in turn derives the contract. There is an added obligation upon the instrument aside from what appears upon the face of the instrument. In short. TRANSFERS BY OPERATION OF LAW Agbayani: The fill title to an instrument may pass without either assignment. exactly similar to that which is implied by drawing a bill except that. . thus assuming liabilities similar to that of a seller or transferor of personal property. the said holder cannot enforce it against the original party. And where the holder of a bill payable to order transfers it without indorsement. Every indorser is a new drawer and the terms are found on the face of the instrument. A person taking a negotiable instrument by assignment in a separate piece of paper takes it subject to the rules applying to assignment. in the case of drawing a bill. The maker is the person primarily liable on a promissory note. and they can be held responsible should the primary parties fail to pay. an instrument is negotiated when it is delivered to the payee or to an indorsee. there is no person primarily liable to pay until and unless the drawee accepts the order of the drawer to pay. An indorser by indorsing the bill or note impliedly enters into 2 contracts: (1) he is selling or transferring the instrument to his indorsee. The drawer of a bill of exchange and the indorsers of either a bill or note are the parties secondarily liable thereon. INDORSEMENT Agbayani: An indorsement is not only a mode of transfer. an indorsement by the payee or present holder. when an instrument payable to order is delivered to the payee thereof. the general indorser. has done anything to prevent its enforcement against the original party. The person to whom he negotiates it is the indorsee. who. the stipulations with respect to the drawer’s responsibility and undertaking do not apply. is the contract of the general indorser. although he knows nothing of the original transaction. by operation of law. the assignee. indorsement. Campos: When the payee of an instrument transfers it to another by signing at the back thereof he is said to have negotiated or indorsed the same and thereby becomes an indorser. The indorsement of an instrument implies an undertaking from the indorser to the person in whose favor it is made and to every other person to whom the instrument may afterwards be transferred. its delivery to the transferee or indorsee. such a delivery to the payee is negotiation. And further. If it is dishonored by non-payment or non-acceptance and you give me notice thereof. Thus. The holder can therefore hold any indorser liable should the maker or acceptor fail to pay.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW The effect of assignment is that the party holding the right drops out of the contract and another takes his place. VIRTVS. In a bill of exchange. the parties to a negotiable instrument are either primarily or secondarily liable. An instrument payable to order requires for its negotiation. Before he accepts such drawee is not liable on the instrument and he cannot be compelled by the holder to accept or pay it. in effect. in effect. and second. it operates as an equitable assignment. may be deemed to have said and done the same things. A holder is a payee or an indorsee who is in possession of an instrument payable to order. who now becomes the holder. or delivery. VNITAS. or (3) upon the death of a joint payee or indorsee. that is.” This. The assignee and every subsequent person to whom the instrument comes by assignment is substituted in the place of the assignor. the payee becomes a holder or he becomes thereby a payee in possession of the instrument. he becomes an acceptor who is absolutely bound to pay on the date specified on the bill. It is also a contract. the delivery to him of the instrument constitutes him the holder thereof. or accepted by the drawee or paid by the acceptor. and (2) he warrants that he will pay the instrument when the two conditions for his liability mentioned above have been fulfilled. where title vests in his assignee or trustee. (1) by death of the holder. if any subsequent assignee from whom. As to the nature of their liability.
indorses the latter’s name and delivers the instrument to a purchaser. once there is detachment.” But the allonge must be tacked or pasted on the instrument so as to become a part of it. Campos: If an instrument is payable to the order of A and B. 31. Campos: An allonge can be validly used only when there is no longer any room on the instrument for further indorsements. If one of several joint payees or joint indorsees indorses his own name and without authority from his co-obligee. Thus.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW 2) It signifies the agreement of the indorser to answer for the amount represented by the instrument in case of default of the maker or the party primarily liable. Its purpose is to provide more space for indorsements. It is a common practice. by indorsement and delivery of the instrument to his co-payee. But the indorsement may be written on the face of the instrument. Clark v Thompson – A written transfer of a note. It only relates to an instrument payable to order because indorsements are not needed in bearer instruments. we are constrained to treat its transfer as a common-law assignment merely. Whether the note was pinned not. Sebastian: Negotiation at the back of the instrument is only true in the case of a check. LEX SOCIETAS VERITAS. it can qualify the nature of the indorsement. both must indorse in order for the transaction to operate as a negotiation. A transfer of a negotiable instrument is effected otherwise than by negotiation when an order instrument is delivered by the payee or special indorsee without his indorsement or where the indorsement is not made properly as required by law. such transaction does not constitute a negotiation of the instrument. it must be attached permanently to the instrument. made on a separate paper to which it was pinned. When you put something else in addition to the signature. indorsement does not necessarily have to be at the back for they can be made below the note. and where the separate paper is only temporarily attached. and an indorsement on a separate piece of paper where there is sufficient space on the instrument for indorsements will be considered as mere assignment. the indorsement is usually written on the back of back thereof. it would be evident. It does not impair the negotiation but serves as an additional security to the transferee. . One who negotiates by mere delivery. since he can hold the indorser liable as such. although he assumes the liabilities of a seller or transferor of the note or bill. the other is prima facie liable to contribute his share to the paying indorser. the maker has the right to dishonor payment because there was lack of proof of the holder that he was the lawful holder of the instrument. The signature of the indorser. VNITAS. may transfer full title to the latter. there being room on the back of the note itself of the transfer. how made. signatures may be placed on an allonge. either as payees or indorsees. not a negotiation. otherwise the transfer will not be sufficient to constitute the transferee a holder. An allonge is a paper attached to a document for receiving indorsements too numerous to be written on the bill itself. The first indorsement of an instrument is by the payee. not a commercial indorsement. Where the inorsement is written on a paper attached to the instrument. It is important to know the order from who the instrument came from because each indorsement made by a general indorser carries the warranty of solvency of all prior parties. It is important to attach the allonge to the instrument in order to determine the order of in which the instrument was indorsed. without additional words. In promissory notes. is a sufficient indorsement. to indorse a bearer instrument whenever it is transferred. A and B will then be jointly and severally liable and an action will lie against any of them individually.The indorsement must be written on the instrument itself or upon a paper attached thereto. and to hold that respondent was not a holder in due course. A contrary rule would open the door to fraud. VIRTVS. however. He will thus be subject to defenses such as failure of consideration. If one of them should pay. HOW MADE Sec. 50 An instrument payable to bearer can be negotiated by mere delivery. If only one indorses. ALLONGE Agbayani: The use of an allonge is allowable only when there is a physical impossibility of writing the indorsement on the instrument itself. If there was supposed to be an allonge and the instrument was presented by the holder without it. was an assignment merely. An allonge is permanently attached to the instrument when. Sebastian: If the instrument no longer has space for indorsements. does not warrant that he will pay in case the primary party fails to pay. Agbayani: If written on the indorsement itself. such paper is called an “allonge. an indorsement is a signature. it cannot be considered an allonge. as when clipped or pinned. But it has been held that one of two joint payees. Indorsement. This helps determine the order of liability of the indorsers. Generally. his indorsee can have no right of action on the instrument because this would be violating the rule against splitting of actions. .
or to whose order. Neither does the provision prohibit a transaction where the indorsee pays the indorser less than the face amount of the instrument. it may be indorsed as to the residue.An indorsement may be either special or in blank. VIRTVS. Sebastian: The indorsement of must be an indorsement of the entire instrument.A special indorsement specifies the person to whom. The provision does not cover a situation where part of the amount of the instrument has been paid. . indorsement in blank. 32. An indorsement in blank specifies no indorsee. 51 LEX SOCIETAS VERITAS. VNITAS. and an instrument so indorsed is payable to bearer. Campos: The purpose of this provision is to protect the obligors from more than one action on the instrument. Where only the signature of the indorser appears. Agbayani: Where the instrument is originally payable to order and it is negotiated by the special indorsement. but as a mere assignment which subjects the holder to all defenses on the instrument. even if the original bearer negotiated it by special indorsement. This is what is called a “discount” of the instrument. where some installments have been paid. . not as a negotiation. Agbayani: An indorsement of a part of the instrument does not operate as negotiation. It remains valid. in a note payable by installments. The law states that the indorsement does not operate as a negotiation and suggests that it is entirely inoperative. Special indorsement. But it may constitute a valid assignment binding between the parties. The discount is given in consideration of the period during which the purchaser has to wait before he can cash the instrument with the maker or acceptor. But where the instrument has been paid in part. 32. Where the instrument is originally payable to bearer it can be further negotiated by mere delivery. The reason is that the effect of a blank indorsement is to make the instrument payable to bearer. An indorsement which purports to transfer to the indorsee a part only of the amount payable. and conditional. Where the instrument is originally payable to order and it is negotiated by the payee by blank indorsement. Kinds of indorsement. the instrument may still be negotiated for the remaining unpaid installments. Off-setting cannot take place under the Negotiable Instruments Law but and could only be done outside of it. it can be further negotiated by the indorsee by indorsement completed by delivery. The maker and all the prior parties. whether by indorsement and delivery or by delivery alone 2) Restrictive and non-restrictive – the kind of title transferred 3) Qualified and unqualified – the scope of the liability assumed by the indorser 4) Conditional and unconditional – presence or absence of express limitations put by the indorser upon the primary obligor’s privileges of paying the holder Sec. 34. An indorsement which purports to transfer to the instrument to two or more indorsees severally does not operate as a negotiation of the instruments. When an indorsement does not comply with Sec. Sebastian: An instrument must be indorsed in full in order to determine the holder of the instrument. restrictive. or which purports to transfer the instrument to two or more indorsees severally. Thus. Indorsement must be of entire instrument. it may be negotiated for the balance. the instrument is to be payable. in which case. The person to whom the instrument is indorsed would not be considered an indorsee but merely an assignee and would therefore take the instrument subject to the defenses available between the original parties. Blake v Weiden – When there has been a purported indorsement of the whole instrument. and it may also be either restrictive or qualified or conditional.The indorsement must be an indorsement of the entire instrument. . it is called a blank indorsement. took the risk of only one cause of action against them. which can be done only at the maturity of the instrument. and may be negotiated by delivery. Campos: Indorsements containing such additional words are classified into special. The basis of classification of indorsements are: 1) Special and blank – future method of negotiation.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: Subrogation happens when a creditor is substituted through novation. KINDS OF INDORSEMENT Sec. the purported indorsees take legal title to their several shares and may sue together. it can be further negotiated by the holder by mere delivery. does not operate as a negotiation of the instrument. 33. title transferring to the indorsee. in assuming liability. or any one or more may sue provided all the other indorsees are brought in as parties. the transfer is not necessarily void. . INDORSEMENT FOR THE FULL INSTRUMENT Sec. qualified. in separate parts to two or more trasferees. and the indorsement of such indorsee is necessary to the further negotiation of the instrument.
unless the instrument is an originally bearer instrument. RESTRICTIVE INDORSEMENT Sec. Indorsement that Kill Negotiability Sebastian: An indorser would want to kill negotiability so (1) that he would not be liable to a holder in due course later on and (2) that he may have a personal defense. An indorsement need not contain the words of negotiability as long as these appear on the face of the instrument. and may be negotiated by delivery. VNITAS. Campos: A restrictive indorsement either restricts the right of the indorsee to further negotiate the instrument or reserves beneficial interest therein in the indorser or in a third person.” 2) “Demand and notice waived. The following have been held to be contracts inconsistent with the character of the indorsement: 1) “Pay to X and Y. the contract so written must not change the contract of the blank indorser. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. Sebastian: An indorsement is special when the name of the indorsee is written in the indorsement. Hence. Sebastian: An indorsee makes a restrictive indorsement to an agent or a trustee because he is dealing with an agent or trustee and not the principal or LEX SOCIETAS VERITAS. . Agbayani: The holder must not write any contract not consistent with the indorsement. Indorsement “as agent for” Agbayani: Under this restrictive indorsement. A special indorser however is liable to subsequent holders. the instrument becomes a bearer instrument. 35. On the other hand. Blank indorsement. Campos: A blank indorsement may be converted into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. any action the indorsee may file is subject to defenses available against the indorser. 52 . Sebastian: When there is a blank indorsement. an instrument payable to bearer on its face always remains a bearer instrument. In either case of special indorsement. It implies that there is a limitation on what the indorsee can do. In the latter case.” 3) “I guaranty payment.” This will make the indroser a garantor and depriv e him thereby of his right to demand notice. Sebastian: A restrictive indorsement limits the title of the indorsee. He merely becomes the agent of the indorser. such omission in the body will render the instrument non-negotiable. all subsequent indorsees take subject to the rights of the restrictive indorser or the third person. or (b) Constitutes the indorsee the agent of the indorser. An indorsement in blank specifies no indorsee. how changed to special indorsement. in which case he is liable only to those who take title through his indorsement. the last indorsement always controlling the means of further negotiation. The holder may then treat the instrument as a bearer instrument. as the case may be. The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. that is. An indorsement of a bearer instrument does not convert it to an instrument payable to order. the indorsement of the special indorsee is necessary for the further negotiation of the instrument. the indorsee does not acquire title over the instrument as against the indorser. A person who negotiates by mere delivery is liable only to his immediate transferee. An indorsement for deposit constitutes the indorsee the agent of the indorser. VIRTVS. Agbayani: While the omission of words of negotiability in the indorsement does not affect the negotiability of the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Campos: There are two forms of special indorsement: “Pay X” or “Pay X or order” followed by the signature of the indorser. When indorsement restrictive. and may later be reconverted into an order instrument by a subsequent special indorsement. Sec. An instrument payable to order on its face may be converted into a bearer instrument by means of a blank indorsement. although the instrument may be further negotiated.An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument. and an instrument so indorsed is payable to bearer. 36. such as lack of consideration. or (c) Vests the title in the indorsee in trust for or to the use of some other persons.
I am the lawful holder of that paper. the person is not the beneficial owner of the proceeds. v Hopkins – Agbayani: An indorsement to A for the benefit of B was held restrictive making the indorsee or his successors subject to good defenses against the restrictive indorser. Such an indorsement does not impair the negotiable character of the instrument. . Indorsee will be paid the amount but. it did not give notice of defenses obtaining between prior parties. 38. This protects himself because the restrictive indorsement acts as a constructive notice to subsequent indorsees that his immediate indorsee is acting as a mere agent or trustee. Qualified indorsement. The words ‘until it has been restrictively indorsed’ in Section 47 do not contemplate every restrictive indorsement but a restrictive indorsement that prohibits the further negotiation of the instrument under Section 36(a). rights of indorsee. – Agbayani: The indorsee of a check indorsed in trust for a third person who is a holder in due course could recover from the drawer who had a defense of failure of consideration for while the restrictive indorsement creating a trust gives notice of this trust to subsequent purchasers. ‘Without recourse’ means without resort to a person who is secondarily liable after the default of the person who is primarily liable. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. upon receipt of payment. Effects of Qualified Indorsement Agbayani: A qualified indorsement constitutes the indorser as a mere assignor of the title to the instrument. In a restrictive indorsement “for deposit. but the restrictive indorsee cannot transfer the instrument for his own debt or for his own benefit. it is for the account of someone else. but I do not guarantee the financial responsibility of the parties on that paper but I do say that I hold title to it just the same as any other personal property. Effect of restrictive indorsement. any one who indorses without recourse states that “all parties to the paper are genuine.” the instrument becomes nonnegotiable. Neither does an indorsement “for deposit only” destroy the transferability of the instrument. Indorsement for a check by the payee “for deposit” does not thereby render it negotiable but prohibits further negotiation for any purpose except for collection for deposit in the payee’s account in the bank selected by the payee.” Liability of Qualified Indorser 53 LEX SOCIETAS VERITAS. In effect. and I have title to it and know of no reason why you could not recover on it as a valid instrument. QUALIFIED INDORSEMENT Sec. (b) to bring any action thereon that the indorser could bring. where the form of the indorsement authorizes him to do so. 37. Agbayani: The indorsement passes the legal title over the note to the indorsee so as to enable him to demand and receive payment of the value of the instrument. Atlantic v Comm.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW beneficiary. title to the check remained in the name of the firm. The person for whom the collection or enforcement being made is the one protected in this nature of the instrument since each indorsee will be charged with the fidelity of an agent or trustee.A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. VNITAS. . Lumber Co. . While the indorsee is entitled to enforce the instrument. This is true under any of the forms of restrictive indorsement. Indorsement “in trust for” Sulbrason-Dickenson Co. Granado v Riverdale – Agbayani: The notation “for deposit” is a restrictive indrosement and indicates that the indorsee bank is an agent for collection and not the payee. (c) to transfer his rights as such indorsee. Where the indorsement is “Pay to C only. White v National Bank – Leonardi v Chase National Bank – EFFECTS OF RESTRICTIVE INDORSEMENT Sec.A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument. But an indorsement for collection does not destroy transferability and it can be reindorsed so that the indorsee can sue in his own name. VIRTVS.” the indorsee can bring an action against the indorser if the indorser received value for said indorsement. By adding the notation.
” The transfer would still be negotiation and the transferee would still be a holder capable of acquiring a title free from defenses of prior parties. He is secondarily liable on his warranties as an indorser under Section 65. the condition renders it nonnengotiable as the promise or order therein would not be unconditional. The only effect of the qualified indorsement is to relieve the qualified indorser of his liability to pay the instrument should the maker be unable to pay at maturity.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: The qualified indorser is not entirely free from secondary liability. But all holders subsequent to the conditional indorsement take subject to the condition.Where an indorsement is conditional. Campos: An indorser is liable to pay the instrument in two conditions: (1) that due demand or presentment be made on the party primarily liable on the date of imaturity. 54 LEX SOCIETAS VERITAS. he expressly rids himself of the second contract. (2) lack of good title on the part of the indorser. the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. Agbayani: A conditional indorsement is an indorsement subject to the happening of a contingent event. that is. The law gives the maker the choice to pay the instrument regardless if the condition was not fulfilled. or (4) the fact. (3) lack of capacity to indorse on the part of the prior parties. or the proceeds thereof. A qualified indorser therefore merely assumes the first contract and agrees merely to transfer legal title to the instrument. a notice of dishonor be promptly sent to the indorser. A conditional indorsement does not render an instrument non-negotiable. if not fulfilled. This is what the law means when it says that he is a “mere assignor of the title of the instrument. an indorser will be liable on both his contracts. Holder may not be entitled because the indorsment is conditional. In the absence of clear and unmistakable language qualifying liability. Campos: An indorser by his indorsement impliedly enters into two contracts: (1) a contract of sale or assignment of the instrument and (2) a contract to pay the instrument if the maker is unable to pay on maturity. The option of paying or not paying pertains to the maker/drawee. the indorsement would not be complete. There is nothing stopping the holder from presenting the instrument to the maker/ drawee. Conditional indorsement. VIRTVS. The value of indorsements is merely supportive of the liability of the person primarily liable. . the person obliged may ignore the condition and pay it. the indorsement becomes condition if the transfer is subject to the fulfillment of a condition. If the person primary liable has the ability to pay. By making a qualified indorsement. Fay v Witte – Copeland v Burke – Hutson v Rankin – CONDITIONAL INDORSEMENT Sec. Sebastian: A conditional indorsement implies that there is a condition where. and (2) that should the latter fail to pay on such presentment. If the indorsement is conditional. A conditional indorsement is one where an additional condition is annexed to the indorser’s liability. But once the condition is fufilled. Sebastian: Unlike a general indorser. that the instrument was valueless or not valid and knew of that fact. at the time of the indorsement. . An indorser indorses qualifiedly if he is not sure if he can guarantee the payment of the liability or the solvency of the maker/drawer. VNITAS. An indorsement without any other condition upon which liability is based is referred to as an unconditional or absolute indorsement. In other words. 39. His liability cannot be limited by implication. subject to the rights of the person indorsing conditionally. the qualified indorser does not warrant the solvency of the maker/drawer. He is liable if the instrument is dishonored by non-acceptance or non-payment due to (1) forgery. But any person to whom an instrument so indorsed is negotiated will hold the same. An indorsement does not affect the negotiability of the instrument because the original promise or order remains unconditional. or dishonor the instrument and wait until the condition is fulfilled. By adding the words “without recourse” above his signature. But if the condition is on the face of the instrument. an event that may or may not happen. one makes an off balance sheet transaction. then the responsibility of the indorsers are not as significant as they should be. The other option is to look at the indorsement and hold the payment of the instrument until the fulfilment of the condition. Refusal to pay of the maker/ drawer will not constitute dishonor if the condition has not yet been fulfilled. the maker/drawee should pay. or a past event unknown to the parties. But as far as the maker is concerned he can choose to ignore the conditions because he is not a party to the conditions.
40. resolutory condition was not breached. Once it ceased to exist. the holder may still cancel the prior special indorsements because the blank indorsement already made it a bearer instrument. An instrument which is originally payable to bear is always payable to bearer. it may nevertheless be further negotiated by delivery. it is deemed prima facie to be payable to the bank or corporation of which he is such officer. even when specially indorsed. and 2) where the payees or indorsees are partners. he does not become a general indorser that warrants under Section 66. 41. A special indorser of an originally payable to bearer instrument is not liable to a holder who became a holder through delivery because delivery was sufficient to transfer title. We already know that if breach happened after the payment of the instrument. there was breach of contract and the remedy is specific performance or rescission. the effect is that Negotiable Instruments Law no longer applies. he has to pay. Effect of instrument drawn or indorsed to a person as cashier. It does not apply to instruments originally payable to order. the instrument is discharged and it ceases to exist. is indorsed specially. . VNITAS. Agbayani: Section 40 applies only to instruments which are originally payable to bearer. a special indorser is liable to special indorsee/s because they acquire their title over the instrument through the special indorsement as they can trace their title through a series of unbroken indorsements. but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Sebastian: By indicating the limited capacity of the indorser. Agbayani: Section 41 applies only to instruments payable to two or more payees jointly. even when they become payable to bearer because the only or last indorsement is in blank. he passes only his part of the instrument. INDORSEMENT TO A CORPORATE OFFICIAL Sec. But if after due date. In their case. INDORSEMENT TO TWO OR MORE PERSONS Sec.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW If the condition is resolutory. However.Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation. the resolutory condition was breached. it can be negotiated by mere delivery.Where an instrument is payable to the order of two or more payees or indorsees who are not partners. When the maker pays. . INDORSEMENT OF BEARER INSTRUMENT Sec. The only time he can refuse is if there was breach at the time of presentment. He failed to show the fluidity of transition from Negotiable Instrumetns Law to contract laws. Indorsement where payable to two or more persons. It does not apply to instruments to two or more payees severally because these fall under Section 8(c) and such instrument so payable may be negotiated by the indorsement of one payee. Agbayani is wrong because there can be no trust since there was no trustor and trustee. Campos: Where the instrument is payable or indorsed to A and B. and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. But the following are exceptions to the rule requiring joint indorsement: 1) where the payee or indorsee indorsing has authority to indorse for the others. Sebastian: Special indorsements do not convert the original bearer instrument to an order instrument. 42. the maker/drawee has no choice but to pay the instrument on due date. If only one payee indorses. Such an indorsement would not operate as such because it would not be an indorsement of the entire instrument. .Where an instrument. unless the one indorsing is authorized by the other. At the time of maturity. all must indorse unless the one indorsing has authority to indorse for the others. . Hence. Johnson v Buffalo Bank – 55 LEX SOCIETAS VERITAS. VIRTVS. But the fact remains that there was an agreement between the indorser and indorsee where the payment was based on a resolutory condition. and no beneficiary. Assuming that the instrument was originally an order instrument which had a blank indorsement. The instrument now becomes a simple contract. Indorsement of instrument payable to bearer. it is no longer a negotiable instrument. Then we enter to the agreement between indorser indorsee which is attached to the agreement which no longer exists as a negotiable instrument. The holder in due course can cancel the special indorsement prior to him but the special indorsments made will still have warranties under Section 66. can we say that the person who was paid was merely holding the proceeds of the note in trust for the previous indorser who indorsed with condition? This is questionable. payable to bearer. As far as maker. they are joint payees and an indorsement by either A or B only will not constitute a valid negotiation so as to free the instrument from defenses.
a certificate of deposit issued by the C bank to the order of “S. or may deposit it to his credit either in the drawee bank or in another bank. In short. 44. and (2) at the same time disclose his principal. Cashier. Agbayani: If the indorsement bears a date. Where the name of a payee or indorsee is wrongly designated or misspelled. Where the holder deposits the check with a bank other than the drawee. . that the date written is the true date. it was held that the indorsement was that of the bank. VIRTVS.An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. . (1) he must add words describing himself as an agent. every negotiation is deemed prima facie to have been effected before the instrument was overdue. Agbayani: A representative must indorse in the same manner as an agent of the maker. As a rule. In order that one may be a holder in due course. he would in effect be negotiating the check to such bank. an agent should make it plain that he is merely signing in behalf of the principal. Indorsement in representative capacity.” INDORSEMENT TO OR BY COLLECTING BANK Campos: A holder of a check may either cash it with the drawee bank. INDORSEMENT BY A REPRESENTATIVE Sec. Agbayani: The mercantile character (1) of the instrument as a negotiable paper 56 LEX SOCIETAS VERITAS. Continuation of negotiable character. every indorsement is presumed prima facie to have been made at the place where the instrument is dated. The fact that an indorsement appears to be in fresher ink than the face of a demand note is not sufficient to overcome the presumption that it was indorsed before it was overdue. The most common form of indorsement by an agent is “Pedro Reyes by Jose Santos. if he thinks fit. Cashier” was indorsed “S. presumption. his proper signature. then payment to him by the latter would discharge the instrument and terminate all rights and liabilities of the parties thereto. And the authority of the agent need not be in writing. 47.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: Where S was the cashier of the C bank. agent. Indorsement where name is misspelled. namely. and one who denies that the holder of such instrument is a holder in due course has the burden of proof. (3) he must be duly authorized. the bank in fact is only a collecting agent. drawer or acceptor should in order to escape personal liability under Section 20. Whatever kind of indorsement is made by the holder. and that it was competent for the bank to show that S acted in his own interest and in violation of his duty to the bank. . . he may indorse in such terms as to negative personal liability. The indorsement without date establishes a prima facie presumption that the instrument was negotiated before maturity.” and came to the plaintiff. The instrument will therefore not show any restriction to the collecting bank’s title and – to all appearances. the instrument must be negotiated to him before it becomes overdue. 46. CONTINUATION OF NEGOTIABILITY Sec. Should he cash it directly with the drawee bank. Of course. the presumption in this section would not arise. title has transferred to it. Campos: An instrument may be indorsed either personally or through an agent. Place of indorsement.Except where the contrary appears. otherwise the signature will prima facie not be a valid indorsement of the instrument. Campos: The indorsement should be made by the holder in the manner he was designated. MISSPELLED NAME OF INDORSEE Sec. Sec. In so signing. This provision becomes important in connection with Section 52(b). presumption. . such bank will credit the amount of the check to his account and the effect would be just like payment. otherwise he may be held personally liable. 43.Except where an indorsement bears date after the maturity of the instrument.Where any person is under obligation to indorse in a representative capacity. and so forth. just his signature without any other words. Sebastian: This provision has no sense in the Philippines because there is only one Negotiable Instruments Law here. since he would have to indorse the check before the bank will accept it for deposit. VNITAS. a holder in due course. the indorsement made by the depositor of a check would be in blank. It has been held that an agent may indorse by merely signing the name of the principal. Time of indorsement. 45. TIME AND PLACE OF INDORSEMENT Sec. Should he deposit it in the drawee bank without immediately cashing it. The presumption would be that stated in Section 11. he may indorse the instrument as therein described adding.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW and (2) of the contracts of several parties to it. 49. He is a holder with notice because he takes a bill which. nor can he strike out such name and convert such special indorsement into a blank indorsement.The holder may at any time strike out any indorsement which is not necessary to his title. STRIKING OUT OF INDORSEMENT Sec. the negotiation takes effect as of the time when the indorsement is actually made. Transfer to such transferees would be equivalent to a mere assignment and subject to defenses. therefore. in any case. thus subjecting him to defenses. they are not holders in due course. since indorsements are usually not dated. if any. The Negotiable Instruments Law does not provide that the holder who is not a holder in due course. 48. effect of. continues after its maturity and until it is paid except (3) that an indorsee or a tranferee after maturity takes the instrument subject to the defenses between original parties. 57 LEX SOCIETAS VERITAS. If all the indorsements appearing on the back of the instrument are special. The only disadvantage is that the instrument is subject to defenses as if it were non-negotiable. thus have a right to cancel any or all indorsements. and therefore. then all of them would be necessary to the holder’s title. the right to have the indorsement of the transferor. may not. retains its negotiability unless it has been paid or restrictively indorsed so as to prohibit further negotiation. they prevent a holder from becoming a holder in due course. The presumption that every negotiation was effected before the instrument was overdue is therefore significant. ought to have been paid. who is presumptively the owner and holder by his mere possession of such instrument. the holder has no right to strike out the name of the person mentioned in such indorsement and insert his own name in place. An indorsement is not necessary when mere delivery is sufficient to vest ownership in the indorsee. why not? 2) Was the title of the person who held it at maturity defective? If the title to the instrument was complete. Transfer without indorsement. The following are effects of striking out: 1) indorser whose indorsement is struck out is relieved from liability on the instrument. He is therefore bound to make two inquiries: 1) Has the bill been discharged? If not. He may or may not be a holder for value and his rights will be regulated accordingly. VIRTVS. . and. because after maturity such subsequent parties take the instrument after it becomes overdue. then whether or not there are indorsements on the back of the instrument would be immaterial to the title of the bearer. Other forms of restrictive indorsements do not destroy negotiability. The holder who acquires title subsequent to the succeeding special indorsement must trace his title not only through the blank indorsement but through the special indorsement as well. VNITAS. is not free from defenses obtaining between prior parties. Agbayani: Where an instrument is transferred by a special indorsement. after maturity. . The fact that the instrument is overdue does not affect the right of the holder to further negotiate it if he wishes to. . although overdue. recover on the instrument. Campos: A negotiable instrument. However. the instrument ceases to be negotiable in the sense that a transferee after maturity is not a holder in due course. for Section 37 recognizes the right of the restrictive indorsee to further negotiate the instrument. but merely prejudices the status of subsequent holders as they cannot be considered holders in due course. Striking out indorsement.Where the holder of an instrument payable to his order transfers it for value without indorsing it. and all indorsers subsequent to him. it is immaterial that for some collateral reason he could not have enforced the bill against some or one more of the parties liable thereon. It does not follow that simply because one is not a holder in due course he cannot recover on the checks in his possession. and 2) all subsequent indorsers are also relieved from their liability on the instrument. In short. None of the indorsements would be necessary to his title since mere delivery would have been sufficient to transfer title from one holder to another. the transfer vests in the transferee such title as the transferor had therein. The holder. the situation is different. TRANSFERS WITHOUT INDORSEMENT Sec. on the face of it. The position of a holder who takes a bill when over due is that he is a holder with notice. Campos: If the instrument is payable to bearer on its face. Although indorsements after maturity are good to transfer title. are thereby relieved from liability on the instrument. The law of the place of dating will govern any controversy should there be conflict of laws. But for the purpose of determining whether the transferee is a holder in due course. an instrument originally negotiable continues to be negotiable in the sense that the contracts of the parties to it continue and are governed by the Negotiable Instruments Law. Where the instrument is payable to order on its face. and the transferee acquires in addition. The indorser whose indorsement is struck out.
it is only fair to the maker and to prior holders to require the possessor to prove without the aid of an initial presumption in his favor. This means that if a defense is available against the transferor. one element lacking for the negotiation of the instrument. that he came into possession by virtue of a legitimate transaction with the last holder. not at the time of delivery. 50. There is. subject however to hte defenses and equities available among prior parties. does not have the right to compel the indorsement of his donor. and therefore since the situation is abnormal. reissue and further negotiable the same. such party may. unless there is proof of an agreement to the contrary. . therefore. LEX SOCIETAS VERITAS.Where an instrument is negotiated back to a prior party. the majority view is that. This operates as an equitable assignment. As to what kind of indorsement such transferee is entitled to. This is the only difference in the effect which Section 49 should have on a gratuitous transfer as contrasted with the transfer “for value. namely. that defense is also available against the transferee. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. although he has a right to sue on an instrument as a legal owner thereof. 58 . It is the exception rather than the rule for a payee of an order instrument or a special indorsee to transfer the instrument without indorsement. such a donee. indorsement by the payee or indorsee. not at the time of the delivery. subject to the provisions of this Act. There can be no apparent reason therefore why an unindorsed instrument should not also be the subject of gift. Campos: If his predecessor had legal title. VIRTVS.” NEGOTIATED BACK TO PRIOR PARTY Sec. he has a right to an unqualified and not merely a qualified indorsement. This contemplates a case where there is delivery and payment of value but no indorsement. The following are the rights of the transferee for value: 1) the transferee acquires only the rights of the transferor. When prior party may negotiate instrument. 2) The transferee has also the right to require the transferor to indorse the instrument. The time for determining whether the transferee is a holder in due course is as of the time of actual indorsement. However. It is only at this time that the instrument can be considered as having been negotiated. The reason is that negotiation is completed at the time of indorsement. VNITAS. the transferee of an unindorsed instrument acquires such. passing title to the donee.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: Section 49 applies only to instruments payable to order. But the transferee of an unindorsed instrument may become a holder by obtaining the indorsement of his transferor.
or both is unpaid. Payment in due course is payment made (1) at or after the maturity of the instrument (2) to the holder thereof (3) in good faith and (4) without notice that his title is defective. payment. but not with equities between intermediate indorsers. and (2) receive payment and if the payment is in due course. Receipt Before Instrument is Overdue Agbayani: One taking a past due paper is chargeable with notice of all equities between the original parties. When the instrument contains an acceleration clause. What constitutes a holder in due course. the holder may be considered as a holder in due course. He has no right to demand payment when instrument is due. May only acquire everything that the transferor has. if such was the fact. May acquire even superior to that of the immediate transferor. pledgee must be in possession of the instrument. When the forgery was invisible to the naked eye. a pledgee has limited rights. (b) That he became the holder of it before it was overdue. the instrument is discharged. it must be indorsed to the pledgee. Negotiable Instruments Law holder in due course Acquires the instrument free of all personal defenses. A forgery that is not apparent is not considered against a holder in due course. This presupposes that there was a dishonor or a default payment. of an instrument which is payable to order vests in the transferee such title as the transferor had therein.The holder of a negotiable instrument may to sue thereon in his own name.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW RIGHTS OF A HOLDER IN GENERAL Sec. without notice that it has been previously dishonored. However. A holder here refers to the payee or indorsee of the instrument in possession thereof. is notice that the instrument is overdue. . VNITAS. . The payment in due course to the holder of an instrument discharges the instrument. you cannot constitute a pledge without delivering to the pledgee the thing that is pledged. and a holder who acquires the instrument on that date is a holder in due course because the principal debtor has the whole day to pay. HOLDER IN DUE COURSE Sec. When a pledgee receives payment. if the instrument is overdue. he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. then the instrument is complete and regular upon its face. the instrument is not overdue. 52.A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face. Under Section 49. making the pledgee a holder as far as the Negotiable Instruments Law is concerned. Moreover. ELEMENTS Agbayani: Any holder proved to have taken an instrument with one of the conditions enumerated in this section lacking is not a holder in due course. and LEX SOCIETAS VERITAS. it is also a notice that it has been dishonored. . (c) That he took it in good faith and for value. Complete and Regular Upon its Face Sebastian: If the instrument can be paid without controversy. a transfer for value. On the date of maturity. A possessor of an unendorsed instrument payable to order may sue in his own name if the transferor could have done so. Agbayani: A holder in due course may (1) sue on the instrument in his own name. Right of holder to sue. it is by way of the lien constituted by the pledge. knowledge of the holder at the time of acquisition thereof that one installment or interest. but without indorsement. Thus. 59 Civil Code holder in good faith and for value Acquires nothing but the rights and obligations of the transferor. 51. In a contract of pledge. and payment to him in due course discharges the instrument. A pledgee of an instrument is a holder who may sue because when you pledge an instrument. His right is to have a lien on the instrument when it becomes due. Sebastian: To sue in his own name means to enforce a negotiable instrument. VIRTVS. (d) That at the time it was negotiated to him. An instrument is overdue after the date of maturity.
V. v Anita Gatchalian – The stipulation of facts expressly states that plaintiff was not aware of the circumstances under which the check was delivered to Manuel Gonzales. one of which is that he became a holder before it was overdue. you do not need to make an inquiry on the title of the indorser. failure to inquire after notice of facts merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in a negotiable instrument and defect in holder’s title. VIRTVS. Sebastian: There is good faith when the holder has no knowledge of fact which renders it dishonest for him to take the instrument. The test for determining whether a holder acquires an instrument in good faith is not whether he was negligent. not surmise. under Section 56. Campos: A holder in order to be a holder in due course must become a holder of the instrument before it is overdue and without notice that it has been previously dishonored if such was the fact. to make inquiries. may amount to bad faith. Holder in Good Faith Agbayani: “Good faith” refers to the indorsee or transferee. de Ocampo. The fact that the instrument is overdue is a strong indication that it was dishonored and the law puts the potential holder on inquiry as to whether it was dishonored and the reason therefor. one who takes the instrument upon which the interest is overdue is not a holder in due course. VNITAS. but we agree with the defendants that the circumstances indicated by them in their briefs. the test is subjective test of honesty. 2) that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. LEX SOCIETAS VERITAS. renders the holder not a holder in due course. As far as a check is concerned. means that he must have knowledge of facts which render it dishonest for him to have a particular piece of negotiable paper. a reasonable time for demanding payment of a check is 180 days from issue. Without Notice of Prior Dishonor Sebastian: There are 3 ways of dishonoring an instrument. However. Knowledge. Vicente R. it has been held that failure to make inquiry. he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. by the terms of the instrument. not an objective test of due care. the transferee may still be a holder in due course. and 60 . is not evidence of purchaser’s bad faith so as to bar him from recovery. A check presented for payment after such time can be dishonored by the drawee bank for being stale. In the case of a time draft presented for acceptance. Also. it was long overdue. Failure to Make Inquiry Agbayani: Ordinarily. the principal was to become due upon default of the payment of the interest. and bad faith. Absence of knowledge of a defense. As a rule. Holder in good faith means a holder without knowledge or notice of equities of any sort which could be set up against a prior holder of the instrument. When he received the check. with actual knowledge of suspicious circumstances. such as in failing to make inquiries. Agbayani: One who took the check two and a half years after it became payable is not a holder in due course. Taking in good faith means that if the holder does not take in bad faith. In short. de Ocampo & Co. it can be dishonored twice. such as the fact: 1) that appellants had no obligation or liability to the Ocampo Clinic. or fear. when circumstances strongly indicate defect. the check was stale. presentment prior to due date or on due date. when the instrument was taken. Campos: One of the important requisites of due course holding is that the holder must have taken the instrument in good faith and that at the time it was negotiated to him. is necessary. A willful failure of one purchasing a note. Note that due course holding is not affect by the holder’s acquisition of knowledge after he has taken the instrument. Sebastian: An instrument past due is technically a default instrument. Even gross negligence in purchasing a negotiable instrument from a holder whose title was defective does not establish bad faith. Even if the seller is in bad faith. Montinola v PNB – Montinola cannot be considered a holder in due course because Section 52 defines a holder in due course as a holder who has taken the instrument under certain conditions. Suspicion or speculation is not enough. suspicion. not knowledge of the exact truth but of some truth that would prevent action by those commercially honest men for whom the law is made. not to the seller of the paper. By then. due date is any date from date of issue.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Where. his good faith is sufficiently shown. Knowledge here means actual knowledge of facts which render the instrument to be dishonoest. is essential element in the matter of good faith. but whether his purpose was dishonest. And suspicious facts and circumstances and grossly inadequate price may properly be considered in determining whether a purchaser acquired notes in bad faith. R.
provided that intention of the transferor is to transfer the full amount represented by the instrument. and 6) negotiation of the instrument under circumstances that amount to fraud. we must declare that plaintiff was guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales. the instrument was a crossed check and that generally indicates restrictions on negotiability. If the amount called for by the instrument is less than the principal debt secured by such instrument. And where such withdrawal takes place before maturity and before the bank receives notice of any defense on the instrument. But the fact that a note is purchased at a discount does not of itself raise an inference that the purchaser is buying a tainted instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW 3) that the check had two parallel lines in the upper left hand corner. their presence will not preclude evidence to show lack of consideration. The mere fact that the present holder paid for nothing for a note or is not a holder for value does not preclude recovery. 3) acquisition of the instrument by unlawful means. and defect of title. The presumption is prima facie and may be rebutted by proof to the contrary. the holder has a lien on the instrument. namely (1) defenses. duress or fear. and why he used it to pay Matilde's account. An amount paid for an instrument. The burden was. yet it may be shown as evidence of fraud. The rule that a possessor of the instrument is prima facie a holder in due course does not apply because there was a defect in the title of Manuel Gonzales and the instrument is not payable to him or to bearer. the presumption fills in the gap. One acquiring an instrument with knowledge of any of the foregoing defects of title of the person negotiating is not a holder in due course. Under the circumstances of this case. Whether or not the words “for value received” appear in an instrument is immaterial. Campos: A negotiable instrument may be given as a gift to the indorsee or transferee. he fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. . 5) negotiation of the instrument in breach of faith. that might be urged against the original payee. and there are no existing defenses. Value need not be full and a holder will be one for value even if he gave less than the face value of the instrument. While inadequacy of consideration is not of itself a sufficient ground for either legal or equitable relief. Sebastian: This case is an exception to the no inquiry rule. but the excess over the debt he holds in trust for whomsoever is entitled to it. placed upon it to show that notwithstanding the suspicious circumstances. amounting to legal absence of good faith. In this case. and it may not be considered as a holder of the check in good faith. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his possession. he cannot be a holder in due course. In their absence. Having failed in this respect. If a negotiable instrument is given as collateral for a debt. which is to “payee’s account only” and can only be encashed. 2) acquisition of the instrument by force. VIRTVS. VNITAS. and also to cover those equities of ownership where there was breach of faith in negotiation. In such cases whatever defenses can be set up against the transferor can also be set up against the transferee. it acquired the check in actual good faith. Defect of title are defined by Section 55 to cover all those situation which at common law were known as equitable defenes. if a trifling sum. If the debt secured by the instrument is less than the sum for which the instrument is issued. may itself establish notice. On the other hand. DEFECTS OF TITLE Agbayani: The Negotiable Instruments Law. 61 LEX SOCIETAS VERITAS. the pledgee can still recover all. The bank becomes a holder for value only when the depositor withdraws the amount of the deposited instrument. he will be free from such defenses. in defining things that may be wrong with an instrument uses three terms. All these circumstances should have put the plaintiff to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales. if any. therefore. it does not destroy negotiability but it means that it may only be negotiated once. (2) infirmities. but only lets in all defenses. 4) acquisition of the instrument for an illegal consideration. which practice means that the check could only be deposited but may not be converted into cash. But where the holder gave valuable consideration for the note and the other requisites of Section 52 are present. the pledgee is a holder for value for the full amount and may therefore recover all. instead of the presumption that the payee was a holder in good faith. ACQUISITION FOR VALUE Agbayani: Where the holder gave no valuable consideration for the transfer of the instrument to him. The defective title of a person over an instrument may result from the following: 1) acquisition of the instrument by fraud. However. the bank is a holder in due course against whom such defense would be unavailable.
Such infirmities are to be found in situations arising under: 1) wrong date inserted where the instrument is expressed to be payable at a fixed period after sight is undated. . Accordingly. 56. or any signature thereto. and 7) material alteration. at the time of negotiation of the instrument to him. Knowledge is required. VNITAS. 5) agent signing per procuration beyond the scope of his authority.Where 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. or knowledge of such facts that his action in taking the instrument amounted to bad faith. or force and fear. or when he negotiates it in breach of faith. by fraud. Nevertheless. notice by the holder of an instrument of any of the foregoing. or for an illegal consideration. Notice before full amount is paid. 55. and 5) others. knowledge and bad faith may be established by circumstantial evidence. where it was delivered wanting in a material particular. WHAT CONSTITUTES “NOTICE OF DEFECT” Sec. But knowledge of the exact truth is not necessary. 4) lack of valid and intentional delivery of a mechanically complete instrument. Knowledge of some truth as would prevent the taking of the instrument by commercially honest men is enough. Agbayani: The section applies to instruments which are payable on demand. not mere suspicion. . NOTICE OF INFIRMITY OR DEFECT OF TITLE Sec. or (2) of such facts that his action in taking the instruments amounts to bad faith. HOLDER NOT IN DUE COURSE Sec. or under such circumstances as amount to a fraud. either (1) of the defect or infirmity. When person not deemed holder in due course. 3) minority and other forms of incapacity to contract. When title defective. The circumstantial evidence may be so strong and decisive that to ignore it would not only be negligence but an act of bad faith. he will be deemed a holder in due course only to the extent of the amount therefore paid by him. 3) filling up and negotiating without authority an incomplete and undelivered instrument. WHAT CONSTITUTES “DEFECTIVE TITLE” Sec. 4) lack of authority of an agent. What constitutes notice of defect. Actual knowledge of facts is necessary to constitute bad faith. Knowledge of agent is knowledge by principal. Sebastian: Those things enumerated are the first things that can go wrong on the instrument.The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument. They include: 1) mistake. duress. 2) filling up a blank instrument not strictly in accordance with the authority given or not within reasonable time. .To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same.Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue. One acquiring an instrument with knowledge of any of the foregoing defenses is not a holder in due course. would render him not a holder in due course. VIRTVS. INFIRMITIES OF AN INSTRUMENT Agbayani: Infirmities include things that are wrong with the instrument itself as distinguished from those that are lacking in contracts on the instrument. the transferee must have actual knowledge. Practically no authority hold that a reasonable time for negotiating a demand note could be extended beyond a year. 53. Agbayani: To constitute notice of defect or infirmity. Agbayani: Title of a person in an instrument becomes defective either in the acquisition or in the negotiation. the person to whom it is negotiated must have had actual knowledge of the infirmity or defect. 62 LEX SOCIETAS VERITAS. 54. Section 56 does not wholly eliminate the duty of inquiry. the holder is not deemed a holder in due course. . 6) forgery.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW DEFENSES Agbayani: Defenses include common law defenses outside those covered in Section 55. surmise or fear. 2) absence and failure of consideration. or other unlawful means. .
It only affects such holder’s rights. Agbayani: A holder not in due course: 1) may sue on the instrument in his own name. The general rule that equitable defenses can be interposed against a person not a holder in due course has this exception. and 4) may enforce payment of the instrument for the full amount thereof against all parties liable thereon. and does not necessarily prevent subsequent holders from acquiring the status of due course holders. 4) but a holder not in due course who derives his title through a holder in due course and who is not himself a party o any fraud or illegality affecting the instrument. RIGHTS OF A HOLDER IN DUE COURSE Sec. and this must be proven as an independent matter of fact. In other words. the former is called a holder in due course by osmosis. Sebastian: Additional rights of a holder in due course are that (1) he holds the instrument free from defenct and defenses and (2) he may enforce payment against all prior parties. coupled with means of verifying them. Sebastian: What constitutes notice of defect does not depend on diligence but on actual knowledge as modified by De Ocampo v. Campos: Under Section 56.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Where there is knowledge of suspicious circumstances. Ifyou are claiming title under a holder in due course. the instrument becomes subject to the same defenses to which it would have been subject as if the paper had never 63 LEX SOCIETAS VERITAS. you acquire everything that belongs to the superior provided that such holder is not involved in the defect of the instrument. it is incumbent upon him to show that the person through whom he derives his title was a holder in due course. the holder must have actual and not merely constructive knowledge of the defect. VNITAS. Campos: The fact that a holder is not in due course will in no way affect the negotiability of the instrument. If an instrument is in the possession is one who is not a holder in due course. 3) holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves. real defenses can be interposed against him. Gross negligence in itself would not constitute notice since it is not the equivalent of bad faith nor of actual knowledge. 3) holds the instrument subject to the same defenses as if it were nonnegotiable. though he is not himself a holder in due course. namely 1) that he derived his title from a holder in due course. A holder in due course is only immune to personal defenses but will yield to real defenses.In the hands of any holder other than a holder in due course. Rights of holder in due course. Anything short of either actual knowledge or bad faith therefore. Agbayani: A holder in due course: 1) may sue on the instrument in his own name. has all the rights of a such former holder in respect to all parties prior to the latter. equitable defenses cannot be interposed against him by parties prior to the holder in due course from whom he derived his title. But a holder who derives his title through a holder in due course. 2) may receive payment and if payment is in due course. you are under a legal duty to prove that the prior holder is a holder in due course. Gachalian. 2) may receive payment and if the payment is in due course.A holder in due course holds the instrument free from any defect of title of prior parties. has all the rights of such former holder in respect of all parties prior to the latter. and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. . or he must have acted in bad faith. It will be noted that there are two requisites. and 2) that he was not himself a party a party to any fraud or illegality affecting the instrument. In order that a holder who derives his title from a holder in due course may recover on the instrument. the instrument is discharged. but derives his title from a holder in due course. in order to constitute notice. 57. Sec. the instrument is discharged. will not constitute notice. He is furthermore free from defenses available to prior parties among themselves. . Fossum v Fernandez Hermanos – If a person not a holder in due course reacquires from a holder in due course. Sebastian: If there is an intervening holder in due course. VIRTVS. and who is not himself a party to any fraud or illegality affecting the instrument. taking the instrument may amount to bad faith. When subject to original defense. has all the rights of such former holder in respect to the parties prior to the latter. Campos: A holder in due course can acquire a better title than his predecessors because he takes the instrument free from any defect of title of prior parties. In an indorsement. and free from defenses available to prior parties among themselves. a negotiable instrument is subject to the same defenses as if it were non-negotiable. that a person 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. the subseqent holders also become holders in due course. But of course. 58. .
The last statement seems to mean defenses which are derived from the nature of the obligation. Who is deemed holder in due course. . intoxication. a defense belong personally to one of them will not be available to the other co-makers. Otherwise. as to the defendant in its inception. 2) he was legally incapable of making the contract. 2) lapse of time or 3) discharge by payment in due course. the minor will be held liable. but which are not available against bona fide purchases for value without notice. The case of the real defense is presented where (1) the contract was void. PRESUMPTION IN FAVOR OF HOLDER IN DUE COURSE Sec. though holding legal title. or something totally different. REAL AND PERSONAL DEFENSES Agbayani: The defenses referred to in Section 57. not voidable only. or (2) the contract has lost its vitality by the occurrence of a subsequent event by: 1) material alteration without defendant’s consent. An instrument subject to real defense cannot be enforced against the person to whom the legal defense is available but it can be enforced against those to whom such a defense is not available. 3) his signature was secured by misrepresentation of the kind of paper he was signing. the right sought to be enforced has never existed or ceased to exist. illegality of the underlying transaction is a real defense. If the illegality of the instrument is by virtue of a statutory provision. mistake. Personal defenses are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him. Where the action is against joint makers. it is a real defense. 1) 2) Personal Defenses absence or failure of consideration want of delivery of complete Real Defenses 1) forgery 2) want of delivery of incomplete instrument 3) insertion of wrong date when necessary 4) filling up of a blank contrary to authority given or not within reasonable time 5) fraud in inducement 6) acquisition of instrument by force. are equitable (personal) defenses only. Niether means it can be real or personal. But as to remote parties. Sebastian: Alteration is neither a real or personal defense. which latter class of defenses can be set up against a holder in due course. A holder unaware of the nature of the note may be a holder in due course. It is a defense against everybody. They can be set up against persons not holders in due course but not against holders in due course. the instrument is valid. The same is true where the instrument is retransferred to the agent of a person not a holder in due course. fraud. But if there was misrepresentation of the minor’s age. fear. VIRTVS. 4) the contract was void under an invalidating statute. as where: 1) his signature was forged or unauthorized. to enforce it against the defendant. it is available to the benefit of the other defendant.Every holder is deemed prima facie to be a holder in due course. 59. In real defenses. The defesne of minority can only be used by the minor and other indorsers may not claim minority of the indorser. unlawful means or for an illegal consideration 7) negotiation in breach of faith or under circumstances amounting to fraud 8) ultra vires acts of corporations 9) want of authority of agent where he has apparent authority 10) insanity where there is no notice of insanity on the part of the one contracting with insane person 11) form or consideration is illegal 3) 4) 5) 6) 7) 8) 9) 10) 11) instrument duress amounting to forgery fraud in factum or fraud in esse contractus minority marriage in case of a wife insanity where the insane person has a guardian appointed by court ultra vires act of corporation where there is an absolute prohibition want of authority of agent execution between public enemies illegality of contract Campos: It should be kept in mind that the question of whether a holder is a holder in due course or not is significant only when there is an existing defense between prior parties. but when it is shown that the title of any person who has negotiated the instrument was 64 LEX SOCIETAS VERITAS. It is better to say neither than to say it is both. but where the defense of the defendant goes to the merits of the case defeating plaintiff’s right to recover. from which the holder in due course is free. Between the parties to the underlying transaction. it is only a personal defense. They are called personal defenses because they are available only against that person or a subsequent holder who stands in privity with him.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW passed through the hands of a holder in due course. 4) bankcruptcy proceedings or otherwise. duress. VNITAS. not legal (real) defenses. .
. However. without more. Asia Banking Corporation v Ten Sen Guan y Sobrinos – The reason for this salutary rule given by the courts in innumerable decision is that the guilty maker or holder of an instrument vitiated by fraud or illegality will naturally seek to put it in the hands of some other person in order to cut off the defense to which the instrument is subject. On the other hand. its dishonor by such party. The drawee is not a party liable on the instrument until and unless he accepts. protest of the bill. Before the presumption arises. LIABILITIES OF PARTIES Campos: From the point of view of liability.The maker of a negotiable instrument. the presumption does not apply in favor of a person who is no longer in possession of the instrument. in such case he becomes an acceptor. without expressly stating it in the note. 60. The parties secondarily liable are: (1) the indorser of both a note and a bill. But when it is shown that the title of any person who has negotiated the instrument was defective. a party secondarily liable is not bound to pay unless the following conditions have been fulfilled: due presentment or demand to the primary party for payment or acceptance. and admits the existence of the payee and his then capacity to indorse. Thus. acquired the title as holder in due course. The maker’s liability is primarily and unconditional. And one who has signed a maker is presumed to have acted with care and to have signed the document in question with full knowledge of its contents unless. that is. and (2) secondary party.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW defective. of course. the maker also admits the existence of the payee and his then capacity to indorse. The parties primarily liable are (1) the maker of a promissory note and (2) the acceptor of a bill. whether or not the holder demands payment from him. Sebastian: Parties who are primarily laible on an instrument are the maker and the acceptor. the primary party is duty bound to pay the holder at the date of maturity. Agbayani: The engagement of the maker is to pay absolutely the note according to its tenor. the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. as it is payable to order. engages that he will pay it according to its tenor. by merely signing his name in a note as such. there is said to be a defect in the title of the holder and the rule that possessor of the instrument is prima facie a holder in due course does not apply. It must be noted that a drawee is not even liable on the instrument. that he is the indorsee in possession of the instrument. Being unconditionally liable. and a presumption arises against the bona fides of the transfer. fraud is proved. The law therefore requires the holder of such paper to manifest the most complete can do and show exactly the circumstances under which the paper was acquired. represents to the world that the payee is an existing person with the then capacity to indorse.e. and is primarily liable on the bill. Under this definition. parties to a negotiable instrument are classified into: (1) primary party. Aside from engaging to pay the instrument according to its tenor. he must prove that he is the holder of the instrument. in order to be a holder. 65 . VIRTVS. and (2) the drawer of a bill. the maker. notice of dishonor to the secondary party and. and he is not relieved from liability even if the instrument should become overdue due to the failure of the holder to make such demand.. Maker must pay according to terms of the note. Furthermore. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. when the instrument is not payable to the holder thereof or to bearer. Liability of maker. in cases of foreign bills of exchange. the burden is on the holder to prove that he or some under whom he claims. VNITAS. But the shifting of the burden of proof to the holder where it is shown that there is a defect in the title of any person who negotiated it does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. one must be in possession of the note or the bearer thereof. and the taking of proceedings required by law after dishonor – i. LIABILITY OF MAKER Sec. Parties who are secondarily liable on an instrument are the drawer and indorsers. The main difference between a primary party and a secondary party is that the former is unconditionally liable when the latter is conditionally liable. by making it. Agbayani: The presumption expressed in this section arises only in favor of a person who is a payee or indorsee who is in possession of the draft or the bearer thereof. The maker consequently is precluded from LEX SOCIETAS VERITAS.
. each step of the way. de Yulo –A perusal of the promissory notes attached to the complaint shows that the appellee signed some of them merely as an agent of one of his co-defendant. the same must be given its legal effects. a maker is undoubtedly a party primarily liable as defined in Section 192. He cannot therefore deny his liability on the ground that no such payee in fact exists. he cannot be heard to question. renders all the signers of the note liable thereon. that is why he will pay the instrument according to its tenor. it is held that the complaint. Mere delay on the part of the creditor. TanTua Sia v Yu Biao Sontua – There being no evidence of fraud. Upon these facts. for example. pays the full value thereof. does not render him or them an accommodation maker or makers with respect to the creditor who. the maker was held liable because when he signed as a maker. upon the receipt of the note. In effect. and the payee’s interest is merely to see that the note be paid according to its terms. When the instrument after it has been issued by the maker is materially altered. The responsibility of the trustee was between the trustor and the beneficiary. and when he passes it to you. I am willing to pay. he admits the then capacity of the payee to indorse. and is of no importance that one or more of the signers has or have not received absolutely any part of the consideration. it is not necessary that any consideration should move to him. as against appellee. the accommodation party may sue the accommodated party for reimbursement. was correctly dismissed for lack of sufficient cause of action. he became a person primarily liable who undertook to make payment according to its tenor. a minor. Clark v Sellner – The fact that a joint and several note has been signed by one or various makers thereof for the accommodation by one or more of his or their comakers. the maker is saying that “I pass the instrument to the payee and he can pass it to you. VIRTVS. A maker must admit the existence of a payee and his capacity to indorse so he cannot deny his liability on the ground that no such payee in fact exists. is further corroborated by the allegation that the chattel mortage to secure them was signed by her and was constituted on her exclusive property. after maturity of the note. By executing a note. and the appellant having admitted the genuineness of his signature on the promissory note in question. the beneficiary of the trustee who is the payee of the note. inasmuch as that is the sole concern of the maker. The complaint itself alleges that on several occasions the latter. Republic v vda. 66 LEX SOCIETAS VERITAS. by making the note. That it was solely said defendant. In this case. including appellee. Sebastian: This case explains what liability one incurs if he signs an instrument. Parot v Gemora – When a promissory note is signed by two or more persons. in enforcing the guaranty given to secure the payment of said note. for he engages to pay the note according to its tenor. the corporate existence of the payee.” PNB v Maza and Macenas – The accommodation party can claim no benefit as such. Thus. Campos: Under Section 60. but he is liable according to the face of his undertaking. since it is not the payee’s concern to know how said proceeds should be spent. such comakers are individually liable for the payment of the full amount of the obligation of such contract. the maker of a promissory note cannot escape liability by alleging that he spent the money for the medical treatment of his daughter. and the latter is not released by the fact that by the lapse of time the guaranty has becomes worthless. After making payment to the holder. he will have every protection available from the indorsers to the maker. obtained several loans from the former Bank of Taiwan. the commitment to pay according to its tenor will not apply to the note because it is no longer the tenor of his obligation. for herself and through other defendants. the accommodation party being the surety. since the relation between them is in effect that of principal and surety. promising to pay the amount of the sad note juntos o separadamente. someone assures the holder that the instrument is good. Araneta v Perez – Under Section 60 of the Negotiable Instruments Law. by making the note.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW setting up the following defenses: (1) that the payee is a fictitious person because. the person negotiating is making representation with respect to prior transactions. A negotiable instrument is substitute for money andsomething acceptable to strangers to the underlying transaction of the instrument. The term maker applies only to the promissory note. who owed the loans. does not affect the liability of the maker. To fasten liability upon him. Therefore. he admits that the payee exists. In such a case the payment by the creditor of the value of the note upon the latter passing into his hands. On each step. He is the primary obligor and it is incumbent upon him to honor his commitment. VNITAS. and (2) that the payee was insane. or a corporation acting ultra vires because. A civil liability cannot be off set from a liability that arose from a breach of trust. a maker warrants that the payee as named in the instrument is existing. subject to no condition whatever. the same as if he were himself financially interested in the transaction. Sebastian: The maker is liable to pay according to its tenor because the maker wrote it. Sebastian: There was no off set because the parties to the note and the parties to the trust were different. By the last holder.
subject to these two conditions and attaches only upon their fulfillment. the drawee of acceptor is the principal debtor and the drawer becomes secondarily liable. maintain an action against the bank selling the exchange. . There is no warranty on the existence of the drawee because the drawee is not yet a party to the instrument. as if he has incorporated the provisions of Section 61 in the bill. if a bill is not paid. as by adding to his order to pay the words: (1) “without recourse. In the absence of due presentment. under Section 192. And a person in whose favor a bank sells a telegraphic exchange on a foreign bank may. STATUS OF DRAWEE PRIOR TO ACCEPTANCE 67 LEX SOCIETAS VERITAS. What is controlling is the liability of the maker. Liability for Unaccepted Bill Agbayani: Is drawer of unaccepted bill primarily liable? It has been held that until the bill ahs been accepted. or (2) if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder. without regard to whether such payee was an immediate party to the purchase of the exchange or not.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sebastian: In this case. accommodation or otherwise. He engages merely that the bill will be accepted or paid or both. the drawer is the primary debtor and after acceptance. Kauffman v PNB – A person whose favor a bank sells telegraphic exchange on a foreign country may. to argue that the check was never dishonored would result in unjust enrichment. Sebastian: The instrument in this case was not negotiable. by merely drawing the bill and signing his name in the bill as such drawer. Liability of drawer. who undertakes to pay the instrument. there was no written instrument at all.The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse. His liability is the as that of a first indorser. without regard to whether such payee was an immediate party to the purchase of the exchange or not. However. Ability to Deflect Liability Agbayani: The law allows the drawer to negative or limit his liability by express stipulation. The presumption is that every bill of exchange is drawn on account of some indebtedness from the drawee to the drawer. The liability of the drawer is therefore. the drawer is not liable. Sebastian: The drawer warrants the existence of the payee and his capacity to indorse. Therefore.” (2) “I shall not be liable in case of non-payment or non-acceptance. impliedly engages to be so secondarily liable. without more. he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. Accordingly. . according to its tenor. in case payment is refused by the bank of destination. or both. Sebastian: The checks in this case were never dishonored because they were never presented.” the drawer is not primarily liable thereon even if the bill is unaccepted. The drawer does not engage to pay the bill absolutely. Drawer may be held liable on the basis of his liability based on his contractual obligation and his statutory undertaking as the drawer of the instrument. whether the bill is accepted or not. It may be pointed out. without expressly stating it in the bill. 61. that under Section 61. the drawer will be liable to that indorser so compelled to pay. according to its tenor and that he will pay only when: (1) it is dishonored. (2) and the necessary proceedings of dishonor are duly taken. the principle of laches did not apply. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. however. which defines a person primarily liable as one “who by the terms of the instrument is absolutely required to pay the same. and that if it be dishonored and the necessary proceedings on dishonor be duly taken. LIABILITY OF A DRAWER Sec. VNITAS. Thus. the drawer is not absolutely required to pay. and engages that. VIRTVS. the drawer. the drawer becomes liable for the payment of its value to the holder provided that notice of dishonor is given. the instrument will be accepted or paid. on due presentment.” Reimbursement Obligation of Drawer PNB v Court of Appeals (1982) – Drawer of checks should pay their value to the bank who paid for them in case said checks were lost and thus were not debited against the drawer’s current account is consistent with the doctrine of preventive unjust enrichment. maintain an action against the bank selling the exchange. in case payment is refused by the bank of destination. and that the acceptance is an appropriation of the funds of the latter in the hands of the former. strictly speaking. To Whom Drawer is Liable Agbayani: The secondary liability of the drawer is in favor of: (1) the holder. in fact.
He cannot refuse to pay a holder in due course on the ground of forgery of the drawer’s signature since he admits its genuineness. capacity. the drawee who refuses to accept may. and the genuineness of the signature of the drawer. he cannot question the existence. and authority of the drawer. But he does not admit the genuineness of the indorser’s signature. because he can still deny payment to the payee. represents that the drawer exists. LIABILITY OF AN ACCEPTOR Sec. for a certain consideration. 62. if payable at some future time. . He is not liable on the instrument until he accepts it. It is to be noted. he admits the capacity and authority of the drawer to draw the bill. Neither can he refuse to pay a holder in due course on the ground of absence of consideration or other personal defense exiting between the acceptor and the drawer. without adding any word to his acceptance. although a drawee is not liable to the holder until and unless he accepts. and also to the drawer himself. and his capacity and authority to draw the instrument. not according to the tenor of the instrument. Thus. Acceptor may choose to accept the instrument on terms that are different from what was written on the instrument. and (b) The existence of the payee and his then capacity to indorse. or allege and prove any other defense which he has to the liability. 62. and even a holder in due course cannot sue him on the instrument before his acceptance. for then he engages to pay it according to the tenor of his acceptance. by accepting the bill. he becomes primarily liable on the instrument. and (3) the capacity and authority of the drawer to draw the instrument. Warranty of the payee’s existence is necessary because it was only upon acceptance that the acceptor became a party.The acceptor. Thus. the acceptor is a drawee who accepts the bill. Before acceptance. (3) Neither can the drawee escape liability by alleging want of consideration between him and the drawer as. The presumption is that every bill of exchange is drawn on account of some indebtedness from the drawee to the drawer. When you agree to pay. If there is no warranty. engages to pay unconditionally the bill according to the tenor of is acceptance. VNITAS. engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer. A bill of exchange presupposes a debtor-creditor relationship between the drawer and the drawee. If the drawee. Once he accepts. it will be presented to the drawee for payment. the better rule seems to be that the acceptor is liable on the bill even if the drawer has overdrawn his account. by his acceptance. the acceptor. Sebastian: An acceptor will pay the instrument according to the tenor of his acceptance. and that the acceptance is an appropriation of the funds of the latter in the hands of the former. Acceptor Primarily Liable Agbayani: The acceptor engages to pay absolutely according to the tenor of his acceptance. you are bound to the instrument. (2) Neither can he claim that the drawer’s signature is a forgery because he admits the genuineness of the drawer’s signature. Once the bill is accepted. 68 LEX SOCIETAS VERITAS. if a bank refuses without just reason to honor a check of one of its depositors although the latter has sufficient funds with it to cover the check. under some circumstances.” His acceptance immediately places a legal liability on him for the payment of the bill in favor of one who became a holder thereof after acceptance and if he wants to escape liability. be made liable to the drawer for breach of contract or for damages based on tort. acceptor is directly and primarily liable to the payee although initially there was no liability. There a warranty with regards to the drawer because when the acceptor accepts. the drawer may recover from the bank damages for any injury suffered by him. including that to his credit or reputation. (2) the genuineness of the drawer’s signature. After acceptance. that his signature is genuine and that he has the capacity and authority to draw the bill.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Campos: The drawee is the person on whom a bill of exchange or check is drawn and who is ordered to pay it. The mere issuance of the bill does not make the drawee liable thereon because it does not operate as an assignment of the funds of the drawee. however. had previously promised the drawer that he would honor the latter’s bill. the drawee is not liable on the bill. For the same reason. subject to no condition whatever. by accepting the instrument. by signing the bill as such. the acceptance will have no point. . His liability is not subject to any condition. without expressly stating it on the bill. the acceptor becomes primarily liable on the instrument under Sec. VIRTVS. that as already stated. Thus. Liability of acceptor. If a bill of exchange is payable immediately. Agbayani: The acceptor. admits: (1) the drawer’s existence. Effect of acceptor’s admissions: (1) The acceptor is consequently precluded from setting up the defense that the drawer is non-existent or fictitious because of his admission of the drawer’s existence. “The drawee by acceptance becomes liable to the payee or his indorsee. it is up to him to show that he is a mere agent of the drawer. the bill of exchange may be presented to the drawee for acceptance before its due date. Campos: Negotiable instruments are payable either immediately or at some future time. by merely signing the bill as such. on the other hand. unjustified refusal to accept will be a breach of the promise. the acceptor. A drawee has no liability on the bill until and unless he accepts the same. the genuineness of his signature. Thus.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
The prevailing view is that the same rule found in Section 62 applies in the case of a drawee who pays a bill without having previously accepted it. Sebastian: By acceptance, acceptor warrants that he is primarily liable. PNB v Picornell – The drawee, by accepting unconditionally the bill, becomes liable to the holder, and cannot allege want of consideration between him and the drawer. The holder is a stranger as regards the transaction between the drawer and the drawee, and if he has given value to the drawer and has no knowledge of any equity between the drawer and drawee, he is in the same situation as an indorsee in good faith. Hence in an action brought by the holder against the acceptor it is no defense that the merchandise sent by the drawer and which constituted the consideration for the drawing of the bill, is of inferior quality than was ordered by the drawee to such a degree that is not worth the value of the bill. Sebastian: An acceptor, upon acceptance, detaches himself from the underlying transaction. He assumes liability under the instrument and independent from the underlying trasaction of the instrument. Thus, defects in the underlying transaction does not affect the acceptor. Effect of Mortgage Asia Banking Corporation v Lacson Company, Inc. – Where being unable to pay certain bills of exchange which the drawee has accepted, the latter makes a mortgage in favor of the holder of said bills upon certain merchandise the value of which is sought to be collected through said bills, in order to secure the payment of said amount if the merchandise is sold and the integrity thereof while the sale is not effected, the execution of said mortgage does not constitute any novation of the obligation represented by said accepted bills, unless it is so expressly stated in said mortgage. Sebastian: Even if an instrument is secured by a mortgage, the mortgage will not operate to novate the liability of an acceptor. Subsequent constitution of the mortgage does not novate the liability of an acceptor. Payment According to Tenor of Acceptance Agbayani: Acceptor to pay according to tenor of his acceptance. It is to be noted that while the maker 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 acceptor’s acceptance may be different from the tenor of the bill, as the acceptor may accept the bill with qualifications. But, of course, if his acceptance is general, the tenor of the bill is the same tenor as the tenor of his acceptance. Thus, suppose that the bill is payable “30 days after sight” and the drawee accepts it but payable “60
days after sight.” He engages to pay the bill “60 days after sight,” which is tenor of his acceptance, not “30 days after sight,” the tenor of the bill. Suppose that the bill is for ₱1,000 and the acceptor accepts it for ₱600, he would be liable only for ₱600, the tenor of his acceptance, not ₱1000, the tenor of the bill. Sebastian: If nagbago ung tenor nung instrument, the holder may consider the instrument dishonored. Alteration Before Acceptance Agbayani: Suppose the bill is originally for ₱1,000. Before the drawee X accepts it, it is altered by the payee B to ₱4,000. Then X accepts it. How much is X liable to a holder in due course? Before the adoption of the Negotiable Instruments Law, at common law, an acceptor was liable according to the tenor of the bill. Since the adoption of the Negotiable Instruments Law, a diversity of opinion has arisen as to the effect of Section 62. According to one view, X is liable for ₱4,000 not ₱1,000. The reason is that the tenor of X’s acceptance is for ₱4,000. “since an acceptor, by Section 62 engages to pay the bill ‘according to the tenor of his acceptance,’ he must pay to the innocent payee or subsequent holder the amount called for by the time he accepted, even though larger than the original amount ordered by the drawer. Moreover, he would be a party who has himself assented tot the alteration.” A learned writer takes the opposite view and he is supported by some decisions. He suggests that the Illinois view overlooks other pertinent sections of the Negotiable Instruments Law and that Section 62 should be paraphrased to state the liability of the acceptor depends upon the terms of his acceptance, that is, whether it is a general acceptance, or a qualified acceptance or an acceptance for honor. He suggests that all three of these acceptance contracts are within the purview of the provision of Section 62 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 qualify the acceptance or to accept for honor but according to the tenor of his acceptance. Under the first view, what is the effect of Section 124 which provides that a holder in due course can recover only the original tenor of the instrument? It seems that this refers to the original tenor of the instrument taken from the standpoint of the person principally liable, in the first illustration, from X’s standpoint. In other words, the original tenor of the instrument is ₱4,000, which is the tenor of X’s acceptance. If after his acceptance, a subsequent indorsee alter the bill to read ₱9,000, then X could be liable only for ₱4,000, the original tenor of his acceptance, even as to a holder in due course. LIABILITY OF AN INDORSER
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
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Who is Deemed an Indorser Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. Agbayani: 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. But one making a note payable to his own order does not, by indorsement thereof, assume liability as indorser. And one who signs otherwise than as maker, drawer, or acceptor, will not be deemed an indorser if he indicates by appropriate words his intention to be bound in some other capacity. Accordingly, an indorser upon a promissory note or bill of exchange who indorses for the purpose of incurring any liability as to the payment of such promissory note or bill of exchange, incurs no liability. This indorsement or guaranty, however, must clearly indicate that it is for the purpose of identification only. But anyone who assumes the responsibility of identifying the payee of a check is answerable to the bank cashing the check if the bank pays its amount to such payee so identified. But where a party signed his name on the back of the check below the clause “for identification of payee’s signature and payment guaranteed,” stamped immediately after a signature appearing thereon as last indorsee, and thereafter the agents of the bank encashed the check in favor of the drawee and not in favor of the person so identified, such agents are guilty of negligence, and the bank is liable to the drawer for the amount of check. Sebastian: Under this section, the person placing his signature upon an instrument who does not signify how is to be bound is deemed an accommodation indorser and liable under Section 66. An accommodation indorser does not receive any consideration but signs it nonetheless. A deemed indorser indorses after the instrument is delivered, while an irregular indorser indorses before delivery. American Bank v Macondray & Co. – An indorser upon a promissory note or bill of exchange who indorses for the purpose of indentifying the person only and not for the purpose of incurring any liability as to the payment of such promissory note or bill of exchange incurs no liability. This indorsement or guaranty, however, must clearly indicate that it is for the purpose of identification only. CONCEPT OF AN IRREGULAR INDORSER
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. Agbayani: Where a person puts his signature on the instrument after delivery, this section does not apply. It is Section 17 (f) and Section 63 which apply. This section applies where the signature in blank is placed on the instrument before delivery. And this section deals only with the liability of the irregular indorser to the payee but does not fix the rights of various irregular indorsers as between themselves which shall be governed by Section 68, under which evidence is admissible as to the order in which they are to be liable. Definition of “Irregular Indorser” Agbayani: Based on the first sentence of Section 64, an irregular or anomalous indorser is a person who, “not otherwise a party to an instrument, places thereon his signature in blank before delivery.” In order, therefore, that a person may be considered an irregular indorse, the following three requisites must be present: (1) he must not otherwise be a party to the instrument, that is, he must not be a maker, drawer, acceptor or regular indorsee thereon; (2) he must sign the instrument in blank; and (3) he must sign before delivery. Such a party so signing is called an irregular or anomalous indorser because he indorses in an unusual, singular or peculiar manner. His name appears where we would naturally expect another name. thus, where an instrument is payable to B or order, B’s name should appear on the back of the instrument as the first indorser, but instead, we find the name of say Y as the first indorser. In such a case, Y is an irregular indorser. Sebastian: An irregular indorser signs the instrument even before issuance. Like a deemed indorser, an irregular indorser is also an accommodation indorser. He accommodates the maker/drawer. An accommodation party can never claim lack of consideration. Since an accommodation party does not have any liability to the payee or the subsequent parties, Section 64 makes the accommodation party liable because subsequent parties relied in good faith on the signature of the accommodation party. Thus, subsequent parties may look to the accommodation party for payment.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
Meaning of “Before Delivery” Agbayani: Does this mean the initial delivery or every delivery from one party to another in the curse of the negotiation of the instrument? In dealing with irregular indorsers, Ogden uses the word “initial” to modify “delivery.” On the other hand, under a case “delivery” seems to include not only the original delivery to the payee but also every delivery from the party accommodated to a subsequent party. LIABILITY OF PERSON NEGOTIATING BY DELIVERY Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Agbayani: This section treats of the warranties or liabilities of: (1) a person negotiating by mere delivery, and (2) a person negotiating by qualified indorsement. It is, of course, to be understood that one negotiating by qualified indorsement completes the process with delivery. The first refers to the instrument payable to bearer, either originally or when the only or last indorsement is in blank. But one indorsing in blank is not referred to here, as he negotiations by indorsement (although blank) completed by delivery, not by delivery only. The second refers to instrument payable to order. Thus, suppose that A makes note payable to B or order. Then B negotiates it by a qualified indorsement to C. the liabilities incurred by B by so negotiating the note are also stated in this section. Suppose that A makes a note payable to bearer and delivers the same to B. then B negotiates the note to C by mere delivery. What is the liability of B in so negotiating? By merely delivering the instrument to C, without saying more, B warrants all the matters and things mentioned in paragraphs (a), (b), (c), and (d) of Section 65 and his liability is limited only to these warranties. Thus, a person negotiating by mere delivery becomes liable to the holder only when the holder
cannot obtain payment form the person primarily liable by reason of the fact that any of the warranties of the person negotiating by delivery is or becomes false. Suppose that he instrument is altered or the maker’s signature is forged, for which reason the holder cannot collect from the maker. The party negotiating by mere delivery is liable to the holder because he warrants that “the instrument is genuine and in all respects what it purports to be.” Suppose that the maker is a minor, a lunatic or other cases of incompetency, a married woman, or a corporation acting ultra vires, for which reason the holder cannot collect from the maker. The party negotiating by delivery is liable to the holder because he warrants that “prior parties have capacity to contract.” But under the last paragraph, “a party negotiating public or corporation securities other than bills and notes, do not warrant the capacity of prior parties to contract.” Suppose that the maker was insolvent at the time of the negotiation of the instrument. This fact renders the instrument valueless, and for this reason, the holder cannot collect on the instrument against the insolvent maker. (1) If the party negotiating by delivery knew that the maker 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 knew. But if the party negotiating did not know of the maker’s insolvency, he would not be liable. (2) The party negotiating by delivery would also be liable, if he knew but concealed that the instrument is not valid for want of consideration because he warrants that he does not know of any fact which would impair the validity of the instrument. But if he did not know that fact, he would not be liable, as he does not warrant that the instrument is valid. The four warranties expressed in this section are not exclusive but may be extended by analogy to like situations. So that, when as indorser, without recourse of a note secured by a lien, released the lien after he had indorsed it to the holder, said indorser is liable for breach of warranty. The Negotiable Instruments Law, Section 65, does not state the only warranties and under said section, by analogy, the person negotiating by delivery or indorsing qualifiedly warrants also that “he will do no act to prevent the indorsee from collecting the note.” The qualified indorser has the same warranties as those of a person negotiating by mere delivery. The only difference is that, while the person negotiating by mere delivery is liable only to his immediate transferee, the person negotiating by qualified indorsement is liable to all parties who derive their title though his indorsement.
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being a holder in due course does not defeat the liability of an indorser and his warranties as set forth in Sections 65 and 66. Like an assignor. it will be honored. the instrument ceases to be negotiable. valid and subsisting. his secondary liability is not limited only to the four warranties. by merely signing his name as such on an instrument and without expressly stating it on the instrument. or to any subsequent indorser who may be compelled to pay it. And. Even if he did not sign the instrument. LIABILITY OF GENERAL INDORSER Sec. (b). on due presentment. in a Philippine case. unless he otherwise indicates. It is sufficient that there was dishonor. 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. as distinguished from qualified indorsers or persons negotiating by mere delivery. the general indorser is liable. . do not undertake to pay the instrument in the event of its dishonor. “engages that. He is liable if. Thus. or both. the indorser may still be held liable. according to its tenor. according to its tenor. any subsequent transferee cannot acquire the rights of a holder because the instrument has become non-negotiable. therefore. the restrictive nature of the indorsement should not negative the usual warranties of a seller of an instrument. in addition. Where the person primarily liable is insolvent. to the indorser’s signature. In addition to his four (4) warranties. and that their secondary liability is limited. The general indorser is secondarily liable. it merely adds the promise that on presentation. for any reason. and his rights. A qualified indorser and one who negotiates by mere delivery. Negotiation by delivery presupposes that no indorsement is necessary because the instrument is payable to bearer and therefore refers to the holder who passes the instrument in the same condition in which he received it. . If it prohibits the further negotiation of the instrument. to their warranties. 66. the person primarily liable cannot pay. Campos: A qualified indorsement is made by adding the words “without recourse” or words of similar import. Sebastian: A person liable under Section 65 does not guarantee of solvency of the person primarily liable for the payment of the instrument. Under such circumstances. he gives no assurance that the parties primarily liable will or can pay the instrument. He is in fact merely assigning the credit and is not a party secondarily liable. namely. it shall be accepted or paid. VIRTVS. However. he will pay the amount thereof to the holder. or to any subsequent indorser who may be compelled to pay it. it has been held that the law does not require that the reason for the dishonor be established. and is an obligation to protect subsequent holders for value from loss in he manner as if there was no trust. and constitutes the indorser a mere assignor of the title of the instrument. and (c) of the next preceding section. on due presentment.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW It is clear form the foregoing that a qualified indorser or a person negotiating by mere delivery are secondarily liable. Under the last paragraph. if the reason for non-payment of instrument is not about the solvency of the person primarily liable.” The qualified indorser cannot plead any of these defenses because they are covered by the warranties implied from his sale of the negotiable instrument. Moreover. a general indorser.” This is similar to the secondary liability of the drawer. on correct principles. Nevertheless.Every indorser who indorses without qualification. he engages that. and that if it be dishonored and the necessary proceedings of dishonor be duly taken. it shall be accepted or p aid. as the case may be. VNITAS. Liability of general indorser. The purpose of the negotiator in these two cases is to pass title to the instrument without incurring liability for its payment. In other words. making no indorsement at all. and that if it be dishonored and the necessary proceedings on dishonor be duly taken. as distinguished from the limited secondary liability of the qualified indorser or of the person negotiating by mere delivery under Section 65. at the time of his indorsement. he will pay the amount to the holder. he would be liable under Section 65. or both. even if he neither knew nor concealed that fact because he engages to pay if the person 72 LEX SOCIETAS VERITAS. will be merely that of an ordinary assignee. and (b) That the instrument is. It has been held that this section includes an indorser for collection. And. for. This holding seems correct where the indorser for collection receives value from the bank so that he can be considered a seller. Agbayani: This section deals with the liability or warranties of one negotiating by general indorsement. the warranties in Section 65(a) could cover most real defenses as would fall within the meaning of “genuine” and “in all respects what it purports to be. As a general rule. as the case may be. warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a). the restrictive indorser is liable to his immediate indorsee as an unqualified indorser. LIABILITY OF RESTRICTIVE INDORSER Campos: The liability of a restrictive indorser would depend on what kind of restrictive indorsement he made. This is to say that he is secondarily liable if the instrument is dishonored. if any.
It will be seen that. runs to all subsequent holders whether holders in due course or not. In Section 66 however. Warranty is only for the immediate transferee. Under Section 65. Section 66(b) imposes liability on the general indorser. In other words. Under Section 66. Warranty is for all persons deriving title from the general indorser. the party negotiating by delivery or by qualified indorsement warrants not only that he is ignorant of any fact which would impair the validity of the instrument or render it valueless. in other words. while as to the second. In this lies the fundamental difference between a qualified and a general indorser. his liability is similar to that of the qualified indorser and the transferor by delivery. if the holder chooses to exercise his right to strike out the indorsement. the party negotiating by delivery or qualified indorsement does not engage to pay the instrument if it is dishonored by non-acceptance or non-payment except when such dishonor arises from his four warranties. As in the case of general indorser. The latter is a party secondarily liable. On the other hand. the warranties of an unqualified indorser run “to all subsequent holders in due course. As between a qualified indorser and a general indorser. To validly negotiate an instrument payable to bearer on its face. he is liable not only as a vendor or assignor of a credit. the general indorser engages to pay the holder or any intervening party who may be compelled by the holder to pay if the instrument is dishonored either by non-acceptance or nonpayment. (3) Under Section 65. unlike the qualified indorser and person negotiating by delivery. There is nothing however to prevent the holder from so doing if he wishes. they extend to parties subsequent to them. his secondary liability is not limited to the four warranties. (2) Under Section 65. If he does. will be paid or accepted. if proper proceedings on dishonor are duly taken. this liability of the assignor exists whether or not he knows of the illegality or non-existence of the credits he assigned. “where a person makes an unq ualified indorsement of a promissory note. the assignor warrants the existence and legality of the credit assigned and will therefore. Indorser has knowledge of the origin of the instrument. his secondary liability is limited. it need not be indorsed. ordinarily. Summary of distinctions between liabilities of persons negotiating: (1) As to the party negotiating by delivery. but not like the general indorser. but like the general indorser. an assignor is not responsible for the insolvency of the principal debtor and will not be liable to the assignee if for that reason the assignee can not collect from the principal debtor. Campos: The general indorser makes two contracts: an assignment or sale of the instrument. the warranties of one who negotiates by delivery “extends in favor of no holder other than the immediate transferee. if the instrument is not valid and subsisting at the time of his indorsement. his warranties extend only to subsequent holders in due course. subsequent parties deriving their title from holders in due course and his immediate transferee. but by Section 66. whether or not he was ignorant of the cause thereof. like the qualified indorser or person negotiating by delivery. As a vendor.” The implication being that t hey do not run in favor of holders not in due course. He may be relieved from liability however. Sebastian: Section 65 There is no mention of the validity of the instrument but only a warranty that he has no knowledge of any fact that would impair the instrument’s validty or render it valuless. be liable to the assignee in case the assignee can not collect from the principal debtor where the credit assigned is illegal or nonexistent. the general indorser warrants that the instrument is valid and subsisting.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW primarily liable cannot pay. his liability will no longer be governed by Section 65. whether such dishonor arises from the warranties or from other causes such as insolvency. while as to the qualified indorser and the general indorser. Section 66 There is a categorical statement that the instrument is valid and subsisting. Unlike the qualified indorser. which is actually not necessary to holder’s title. Accordingly. or both. while under Section 66. and a special contract of indorsement. if this is special. the warranties of the first extend to all subsequent parties who acquire title through his indorsement regardless of whether they are holders in due course or not. by implication. It has been suggested that this phrase be interpreted to mean merely that the indorsee should not have had knowledge of the breach of warranty at the time the instrument is indorsed to him. but his liability runs only in favor of those holders who make title through his indorsement. VNITAS. the Negotiable Instruments Law specifies and defines his liability and parol testimony is not admissible to explain or defeat such liability. 73 LEX SOCIETAS VERITAS. and if dishonored he engages to pay the holder. his warranties extend only to the immediate transferee. Privity of relationship is established. . His liability on the special contract of indorsement is similar to that of the drawer and is expressed in the second paragraph of Section 66 – he engages that the instrument upon presentment.” Under this section the liability of the qualified indorser. but also on his contract of indorsement. VIRTVS.
67. but its drawer. pay the holder or any intervening party if the instrument is dishonored either by nonacceptance or non-payment. Qualified indorser Person Negotaties by Delivery immediate transferee.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Limitation of Application of the 4th Warranty Agbayani: The fourth warranty of the general indorser is different from that of a qualified indorser or person negotiating by delivery. . while a qualified indorser is liable to all parties who can trace their title to his indorsement. Thus. But the fourth warranty of a general indorser does not run in favor of holders who are parties to the illegal transaction. and became a mere voucher of proof of payment. the PNB is neither. (3) Immediate transferees. to the PNB’s alleged right to recover from PCIB. because the GSIS is not an indorser of the check. PNB v Court of Appeals (1968) – With respect to the warranty on the back of the check. Beneficiaries of the Warranties Agbayani: The law extends the warranties only to subsequent holders in due course. — Where a person places his indorsement on an instrument negotiable by delivery. . but evidence is admissible to show that. The indorser of a check does not warrant the genuineness of the drawer’s signature to the drawee who pays it since the drawee is not a holder in due course under section 52 not a holder under Section 191. Agbayani: This rule applies only with respect to an indorser as against another but not as against a holder in due course. the PCIB guaranteed only “all prior indorsements. he incurs all the liability of an indorser. it is silent as to the rights of a holder not in due course. Upon payment by the PNB. 4th Warranty Engages to Warrants that the instrument is valid and subsisting. VNITAS. Sebastian: Signing a bearer instrument makes the indorser liable under Section 66. Under this rule.As respect one another. as between or among themselves. indorsers are liable prima facie in the order in which they indorse. as drawee. Order in which indorsers are liable. all subsequent parties who acquire title through his indorsement. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. Doesn’t engage to pay the instrument if it is dishonored by non-acceptance except when such dishonor arises from the found from his four warranties. But a person negotiating by delivery is liable only to his immediate transferee. 68.” not t he authenticity of the signatures of the officers of the GSIS who signed on its behalf. every indorser is liable to all indorsers subsequent to him but not those prior to him whom he in turn makes liable. However. This section contemplates successive negotiations of the instrument 74 LEX SOCIETAS VERITAS. even if they are not holders in due course. While the qualified indorser or person negotiating by delivery warrants that he is ignorant of any fact that will render the instrument valueless or impair its validity. Warrants that he has no knowledge of any fact that would impair the instrument’s validty or render it valuless. Otherwise. they have agreed otherwise. The warranties provided for in Sections 65 and 66 do not run in favor of the drawee in respect to the genuineness of the drawer’s signature but only in favor of subsequent holders in due course. Said warranty is irrelevant. the warranties of a general indorser extend to the following: (1) Subsequent holders in due course. but. (2) Persons who derive their title from holders in due course. therefore. VIRTVS. the transferee of a qualified indorser would have greater rights than the transferee of a general indorser. whether such parties are holders in due course or not. Liability of indorser where paper negotiable by delivery. Sebastian: General indorser Extends to all subsequent parties. ORDER IN WHICH INDORSERS ARE LIABLE Sec. Accordingly. LIABILITY OF INDORSER OF A BEARER INSTRUMENT Sec. the check ceased to be a negotiable instrument. 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. The law does not use the word “only”. an opinion is expressed that there seems to be no reason why the warranties of a general indorser should not run in favor of any person to whom the instrument Is negotiated as in Section 65. It could not have been availed of by a subsequent indorsee or a holder in due course subsequent to the PCIB. inasmuch as the drawee is not such holder nor is the presentation for payment to him a negotiation.
Liability of an agent or broker. when the holder expressly releases the first indorser. . To escape personal liability as a party negotiating by delivery. and (2) state that he is acting only as an agent.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW and successive indorsements. the second joint indorser is prima facie liable to contribute and the burden of proof to show release from such liability is upon the second indorser. the second indorser will be discharged. LEX SOCIETAS VERITAS. LIABILITY OF AGENT OR BROKER Sec. two things must be disclosed. and he may sue any of the indorsers. Sebastian: This section is referring to a bearer instrument. However. if one of the joint indorsers pays the instrument. the agent must disclose his principal and state that he is acting only as an agent. as a party negotiating by delivery. The liability and warranties of the agent are those stated in Section 65. in joint and several obligations. he incurs all the liabilities prescribed by Section Sixty-five of this Act. Agbayani: This section seems to refer to instruments which are payable to bearer. It does not determine the order of liability of joint indorsers among themselves. Sebastian: Even if the law provides that an injured party can go against any of the indorsers. But parol evidence is not admissible to relieve an agent whose indorsement brings him within this section. The rule that indorsers are liable in the order they indorse is only as between or among themselves but not a against the holder. To escape personal liability as a party. unless he discloses the name of his principal and the fact that he is acting only as agent. with interest for the payment already made.” Campos: Among themselves. the agent must (1) disclose his principal. One of the joint indorsers cannot escape liability because proper notice of dishonor was not given to his join indorser. VNITAS. As agent of the principal. Consequently. indorsers are liable prima facie in the order they indorse. Rather it is actually the agent’s principal that gives warranty. To avoid liability. “he who made the payment may claim from his co-debtors only the share which corresponds to each. 75 . VIRTVS. As to the holder. namely: (1) identify one’s self as an agent and (2) identify his principal.Where a broker or other agent negotiates an instrument without indorsement. 69. they are liable in any order. Under the New Civil Code. Section 68 does not bind the holder. there are no warranties. regardless of the order of their indorsement. the action must still comply with the Rules of Court and sue all of them as indispensable parties.
VNITAS. want of consideration or amount drawn is in excess of drawer’s funds) payee’s payee is a existence fictitious person or non-existent person drawer’s existence payee’s capacity to endorse payee is a minor or an insane person or otherwise incapacitated QUALIFIED INDORSER 65 instrument is genuine and in all respects what it purports to be he has good title to the instrument forgery and material alteration GENERAL (IRREGULAR) INDORSER 66 (64) instrument is forgery and genuine and material in all respects alteration what it purports to be he has good title to the instrument he has no title to the instrument because he stole it or he procured it through fraud payee's capacity to indorse payee's capacity to indorse he has no title to the instrument because he stole it or he procured it through fraud all prior parties have capacity to contract a prior party is a minor or an insane person or otherwise incapacitated all prior parties have capacity to contract a prior party is a minor or an insane person or otherwise incapacitated in case of a corporate payee.Defenses Barred payee's existence 60 payee is a fictitious person or non-existent person payee is a minor or an insane person or otherwise incapacitated DRAWER payee's existence 61 payee is a fictitious person or non-existent person payee is a minor or an insane person or otherwise incapacitated ACCEPTOR 62 drawer is a fictitious or non-existent person drawer’s forgery of genuine drawer’s signature signature drawer’s drawer is a capacity minor or an insane person or otherwise incapacitated in the case of a corporate payee. VIRTVS. the transaction is ultra vires if the insolvency of the maker at the time of negotiation is the instrument is. UNDERTAKINGS.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW SUMMARY OF WARRANTIES. the transaction is ultra vires illegality of the note because of illegal consideration 76 LEX SOCIETAS VERITAS. DEFENSES BARRED AND BENEFICIARIES MAKER Section Warranties . at the time of his endorsement in the case of a corporate prior party. . the transaction is ultra vires drawer’s drawer lacks authority of authority to draw to draw the instrument instrument (e. the transaction is ultra vires in the case of a corporate payee.g. the transaction is ultra vires no knowledge of fact that would impair the validity of the in the case of a corporate prior party.
No undertaking to pay the instrument except if dishonor results in a breach of any of the 4 warranties. VNITAS. he will pay holder or any endorser who pays it. he subsisting would be liable for a breach of this warranty by delivery qualified Warranties extend to all holders indorsement in due course as well as to the transferee of a holder in due Warranties Warranties course. obligation is principal. and proceedings for dishonor are taken. the transaction is ultra vires Beneficiaries of Warranties instrument or would render it valueless Undertakings Unconditional and principal obligation to pay according to tenor of instrument. 77 .NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW in the case of a corporate payee. deriving title through the qualified endorsement. known to the is valid and endorser. VIRTVS. he will pay the bill to holder or endorser who may be compelled to pay it. LEX SOCIETAS VERITAS. whether or not such subsequent party is a holder in due course. The secondary extend to extend to all obligation to pay is not limited immediate subsequent to a dishonor resulting from a transferee parties breach of the warranties. obligation is secondary. obligation to pay is secondary and conditional. only. If instrument is dishonored. If bill is dishonored and proceedings for dishonor taken. Pay the bill according to the tenor of his acceptance.
payable at a special place. If it is for acceptance. In time bill or usance bill. Effect of want of demand on principal debtor. the party holding the instrument must make a notice of dishonor. unless waived or excused. but if the instrument is. to check if it is due and to avoid double presentment. This rule applies to instruments payable on demand. With the dishonor of the instrument by nonpayment. as against the payee.Presentment for payment is not necessary in order to charge the person primarily liable on the instrument. he may use the instrument. presentment for payment is necessary in order to charge the drawer and indorsers. the drawee indicates that he is willing to pay the instrument according to its tenor. If there is no demand. it is equivalent to a tender of payment to him. DEMAND ON THE PRINCIPAL DEBTOR Sec. the negotiable instrument is brought to verify the authenticity. he becomes bound as a party primarily liable on the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW PRESENTMENT FOR PAYMENT Sebastian: A promissory note is presented once while. Definition of Presentment Agbayani: Presentment is meant the production of a bill of exchange 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. Sebastian: Presentment is the physical brining of the instrument to the person primarily liable and making presentment on due date of the instrument. 78 . VNITAS. a bill of exchange is presented twice. It cannot be validly claimed that it is the presentment for payment of the bill to the acceptor which is the operative act that makes the acceptor liable under his acceptance. VIRTVS. In presentment for payment. the drawee is a stranger to the bill but from the moment he accepts. then there is no default arising from delay. such ability and willingness are equivalent to a tender of payment upon his part. Sebastian: It is not the presentment that creates the liability for persons primarily liable because the liability is already there but the presentment/demand will make it due and payable (demandable). 70. Campos: Presentment for payment need not be made to charge the primary party. The equivalent of presentment in Civil Law is demand. Checks and a bill that stipulates that presentment is waived may be presented once. . When there is presentment for payment. Acceptor is ultimately obligated to pay but may make use the period of time to pay. its functional equivalent is demand for payment. The holder You does not get paid until the lapse of the specific time/date indicated in the instrument. during such time. upon acceptance. But except as herein otherwise provided. it is only necessary in cases of bills of exchange which are payable at sight or within a certain number of days after sight. If the bill is payable at a special place it is not necessary to make presentment for payment to the person primarily liable. the instrument is dishonored by non-payment. and the holder loses his right to recover interest due subsequent to maturity and cost of collection but can still hold the former liable. as a rule. that the drawer modifying the terms of the acceptance. Before he accepts. and he is able and willing to pay it there at maturity. Demand for Payment Agbayani: Presentment for payment is not necessary in order to charge the person primarily liable. The rule is no presentment. and payment is not made. The only effect is that if. Then there will be a demand for payment of the instrument. Nature of Presentment Sebastian: There are two types of presentment. Demand on Persons Secondarily Liable LEX SOCIETAS VERITAS. If the drawee dishonors. and to receive payment and surrender it if the debtor is willing to pay. When holder presents the draft. the person primarily liable is able and willing to pay the bill at the special place at maturity. He is bound according to the tenor of his acceptance and he cannot show. It consists of a (1) personal demand for payment at the proper place (2) with the bill or note in readiness to exhibit it if required. by its terms. he wants the drawee to accept so that he will become liable. no payment. If it is for payment. The maker and acceptor are obliged to pay the instrument although no demand has been made on them on its due date and they remain liable even when it is already overdue. Campos: Presentment for payment is the presentation of the instrument to the person primarily liable for the purpose of demanding and obtaining payment thereof. the holder can go back to the drawer and hold him liable under Section 61.
After giving notice. presentment must be made on the day it falls due. Last negotiation means the last transfer for value. Where it is payable on demand. except that in the case of a bill of exchange. presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. However. PRESENTMENT OF INSTRUMENTS PAYABLE/NOT PAYABLE ON DEMAND Sec. VNITAS. or if the bill not required to be presented for acceptance. (2) within a reasonable time after issue. if it is a bill of exchange. Consequently. the persons secondarily liable are discharged and only the person primarily liable is left to answer for the payment of the instrument: 1) In the three cases required by law. there is no need for presentment for acceptance. VIRTVS. notice of dishonor by non-payment must be given to the person secondarily liable unless excused. presentment for acceptance is not necessary. notice of dishonor must be given to all persons secondarily liable. (3) or within a reasonable time after last negotiation. the exceptions herein stated are relative. 4) If the bill is dishonored by non-payment: a) notice of dishonor by non-acceptance must be given to persons secondarily liable unless excused and b) in case of foreign bills. PROCEDURE TO HOLD PERSONS SECONDARILY LIABLE ON A BILL OF EXCHANGE Agbayani: If one of the steps is not taken. Section 71 read in connection with the last sentence of Section 70 simply means that the instrument must be presented for payment on the date and period therein mentioned to charge the persons secondarily liable. Otherwise. Campos: Different rules apply to demand notes and to demand bills of exchange. PROCEDURE TO HOLD PERSONS SECONDARILY LIABLE ON A NOTE Agbayani: 1) Presentment for payment must be made within the period required to the person primarily liable unless excused. Presentment is excused in Section 148. it must be presented for payment to the person primarily liable unless excused. they are discharged except as otherwise provided for. 2) If the bill is dishonored by non-acceptance: 1) notice of dishonor by non-acceptance must be given to persons secondarily liable unless excused and 2) in case of foreign bills. so that the liability of all indorsers of a demand note expires at the same time. 3) But if the bill if accepted.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: Presentment for payment to the person primarily liable is necessary to charge persons secondarily liable. Sebastian: Present (for acceptance) instrument to drawee. the requirement of reasonable time for a bill begins to run form the last taking for value. . And the instrument must be presented on the date of maturity. the drawer and indorsers are discharged from liability. presentment must be made within a reasonable time after its issue. If the drawee dishonors. (1) if it is payable on a fixed date. Secondary liable persons are only required to pay upon notice that the person primarily liable had dishonored or declined to pay the instrument. 71. 79 LEX SOCIETAS VERITAS. and subsequent transfers between banks for purposes of collections are not negotiations within this section. holder must serve of dishonor telling the drawer that the instrument was declined. Other than these cases. Sections 79 and 80 give two exceptions to the general rule that if no presentment for payment is made. and (3) bill is drawn payable at a certain place. Presentment is necessary when (Section 143): (1) bill is payable at sight or necessary to fix maturity. protest for dishonor by non-acceptance must be made unless excused. (2) bill specifically stipulates. thus holding drawer liable to his warranties. presentment for acceptance to the drawee or negotiation within a reasonable time after acquisition unless excused. and 2) If the note is dishonored by non-payment. Otherwise. As regards demand notes the time at which the reasonable time begins to run is the date of issue of the note and not the date on which the individual indorser signed. Agbayani: Where the instrument is payable on demand. Only the drawer or indorser referred to in these sections are relived of their liability. . Presentment where instrument is not payable on demand and where payable on demand. As a rule. In other cases aside from the three. holder must give the dishonored instrument to the person secondarily liable and demand for payment under Section 61 or 65. Person not given notice is discharged and released from liability. protest for dishonor by non-acceptance must be made unless excused. the time for presentment depends upon whether the instrument is a bill or a note. if it is a promissory note. the person secondarily liable are discharged.Where the instrument is not payable on demand.
the persons secondarily liable are discharged. namely. drawee and payee al reside or are located in the same city. 73. (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented. What constitutes a sufficient presentment. 72. If no such loss is shown by the drawer. If made before maturity. it is too late and unless delay is excused by law. to any person found at the place where the presentment is made. if a note. or by some person authorized to receive payment on his behalf. (d) To the person primarily liable on the instrument. VNITAS. The time within which a check should be presented for payment is governed by Section 186. WHAT CONSTITUTES “REASONABLE TIME” Agbayani: The term reasonable time is relative or based on accepted commercial practice. a special rule with respect to presentment for payment applies to checks. 193. the secondary parties will be discharged. it is not sufficient. (d) In any other case if presented to the person to make payment 80 LEX SOCIETAS VERITAS. Agbayani: If the presentment does not comply with any of these requisites. where an instrument payable on demand is negotiated an unreasonable length of time after its issue. a demand bill of exchange should be presented within a reasonable time after the last negotiation thereof. Thus. must be made: (a) By the holder. the check remains effective as an order of the drawer to the drawee bank to pay the holder and if the bank does pay. provided presentment is made within a reasonable time from the last negotiation. presentment must be made on the day the instrument falls due. and the secondary parties thus remain liable. and not to the person secondarily liable. does not extend the time for presentment. Thus. (b) At a reasonable hour on a business day. . it is not effective. the presentment must be made on the date of maturity. the holder who takes the instrument after the laps of a reasonable time from its issue. Presentment for payment cannot be made on a Sunday or holiday. to be sufficient. VIRTVS. However. However. Place of presentment.Presentment for payment. If made after maturity. Hence. presentment of a check should be made on the business day next succeeding that on which it was issued.Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented. (c) Where 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 make payment. PLACE OF PRESENTMENT Sec.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW While a demand note must be presented for payment within a reasonable time after issue. PRESENTMENT OF INSTRUMENT PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME Agbayani: Where the instrument is payable at a fixed or determinable future time. or if he is absent or inaccessible. (c) At a proper place as herein defined. the transfer of a check to successive holders. will be subject to personal defenses. . . Under Section 71. Unlike in ordinary bills of exchange. he remains liable despite the unreasonable delay. The effect is the same as if no presentment is made. or to the acceptor. the drawer is discharged by delay in presentment only to the extent of any loss caused by such delay. It is well settled that when the drawer. where it is drawn and delivered in the place where the drawee bank is located. A presentment before maturity is not proper. In order that the holder may charge the drawer. Campos: If an instrument has a fixed date of maturity. although reasonable time may not have elapsed between the last negotiation and the presentment for payment of a demand bill. it can debit the amount against the drawer’s account. The most frequent cause of loss to the drawer which could have been prevented by a prompt presentment is the subsequent insolvency of the drawee bank at a time when the drawer had sufficient funds on deposit to pay the check. Sebastian: Reasonable time for a check is from 6 month from issuance. a notice to the makers before maturity. reminding them of the date when the note would fall due. presentment to the drawee bank should be made within a reasonable time. A check is intended for immediate use. the holder is not a holder in due course. SUFFICIENCY OF PRESENTMENT Sec. Presentment for payment is to be made to the maker. if a bill. under Section 53. What constitutes reasonable time is determined by Sec. is not a proper presentment. the liability of the drawer and indorsers of a demand bill can be preserved indefinitely.
only the other parties secondarily liable are discharged. Agabayani: But if the persons primarily liable are not partners. Exception to Rule Requiring Exhibition of Instrument Agbayani: Actual exhibition is not necessary in the following cases: a) When he debtor does not demand to see the instrument but refuses payment on some other grounds. PRESENTMENT OF INSTRUMENT PAYABLE AT BANK Sec. and if.Where the person primarily liable on the instrument is dead and no place of payment is specified. he can be found. Presentment to joint debtors. presentment for payment must be made during banking hours. 74. . primarily liable on the instrument and no place of payment is specified. A drawer may have the right to expect that the drawee will pay when. in which case presentment at any hour before the bank is closed on that day is sufficient. Instrument must be exhibited. Campos: This section gives an instance where the drawer will not be discharged in spite of lack of presentment to the primary party. The holder must use diligence to find the personal representative. Presentment where instrument payable at bank. . if there be one. and b) When the instrument is lost or destroyed. Thus. if such there be. VNITAS. presentment to him would be sufficient. Presentment where principal debtor is dead. The purpose of exhibition is to enable the debtor: 1) to determine the genuiness of the instrument and the right of the holder to receive payment. and if he can be found. PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD Sec. presentment must be made to all of them. 76.The instrument must be exhibited to the person from whom payment is demanded. The absence of a right in the drawer to require and of a right to expect the drawee or acceptor to pay is not identical in meaning. 77. VIRTVS. presentment must be made to them all. Presentment to persons liable as partners. . and 2) to enable him to reclaim possession upon payment.Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified. Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. PRESENTMENT TO JOINT DEBTORS Sec. must be delivered up to the party paying it. PRESENTMENT OF INSTRUMENT Sec. presentment has been held necessary. or if presented at his last known place of business or residence. presentment for payment must be made to his personal representative.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW wherever he can be found. 78. When presentment not required to charge the drawer. although there is no contractual duty then owed by the drawee to the drawer to pay. presentment for payment may be made to any one of them. if one of them is duly authorized by the others for the purpose. not partners. PRESENTMENT TO DRAWER NOT REQUIRED Sec. Purpose of Presentment Agbayani: Presentment includes not only demand for payment but also the exhibition of the instrument. and when it is paid. unless the person to make payment has no funds there to meet it at any time during the day. . Agbayani: In case of death of one of the makers who are partners. presentment should be made at the place specified. . Agabayani: Under this section.Where there are several persons. presentment shall not be made to his personal representative but to the surviving partner. with the exercise of reasonable diligence. A right to require payment means that there is a preexisting contract between the drawer and drawee which makes it a duty on the part of the drawee or acceptor to pay. 79. Agabayani: Presentment for payment may be made to the executor or administrator if there be one. . Sebastian: Relate this provision with Section 87. PRESENTMENT TO PARTNERS Sec. even though there has been a dissolution of the firm. 75. a course of dealing between the drawer and drawee 81 LEX SOCIETAS VERITAS. Of course. The drawer would not be discharged from his liability.Where the instrument is payable at a bank. Although the indorser himself be the personal representative. Agbayani: Sections 76 to 78 are inapplicable if there is a place specified.
Furthermore. thus. or which though foreseen. Similarly. Agbayani: Under this section. Agbayani: What is excused here is not the making of presentment but only the delay in making presentment. though he would have no reason to expect its payment. a primary party who is liable even without presentment. presentment. or makes part payment knowing that the bill has not been presented to the drawee. he has no reason to expect that the note will be paid upon presentment. PRESENTMENT FOR PAYMENT EXCUSED Sec. Where the drawer has no funds with the drawee. or if he stopped payment thereof. The drawer-drawee thus becomes a maker. (c) By waiver of presentment. if the drawer promises from time to time to pay the bill. Where the drawee is insolvent at the time a check is issued. and the drawer knows of it. Hence. Campos: The fact that the drawee bank was closed by the government dispenses with presentment. and (2) he has no reason to expect its payment. Where the drawee of a bill is a fictitious person. presentment is deemed waived. When the cause of delay ceases to operate. then no presentment can possibly be made and no secondary party can insist on it as a condition to his liability. express or implied. the holder may treat such instrument as a note. PRESENTMENT TO INDORSER NOT REQUIRED Sec. presentment must be made with reasonable diligence. 82 LEX SOCIETAS VERITAS. knowledge on the part of an indorser that the primary party is insolvent at the date of maturity does not free the holder from his duty to present. after the exercise of reasonable diligence.Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default. being the person primarily liable. in such a case. cannot be made. When presentment for payment is excused. are inevitable. or negligence. however. the accommodation payee-indorser. When delay in making presentment is excused. (b) Where the drawee is a fictitious person. misconduct. presentment is not required because under Section 130. Implied waiver of presentment may be manifested by any language or conduct or agreement between the parties reasonably calculated to lead the holder to believe that presentment is waived or to mislead to prevent him from treating the bill as he otherwise would. 82. where the instrument was not made or accepted for his accommodation. In other words. It may be implied from any conduct or act of the drawer which misleads or prevents the holder from treating the bill as he otherwise would. But insolvency of the party upon whom presentment should be made does not. the drawer would have no right to require or expect payment and presentment is therefore not necessary to charge him. Thus. VIRTVS. When presentment not required to charge the indorser. Circumstances under which waiver of presentment may be implied are varied. . Excusable circumstances are those events which could not be foreseen. the holder must take all steps likely to discover the whereabouts of the party to whom presentment is to be made. what is excused is the failure to make presentment for payment. presentment and notice are not required to charge him because he would not have the right to expect payment. 80. Agbayani: Under this section. where the drawee and the drawer are the same person. Campos: This section refers only to an indorser. VNITAS. Reasonable diligence implies active search. DELAY IN PRESENTMENT EXCUSED Sec. two conditions must concur (1) The instrtment was made or accepted for the indorser’s accommodation. or where his bank balance is less than the amount of his check. In the situation covered by the above provision. . In the usual case the indorser is entitled to presentment to the primary party because the latter is normally the principal debtor. only the other parties secondarily liable are discharged. as required by this Act. After the cause of delay ceases. the holder may treat the instrument as a bill or a note and hold the drawer liable as a maker who as a primary party is not entitled to presentment. presentment must be made within reasonable time. the principal debtor is the indorser and thus has no right to demand payment from the accommodation maker or acceptor. To excuse presentment. Thus.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW justifies the reasonable expectation on the part of the drawer that the drawee will pay.Presentment for payment is excused: (a) Where. Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. Presentment is not required where the drawee is a fictitious person because there is no one to whom presentment is to be made. is not discharged even if no presentment for payment is made because he did not give value for it. . 81.
persons secondarily liable are presumed liable in the order they become parties to the instrument. Sebastian: Under this section. . Section 86. In other words. the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may. . it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. and by including the date of payment. Campos: Presentment for payment cannot be made on a Sunday or legal holiday.Every negotiable instrument is payable at the time fixed therein without grace. without necessity of first bringing an action against the person primarily liable.Where the instrument is made payable at a bank. yet among themselves. When instrument dishonored by non-payment. since the maker cannot be compelled to pay sooner than he promised. 88. Campos: In determining the proper date for presentment. the time of payment is determined by excluding the day from which the time is to begin to run. PAYMENT IN DUE COURSE Sec. in providing that a specified event may be used as a point of time from which the period is to run. after an instrument is dishonored by non-payment. Sebastian: What about the rule on non-joinder of an indispensable party? RULE ON INSTRUMENT MATURING ON SATURDAY OR SUNDAY Sec. means any kind of event which under Section 4 will not destroy negotiability. his waiver must be with knowledge of the facts which release him. and if the note matures on such a day. LIABILITY OF PERSONS SECONDARILY LIABLE ON DISHONORED INSTRUMENT Sec.Subject to the provisions of this Act. Otherwise. VIRTVS. The maker is not discharged if the holder fails to make a presentment for payment at the bank because the maker is primarily liable. If no notice of dishonor is given to them. while it is true that they become principal debtors as to the holder. Rule where instrument payable at bank. 85. . ignorance as to their legal effect will not relieve him from liability in the absence of fraud. WHEN INSTRUMENT IS DISHONORED BY NON-PAYMENT Sec. However. The bank may charge the amount of the note from the account of the maker without further authority from the latter. . . he can recover back the money so paid. Agbayani: This section applies where the instrument is payable at a particular named bank. when the instrument is dishonored by non-payment. To bind the indorser or drawer. they are discharged. the persons secondarily liable thereon ceases to be secondarily liable. .Payment is made in due course when it is  made at or after the maturity of the 83 LEX SOCIETAS VERITAS. Time of maturity. INSTRUMENTS PAYABLE AT BANK Sec.The instrument is dishonored by non-payment when: (a) It is  duly presented for payment and  payment is refused or cannot be obtained. when instrument dishonored. VNITAS. 84. or (b) Presentment is  excused and the instrument is  overdue and  unpaid. 87. the payor must know that there was in fact a theft. or after that happening of a specified event. 83. provided that notice of dishonor is given to them. COMPUTATION OF TIME Sec. 86. the note or bill will have to be presented on the next business day. so that if he pays in ignorance of the fact that demand was not made and notice not give. This is equivalent to an order to pay addressed to the bank by the maker. Time. notice of dishonor must be given to them first. What constitutes payment in due course. after sight. Liability of person secondarily liable.When the instrument is payable at a fixed period after date. the date from which the time is to run is excluded and the date of payment included. . They become principal debtors and their liability becomes the same as that of the original debtor. after which the holder can bring an action against any one of them. But where persons secondarily liable are charged by dishonor and notice. consent given by an indorser to the holder before maturity that the time of payment may be extended to the maker constitutes a waiver. When the day of maturity falls upon Sunday or a holiday. he will still be required to pay. at the option of the holder.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Likewise. be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. how computed. Agbayani: As to the holder.
A bank to which a note is sent for collection is the agent of the owner. this amounts. The payment does not discharge the instrument. The remedy of the original holder is against the thief. He can still be made liable thereon by the true owner of the instrument. Any party prejudiced by such payment will have a remedy against the guilty party. will not operate as a discharge of the instrument. Payment to the indrosee who is not in possession of the instrument is not payment in due course. it would constitute a negotiation back to the person primarily liable and he can re-negotiate it. A new instrument given in renewal of an old one retained by the payee constitutes but a suspension of the old one until the new one is paid. if there is a forged indorsement. it is a nullity and no right passes by it. However. It is immaterial that the maker requested the holder to send the note to this bank for collection. The party paying must insist on the presentment of the instrument by the party demanding payment in order to make sure that it is at the time in his possession and not outstanding in another. Agbayani: If the payment is made before maturity. it is clear that the check is paid or discharged as soon as the holder receives the cash. If paid before maturity and the instrument is negotiated to a holder in due course. it shows its intention to honor the check and it will be deemed paid whether or not a credit entry has been made to the holder. that the holder traces his title through genuine indorsements. VIRTVS. such payment will not be considered absolute until the paper given in payment has been itself paid except where the parties expressly or impliedly agree that the claim shall be discharged by such payment. the maker or acceptor is liable to pay. payment by him even at or after maturity. As far as the maker or acceptor is concerned. SUMMARY OF RULES ON PRESENTMENT FOR PAYMENT 84 LEX SOCIETAS VERITAS. to a payment of the checks. is not a discharge unless the party receiving payment had authority from the others to receive payment on their behalf. it is still payment in due course. and if he does pay. if the instrument is payable to bearer and was stolen from the payee. just as if currency had been paid over the counter and immediately redeposited. will not be payment in due course under Section 88 and therefore. impliedly or by estoppel. when it is presented for payment. The taking of a renewal note is not a payment of the original. as he is not a holder. entry of a credit by the clearing house does not constitute payment and the drawee bank still has the right to reject the check when it reaches it from the clearing house. and received as a deposit and credited to his account. In such a case. Payment must be made to the holder at or after maturity in order to operate as a discharge of the instrument. If the payor at the time he pays knows that the holder’s title is defective. The maker or acceptor must satisfy himself. to receive payment in his behalf. and if there is a forged instrument. the maker or acceptor. it is equivalent to paying the money to the depositor. in the absence of fraud. the instrument was discharged upon his payment. The maker of the note or the acceptor of a bill must satisfy himself. On the other hand. if the bank credits the amount of the check to the depositor’s account. But a holder may prefer to deposit the amount in his own account in the drawee bank. Likewise. in the absence of any other agreement between the parties. and receiving the cash again for deposit. Campos: Payment in order to discharge the instrument must be in due course. that the holder traces his title through genuine indorsements. The original holder from whom it was stolen cannot subsequently claim payment against the maker or acceptor on the ground that he is the real owner of the instrument. The possession of notes by the maker is presumptive evidence that the notes are paid but the payee’s possession of the instrument raises the presumption that they are not paid. pays in due course. where the drawee bank charges the check to the account of the drawer. it must be made to the holder. The check will then be deemed discharged. If the holder presents a check over the counter of the drawee bank. However. as a general rule. no right can pass by it. In order to be in due course. although the latter may have known of the infirmity. When payment of an instrument is made by giving another instrument. who pays without knowledge of such loss. Where a check is presented by the payee or holder to the bank on which it is drawn. and payment by him will not effect a discharge of the instrument. his payment will operate to discharge the instrument. whether he is the beneficial owner or merely a non-beneficial owner under a restrictive indorsement. if the payor did not know or did not have notice of the defective title. Payment to one of several payees or indorsees in the alternative discharges the instrument but payment to one of several joint payees or joint indorsers. when the instrument is presented to him for payment. Payment to a prior holder will not discharge the instrument unless he is authorized by the present holder either expressly. if the party demanding payment is a holder in due course and the defect in the instrument or in the title thereto does not give rise to a real defense. Thus.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW payment  to the holder thereof  in good faith and without notice that his title is defective. the latter may recover on the instrument. . VNITAS.
has not been accepted. NOTICE OF DISHONOR TO WHOM GIVEN Sec. MEANING OF “NOTICE” Agbayani: By notice of dishonor is meant bringing whether verbally or by writing. the fact that a specified negotiable instrument. Sebastian: Parties not notified are discharged from their liability. notice of such dishonor must be given to persons secondarily liable. It is made by (1) exhibiting instrument and (2) demanding payment. Parties secondarily liable who receives notice becomes an unconditional debtor to the party serving such notice. Thus. no secondary party may be held liable. Without this notice. Sebastian: Presentment for payment is necessary so that persons secondarily liable can be made liable. or has not been paid. When an instrument is dishonored by (1) non-acceptance of a bill or (2) nonpayment of a bill or note. If paid. to the knowledge of the drawer or the indorser of the instrument. b) as to the indorser. and any drawer or indorser to whom such notice is not given is discharged. namely. VIRTVS. and that the party notified is expected to pay it. LEX SOCIETAS VERITAS. the drawer and indorsers. such parties are discharged. Campos: Notice of dishonor is bringing either verbally or in writing. c) when dispensed with under Section 82. and d) when the instrument has been dishonored by non-acceptance. This will not apply to a drawer sans recourse because a drawer may limit or negate liability under Section 61.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: Presentment for payment is not necessary to charge persons primarily liable. VNITAS. a joint maker and an accommodation maker is not entitled to notice. under Section 79. except: a) as to the drawer. To whom notice of dishonor must be given. 85 . when a negotiable instrument has been dishonored by non-acceptance or non-payment. the following are the effects: (1) Notice to an antecedent party benefits subsequent parties and (2) service of notice of dishonor makes all indorser co-obligors. But it is necessary to charge persons secondarily liable. 89. The purpose is to notify the drawer and/or the indorsers that the holder is enforcing his right against them under their contract to pay should the instrument not be paid or accepted at maturity. and that the party notified is expected to pay it. under Section 80.Except as herein otherwise provided. to the knowledge of a drawer or indorser of an instrument. must be surrendered to person liable to enable person to check genuineness and to retrieve upon payment. . upon proper proceedings taken. notice of dishonor must be given to the drawer and to each indorser. upon proper proceeding taken. Assuming that all indorsers were notified. Otherwise. Persons primarily liable need not be given notice of dishonor in order to charge them because they are the very ones who dishonor the instrument. the fact that a specified negotiable instrument. has not been accepted or has not been paid. except in the cases where the law provides otherwise.
it will be incumbent upon the plaintiff who seeks to enforce the defendant’s liability upon a negotiable instrument as indorser to establish liability by proving that notice was given to the defendant within the time and in the manner required by the law that the instrument in question has been dishonored. . Agbayani: Notice of dishonor may be given by: 1) the holder. Under the law on procedure. or an indorsee for collection. Notice given by the maker is not binding unless he has been authorized. EXCEPTIONS TO THE RULES REQUIRING NOTICE Agbayani: Notice of dishonor to persons secondarily liable is necessary to charge them except: a) when notice is waived (Section 109). a restrictive indorsee who is a trustee for the benefit of another. upon taking it up. Where there is no proof in the record tending to show that plaintiff gave any notice whatsoever to the defendant that the instrument in question has been dishonored. and f) as to a holder in due course without notice (Section 117). the indorser engages to pay only if the instrument is dishonored and the “necessary proceedings” on dishonor are duly t aken. Campos: A holder. Thus. . c) as to drawer. his liability is conditional. said plaintiff has not established its cause of action. under Section 114. VIRTVS.Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice. He can only give notice to another party against whom he has a right of reimbursement should such party giving notice pay the instrument. NOTICE BY AGENT Sec. either expressly or impliedly. Sebastian: Notice of dishonor is notice given to persons secondarily liable. and that person declined to make payment. By whom given. he is discharged. In case of service of notice. the complaint must allege and prove presentment to the maker and notice of dishonor. respectively. on notice of dishonor and if such notice is not given. It may also be given by one duly authorized by the holder to collect though he himself is not a holder. It is required because when you seek to recover from persons secondarily liable. such a party cannot give notice of dishonor to everybody. BURDEN OF PROOF Asia Banking Corporation v Juan Javier – If. Sebastian: The person who will give notice is the holder or any person in behalf of the holder. d) as to indorser. and 4) another person in behalf of such party.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Under Section 66. and 62. under Section 115. 3) any party to the instrument who may be compelled to pay the holder. Thus. said indorser is released from all liability upon the document. However. BY WHOM GIVEN Sec. after a negotiable instrument is dishonored for non-acceptance or non-payment. e) where due notice of dishonor by non-acceptance has been given (Section 116). would have a right to reimbursement from the party to whom the notice is given. or that the same are dispensed with under Sections 82 and 109. to give such notice. and failure to notify the indorser discharges his obligation. b) when dispensed with under Section 112. Thus. you must first tell them that the person primarily liable had defaulted. 86 LEX SOCIETAS VERITAS. you are calling upon them to pay pursuant to the warranties they made under Sections 66. The indorser’s knowledge that the maker was in default on a note does not dispense with notice of dishonor. Hence. or is not required under Section 118. Notice given by agent. 2) another in behalf of the holder. whether that party be his principal or not. 90.The notice may be given by or on behalf of the holder. “Necessary proceedings” on dishonor means notice of dishonor and in case of foreign bills of exchange. And the burden of proving due notice or that notice was waived or excused is on the holder. the plaintiff does not sufficiently establish the defendant’s liability. whether he is the owner of the instrument or not. VNITAS. among other things. bringing to their attention the fact that the instrument was presented to person primarily liable. 91. an additional requirement of protest. the showing to the indorser by the maker of a telegram demanding payment of the maker is not sufficient notice. . and who. or by or on behalf of any party to the instrument who might be compelled to pay it to the holder. the agent does not need to have authority to serve notice of dishonor. can give a binding notice. may give notice of dishonor. Campos: To charge the indorser. 65. the indorser is not notified of the fact in the time and manner prescribed by law. Where these facts are not proven. This group would include notaries and attorneys. A prior indorser may give notice to parties prior to him because he is a party who might be compelled to pay the instrument to the holder and upon so paying would have a right of reimbursement from the party notified.
Notice by agent is governed by 2 provisions. it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. the latter has the same time to notify the secondary parties. Sec. Where notice is given by or on behalf of a party entitled to give notice. If he gives notice to his principal. He must serve notice of dishonor to the indorsers and to the holder himself. Effect of notice on behalf of holder. SUFFICIENCY OF NOTICE Sec. diligent effort to make personal service upon the indorser. VNITAS. he must do so within the same time as if he were the holder. 96. is given. the notice must contain the following: 1) sufficient description of the instrument to identify it. When agent may give notice. Agbayani: The benefit referred to here is the right to charge the person secondarily liable who received the notice. To constitute compliance with the rule. and who.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: Notice of dishonor may be given by an agent and it is not necessary that the agent be authorized by the principal. not by the holder but by a party entitled to give notice under Section 90. 87 LEX SOCIETAS VERITAS. 92. But whatever insufficiency it has. The principal has also the same time to give notice to the parties secondarily liable. the collecting bank should notify either the drawer directly or his principal (the holder) of such dishonor within the time specified by Sections 103 and 104. Effect where notice is given by party entitled thereto. he must give notice within the time allowed by law as if he were a holder. 94. Should he decide to notify the holder. upon taking it up. you are not creating liability. it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. the instrument that was dishonored is in the possession of the agent. 2) a statement that it has been presented for payment or acceptance. Sebastian: An insufficient notice makes the notice defective. NOTICE OF NOTICE Sec. FORM OF NOTICE Sec. A mere recital in a notice that the instrument was not paid would be sufficient to constitute a statement that it was dishonored. . 95. the party to whom this benefit inures can charge the party receiving the notice of dishonor. Sebastian: In the case of the agent of the indorser. and indicate that it has been dishonored by nonacceptance or non-payment. however.A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. it must be accompanied by language will inform the party addressed that the instrument had been duly presented. Sec. and that it has been dishonored. rather you are seeking to enforce a right. Agbayani: If the agent chooses to give notice to his principal. . A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. or he may give notice to his principal. The notice. he may either himself give notice to the parties liable thereon. would have a right of reimbursement from the party to whom notice is given. as if the collecting bank were an independent holder. it may be cured. Agbayani: The principle involved here is the same as under Section 92. and 3) a statement that the party giving notice intends to look for the party addressed for payment. receipt of the notice creates a liability. Campos: A typical example of an agent under the above section is the bank with whom a check has been deposited by the holder for collection.The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument. by a party to the instrument who might be compelled to pay it to the holder. and the principal. . has himself the same time for giving notice as if the agent had been an independent holder. Form of notice. upon the receipt of such notice. 93. the evidence must show either actual personal service. Agbayani: Whether written or oral. or an ordinarily intelligent. In the case of an agent giving notice. The word “may” in the last sentence is held to mean that a choice is allowed for the service of notice. It may in all cases be given by delivering it personally or through the mails. namely.Where notice is given by or on behalf of the holder. even he himself did not give the notice. Campos: The notice must (1) identify the instrument and (2) make known the fact that it has been dishonored either by non-acceptance or non-payment. . . In a personal service. When notice sufficient. Under Section 94.Where the instrument has been dishonored in the hands of an agent. VIRTVS. In other words. Assuming the check is dishonored by the drawee bank.
by merely receiving the notice. Parties primarily liable are not entitled to notice. a special power of attorney is necessary because when an agent receives notice of dishonor. Sec. Otherwise. and 3) if with reasonable diligence he could be found. the notice may be left with anyone found in charge therein. If you serve notice not to the person himself. or (3) if there be one but he cannot be found with reasonable diligence. Installment notes w/o acceleration clauses are deemed to be separate notes with respect to each installment. provided that: 1) his death is known to the party giving notice. joint makers. But Article 1878 of the Civil Code does not include receipt of notice of dishonor as one of the instances where a special power of attorney is required. Notice where party is dead. A single notice of dishonor to persons secondarily liable for the entire amount. 98. service of notice depends on the circumstances.When any party is dead and his death is known to the party giving notice. upon default of one payment. (2) or although his death is known to the party giving notice but there is no persona representative. But when you are trying to serve the person itself. Notice to agent must be distinguished from notice attempted to be given to the party himself where he is absent at his place of business or residence. and he is unavailable.” Sebastian: Section 97 says that service does not need to be directly to the parties secondarily liable. And if notice is given to an agent. To ascertain that the agent is authorized to receive notice of dishonor. If there was no power of attoney. he must be duly authorized to receive notice of dishonor. But for Installment notes with an acceleration clause. because it is clear therefrom that an agent to be competent to receive notice of dishonor must be an agent “in that behalf. . In the latter. he is put on inquiry to find out whether there is a personal representative or not. If he is not authorized to receive notice of dishonor. or joint acceptors. he can be found. you must ascertain that the agent is properly authorized. This suggests that the power of attorney of the agent must state he has the power to receive notice. If he neglects to make 88 LEX SOCIETAS VERITAS. The notice must state that it was presented for payment and the fact that payment was refused. Sec. service of notice of dishonor is only for the amount defaulted. It may be served on the agent of the party secondarily liable. notice may be sent to the last residence or last place of business of the deceased. an accommodation indorser is entitled to notice. the notice must be given to a personal representative. notice must be given to his personal representative. In a case of installment note that is defaulted. Agbayani: Accordingly. Sebastian: A notice does not have to be in writing. there was no agent or anyone else in charge. which is not within the scope of a general power of attorney. When you know you are dealing with an agent. the contingent liability of the indorser becomes a real liability. describe in a manner sufficient to inform persons secondairly liable which instrument was in fact dishonored. To whom notice may be given. 97. It may be verbally made. Persons primarily liablen include an accommodation maker. You can run after indorser only up to the amount default because the entire balance is not yet due. but to a person who is supposedly an agent of the person secondarily liable. Receipt of notice of dishonor must be within the power of the agent. default in one installment results to the entire balance becomes due. receipt creates an obligation on the part of the indorser to make good his warranty under Section 66. Campos: Not every agent of the party sought to be charged would be a proper agent within this section. (1) if his death is not known to the party giving notice. If there were diligent efforts to serve notice. the notice is not valid. VIRTVS. Notice may also be sent by telegraph. What is necessary is to give details of the dishonored instrument. If there be no personal representative. if there be one. If he is not. But although the party is dead. VNITAS. Notice may thus be given by telephone provided it be clearly shown that the party to be notified is fully identified as the party at the receiving end of the line. then service is fatally defective and secondarily liable parties are discharged. 2) there is a personal representative. then notice may be sent to the last residence or last place of business of the deceased. and if with reasonable diligence. TO WHOM NOTICE IS GIVEN Sebastian: Notice of dishonor is given to parties secondarily liable. It must contain that you are holding the person secondarily liable for the value of the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Campos: Notice may be given orally or in writing. This only applies if the holder/server of notice know that he is dealing with an agent. Agbayani: When the person to be given notice of dishonor is dead. . Thus. it is deemed that the notice of dishonor is waived. Campos: If the party’s death is known to the holder.Notice of dishonor may be given either to the party himself or to his agent in that behalf. you must establish his authority. An irregular indorser must also be given notice if he is to be charged. Therefore. And notice by service of process against the indorsers has been held sufficient where process was served within the time prescribed by law. you don’t need to establish the agency if you will leave the notice to any person available. you must ask for a power of attorney. service is required to ascertain if the agent is authorized to receive notice. .
and the heirs. such as joint drawers. not the estate. 99.Where a party has been  adjudged a bankrupt or an insolvent. 101. Thus. if only one of such joint parties is notified. . . Agbayani: The provisions of this section do not apply to joint payees or joint indorsees who indorse as such joint indorsers to whom notice of dishonor has been given are not discharged by reason of failure to give notice to the other joint indorsers. 104 and 107. and presentment must be made on the date of maturity. will not discharge the former. if the fact of death is not known to the holder. or to joint accommodation indorsers who are not solidarily liable under Section 68 as t hey are neither payees nor indorsee. it will be sufficient. But where the joint parties are not jointly and severally liable. notice of dishonor must be given after the close of banking hours on the date of maturity. But even in such cases. Their liability under Section 100 is conditioned upon notice to each of them. But if the instrument is payable at a bank. 100. the holder must serve notice to his personal representative. The purpose of giving prompt notice is to give the persons secondarily liable every opportunity to secure themselves such as. VIRTVS. Notice of dishonor may be given on the date of maturity. Sec. Accordingly.Notice may be given as soon as the instrument is dishonored and. such as. . even though there has been a dissolution. Sec. Accordingly.Where the parties to be notified are partners. the instrument cannot be said to be dishonored by non-payment unless it is overdue and unpaid. it is not dishonored if the maker deposits the amount of the instrument before the close of banking hours. Agbayani: The reason for this rule is that each partner is an agent of the partnership of which he is a member.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW inquiry and the personal representative could have been found with reasonable diligence. notice to the last resident or place of business of the deceased would be ineffective to charge the estate. The latest time at which a notice of dishonor may be given depends in part on whether the party to give 89 LEX SOCIETAS VERITAS. regardless of the indorser’s knowledge that the maker was in default. of course. Notice to persons jointly liable. An administrator or executor is not considered as the personal representative of the deceased becaise an administrator or executor represents the court. unless the one notified was given authority to receive for the others. Hence. Thus. provided that the instrument has been presented for payment and it has been dishonored. WHEN NOTICE IS GIVEN Sec. Notice of dishonor can be given only after the instrument has been actually dishonored. Campos: This section should be interpreted with Section 68 under which joint payees or joint indorsees are deemed to indorse jointly and severally. joint payees and joint indorsees are deemed to have indorsed jointly and severally. Campos: Notice to one partner is notice to firm although it was fraudulently suppressed by the partner who received it. notice to any one partner is notice to the firm. this rule will not apply to joint payees and joint indorsees because notice to one is notice to all. 102. 100 applies and notice to each of them is necessary to charge any of them. presentment is excused. Thus. notice may be given either to the party himself or to his trustee or assignee. Campos: The earliest time at which a notice of dishonor may be sent is immediately after dishonor. although it will discharge the latter. the creditors. this section applies to joint parties other than joint payees and joint indorsees who indorse. to enable the party to be charged to preserve and protect his rights against prior parties. Section 98 does not impose on him the duty to notify the personal representative. Notice to partners. and a notice of dishonor by non-payment before maturity of the instrument is premature and ineffective. Thus. Notice to bankrupt. Sec. if there is one and can be found with reasonable diligence. unless delay is excused as hereinafter provided. Time within which notice must be given. But where the notice is actually received by the party within the time specified in this Act. and notice given before the paper becomes due is premature and insufficient. notice to one is notice to the others. Notice of dishonor may not be given before the date of maturity because an instrument cannot be said to be dishonored for non-payment unless presented. Agbayani: The time for giving notice is fixed in Sections 103. VNITAS. though not sent in accordance with the requirement of this section. . Sebastian: In Section 68. or has  made an assignment for the benefit of creditors. unless. . must be given within the time fixed by this Act. On the other hand. a notice to only one of them is sufficient to charge the notified indorser and the failure to notify the others. all of them are discharged. to drawers who sign a bill jointly. Sebastian: Section 98 implies that the contingent liability of the secondarily liable persons is not extinguished by their death. although he could have discovered such fact with the exercise of reasonable diligence.Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. Sec.
notice of dishonor must be sent to that address. attention to the president.Where the person giving and the person to receive notice reside in the same place. 108. The burden of proof of actual receipt of the notice will rest upon the party who gave it.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW notice and the party to be notified are in the same place or in different places. WHEN NOTICE IS DEEMED GIVEN Sec. the sender is deemed to have given due notice. The sooner the holder holds them liable. it must be given before the usual hours of rest on the day following. the notice may be binding upon proof by the sender of its actual receipt. those secondarily liable. or (2) the party giving notice and the party to receive notice resides in different places. Campos: Notice of dishonor is duly addressed under Section 105 when a letter or post card has been written by the sender and properly stamped.Where a party has added an address to his signature. or (b) If he lives in one place and has his place of business in another. or if there be no mail at a convenient hour on last day. Thus. the party to receive notice would be discharged. where the president of the corporation and the corporation were both indorsers. VNITAS. notice may be sent to the place where he is so sojourning. . Hence. should a notice be given on a Sunday or holiday. (b) If given at his residence. VIRTVS. if a notice is not given within the time fixed by Sections 103 and 104. 106. 103. At any rate.Where the person giving and the person to receive notice reside in different places. Thus. Where parties reside in different places. what constitutes. notice must be given within the following times: (a) If given at the place of business of the person to receive notice.Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post90 LEX SOCIETAS VERITAS. 104. or (c) If he is sojourning in another place. containing the information required by Section 96. it must be deposited in the post office in time to reach him in usual course on the day following. Sec. . Sec. notwithstanding any miscarriage in the mails. rebuttable or conclusive. Agbayani: The law provides a different period for giving notice of dishonor depending upon whether (1) the party giving notice and the party to receive notice resides in the same place. and which notice bears the name of the party to whom notice is to be sent and the designation of the proper place. . Campos: The sending of a notice to an address designated by the indorser will be sufficient even though the address is an incorrect one. then the notice must be sent as follows: (a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters. . the notice is inoperative and the secondary party so notified is discharged. notice of dishonor is served to protect the holder and in turn. mailing will not give rise to the presumption of receipt. The same place refers to the corporate limits of a town or city where the presentment is made or where the holder resides. However. a mailed notice of non-payment addressed to the corporation. the act may be done on the next succeeding business day under Section 194. Where the time for giving or sending notice falls on a Sunday or a holiday. Deposit in post office. . Immediate notice must be served. notice given out of time would be considered not to have been given. may be able to preserve their claim against the person primarily liable. by the next mail thereafter. (b) If given otherwise than through the post office. Sebastian: Notice must be served within 24 hours unless there is excusable delay. Where notice must be sent. (c) If sent by mail. was held not to be duly addressed to the individual indorser so as to give rise to the presumption of due notice. it must be deposited in the post office in time to go by mail the day following the day of dishonor. Unless excused.Where notice of dishonor is duly addressed and deposited in the post office. Their contingent liability will be converted to an actual liability. In this case. Sec. The holder serves notice to secondarily liable persons when the person primarily laible refuses to pay. Where parties reside in same place. it must be given before the close of business hours on the day following. then within the time that notice would have been received in due course of mail. Where notice is sent to an address other than the one designated. WHERE NOTICE IS GIVEN Sec. notice may be sent to either place. When sender deemed to have given due notice. it is sufficient. the sooner they can make a claim against the person primarily liable. but if he has not given such address. Requiring them to pay means they will ask reimbursement from the person primarily liable. the notice must be given within the following times: (a) If sent by mail. 105. . if it had been deposited in the post office within the time specified in the last subdivision.
is a waiver of lack of notice. . unconditional debtors. But where copy of the protest is sent by mail in good season addressed to the drawer. A waiver is embodied in the note itself. 109. . VIRTVS. it binds him only. addressed and mailed. Sebastian: Waiver is the abandonment/relinquishment of an existing right. it is binding upon all parties. Similarly. it cannot bind the other parties secondarily liable. What Constitutes Waiver of Notice Agbayani: Waiver is the intentional abandonment of a right. . he has. If you place the waiver outside the instrument. and it will not be inferred from doubtful acts of language of the indorser. or at least. only parties secondarily liable may waive notice of dishonor. and the waiver may be expressed or implied. . time of. It may be expressed or implied. all indorsers appearing below it are bound and the holder need not give them notice to hold them liable. contradicted. but must be proved by clear and unequivocal evidence.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW office department. If the waiver is written above the signature of the indorser. But such a waiver does not make the indorsers liable as co-makers since their obligation to pay is still a contingent liability. Accordingly.Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice. A waiver is valid when (1) you own the right you are waiving. Sebastian: Waiver of notice of dishonor may be waived before due date or after it has been committed. there is a waiver of notice on the original note. Thus.Where a party receives notice of dishonor. Notice to subsequent party. it binds him only. Otherwise. The burden of proof is on the holder to show waiver of notice. VNITAS. after the receipt of such notice. In other words. a person waiving must have the right to notice of dishonor. Campos: A letter from the indorser to the holder after dishonor. that the presumption is conclusive if not rebutted. notice would not deemed to have been deposited in the post-office. It has been held that when the notice by letter is duly stamped. and the addressee’s (indorsers) evidence that he had not receive the notice will be excluded. it is binding upon all parties. the notice. the same time for giving notice to antecedent parties that the holder has after the dishonor. A printed waiver on the back of the instrument above the indorsements is a waiver embodied in the instrument itself. The letter box must be under the control of the post-office department. 110. whether in the case 91 LEX SOCIETAS VERITAS. Waiver of protest. but the indorsers procure the holder to consent to an extension of time of payment and accept a renewal note. in this sense.A waiver of protest. therefore. waiver may be done at any time prior to payment. is not proper. NOTICE TO ANTECEDENT PARTIES Sec.Where the waiver is embodied in the instrument itself. If the waiver is embodied in the instrument itself. Otherwise. PERSONS AFFECTED BY WAIVER OF NOTICE Sec. but. even though mailed. Agbayani: The notice must be properly addressed. . Whom affected by waiver. contradicted. 107. (3) it is deliberate and (2) it did not result from vice of consent. 111. or at least. “the presumption is now conclusive that the latter received it. Consequently. when a note is dishonored and no notice is given to indorsers. The effect is to make all the subsequent indorsers unconditionally liable and. Waiver of notice. Types of Waiver of Notice Campos: Waiver may either be express or implied. where it is written above the signature of an indorser. Time of Making a Waiver of Notice Campos: Waiver may be made before or after maturity of the instrument. Agbayani: The persons affected by waiver depends upon whether the waiver is in the instrument itself or is written above the signature of an indorser. notwithstanding any miscarriage in the mails. WAIVER OF PROTEST Sec. It is binding upon all parties. the sender is deemed to have given due notice which is presumed to be received by the addressee. It would see. stamped and mailed. (2) the right exists (not expected or inchoate). admitting liability. not having been rebutted. WAIVER OF NOTICE Sec.
Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person. Failure to give due notice to the other parties secondarily liable will discharge them. constitutes notice of dishonor of the bill. But where notice of dishonor is wavied. DISPENSING NOTICE OF DISHONOR Sec. Delay in giving notice. Campos: Reasonable diligence depends upon the circumstances of the case. . Sebastian: If the basis is beyond control of the person serving the notice of dishonor. where there is no antecedent contractual relation between the drawer and drawee under which the drawee is bound to accept or pay. misconduct. (e) Where the drawer has countermanded payment. When notice is dispensed with. 115. — Notice of dishonor is not required to be given to an indorser in either of the following cases: (a) When the drawee is a fictitious person or person not having capacity to contract. . (b) When the drawee is fictitious person or a person not having capacity to contract. VNITAS. the absence of contractual relation between the drawer and drawee will not always operate to free the holder from the duty to give notice to the drawer. and the indorser was aware of that fact at the time he indorsed the instrument. (c) When the drawer is the person to whom the instrument is presented for payment. Similarly. On the other hand. 113. it was held that reasonable diligence had not been exercised. mailed the notice to a co-indorser whose address he knew. thus considering the drawer a “maker” and a primary party. there must be service as soon as the cause of the delay is gone. and which was not received. When notice need not be given to indorser. Agbayani: As to a particular person secondarily liable on an instrument. the holder is given the option under Section 130 of treating the instrument as a promissory note. and the holder demands payment from the drawer within such time that he should give notice of dishonor to the drawer. Agbayani: Where protest is waived. Campos: The reason for not requiring notice under paragraphs (a) and (b) is that in each of these cases. delayed service is excused. (c) Where the instrument was made or accepted for his accommodation. where notice is sent to a town where the indorser had never lived. The reason for non-requirement of notice under paragraph (c) is because such demand for payment. it cannot be given to or does not reach the parties sought to be charged. Thus. notice must be given with reasonable diligence. . it was held that reasonable diligence had been exercised. it is ineffective. (b) Where the indorser is the person to whom the instrument is presented for payment. after the exercise of reasonable diligence. failing to find it. not due to negligence or misconduct. 112. is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. When notice need not be given to drawer. VIRTVS. These sections apply only to the drawer or indorser concerned. or negligence. where the holder examined a telephone directory for the address of the defendant and. in a case where the holder inquired of the payee and mailed the notices to the address given by such payee. However.Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default. such as the drawer or an indorser. DISPENSING NOTICE OF DISHONOR Sec. and 2) where the drawee is fictitious or without capacity to contract. notice of dishonor is not required because the drawee has no right to require that the drawee accept or pay. notice of dishonor to him is not necessary: 1) where he has knowledge of the dishonor by means other than through a formal notice. where the drawer of a check has no account or no sufficient funds with the drawee bank. Under paragraph (d). of itself. 92 LEX SOCIETAS VERITAS. Sec. as when he is both the drawee and drawer or when presentment is made him. If there is excuse for delay.Notice of dishonor is dispensed with when. then later he learned of the indorser’s address and mailed a second set of notices. or a case where for some reasons presentment is not required or is dispensed with. how excused. but failed to inquire of the co-indorser.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW of a foreign bill of exchange or other negotiable instrument. he is not entitled to notice of dishonor. 114. presentment and notice of dishonor are deemed waived also. Thus. When the cause of delay ceases to operate. presentment is not waived. The case referred to must be one where presentment has been made upon the drawee who dishonors the bill. (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument. . DELAY IN GIVING NOTICE OF DISHONOR Sec.
117. his rights against secondary parties are lost and such rights will not be revived by a subsequent presentment for payment. (c) By the intentional cancellation thereof by the holder. the drawee may accept or pay. It will merely constitute a negotiation back to the principal debtor who can renegotiate the instrument. while protest for other negotiable instruments is optional. (2) a payment made by the principal debtor. (d) By any other act which will discharge a simple contract for the payment of money. If payment is made before the date of maturity. . Notice of dishonor is not required where the drawer has countermanded payment because it is his own act which causes the dishonor of the instrument. Whether primary or secondary. (b) By payment in due course by the party accommodated. It relives all parties. OMISSION OF NOTICE OF NON-ACCEPTANCE Sec. the instrument is not discharged as the payment is not in due course. . When protest need not be made. VNITAS. DISPENSING PROTEST OF FOREIGN BILLS Sec. and the payer may cancel indorsements subsequent to his own and re-issue the paper. VIRTVS. LEX SOCIETAS VERITAS.Where due notice of dishonor by non-acceptance has been given. how discharged. Sebastian: In a negotiable instrument. “countermanding payment” is the same as a “stop order” and means ordering the drawee bank not to pay the check issued by the drawer. If the holder then gives due notice of dishonor. but protest is not required except in the case of foreign bills of exchange. from further liability on the instrument. Instrument. when must be made. 118. NOTICE OF NON-PAYMENT Sec. notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. 93 . the only obligation meant to be discharged is that for payment for a sum of money. as the case may be.An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. his payment only conceals his own liability and those obligated after him. it may be protested for non-acceptance or non-payment. If he fails to give notice of dishonor by non-acceptance. the payment must be (1) a payment in due course. (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. . Notice of non-payment where acceptance refused. All prior parties primarily liable or secondarily liable to the bill. Where the payment is made by a party who is not the primary obligor or an accommodation party. Where any negotiable instrument has been dishonored. By Principal Debtor Agbayani: In order to discharge the instrument.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW who may have a reason to “expect” that despite such absence. Effect of omission to give notice of non-acceptance. Sebastian: This section is not an exception to give notice. he may enforce his rights against them by an action. Campos: A dishonor by non-acceptance confers upon the holder an immediate right against all secondary parties. 116. 119.A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor. where the instrument is made or accepted for his accommodation. HOW INSTRUMENTS ARE DISCHARGED Sec. Agbayani: Protest is necessary for foreign bills of exchange. Performance of the obligation in the instrument is the payment of the sum of money by the person primarily liable to the holder of the instrument and the discharge of the monetary obligation to the person liable discharges the instrument. and it will be valid against the prior parties. Functional equivalent in civil law is the extinguishment of the contract. DISCHARGE OF NEGOTIABLE INSTRUMENTS Campos: The discharge of the instrument effects the extinguishment of the obligations arising thereunder. are liable to such payer.
it is not payment in due course. And if the intention was to give the money in payment. but it can still still extinguished because of confusion or merger of the rights of the debtor and creditor. Civil Code) Whoever pays on behalf of the debtor without the knowledge or against the will of the latter. LEX SOCIETAS VERITAS. not a party to the instrument or a virtual stranger. the presumption is that he has bought it and not paid it off. and that is where an instrument has been protested and some one voluntarily makes ‘payment supra protest’ or ‘for honor’.When a person makes a payment and he is not the party obligated to pay.e. he can recover only insofar as the payment has been beneficial to the debtor. 1236. By Accommodated Party Agbayani: As between the accommodation party and the accommodated party. he fulfills the representation made by the drawer and by the indorsers and therefore payment by him will also discharge the instrument. Although the drawee is not a party until he accepts and payment by him is literally not a discharge under Section 119. the instrument is not discharged because payment is not made by the person principally liable. “Principal debtor” would include the maker and the acceptor. There are people who can make payment that will not discharge the instrument. If a holder refuses to accept payment from a person who could be made to pay. a third person can make payment for an obligor. Sebastian: As a rule. 94 . If not at or after maturity. otherwise it would constitute a purchase or negotiation. a creditor is not compelled to accept a third party payment. It must be understood that not any one who desires may pay the instrument and then recover of the maker. Payment must be made by or on behalf of the principal debtor. payment for honor). If the parties agree to discharge the instrument by a renewal note. (Art.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW The term “principal debtor” refers to the person ultimately bound to pay the debt. his payment in due course discharges the instrument as if payment was made by the principal debtor. except that if he paid without the knowledge or against the will of the debtor. Campos: Payment is the most usual way of discharging a bill or note. VNITAS. but by novation or by agreement. Sebastian: When the instrument is paid by a third party. It may also be made by a accommodation party. Performance of the obligation has to be plain and simply the payment of money. In civil law. When one who is not a party to a negotiable paper pays his money for it and takes up the paper. Payment must be made to the holder. He must be a person who has in some way made himself liable for the payment of the instrument. the latter is the one ultimately liable on the accommodation instrument. and the instrument would remain outstanding. which modes are expressly recognized under Section 119 (d). the instrument cannot be presumed to have been paid. Whoever pays for another may demand from the debtor what he has paid. Hence. cannot compel the creditor to subrogate him in his rights. such as those arising from a mortgage. It must be payment in due course. or penalty. guaranty. This presumption can be overturned when there is expressed that the payment is to discharge the instrument. As a rule. However. payment should be in money in order to effect its discharge. Not all types of payment will discharge the instrument. it will be considered a negotiation of the instrument. a negotiable isntrument is discharged by payment. the instrument is not discharged. When the person primarily liable on the instrument pays it before due date. This is true whether he is a party to the instrument or not. there is a presumption that the instrument was negotiated to him. there must be payment in due course by on or behalf of a principal debtor. VIRTVS. otherwise. (Art. But in Negotiable Instruments Law. the instrument is discharged. Under Section 88 payment must be made at or after maturity. A third party payment can be made by a total stranger (i. Payment must be made in good faith and without notice of the defect of the title of the holder. it would be discharged not by payment strictly speaking. that person and all subsequent parties are discharged. This is because the instrument can still be renegotiated. or whether he appears to be liable primarily or secondarily in the instrument. By Third Person The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation. not all payments discharges an instrument. There is however one exception to this. Since a negotiable instrument must contain an unconditional promise or order to pay a sum certain in money. Civil Code) Agabayani: If payment is made by a third person. it is possible. unless there is a stipulation to the contrary. Under the New Civil Code. 1237.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
Campos: Payment by the accommodated party if the instrument is made or accepted for his accommodation is actually payment by the principal debtor, whether or not he appears to be a party to the instrument. Cancellation by Holder Agbayani: The cancellation must be intentional and made by the holder. Cancellation may be done by tearing the instrument, burning it or writing across it the word “cancelled.” There must be an intention to cancel the 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. Thus, the instrument is not discharged where the cancellation is made under a mistaken belief that it has been fully paid when as a matter of fact there is a failure of such payment, or where cancellation is induced by fraud. Sebastian: What is important here is that cancellation must be intentional. Only the holder can do this. In this case, the presumption is that he does not intend to recover from the party primarily liable on the instrument. This presupposes that the holder gave consent to the cancellation. It is not enough to say that the cancellation was intentional. It is equally important to say that cancellation was not only intentional, but it must be a cancellation that is free from any vice of consent. When you cancel an instrument, the presumption is that it is intentional. To enforce the instrument, you must prove that the cancellation was unintentional. By Acts that Discharge a Money Debt Agbayani: Novation would discharge the instrument. However, it has been opined that paragraph (d) of Section 119 is meaningless and inoperative in light of the other provisions of Section 119, and that consequently the provision has not altered the unwritten rule as to discharge of negotiable instruments, either as between the parties or with respect to holders in due course. By Merger or Legal Compensation The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (Art. 1275, Civil Code) In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (Art. 1279, Civil Code) Extension of Time of Payment Agbayani: An extension of time granted by the holder to the debtor will not discharge the instrument because this ground is not omitted in Section 120 and it is omitted in Section 119. Sebastian: Extension of time without consent of parties secondarily liable will discharge them. This makes the obligation of the parties secondarily liable more onerous. In altering the tenor of the instrument, there must be consent of the person primarily liable and all parties secondarily liable. Principal Debtor Acquires Instrument Agbayani: In order to discharge an instrument under paragraph (e), reacquisition mmust be (1) by the principal debtor, (2) in his own right, and (3) at or after the date of maturity. In his own right means not in a representative capacity. Reacquisition by the principal debtor in his own right but before maturity will not discharge the instrument. It will merely constitute a negotiation back to the principal debtor who, under authority of Section 50, may renegotiate the instrument. Discharge by Operation of Law Agbayani: An instrument may be discharged by operation of law. If a judgment is obtained on a bill or a note, the bill or note is thereby extinguished and merged in the judgment. But the judgment alone, without actual satisfaction, is not extinguishment as between the plaintiff and other parties not jointly liable with the original defendant, whether those parties be prior or subsequent to the defendant. A discharge in bankruptcy, unless otherwise provided by statute, releases a bankrupt from all his provable debts, and therefore will discharge the bankrupt on all bills accepted, or notes made by him but will not discharge the other parties.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
A discharge (1) of a party not given due notice of dishonor or (2) by the Statute of Limitation is a discharge by operation of law. Sebastian: Discharge of the person by operation of law does not discharge the instrument. When a person primarily liable is excused by the law from payment of the instrument, there is a discharge by operation of law. Take note, the instrument is not yet discharged.; only the person. Persons secondarily liable will remain liable as indorsers. Thus, when the party primarily liable is discharged by operation of law, the instrument is not discharged because parties secondarily liable are still required to pay. In execution of judgment, the instrument is not discharged because it is not the instrument that you are paying; it is the judgment of the court that is being executed. DISCHARGE OF PERSONS SECONDARILY LIABLE Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's 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 expressly reserved. By Discharge of Instrument Agbayani: Any of the acts that will discharge an instrument under Section 119 will discharge the parties secondarily liable thereon, such as, by payment in due course by the maker. This discharges the indorsers of the note. By Intentional Cancellation Agbayani: No consideration is necessary to support a discharge by intentional cancellation of an indorser’s signature by the holder. By the Discharge of Prior Party
Agbayani: The intentional cancellation of a prior party also discharges the subsequent parties thereto because if the latter were not discharged, and he is made to pay be the holder, he would not be able to enforce his right of recourse against the prior party who has been discharged by the holder. By Valid Tender of Payment Agbayani: Tender of payments means the 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. But where an instrument is payable at a bank and the indorser waived protest, the fact that the maker had money on deposit in the bank at maturity was held not sufficient tender under Section 70 and 87 to discharge an indorser. Notice of that fact must be brought to the holder. Sebastian: When a party secondarily liable offers to pay the holder and the latter declines payment, that party as well as all subsequent parties are considered discharged because it is not fair that if the holder fails to collect from the person he wanted, the holder goes back to the persons secondarily liable who already offered to pay the instrument. Subsequent parties must also be discharged because if the holder comes after them, they will eventually go after the original secondarily liable person. If an indorser goes to the place of payment and he is able and willing to discharge the instrument, and the holder refuses to take it from him, there is a valid tender of offer which was declined. Under the principles of the Negotiable Instruments Law, mere presence is equivalent to a tender of payment. There is no discharge if the bank failed to inform the holder that there were insufficient funds for the bank to pay the instrument. In civil law, if the creditor is in mora accipienti, he suffers the following: 1) If obligation is for delivery of a particular thing, the responsibility of the debtor is diminished to responsibility arising from fraud and gross negligence. 2) If the thing is lost, the creditor bears the loss. 3) If the thing is declined by the creditor requires expenses for preservation, the expenses is bourn by the creditor. The creditor will cease to have title to the instrument for refusing to accept a valid tender of payment. By Release of Principal Debtor
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
Agbayani: If the holder releases the principal debtor, the persons secondarily liable are also discharged as (1) this discharges the instrument and (2) deprives them of their right of recourse against the principal debtor. But if on releasing the principal debtor, the holder reserves his right of recourse against the parties secondarily liable, they are not discharged. The reason is that the effect of such reservation is the implied reservation of their right of recourse against the principal debtor. In other words, while the holder cannot hold the person principally liable, he can hold the parties secondarily liable, but they in turn can hold the principal debtor should any of them be made to pay the holder. This reservation of the right of recourse cannot be implied from acts and conduct but must be express. The release must be a voluntary act of the holder, not by operation of law. If the release is not for value, it is not a discharge of secondary parties. As to an accommodation maker or acceptor, the general rule is that he is not discharged by the holder’s release of the principal debtor even if the release be made with knowledge of the true relation of the parties and, conversely, the release of an accommodation maker or acceptor does not discharge the principal debtor though the latter occupies the position of a party “secondarily liable” on the instrument. By Extension of Time Agbayani: If the holder agrees to extend the time of payment, the indorsers are discharged. The following, however, are exceptions: 1) where the extension of time is consented to by the party secondarily liable, he is not discharged, and 2) where the holder reserves his right of recourse against the party secondarily liable, the latter is not discharged. PAYMENT BY PERSON SECONDARILY LIABLE Sec. 121. Right of party who discharges instrument. - Where 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 strike out his own and all subsequent indorsements and against negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated.
Agbayani: The first effect is that the instrument is not discharged but it discharges the party paying. The second effect is that the party paying is remitted to his former rights against parties prior to him. If he was formerly a holder in due course, even if at the time of payment he already had notice of defects of title, he can enforce his rights against any of the parties prior to him free from defenses, as he is remitted to his former rights. But it is a well-known rule of law that if the original payee of a note, unenforceable for lack of consideration, repurchases the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee’s hands to the same defenses to which it would have been subject if the paper never passed through the hands of a holder in due course. This is also true where the instrument is retransferred to an agent of the payee. The third effect is that the party paying can strike out his indorsement and subsequent indorsements. The fourth effect is that the party paying can renegotiate the instrument. Where there is a slight ambiguity in this section on this point, the exceptions would seem to apply only to the right to negotiate but not to the rule that the instrument is not discharged. Accordingly, where a drawer of a certified check was required to take up the check because of the failure of the drawee bank, the instrument is not discharged and he is subrogated to the rights of the payee. In the following cases, the party secondarily liable who pays cannot negotiate the instrument: 1) If the drawer pays as the bill is payable to the order of a payee, he can no longer negotiate the instrument. 2) If the payee is an accommodated party and pays, he cannot negotiate the bill because he is the ultimate person to pay it and he does not have a right of recourse against either the drawee or drawer. Campos: Payment by an indorser at maturity, not on behalf of the principal debtor but in discharge of his own liability, does not discharge the instrument but constitutes the indorsee a holder of the instrument, which remains a continuing obligation against the primary party. Neither does payment by drawer discharge the instrument. Sebastian: If payment is made by parties secondarily liable, the instrument is not discharged. The party who paid may still run after the persons primarily liable. Basically, the right of enforcement merely goes up until it reaches the person primarily liable. Party who pays the instrument, even if technically not a holder in due course, is restored to his status from the time he originally held the instrument.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
Agbayani: Cancellation signifies not only the drawing of criss-cross lines but also tearing. or after its maturity. Sebastian: The requisites for cancellation are basically the same as those of renunciation.The holder may expressly renounce his rights against any party to the instrument before. Similarly. burden of proof. EFFECT OF UNINTENTIONAL CANCELLATION Sec. Cancellation is inoperative (1) when made unintentionally. applies only to renunciation by a unilateral act of the holder without consideration and in cases where the instrument is not delivered up to the person intended to be realeased. oral novation under which the obligation of other persons is accepted in lieu of that of the maker of a note. if the instrument is delivered to the person primarily liable. . An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. Thus. This section does not apply to. VIRTVS. Therefore. 123. unintentional. or burning. the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. this term includes the release of a claim by virtue of an accord and satisfaction as well as a gratuitous waiver of liability. 98 . . It may be made by any other by means by which the intention to cancel the instrument may be evident. Where an instrument or signature thereon appears to have been cancelled. Sebastian: Renunciation is. the presumption was that the burning was intentional and done for the purpose of cancelling the instrument. LEX SOCIETAS VERITAS. or (3) when made without authority of the holder. it does not prevent an oral gift of an indebtedness by the payee to the makers coupled with an intentional destruction of the notes. 122. Definition of Renunciation Agbayani: Renunciation is the act of surrendering a right or claim without recompense but can be applied with equal propriety to the relinquishing of a demand upon an agreement supported by a consideration. the renunciation may be oral. Section 119(e) would cover the case of an oral release with consideration. erasures.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW RENUNCIATION BY HOLDER Sec. Cancellation. Renunciation by holder. (2) when made under a mistake. VNITAS. where it appeared that the date and the signature of the maker of the note where destroyed by burning. Requisites of Renunciation Agbayani: Renunciation discharges the instrument when it is: 1) absolute and unconditional. 2) it is made in favor of the person primarily liable. obliterations. However. at. the party claiming that the cancellation is inoperative must prove his allegations. Form of Renunciation Agbayani: The renunciation must be express and in writing.A cancellation made unintentionally or under a mistake or without the authority of the holder. But a renunciation does not affect the rights of a holder in due course without notice. a debt condonation. considered in connection with Sections 119 and 120. and the burden was on the holder to prove the contrary. and 3) it is made at or after maturity. is inoperative but where an instrument or any signature thereon appears to have been cancelled. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Agbayani: This section. or prevent discharge by. in effect.
Banker’s Acceptance Agbayani: A draft or bill of exchange of which the acceptor is a bank or banker engaged generally in the business of granting banker’s acceptance credit. VIRTVS. Campos: A banker’s acceptance is a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. defined. Like the trade acceptance. Clean and Documentary Bill of Exchange Agbayani: “Clean bill of exchange: is one to which are not attached documents of title to be delivered to the person against whom the bill is drawn when he either accepts or pays the bill. drawn by a seller on a buyer for the purchase price of goods. drawn by a seller against the purchaser of goods as drawee. for a fixed sum of money. the draft becomes an acceptance. They are of limited negotiability because they may only be indorsed once. bearing across its face the acceptance of the buyer. It is usually payable to order. signed by the person giving it. It is used LEX SOCIETAS VERITAS. It is more versatile and more popular than the trade acceptance as it is used not only in domestic transactions but even more so in international trade for financial. . “Documentary bill of exchange” is one to which are attached documents of title to be delivered and surrendered to the drawee when he accepts or pays the bill. or at the end of a stated time in a transaction where goods are bought from a wholesaler and the latter. instead of taking the buyer’s promissory note. who writes “Acceptance” across the bill’s face and signs it. at sight. Bill of exchange. TYPES OF BILLS OF EXCHANGE Drafts Agbayani: A common term for all bills of exchange and they used synonymously. VNITAS. (2) A draft or bill of exchange drawn by the seller on the purchaser of goods sold and accepted by such purchaser. A banker’s acceptance is similar to a trade acceptance. the fundamental difference being that the banker’s acceptance is drawn against a bank instead of the buyer.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW BILLS OF EXCHANGE DEFINITION OF BILL OF EXCHANGE Sec. drawer and drawee bank are liable to purchaser of draft for not complying with his instructions. 126. it differs from other bills in that it specifies the transaction which gave rise to it. Unlike the trade acceptance. showing on its face the acceptance of the purchaser of goods and that it has arisen out of a purchase of goods by the acceptor. .A bill of exchange is an unconditional order in writing addressed by one person to another. Trade Acceptance Agbayani: (1) A bill of exchange payable to order and at a certain maturity. Its use is generally limited to domestic transactions. which is accepted by the bank. Trust Receipts Treasury Warrant Money Orders Agbayani: A species of draft drawn by the post office upon another for an amount money deposited at the first office by the person purchasing the money order and payable at the second office to a payee named in the order. In bank drafts. Sebastian: Once a bill is signed and accepted by the drawee. import and export transactions. 99 Campos: A trade acceptance is a draft or bill of exchange with a definite maturity. a banker’s acceptance. D/P and D/A Bills of Exchange Agbayani: “Documents against payment bill (D/P Bill)” is a sight or time bill to which are attached to documents to be delivered and surrendered to the drawee when he has paid the corresponding bill. 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. executes a time bill on the buyer. which is accepted by the buyer. Trade Acceptance states upon its face that the obligation of the acceptor arises out of purchase of goods from the drawer confined to credit obligations arising from the sale of goods must have a definite maturity Bill of Exchange does not state upon its face that the obligation of the acceptor arises out of purchase of goods from the drawer cover various kinds of transactions may be payable on demand.
on its face purports to be. Sebastian: A bill does not operate as an assignment of funds in the hands of the drawee. Bill not an assignment of funds in hands of drawee. Agbayani: Where the drawee has not accepted the bill drawn against him. 127. there is no preference of one bill over another.A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof. Sebastian: The liability of two or more acceptors is joint and solidary. When a bill of exchange is accepted. . 130 Drawer and drawee is the same person – treated as a promissory note If the drawer and drawee is the same person o Drawer instructs himself to pay the payee Same if the drawee is fictitious Same if the drawee is incapacitated Enforcement of the instrument as BOE or PN depends on the holder. And a holder in due course of a dishonored bill has no cause of action against the drawee either at law or in equity as an assignee of the drawer’s contractual rights underlying the bill. If there are 2 or more acceptors.A bill may be addressed to two or more drawees jointly. both drawn and payable within the Philippines not required to be protested Foreign Bill a bill which is. even if the drawer has funds with the drawee. Sec. an unaccepted draft cashed by a bank at the drawer’s request is not an assignment of the drawer’s funds in the hands of the drawee. BILLS DRAWN ON MULTIPLE DRAWEES Sec. the maker. even if the drawer has sufficient funds in the hands of the drawee to pay for the bill. Bill addressed to more than one drawee. or (2) to be payable in the Philippines but drawn outside thereof. Futhermore. VNITAS. the “drawer” would then be a party primarily liable on the instrument to whom notice of dishonor need not be given. whether they are partners or not. the holder may treat the instrument at his option either as a bill of exchange or as a promissory note. Distinction Agbayani: Inland Bill a bill which is. 130. the holder need not prove presentment for payment or present the bill to the drawee for acceptance. Time or Usance Bills Agbayani: “Sight bills” are bills which are payable upon presentation or at sight or on demand. This does not mean there is earmarking of funds. Bills in Set Inland and Foreign Bills LIABILITY OF DRAWEE Sec. it purports (1) to be drawn in the but payable outside thereof. Treating the bill as a note would constitute the drawer. Conflict Rule BILL TREATED AS A NOTE Sec. but not to two or more drawees in the alternative or in succession. . and the drawee is not liable on the bill unless and until he accepts the same. Unless the contrary appears on the face of the bill.An inland bill of exchange is a bill which is. Inland and foreign bills of exchange. . Time or usance bills” are bills which are payable at a fixed future time or at a determinable future time. 129. Agbayani: In all these cases.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW “Documents against acceptance bill (D/A Bill)” is a time bill to which are attached to documents to be delivered and surrendered to the drawee when he accepts the bill. VIRTVS. they cannot end up pointing to each other kung sinong magbabayad and demand on one or either is a demand for the whole amount. Any other bill is a foreign bill. . INLAND AND FOREIGN BILLS Sec. on its face purports to be. the holder cannot enforce it against him. the holder may treat it as an inland bill. Instead there is an agreement of the drawee to make payment for the drawer either because the drawer has money with the drawee or the drawee agrees to lend the drawer money. Thus. on its face. both drawn and payable within the Philippines. When bill may be treated as promissory note. Thus. notice of dishonor need not be given to the drawer to charge him. 100 LEX SOCIETAS VERITAS. both drawn and payable outside the Philippines required to be protested A bill is foreign if. 128. –  Where in a bill the drawer and drawee are the same person or  where the drawee is a fictitious person or  a person not having capacity to contract. or on its face purports to be.
Acceptance a promise to perform an act Payment actual performance thereof Campos: Acceptance only applies to bills of exchange and its object is to bind the drawee and make him an actual and bound party to the instrument. how made. Sebastian: Acceptance is not required for all bills of exchange. Constructive Sec.The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need. The acceptance must be in writing and signed by the drawee. Agbayani: If the referee pays. to return the bill accepted or non-accepted to the holder. . The moment it is presented to you. 101 . VIRTVS. the holder has the option to go to the person in case of need. Such person is called a referee in case of need. or refuses within twenty-four hours after such delivery or within such other period as the holder may allow. by and so forth. the referee is substituted to the rights of the indorser and may go after the other indorsers or the maker. It must not express that the drawee will perform his promise by any other means than the payment of money. Referee in case of need. that is to say. KINDS OF ACCEPTANCE Actual Sebastian: A simple signature will not constitute acceptance because the law provides that signature without indication in what capacity is deemed to be an indorser. Acceptance. VNITAS. 137. Liability of drawee returning or destroying bill. Sebastian: If the instrument is not paid and indorser is being made to pay and he cannot perform his liability. It is in the option of the holder to resort to the referee in case of need or not as he may see fit. It is only required only if it is a time draft. But if the referee in case of need makes good on the obligation of the indorser.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW REFEREE Sec. It is an act by which a drawee assents to the request of the drawer to pay it. the obligation to pay arises. LEX SOCIETAS VERITAS. DEFINITION ACCEPTANCE Sec. . no need to go to a drawee to accept. 132.Where a drawee to whom a bill is delivered for acceptance destroys the same. . In the case of a draft payable on demand.Such person is not obligated to pay because he did not affix his signature on the instrument.The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. Agbayani: Acceptance is the signification of the drawee of his assent to the order of the drawer. You merely go to the drawee for payment. in case the bill is dishonored by non-acceptance or non-payment. he will be deemed to have accepted the same. he may recover the amount from the drawer or indorser who has named him as referee in case of need. It is the same when the bill is a sight draft. 131.
139. (d) Qualified as to time. or (2) where the drawee refuses. within 24 hours after such delivery. The drawee is not entitled to keep the bill while he makes up his mind. Sec. the drawee destroys the bill or failed to act on presentment after 24 hours. implies a demand for its return if acceptance is declined. and fails to accept within such period or within such other period as the holder may allow. In any of theses cases. The drawee could still accept by notification within twenty-four hours. . Should he return it unaccepted within 24 hours. unless it expressly states that the bill is to be paid there only and not elsewhere. Should he return it before the 24-hour period. Thus. . If the drawee. an acceptance to pay part only of the amount for which the bill is drawn. 140. the holder must treat the bill as dishonored or else he will lose his right against prior parties. the holder then would be required to treat the bill as dishonored or lose his right against prior parties. which makes payment by the acceptor dependent on the fulfillment of a condition therein stated. Kinds of acceptance. the bill is not necessarily dishonored because he can still accept it until the expiration of the 24th hour. Mere failure to return the bill within twenty-four hours is acceptance. Agbayani: A general acceptance is one that assents without qualification to the order of the drawer. Accordingly. Campos: Section 140 provides that a general acceptance is an acceptance to pay at a particular place. VNITAS. What constitutes a general acceptance. still refused to act after the expiration of the time allowed. but return within twenty-four hours unaccepted would not be a dishonor. A general acceptance assents without qualification to the order of the drawer.An acceptance is qualified which is: (a) Conditional. if the bill is retained by the drawee. under Section 185 a check was subject to the same rules and that failure to return within twenty-four hours a check sent to a drawee bank for payment was an acceptance upon which the holder could recover against the bank. Agbayani: A qualified acceptance is one which in express terms varies the effect of the bills as drawn. But it does not necessarily follow that because the law is silent as to be presented for payment that the result should be different from the case of presentment for acceptance. although the delay was due to the neglect of a third person. (b) Partial. (e) The acceptance of some. Thus. Further. If the drawee returns it with a statement of refusal to accept. . the drawee will be primarily liable as an acceptor. Qualified Sec. the drawee would be required to comply on pain of being held as an acceptor. The consideration involved in both cases are the same. or within such time as is given him. Sebastian: There is constructive acceptance when upon presentment. The mere fact that the acceptance is to pay at a particular place does not make the acceptance qualified but to say that to pay only at a particular place makes the acceptance qualified. the drawee agrees to the order of the drawer without any other qualification. an extrinsic acceptance would play an important part. Sections 136 and 137 expressly cover only presentment for acceptance and presentment for payment is not covered. that is to say. General Sec. The 24-hour period is counted from delivery and not from demand for the return of the bill. after returning the bill. The bill is at all times the property of the holder and he is entitled to have it when he wants it. Campos: Under Section 141. Sebastian: In general acceptance. then even if the 24 hour period has not lapsed. the bill should then be considered dishonored. that is to say. 102 LEX SOCIETAS VERITAS. VIRTVS. the presentation for acceptance is a demand for acceptance which.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: There is constructive acceptance (1) where the drawee to whom the bill is delivered for acceptance destroys it. one or more of the drawees but not of all. A qualified acceptance in express terms varies the effect of the bill as drawn. the instrument is still negotiable and does not violate Section 1(b). Here.An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. 141.An acceptance is either general or qualified. Campos: The drawee has 24 hours after presentment within which to make up his mind whether to accept the bill or not. (c) Local. If the holder should demand its return before twenty-four hours. an acceptance to pay only at a particular place. to return the bill accepted or not accepted. Qualified acceptance. . the following are qualified acceptance: 1) Conditional – The condition does not qualify the order to pay but only the acceptance. that is to say. the drawee will be deemed to have accepted the bill even if there is no actual written acceptance by him.
103 LEX SOCIETAS VERITAS. Upon the other hand. Thus. pursuant to the principle enunciated in Section 18. . (3) it must not express that the drawee will perform his promise by another means than the payment of money and (4) it must be communicated or delivered to the holder. actual payment of the amount of a check implies not only an assent to said order of the drawer and recognition of the drawee’s obligation to pay the aforementioned sum. Sebastian: An acceptance must be in writing to avoid relying on the recollection of the parties with regard to their liabiity on the insturment. VNITAS. A qualified acceptance does not always result to a dishonored bill. they remain liable on the instrument. DELIVERY OF ACCEPTANCE Agbayani: The acceptance is incomplete until delivery or notification. but also a compliance with such obligation. in the place of the first indorser. Until there is delivery. and (signed by the drawee. is not an acceptance under Section 135. the payee or other holder has no recourse against him but only against the drawer and indorsers. the drawee becomes liable on the bill. which. A holder need not take a qualified acceptance but instead may insist on a general or unqualified acceptance. He must return the instrument to the holder and say when to come back for the decision. An oral acceptance is not binding on the drawee. and more reliable in its nature than the statement or recollection of witnesses. acceptance is not required for checks because they are payable on demand. it is treated as qualifiedly accepted. a collateral writing stating that the defendant is authorizing A to make sight drafts if necessary for commissions due from time to time as they accrue. may treat the bill as dishonored. Campos: Under Section 132. VIRTVS. if given. may revoke an acceptance before delivery and cancel the written acceptance. the requisites for a valid acceptance are: (1) it must be in writing. the drawee has up to 10:00 am June 2 to accept the bill. It must be signed by the drawee to manifest his consent. And the acceptor or drawee who has not communicated his acceptance or transmitted the accepted bill to the holder. In the words of the law. However. It must not express that the obligation will be performed other than payment of money. the date of maturity will fall on June 11 and not on June 12. the drawee/acceptor has every right to revoke the acceptance. Such peron has the time until delivery before the acceptance becomes permanent. A holder may treat the bill as dishonored and must give notice of dishonor to all parties secondarily liable. The bill becomes in effect a note. an acceptance of a future bill must be unconditional. the additional process of protest must be complied. If notified and they do not express their dissent within a reasonable time. REQUISITES OF ACTUAL ACCEPTANCE Agbayani: Actual acceptance must be (1) in writing. The acceptance cannot be made orally because sound public policy requires some substantial and tangible evidence of contract. unlike a partial indorsement which under Section 32 does not operate as a negotiation of the instrument. he should give notice thereof to the drawer and indorsers. in the case of a check. (2) it must be signed by the drawee. And lastly. Although the acceptance of a bill may be conditional.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW 2) Partial – A partial acceptance does not affect the negotiability of the instrument. In addition. However. and upon his failure to obtain the latter. he would not be bound. is the payment on demand of the sum of money. SIGNATURE OF DRAWEE Agbayani: Without the signature of the drawee. If he accepts the bill on June 2. Take note that if the drawee/acceptor asks for time to decide whether or not he will accept the instrument. Campos: Acceptance. will retroact to the date of presentation. otherwise the latter will be discharged from liability. Payment of a check does not include or imply its acceptance in the sense that this word is used in Section 62. and (3) it must not change the implied promise of the acceptor to pay only in money. if he agrees to a qualified acceptance. and the drawer. he cannot hold the instrument. Sebastian: If the acceptance seeks to change the agreement between the payee and the drawer. 4) As to Time 5) As to Drawee – If the bill is addressed to more than one drawee and only one of them should accept. if a bill is payable 10 days after sight. because the agreement is conditional. if any. Thus. But should the drawee refuse to accept. 3) Local – Acceptance is qualified as to place of payment. the acceptor standing in the place of the maker. and it is presented at 10:00 am on June 1. For a foreign bill. the acceptance of a bill the signification by the drawee of his assent to the order of the drawer. EFFECTS OF ACCEPTANCE Agbayani: Upon acceptance. the acceptance is qualified. it must communicated and delivered to the holder. otherwise it will not be considered an acceptance. FORM OF ACCEPTANCE ACCEPTANCE OF CHECKS Agbayani: In general.
this will do. and 5) the holder takes the bill on the faith of the forward acceptance. Sebastian: When an acceptance is made on a separate instrument. if given. The first is sometimes referred to as an “extrinsic acceptance” and the second is a “virtual acceptance. It is enough that the bill is received on faith of the separate acceptance.An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who. and must be clear and unequivocal. and promise to accept it. Sebastian: This section contemplates that the bill is accepted even before it could be written. be noted. on faith thereof. o To avoid creating doubt on the acceptance Acceptance by means of telegram o According to agbayani.The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill. or (2) on a separate paper. An acceptance on a separate paper may be either an acceptance of an existing bill or an acceptance of a future bill. 136. give notice of dishonor.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW ACCEPTANCE OF BILL ON ITS FACE Sec. it must identify the bill to which the acceptance refers. receives the bill for value. Agbayani: The variance in wording between Sections 134 and 135 should. Acceptance by separate instrument. . Holder entitled to acceptance on face of bill. If the bill is non-existent. persons secondarily liable are discharged. and he must. it does not bind the acceptor except in favor of a person to whom it is shown and who.Where an acceptance is written on a paper other than the bill itself. PROMISE TO ACCEPT Sec. otherwise. therefore. 2) that the bill shall be drawn within a reasonable time after such promise is written. o AMS: this creates a lot of risk. If the acceptance is on a separate paper. . Promise to accept. he may consider the instrument dishonored.The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill. How acceptance made Generally written on the instrument itself. dates as of the day of presentation. For there to be an acceptance. the acceptance on a separate paper must comply with the following requirements: 1) that the contemplated drawee shall describe the bill to be drawn. . Campos: An acceptance in order to be binding need not be written on the instrument itself. if such request is refused. the following must concur: 1) the acceptance must refer to a bill yet to be drawn. TIME TO ACCEPT (24-HOUR RULE) Sec. receive the bill for value. 134. but may be written on a separate instrument as in a letter or by a telegram. Agbayani: The holder has a right to require that the acceptance must be written on the bill itself. 3) there is a promise to accept the bill 4) the bill is executed within a reasonable period of time because advance acceptance is worthless without the bill being made. under Section 135. Section 134 provides that an extrinsic acceptance must be in writing and is good only to persons to whom it is shown. it binds only those to whom it was shown and who. while Section 135 provides that a promise to accept is good to any person who upon “faith thereof receives the bill for value. VNITAS. ACCEPTANCE BY SEPARATE INSTRUMENT Sec. If it is made on a separate paper (a) it may be accepted as to existing bill or (b) it may be an acceptance as to a non-existing bill. when equivalent to acceptance. VIRTVS. Time allowed drawee to accept. the acceptance. If the drawee refuses. 2) the acceptance is in writing and describes the bill to be accepted. . the holder may treat the bill as dishonored. may treat the bill as dishonored. upon the faith thereof. however. and. on the faith thereof.” Accordingly.” To be operative. . Agbayani: Acceptance may be made (1) on the bill itself. 133. This section is not confined to sight bills but is applicable to all bills of exchange. 104 LEX SOCIETAS VERITAS. receives the bill for value. it is deemed to be an acceptance only with respect to people who saw and relied on the acceptance. 135. Otherwise. The law gives the holder the right to demand that the acceptance be made on the instrument. The acceptance here is binding on all persons who relied on the acceptance even if they have not seen the instrument. it does not seem necessary that the separate acceptance be shown. and 3) that the holder shall take the bill upon the credit of the promise.
the belated acceptance retroacts to the date of presentment. This section does not mean that one to whom the bill is transferred while incomplete may become a holder in due course. failure of the drawee to accept within 24 hours is deemed an acceptance. acceptance should be done at the due date. But if the drawer and the indorsers expressly or impliedly give their consent to the qualified acceptance. Accordingly. . or as indorsed by them.The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance. as certification is equivalent to acceptance. the drawer is not prohibited from giving the drawee a longer period of time to decide. a drawee has 25 hours to accept or not. after receiving notice of qualified acceptance. the holder. the drawer and indorsers are discharged because the drawer and the indorsers warrant that the bill would be paid as drawn. or when it is overdue. 142. 138. When the drawer or an indorser receives notice of a qualified acceptance. Where the holder takes a qualified acceptance. Sebastian: As a rule. Without this. nothing prevents an instrument from being discharged by payment. they are not discharged. a bill may be accepted even after it is overdue or dishonored. (3) even when the bill is over due. if the check is presented for certification. VIRTVS. Rights of parties as to qualified acceptance. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it. or after it has been dishonored by a previous refusal to accept. or by non payment. or while otherwise incomplete. . Agbayani: The holder has a right to require the drawee to accept the bill without qualification. or subsequently assent thereto. VNITAS. When the drawee accepts at a later date. Acceptance of incomplete bill. in the absence of any different agreement. or (4) even after it has been dishonored by non-acceptance or by nonpayment. Section 138 allows acceptance to be made while it is incomplete. However. express his dissent to the holder or he will be deemed to have assented thereto. is entitled to have the bill accepted as of the date of the first presentment. Thus. 105 . within a reasonable time. a drawee can accept the bill at any time prior to the instrument being discharged by payment. But of course.A bill may be accepted before it has been signed by the drawer.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Agbayani: The time allowed begins from the time of delivery and not after demand for a return of the bill and the time for returning the bill to the holder does not begin to run from the demand for its return but from the date of delivery. And a drawer or an indorser will be considered to have consented if. ACCEPTANCE OF INCOMPLETE BILL Sec. the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance. If the drawee refuses. However. this ruling will not apply. As a rule. (2) even when the bill is otherwise incomplete. LEX SOCIETAS VERITAS. Campos: Although a bill is usually accepted a reasonable time after execution. not acceptance. he must. and a qualified acceptance would vary their contract without their consent. Where a qualified acceptance is taken. Under the same section. the holder can treat the bill as dishonored by non-acceptance. since an instrument does not lose its negotiability by the mere fact that its maturity date has passed or that the drawee has refused to accept or pay it. Agbayani: Acceptance may be made (1) before the bill has been signed by the drawer. the holder must give notice of dishonor. he does not express his dissent thereto within a reasonable time. he may treat the bill as dishonored by nonacceptance. A drawee bank is not entitled to 24 hours to decide whether to pay a check or not because a check is presented for payment. RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE Sec.
VIRTVS. presentment is excused. . So. and a presentment immediately after its reception is in time to charge the indorsers. (b) Where. to charge persons secondarily liable. the persons secondarily liable thereon are not discharged.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW PRESENTMENT FOR ACCEPTANCE PRESENTMENT DEFINED Agbayani: It is the production of a bill of exchange to the drawee for his acceptance. or is a fictitious person or a person not having capacity to contract by bill. although the presentment may have been irregular. WHEN PRESENTMENT IS REQUIRED Sec. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. WHEN PRESENTMENT IS EXCUSED Sec. it means the physical production of the bill where you produce and show it to the person whom you are requesting to accept. it is irregular but the acceptance is refused on the ground that the drawer has no funds in the hands of the drawee.Presentment for acceptance is excused and a bill may be treated as dishonored by nonacceptance in either of the following cases: (a) Where the drawee is dead. Presentment for acceptance is not necessary to render any party liable except in the three cases enumerated in Section 143. presentment can not be made. Presentment is also excused when it cannot be made even with reasonable diligence. acceptance has been refused on some other ground. or has absconded. (c) Where. or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. RELEASE OF DRAWER AND INDORSER LEX SOCIETAS VERITAS. When a bill is presented after business hours or on a holiday. after the exercise of reasonable diligence. 106 . the bill may be treated as dishonored under Section 148(c). or (b) Where the bill expressly stipulates that it shall be presented for acceptance. Agbayani: Where presentment cannot be made notwithstanding the exercise of reasonable diligence. even when no presentment for acceptance is made. there is nothing wrong in making a presentment for acceptance in the other cases. And if the bill is dishonored by non-acceptance. presentment for acceptance is not necessary in order to make a person liable on the instrument. 148. Of course. and therefore. Where presentment is excused. Presentment is also not needed if the drawee is a fictitious person. if the bill is negotiated within a reasonable time. Sebastian: If the drawee absconded there is no more need for presentment. Presentment for acceptance must be made: (a) Where the bill is payable after sight. Sebastan: When you present a bill for acceptance. it is necessary (1) to make presentment for acceptance or (2) to negotiate the bill within reasonable time. although presentment has been irregular. presentment for acceptance is always to the drawee of the bill. it is a usual course to present such bills for acceptance. Sebastian: As a rule. It means the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his acceptance or his assent to the order of the drawer. or in any other case. Campos: Presentment for acceptance refers to bills of exchange only. 143. they will not be deemed dishonored. VNITAS. The same rule applies to bills payable on demand. Therefore. An irregular presentment in which acceptance is refused on some other ground is where presentment is made on a Sunday. This is different in contract laws where demand is necessary to make a person liable to pay and there are specific instances where demand is waived. where presentment for acceptance is necessary in order to fix the maturity of the instrument. Indeed. Campos: Checks are not meant to be presented for acceptance or certification and if so presented and certification refused. Campos: A delay of the mails is sufficient excuse for omission to immediately present a bill for acceptance. the holder may treat the bill as if it had required acceptance. When presentment for acceptance must be made. and the drawee refuses to accept because the drawer has no funds with him. In those three cases.
Behn Meyer & Co. or (2) they are partners. with the exercise of reasonable diligence. By delaying. PRESENTMENT HOW MADE Sec. Where the drawee is dead. Paragraph (b) of Section 145 seems to be merely permissive since. 145. to the drawee or some person authorized to accept or refuse acceptance on his behalf. Sebastian: Presentment for acceptance to a deceased drawee is not mandatory. Under Section 141(e). Presentment where time is insufficient. the drawer and all indorsers are discharged. the law does not prescribe the place where presentment for acceptance should be made. the earlier you can prepare claim against parties from whom you are entitled to reimbursement. v HSBC – In this case. and (a) Where a bill is addressed to two or more drawees who are not partners. 144. the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. how made. and (2) within reasonable time after acquisition thereof. presentment is excused where the drawee is dead. presentment for acceptance to his personal representative is merely permissive. Sebastian: If presentment is required it must be done within reasonable time to protect persons secondarily liable. Except as herein otherwise provided. VNITAS. in which case presentment may be made to him only. (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors. If they are partners. acceptance by one drawee where there are two or more is a qualified acceptance. subject to the limitations set forth in our partnership law. When failure to present releases drawer and indorser. VIRTVS. Presentment for Acceptance Presentment for Payment 107 LEX SOCIETAS VERITAS. By presenting on time. the word “may” in said paragraph indicates merely a permission to adopt either one of the two alternative methods of presentment stated—not permission to omit it altogether. presentment must be made to both of them unless (1) one is duly authorized to accept or refused acceptance. presentment must be made to them all unless one has authority to accept or refuse acceptance for all. . Agbayani: Presentment for acceptance must be made: (1) before the bill is overdue. It was held that there was unreasonable delay which discharges parties secondarily liable.O. presentment may be made to his personal representative. Sec. the presentment mentioned there to be made to the personal representative of the deceased drawee is merely optional. 145. on a business day and before the bill is overdue. Presentment to personal representative cannot be construed as a mandatory requirement of law. since Section 148(a) excuses presentment. RULE IF DRAWEE IS DEAD Agbayani: Where the drawee is dead.Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour. since there is no section which excuses presentment in case the drawee has been adjudged bankrupt or an insolvent or has made an assignment for the benefit of the creditors. to present the bill for acceptance before presenting it for payment on the day that it falls due. presentment may be made to him or to his trustee or assignee. As to paragraph (c).NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sec. Presentment. Presentment is excused in this case an in case the drawee has absconded.Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time. ACCEPTANCE OF JOINT DRAWEES Sebastian: If there are 2 or more drawees. it would not matter where it takes place. presentment to one is good enough. presentment must be made to all of them. Where there are two or more drawees. Hence. the instrument was presented for acceptance more than a month. REASONABLENESS OF TIME OF PRESENTMENT N. . It would seem therefore that as long as such presentment is made to the proper person/s in accordance with Sec. the sooner that you know he declines. presentment for acceptance is not necessary. . by Section 148(a). Campos: Unlike the presentment for payment. (b) Where the drawee is dead. This is the rule when drawees are not partners. If he fails to do so. Thus. Generally. 147. you are prolonging agony of the drawer. the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. it seems that under Section 145(b). or is fictitious or a person not having capacity to contract because it would then be futile. presentment must be made to the drawee or some person authorized to accept or refuse acceptance on his behalf. you will know whether or not the drawee will accept.
A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained. The holder need not wait for that day to arrive. Otherwise.” provided of course he gives them the notice of dishonor as prescribed by Section 89. there is no distinction between instruments payable at a fixed or determinable future time and instruments payable on demand. 150. and the holder acquires an “immediate right of recourse against the persons secondarily liable. Notice of Dishonor Protest RIGHT OF RECOURSE Sec. This is true even when the bill is payable at a fixed or determinable future time and the date of maturity has not yet arrived. Campos: When a bill is dishonored by non-acceptance there is no need to present the instrument again for payment. the drawer and the indorsers will be discharged. presentment for acceptance may be made before twelve o'clock noon on that day. Agbayani: The only difference between Section 72 and 85 is that under Section 146. it may be made for all kinds of bills before 12 noon on Saturday provided that day is not a holiday. 149. Agbayani: When a bill is dishonored by non-acceptance. once the instrument is declined for non-acceptance. there is no need to present the instrument to the drawee for payment. . Agbayani: Where the bill is dishonored by non-acceptance. If the drawee has made it clear LEX SOCIETAS VERITAS. parties secondarily laible will be discharged. there is no necessity of making a presentment of the bill for payment. when required. The holder. When Saturday is not otherwise a holiday. can immediately file an action against the parties secondarily liable on the bill. Thus.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW presentment to representative is optional the liabilities of parties secondarily liable are preserved RULE IF DRAWEE IS INSOLVENT presentment to representative is madatory failure to do so would discharge parties secondarily liable that he wants no liability. Rights of holder where bill not accepted. to charge the acceptor for honor. and protesting when required. Otherwise. or (b) When presentment for acceptance is excused and the bill is not accepted. 146. presentment for payment is necessary. When dishonored by nonacceptance. if after the previous non-acceptance. DAYS PRESENTMENT CAN BE MADE Sec. Presentment must be done within reasonable time. VIRTVS. Duty of holder where bill not accepted.Where a bill is duly presented for acceptance and is not accepted within the prescribed time.A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. 108 . But. Sebastian: When an instrument is dishonored by non-acceptance. of course. On what days presentment may be made. And when the bill has been accepted for honor. it is clear that the drawee is not willing to be liable for it. DUTY OF HOLDER OF A DISHONORED BILL Sec. after giving notice of dishonor. Sebastian: There is no difference between bill payable on demand and bill payable on future determinable time. . the bill is subsequently accepted. tardiness or delay in presentment can be excused if you did not have sufficient time to do it. 151. it is equally clear that he is not willing to pay. the holder must give notice of dishonor and protest. the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. VNITAS. presentment for payment is also necessary.When a bill is dishonored by nonacceptance. DISHONOR BY NON-ACCEPTANCE Sec. . Where presentment is for acceptance. an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. However. .
by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment.Where a foreign bill appearing on its face to be such is dishonored by nonacceptance. The necessity of protest is confined to foreign bills of exchange which under Section 185 include foreign checks. and it was dishonored. Thus. If it is not so protested. but not for inland bills or notes. However. (3) where the bill has been accepted for honor. The notary protests against all parties. 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. Protest is required: (1) for uniformity in international transactions because most countries require it and (2) in order to furnish authentic and satisfactory evidence of the dishonor to the drawer who.” Campos: Protest is the testimony of some proper person. 152. Sebastian: Protest is necessary when (1) the foreign bill is dishonored by nonacceptance or by non-payment. presentment for payment is not necessary. Then the notary will write a certificate of protest which states that presentment was made and it was declined.” In its popular sense. protest is optional. Agbayani: Where a bill has already been protested for non-acceptance. Where a bill does not appear on its face to be a foreign bill. where protest is required. For inland bills. shows him that the bill of exchange was due. 109 LEX SOCIETAS VERITAS. after the bill has been dishonored by non-acceptance. Sec. Protest. . (2) or there is a referee in case of need. how made. In the absence of such protest. . Agbayani: Protest is required only for foreign bill. In what cases protest necessary. the drawer and indorsers are discharged. it must be protested for non-payment before it is presented for payment to the referee in case of need. (b) The fact that presentment was made and the manner thereof. and the holder reserves the right to hold all parties liable. NECESSITY OF PROTEST Sec. VNITAS. that it was refused. that the regular legal steps to fix the liability of drawer and indorsers have been taken. and such payment (or acceptance) was refused. This is mandatory for foreign bills because protest ensures that there was compliance with foreign laws applicable. protest for non-payment is merely optional. Sebastian: Protest is actually a notarial act. . usually a notary and usually in the form of an affidavit. . or was accepted for honor but was not paid. This is done on the day of dishonor. In protest. it was presented on that same day. 153. and that all parties secondarily liable are put on notice. the maker is unconditionally liable. It is not necessary in foreign promissory notes because in the case of a note. and must be under the hand and seal of the notary making it and must specify: (a) The time and place of presentment. part of due diligence is to determine whether the bill was inland or foreign to determine if protest is needed. will discharge the drawer and the indorsers. “it means all the steps or acts accompanying the dishonor of a bill or note necessary to charge an indorser. while in an unaccepted bill no party is liable unless there has been due notice of dishonor.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW PROTEST PROTEST DEFINED Agbayani: “By protest is meant a formal statement in writing made by a notary under his seal of office at the request of the holder of a bill or note.The protest must be annexed to the bill or must contain a copy thereof. 157. may experience difficulty in verifying the matter and may be forced to rely on the representations of the holder. (2) where the foreign bill is dishonored by non-payment it not having been previously dishonored by non-acceptance. protest thereof in case of dishonor is unnecessary. HOW MADE Sec. it must be duly protested for nonacceptance. it must be duly protested for nonpayment. Protest both for non-acceptance and non-payment. in which it is declared that the same was on a certain day presented for payment (or acceptance as the case may be). formal protest of dishonored foreign bills is a condition precedent to the holder’s right of recovery from secondary parties. a written certificate signed by the notary public which was meant to be a statement which is made at the request of the holder of an instrument. Campos: In addition to due presentment. the secondary parties will be discharged. it must be protested for non-payment before it is presented for payment to the acceptor for honor. VIRTVS. Omission of protest. the holder goes to notary public. from his residence abroad. they may also be protested if desired.A bill which has been protested for non-acceptance may be subsequently protested for non-payment. Under Section 151. (4) where the bill contains a referee in case of need. The protests states that a bill was presented for payment or acceptance. dishonor and due notice of dishonor. Protest is required: (1) where the foreign bill is dishonored by non-acceptance.
He can do this in several ways. The main purpose therefore is to furnish to the holder legal testimony of presentment. he must prove that there has been a protest of the instrument that it has been presented for payment or acceptance to the person liable and that it has been refused. 154. Protest. . or in his registry book. if any. demand and notice of dishonor. 1950. to the last person on the instrument. and notice of dishonor. the instrument may be taken by a notary public to the party and the party may state that he refuses to pay it. WHEN MADE Sec. the formal protest may be made on May 10. The protest may even be made at the trial. BY WHOM MADE Sec. VNITAS. he sends notice to all the parties on the instrument. in the presence of two or more credible witnesses. It is the same as a deposition It can go in as evidence anywhere and will prove the case. When a bill has been duly noted. to be used in actions against the drawer and indorsers. And the notary’s certificate of protest is only evidence of th ose facts which are stated therein which it is the duty of the notary to note in making presentment and demand for payment. Protest. So when one comes to prove his case as the holder of an instrument. the notary makes a statement to that effect and attaches his seal that it has been dishonored. Collateral facts noted by the certificate must be proved by other evidence. The notary keeps this or he may send his sworn statement. Notice of Protest Agbayani: After the notary protests the instrument. The certificate of protest is the same as a deposition. Where the person making the protest is not a notary. suppose that a bill is dishonored on April 26. by whom made. and that he has protested it for non-payment. Campos: The protest must be made on the day of dishonor. But it must at least be “noted. such protest must be made on the day of its dishonor unless delay is excused as herein provided. or (b) By any respectable resident of the place where the bill is dishonored. demand. The main purpose of the protest. That is part of his case. and he would say “Notices enclosed herewith to be sent to the other parties. 1950. . This is the protest. . is to furnish to the holder legal testimony of presentment. The certificate is generally accepted as evidence of the facts set forth in its terms. or the fact that the drawee or acceptor could not be found. VIRTVS. when to be made. And at the trial. to be used in an action against the drawer and indorsers. one copy to one person and one to the other. He is not concerned with the truth or falsity of the statement. the notary attests to the fact that the affiant made a statement under oath. just as the same as a deposition. Evidence of Protest Agbayani: When suit is brought on the paper. therefore.” If the holder has sent notice to all the parties he is entitled to come in and recover because he has performed his contract. It is not the notice of protest. Campos: In making a formal protest. the notary public acts in a different capacity from that in which he acts when making acknowledgment. Agbayani: Where the instrument is presented for payment and payment is refused. He might send it to the person who sent the paper in for collection. The notation is for the purpose of requiring the commitment of the facts to writing while they are 110 LEX SOCIETAS VERITAS. to the last person on the instrument. The protest is a solemn declaration made by the notary public that the paper has been dishonored.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW (c) The cause or reason for protesting the bill. (d) The demand made and the answer given. It is admissible as evidence of the facts set forth in its terms and its production does away with the necessity of proving these facts by witnesses in court. the protest may be subsequently extended as of the date of the noting. or a paper attached thereto. 155. The noting must be made on the day of dishonor but it may be extended into a formal protest afterwards. He has sent notice to all the parties on the instrument that he intends to recover against them. 1950. it is absolutely necessary that proof be shown.” After that is done. However. The protest need not be made on April 26. Agbayani: By the term “duly noted” is meant that the notary public jots down a note on the bill. this statement of the protest by the notary is part of his case. it is merely prima facie evidence and all facts stated therein may be disproved by competent evidence showing the statements to be false. protest means the certificate of the notary or other person attesting to the acts constituting protest. consisting of his initials or signature and those matters required to be stated in Section 153. it must be made in the presence of two witnesses.When a bill is protested. Campos: In the above provision. Thus. In the latter case.Protest may be made by: (a) A notary public. and its production obviates the necessity of proof of these facts by witness in open court. Then the notary public would send his notice of protest for the other parties on the instrument.
he probably would not be able to pay for the bill. the holder may cause the bill to be protested for better security against the drawer and indorsers. Such a protest is not necessary to charge the drawer and the indorsers. except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance.A bill must be protested at the place where it is dishonored. protest does not amount to actual dishonor. neither does it indicate that the holder acquires any additional rights. Sections 114 and 115 which set forth the circumstances when notice is not necessary to charge the drawer and indorser. . Sebastian: If protest is delayed. and no further presentment for payment to. It is optional on the part of the holder. the drawee is necessary. or demand on.Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures. . the protest must be made at the place where the instrument is dishonored. or negligence. 160. then make the protest at the place where it is payable. WHERE MADE Sec. Protest where bill is lost and so forth. Thus. When the acceptor is declared bankrupt. protest may be made on a copy or written particulars thereof. It is also believed that Section 159 incorporates not only Section 122 but also. 111 LEX SOCIETAS VERITAS. 158. When protest dispensed with. VNITAS. for its acceptance for honor. 159. and the contents of the instrument may be proven as in other cases of lost documents. VIRTVS. When the cause of delay ceases to operate. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default. it is possible that it will be excused if it can be premised on circumstances beyond the control of the holder. the holder can immediately protest the bill based on the insolvency of the acceptor. if he makes a notation on the bill to show that the instrument was dishonored and on what date. The protest for better security is to give notice to the drawer and the indorsers of this fact in order to enable them to make the necessary arrangements so that they will not be held liable thereon and prevent loss of re-exchange. 156. Campos: The excuses for delay in making protest and the circumstances which dispense with it are the same as those in notice of dishonor.Protest is dispensed with by any circumstances which would dispense with notice of dishonor. WHEN PROTEST IS DISPENSED Sec. LOST OR DESTROYED BILLS Sec. Sebastian: If acceptor is declared insolvent without having the instrument presented to him. . This is called “protest for better security”. Campos: This provision is in consonance with the general principle that the loss of an instrument does not affect the rights and liabilities of parties thereto. Protest before maturity where acceptor insolvent. (2) but before the date of maturity. A protest for better security must be made: (1) after acceptance. The purpose of the section must therefore be merely to inform the drawer of the failure of the acceptor to enable the former to arrange for the payment of the bill at maturity. . by implication. But if the bill is payable at the place which is not the place or residence of the drawee. misconduct. . Protest will be given to persons secondarily liable.When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it. Campos: Nothing in the section indicates that failure to protest for better security would deprive the holder of any rights. the bill must be noted or protested with reasonable diligence. Agbayani: Loss or destruction of the bill does not excuse the making of protest. Agbayani: One made by the holder against the drawer and indorsers where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures. The exception is where the bill is payable at a place other than the residence of the drawee. where made. PROTEST FOR BETTER SECURITY Sec. Protest. Agbayani: Generally.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW fresh in the mind of the notary. Sebastian: Protest is made in the place where the bill was dishonored. as for example. He does not have to make the formal certificate of protest on the same day the instrument is protested by him. (3) when the acceptor has been adjudged bankrupt or insolvent or has made an assignment for the benefit of creditors. it must be protested for nonpayment at the place where it is expressed to be payable.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
Sebastian: The burden of evidence is on the part of holder to prove existence of the instrument and the right to collect based on the instrument.
ACCEPTANCE FOR HONOR Campos: Acceptance for honor is proper only after a bill has been protested for dishonor by non-acceptance or for better security. It is made to save the credit of some party or parties to an instrument. If the name of a referee in case of need is inserted in the bill, the holder may resort to him in case of dishonor, and his acceptance would be an acceptance for honor. The general effect of an acceptance for honor is to make the acceptor liable on the bill to the holder and all parties subsequent to the party for whose honor he accepted. However, his liability is not absolute but merely conditioned on the drawee’s failure to pay upon presentment at maturity, after which a protest must be made and a notice of dishonor be given to the acceptor for honor. Another effect of an acceptance for honor is that the holder’s rights against secondary parties are postponed until the following conditions take place: 1) Presentment for payment to the drawee 2) Dishonor by such drawee 3) Dishonor to the acceptor for honor and secondary parties 4) Protest 5) Presentment to the acceptor for honor 6) Dishonor by him 7) Notice of dishonor to the secondary parties The acceptor for honor, should he suffer damages due to his acceptance, has a right of recourse against the party for whose honor he accepted and all parties against whom the latter would have recourse. Sebastian: Acceptance for honor is made to save the credit of a particular party on a particular instrument. The risk of non-payment is greatly diminished because a new party comes in who is presenting to pay the instrument. ACCEPTANCE FOR HONOR DEFINED Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
Agbayani: An acceptance of a bill made by a stranger to it before maturity, where the drawee of the bill has refused to accept it, and the bill has been protested for non-acceptance, or where the bill has been protested for better security. Such an acceptance is also called acceptance “supra protest.” This is a peculiar kind of acceptance. It most frequently happens when the original drawee refuses to accept the bill, in which case a stranger may accept the bill for the honor of some one of the parties thereto, which acceptance will insure the benefit of all the parties subsequent to him for whose honor it was accepted. An acceptance for honor is done “to save the credit of the parties to the instrument or some party to it, as the drawer, drawee, or indorser, or somebody else. Someone desires to save the credit of another on the bill and he does so by writing “accepted” on the bill. The court holds that consideration is presumed and the presumption is that he does have funds or money of the party for whose honor he accepts. Requisites Agbayani: The following are the four requisites established by law in order that an acceptance for honor may be validly made: 1) The bill must have been previously protested (a) for non-acceptance or (b) for better security. 2) The bill is not overdue at the time of the acceptance for honor. 3) The acceptor for honor must be a stranger to the bill. If he is a party, his acceptance for honor would not give any additional security to the holder, as such a party is already liable thereon. 4) The holder must give his consent. Sebastian: Acceptane for honor is made only if the instrument has been dishonored by non-acceptance. If the instrument is a foreign bill, dishonor by the drawee must have been protested. It must be made before the bill becomes overdue. If it is already overdue, payment for honor is the only way to save the credit of the drawee. For there to be accepatance for honor, the acceptor for honor must be a total stranger to the instrument. Meaning he must have no liability on the instrument. An acceptor for honor is a new party that is being made liable on the instrument. Valuable consideration is presumed Otherwise, the transaction will be considered a donation. HOW MADE Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor.
Agbayani: It is essential that the acceptor for honor appear before a notary public and declare that he accepts the protested bill in honor of the drawer or indorser, as the case may be, and that he will pay it at the appointed time. An acceptance for honor then, is properly made by the acceptor appearing before a notary public and declaring his intention to accept for the honor of some one or more of the parties and subscribing to some such expression of his intention as “accepted for the honor of A” Sebastian: An acceptance for honor is made by executing a written instrument saying that the acceptor is accepting for honor and for the benefit of a party to the instrument. Failure to to identify in whose honor, the acceptance is deemed for the honor of the drawer. It must be signed. Lastly, it must declare that the protest bill is accepted. Payment by the acceptor for honor does not discharge the instrument. Until the drawer reimburses the acceptor for honor, the instrument still subsists. Unless the acceptor for honor discharges the instrument himself. There can even be several acceptors for honor for one person. Requisites Agbayani: Like an ordinary acceptance, acceptance for honor must be: 1) In writing and indicate that it is an acceptance for honor and 2) Signed by the person making the acceptance. FOR WHOSE BENEFIT Sec. 163. When deemed to be an acceptance for honor of the drawer. Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. Sebastian: Acceptance for honor is made for the the person it was made and all subsequent parties. LIABILITY OF ACCEPTOR Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. Acceptor does not have to accept FULL responsibility. At the end of the day, the acceptor is not the one with the utang.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN
WARRANTIES OF ACCEPTOR FOR HONOR Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Agbayani: The liability of an acceptor for honor is secondary, not primary or absolute. He agrees to pay if: (1) presentment for payment has been made; (2) the drawee does not pay; (3) the bill is protested for non-payment; and (4) notice of dishonor is given to him. Sebastian: Section 165 According to the tenor of his acceptance, provided: 1) it shall not have been paid by the drawee 2) it shall have been duly presented for payment and protested for nonpayment 3) Notice of dishonor given to him. PROTEST REQUIRED Sec. 166. Maturity of bill payable after sight; accepted for honor. Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor. Sebastian: Noting here means in preparation of protest. This section presupposes that the bill is foreign. Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sebastian: Try to collect first before going after acceptor for honor. Also, protest for non-payment must first be made before going after acceptor for honor Section 60 According to the tenor of his acceptance.
or referee. PRESENTMENT FOR PAYMENT HOW MADE Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows: (a) If it is to be presented in the place where the protest for nonpayment was made, it must be presented not later than the day following its maturity. (b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four. Sebastian: Presentment must be made the day following the maturity date. It must be noted that presentment to acceptor for honor is presentment for payment. DELAY IN PRESENTMENT Sec. 169. When delay in making presentment is excused. - The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need. DISHONOR OF THE BILL Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for nonpayment by him. Agbayani: The holder must protest for non-payment by the acceptor for honor in order to fix the liabilities of the indorsers.
LEX SOCIETAS VERITAS. VNITAS. VIRTVS.
174. Also. Where a bill has been paid for honor. it must identify the party for whose account you are making payment.Where two or more persons offer to pay a bill for the honor of different parties. . any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. 2) The notary then records the declaration in the protest or in a separate paper attached to it. notice of dishonor is enough). The holder gets satisfaction. and (2) the notarial act must be based on a declaration by the payer for honor.The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. Agbayani: The following is the procedure in making payment for honor: 1) The payer or his agent goes to a notary public and declares his intention to pay the bill and for whose honor he pays. . and succeeds to. Preference of parties offering to pay for honor. Sec. Therefore. . The payor for honor is subrogated to all the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. Sec. VIRTVS. but the party for whom payment is made is not discharged and remains liable to the payor for honor. Agbayani: The following are the requisites established by law in order that a payment for honor may validly be made: (1) the bill has been protested for nonpayment. the payment will operate as a mere voluntary payment and the payor acquires only the rights stated in Articles 1236 to 1237 of the NCC and not those stated in Section 175. Campos: Under Sections 171 to 177. VNITAS. all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for. (1) The payment must be attested by notarial act appended to the protest. only a bill which has been protested can be paid for honor and in order not to operate as a mere voluntary payment. in order to operate as such and not as a mere voluntary payment. Reasonable period of time to notify person for whose honor you are paying. payment will only be considered a voluntary payment thus giving the payor right to be reimbursed. Sebastian: For there to be payment for honor. and (2) any person. payment for honor may be availed of when the holder does not want to indorse the bill and thereby incur the liabilities of an indorser or of one negotiating by mere delivery. Who may make payment for honor. or form an extension to it. REQUISITES Sec. A payment for honor is not confined to an acceptor for honor but may be made by anyone as long as the requisites are complied with. .Where a bill has been protested for non-payment. . it has to be made before a notary after a declaration by the payor of his intention to pay for honor and for whose honor he pays. 115 LEX SOCIETAS VERITAS. the person whose payment will discharge most parties to the bill is to be given the preference. The effect of a payment for honor is to discharge all parties subsequent to the party for whose honor it was paid. Sebastian: Payment for honor will only make payment only when the party being protected is summoned to pay the instrument. must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. 175. Sec. The purpose therefore of a payment for honor is to free some party to the bill from the obligation to make immediate payment on maturity. 173. there must be intent to discharge the insturmement and it is made at maturity.The payment for honor supra protest. 171. even a party thereto may pay supra protest. Payment for honor. 172. Effect on subsequent parties where bill is paid for honor. both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW PAYMENT FOR HONOR Agbayani: Instead of simple negotiation to the person desiring to pay. the holder who refuses such payment loses his right of recourse against any party who would have been discharged by such payment. how made. Sebastian: Before payment for honor the bill must have been protested (if inland bill. 3) The payor then notifies the person for whose honor he pays within reasonable time If these formalities are not followed. Declaration before payment for honor. This is distinguished from acceptance for honor in which the acceptor must be a stranger to the bill. Otherwise. PROCEDURE FOR PAYMENT FOR HONOR Sec.
Sebastian: If the payee refused to be paid. Where holder refuses to receive payment supra protest. the whole of the parts constitutes one bill. As compared to the rule under the Civil Code. But nothing in this section affects the right of a person who. Problems arise at a point where a party transfers two or more parts of the same bill to different persons. . Bills in set are for the purpose of increasing the probability of the bill reaching its destination. .The payer for honor. the true owner of the bill.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW HOLDER REFUSES PAYMENT Sec. This is to enable him to enforce his rights against those who are liable to him under Section 175. is entitled to receive both the bill itself and the protest. and in addition. and every indorser subsequent to him is liable on the part he has himself indorsed. But there are special rules rendered necessary because of the nature of bills so issued. . LIABILITY OF HOLDER WHO INDORSES TO DIFFERENT PERSONS Sec. the holder whose title first accrues is. as between such holders. since the means of communication and transportation then were irregular and not very dependable. RIGHTS OF PAYOR FOR HONOR Sec. VIRTVS. in due course. accepts or pays the parts first presented to him. The use of such bills in sets must have diminished since because of the facility and regularity of our modern means of communication. all of which parts constitute but one bill. each part of the set being numbered and containing a reference to the other parts. 177. Sebastian: When someone makes payment for honor. 116 . all parties who would have benefited from the payment will be discharged. 179. Agbayani: (1) He acquires the rights of the holder under Section 175. refusal of the creditor to accept payment will not discharge all parties liable. 180. VNITAS. Bills in set constitute one bill. Where two or more parts of a set are negotiated to different holders in due course. on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor. Where the holder of a bill refuses to receive payment supra protest. RIGHTS OF HOLDER Sec. It was thought that if drawn in set and each part sent by different means.Where a bill is drawn in a set. 176. (2) the payer for honor has also the right to receive both the bill and the protest. Rights of payer for honor. as if such parts were separate bills. All rules applicable to bills of exchange generally are applicable to bills issued in sets. and containing a reference to the other parts. Right of holders where different parts are negotiated. 178. BILLS IN SET Campos: The reason for drawing bills in a set was to obviate the difficulties which would arise in case of miscarriage of the bill.Where the holder of a set indorses two or more parts to different persons he is liable on every such part. each part is sent by different conveyances. ACCEPTANCE OF BILLS IN SET LEX SOCIETAS VERITAS. he loses his right of recourse against any party who would have been discharged by such payment. chances that one of the set would reach the payee or its destination would be greater. that person is entitled to reimbursement. Liability of holder who indorses two or more parts of a set to different persons. each part being numbered. DEFINITION Sec. Agbayani: One composed of various part. For this reason.
The most important seems to be according to the security of the bond. as it is in this that bonds differ fundamentally among themselves. LEX SOCIETAS VERITAS. a sum certain in money to order or to bearer. and the part at maturity is outstanding in the hands of a holder in due course. and meanwhile. (2) a bond runs for a longer period of time than an ordinary promissory note. . particularly Section 1 thereof. DISCHARGE OF BILL Sec. generally six months apart. Based on the bond security. 117 . and (4) due bills. and contains an agreement of the company to pay the sum at a specified time in the future. (5) debentures.A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another. to pay money. to pay a specified interest on the principal amount at regular intervals. . and (3) a bond is issued under different legal circumstances. . under seal. VNITAS. The bond certifies that the issuing company is indebted to the bondholder for the amount specified on the face of the bond. some of the important classes of bonds are: (1) mortgage bonds. (2) bonds (3) bank notes. it would be a complete nullity because you cannot have a contract with one party. the whole bill is discharged. (4) guaranteed bonds. 184. if one part is discharged. 183. Bonds are negotiable if they conform with the Negotiable Instruments Law. . If the note was a nonnegotiable instrument. You can make a promissory note payable to yourself. bonds may be defined as a series of instruments representing units of indebtedness regarded as parts of one entire debt. (6) income bonds. Sebastian: Section 184 is nothing but a definition. he is liable on every such part as if it were a separate bill. VIRTVS. or at a fixed or determinable future time. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course. Promissory note.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Sec. PROMISSORY NOTES AND CHECKS PROMISSORY NOTE DEFINED Sec. (2) equipment bonds. Bonds are evidences of indebtedness of the issuer and are usually sold to raise capital. defined. 182. 181. 181. signed by the maker. There are various method of classifying bonds. where any one part of a bill drawn in a set is discharged by payment or otherwise. and 182. But since all bonds of a single issue are grouped together under a supplemental agreement known as trust indenture or bond indenture.The acceptance may be written on any part and it must be written on one part only. A promise. he is liable to the holder thereon. Effect of discharging one of a set. TYPES OF PROMISSORY NOTES Agbayani: The following are special types of promissory notes: (1) certificate of deposit.When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him. Where a note is drawn to the maker's own order. Agbayani: Subject to the exceptions in Sections 180. They are really elaborate promissory notes. it is not complete until indorsed by him. engaging to pay on demand. PAYMENT BY ACCEPTOR Sec. the whole bill is discharged. The reason is that the bill constitutes only one bill. The following are distinctions between an ordinary promissory note and a bond: (1) a bond is more formal in character than the ordinary promissory note. Payment by acceptor of bills drawn in sets. (3) collateral trust bonds. Acceptance of bill drawn in sets.Except as herein otherwise provided.
and that income bonds are the weakest of all obligations resting on general credit. preferred stocks into common stocks. The interest on income bonds which is payable out of earnings only. VIRTVS. They are therefore generally not negotiable. This is a form of special lien bonds employed for the most part by railroads in order to obtain money at low rates by pledging their movable equipment. Mortgage bond – Those that are secured by a mortgage constituted on corporate physical property. in the case of railroads. Collateral trust bonds – Those that are not secured by lien on physical property of the corporation but by a lien on securities deposited with a trustee as collateral. negotiated before the maturity of the interest they represent. Frequently they are protected by “negative pledge” clauses which are agreements against new mortgages on the corporate assets or those of subsidiary companies which do not equally secure the debenture. carrying a possibility of an increased income return. Finally. they are not money. the debtor corporation would have no right to pay off the bonds and get rid of the restrictions of the mortgage or indenture before the bonds fell due. VNITAS. lien or pledge on specific corporate property but by general credit of the corporation and restrictive agreement. and are convertible at the owner’s request and under clearly specified conditions into some less secure. Without a provision for redemption. . and transferred just like any commercial paper. It is a device of clearing house associations to save inconvenience and labor incident to the setting of balances between the members of the association. such as. The certificates of due bills are issued. Equipment bond – Those that are secured by a mortgage or pledge of corporate movable equipment. convertible securities are issued in a more secure and less speculative form. They are not merely certificates of deposit creating a contract of bailment but are as negotiable as checks payable to bearer. The interest is payable only out of net profit. Bank notes are the promissory notes of the issuing bank payable to bearer on demand and intended to circulate as money. Registered bonds – Those which are issued to a specified person named therein and the fact of issuance to him is registered in the books of the issuing corporation. defined. Coupon bonds – Those to which are attached a sheet of dated. The convertible bond and the convertible share are classed together as “convertible securities. that of the issuing corporation and that of the guaranteeing corporation. They are payable only to the person whose name is thus registered and transferred only on presentation at the obligor’s office with a written assignment duly executed by the registered owner. Check. They are regarded as cash ansd pass from hand to hand without any evidence of title in the holder than that which arises from possession. it may consist of shares or binds of any corporation issuing the collateral trust bond. Guaranteed bonds – One that is secured by the guaranty of a corporation other than the one issuing it. or as promissory notes payable to order or bearer. and (10) coupon bonds. a double obligation. may be cumulative or non-cumulative.A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided. it may be stated that like shares. bonds are made convertible into preferred and common stocks. (8) redeemable. instead of the actual payment of money. such as. a form of security with a fixed or limited income return. The disadvantage of debenture bonds is that they rest on the general credit of the corporation rather than on the security of specific corporate assets.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW In addition. Debentures – Those that are not secured by any specific mortgage. Another term used is clearing house certificate. by one member of the association to another. secured bonds into debenture bonds and stocks. It implies therefore. Redeemable bonds – Those that give the privilege to the issuing corporation to pay off the bonds even before the date of maturity. (9) registered bonds. CHECK DEFINED Sec. numbered and similarly printed coupons which the bondholder may cut off when due or thereafter. They are negotiable promissory notes if they conform to the requirements of the Negotiable Instruments Law. It may also consist of bonds of small operating company which the issuing holding corporation controls. A due bill is an instrument whereby one person acknowledges his indebtedness to another. 185. However. more speculative form of security. the provisions of this Act applicable to a bill of exchange payable on 118 LEX SOCIETAS VERITAS. Convertible bonds – One which confers on the holder the option of exchanging it for a more speculative class of security. The property is conveyed to a trustee for the benefit of the bondholders in case the interest or principal is defaulted. Accordingly. Income bonds – One the principal of which may or may not be secured by a mortgage but the interest is payable only out of the net profit. Such securities may consist of shares or bonds issued by the subsidiaries of the corporation issuing the collateral trust bonds. Such coupons may be served and deposited in a bank. . They are usually issued under a trust indenture and for a shorter term than mortgage bonds. their rolling stock.” Generally speaking. for preferred shares or common shares. It is thus seen that the position of the holder of an income bond resembles that of the holder of preferred shares. bonds may also be (7) convertible.
and 182. or in parcels. for the proliferation of worthless checks can only create havoc in trade circles and the banking community. The whole theory and use of a check points to its immediate payability. Test for reasonable time: Did the payee employ such diligence as a prudent man exercises in his own affair? Check Section 81 of the Negotiable Instruments Law provides that delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder. where it is drawn and delivered in the place where the drawee bank is located. the drawer is not discharged. The only injury which would be sustained by the drawer in case of presentment was not made within a reasonable time would be caused by the failure of the bank subsequent to the delivery and prior to the presentement of the check. Hence. Within what time a check must be presented. checks have come to be perceived as convenient substitutes for currency in commercial and financial transactions. VNITAS. then a check is a negotiable instrument subject to the same rules as the latter. Although under Section 185. 181. in consideration of its temporary use of the money. checks have become widely accepted as a medium of payment in trade and commerce. Although not legal tender. 119 LEX SOCIETAS VERITAS. A depositor places money in his bank under an agreement that it may be withdrawn anytime by his order. to the depositor’s order when demanded. The reason is that the bill constitutes only one bill. TYPES OF CHECKS The following are special types of checks: (1) cashier’s check. . and the bank or banker. a check is a bill of exchange payable on demand. If the check is delivered on one day and is not presented before the close of banking hours the next business day. had no funds in the bank or banker’s hands. and by his check or order. does not extend the time for presentment. agrees to pay it in whole. or if. the drawer will still remain liable to pay the same. the whole bill is discharged. (5) crossed checks. VIRTVS. the drawer is discharged to the extent of any loss suffered from the failure to present. it is intended for immediate use and not to circulate as promissory note. The order is evidenced by the check which he draws and by which he expresses his desire to appropriate s much of his money in the bank to the payee named therein. Under the law. PRESENTMENT FOR PAYMENT Delay in Presentment Agbayani: A stale check is not presented for payment within a reasonable time after its issue. It is an order addressed to a bank and partakes of a representation that the drawer has funds on deposit against which the check is drawn.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW demand apply to a check. when a check is not presented for payment within a reasonable time after its issue. The basis or foundation of such perception is confidence. CROSS CHECKS AND ITS IMPLICATIONS Sec. if the drawer. 186. it is not a check. or negligence. he desires to appropriate so much of it to another person. Campos: A check is an instrument which is in the form and nature of a bill of exchange. notwithstanding the lapse of time. Unlike a promissory note. misconduct. but unlike an ordinary bill it is always payable on demand and always drawn on a bank. If such confidence is shaken. If negotiable in form. he had withdrawn his funds. at the date of the check or at the time of the presentment of it for payment. the drawer is discharged but only to the extent of the loss caused by the delay. the usefulness of checks as currency substitutes would be greatly diminished or may become nil. But he does not agree to contract to pay at a future day by acceptance and the depositor cannot require it. if one part is discharged. Agbayani: Subject to the exceptions in Sections 180. a check is note a mere undertaking to pay an amount of money. Any practice therefore tending to destroy that confidence should be deterred. Republic v PNB – A cashier’s or manager’s check is a primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. (2) manager’s check. after drawing the check and before its presentment for payment and dishonor. Therefore. where it is subject at any time to his order. If a bank or banker still remains in good credit and is able to pay the check. if no loss or injury is shown. (4) certified checks. the drawer would remain liable to pay the check. If it is not drawn on a bank or is not payable on demand.A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. A depositor places money with his bank or banker. For this reason. and not imputable to his default. There is therefore an element of certainty or assurance that the instrument will be paid upon presentation. sufficient to ensure payment upon its presentation to the bank. . the transfer of a check to successive holders. notwithstanding many months may have elapsed since the date of the check and before the presentment for payment and notice of dishonor. So. (3) memorandum checks. Agbayani: A check must be presented within a reasonable time after its issue.
Furthermore. Agbayani: A certification is an agreement whereby the bank against whom a check is drawn. The refusal of a bank does not dispense with the requirement of presentment for payment since a check is of right presentable only for payment at the bank on which it is drawn. The maturity of the check for purpose of presentment for payment and of dishonor in order to bind parties to it. The bases of this statement are Section 84 and 186 of the Negotiable Instruments Law. in the payment of debts. thus marked and certified. 187. and an almost indispensible office. where the check is dishonored by non-payment and the drawer is not given notice of dishonor. In applying the rule. And the drawee is not liable to the holder for refusal of the bank to certify checks. Nothing can be simpler or safer than this process. It cannot be doubted that the certifying bank intended these consequences and it is liable accordingly. A telegram sent by a bank that it would pay a certain check has been held to be a certification. But the drawer may be held liable by the payee on the basis of the original consideration between him and said payee. To impart strength and credit to the paper by obtaining an acknowledgement from the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check will be paid upon 120 LEX SOCIETAS VERITAS. It is advisable to perform its important function until. and this agreement is binding on the bank as its notes on circulation. And it is immaterial to such liability in favor of a holder in due course whether the drawer had funds or not in the bank or the drawer was indebted to the bank for more than the amount of the check.K. has been held as sufficient certification. in the course of business. is to enable the holder to use it as money. Certification is equivalent to acceptance in that the drawee bank is bound on the instrument upon certification.” with the initials of the cashier of the bank do not constitute a sufficient certification under modern banking practice. Delay in the presentment of a check for payment will discharged the indorsers thereon. we have the money of the drawer here ready to pay it. or any other obligation it can assume. The result is that the plaintiff has been treated as a holder in due course of checks transferred several months after issue. as regards both parties. It was further held that Section 143 and 144 of the Negotiable Instruments Law are not applicable to checks because these provisions have to do with the presentment for acceptance of ordinary bills of exchange. Stamping of the word “certified. But a bank is not obligated to the depositor to certify checks. the certificate of the bank of a check is equivalent to acceptance. is not identical with the maturity which will charge subsequent holders with notice of defect of title or infirmities in the instrument. The certification of a check is a means in constant and extensive use in the business of banking and its effects and consequences are regulated by the law merchant. a certifying bank has all the liabilities stated in Section 62. It implies that the check is drawn upon sufficient funds in the hands of the drawee. the practice is at once to charge the check to the account of the drawer. when the check is paid. they pass from hand to hand. To hold otherwise would render these important securities only a snare and a delusion. the certification is equivalent to an acceptance. and. We will pay it now if you will receive it. A bank incurs no greater risk in certifying a check and in giving a certificate of deposit. whether or not he is injured by the delay as the law presume that he is prejudiced. VNITAS. In the great commercial center. VIRTVS. Certification (1) is equivalent to acceptance and is the operative act that makes the drawee bank liable. .” or “good” with the date of certification and the signature of the officer of the bank authorized to certify checks. Certification of check. and that they shall be so applied whenever the check is presented for payment. enter largely into the commercial and financial transactions of the country. . The holder says “No. By the law merchant. to credit it in a certified check account. undertakes to pay it at any future time when presented for payment. a certificate of deposit payable to the order of the depositor.Where a check is certified by the bank on which it is drawn. (2) it operates as an assignment of the funds of the drawer in the hands of the drawee bank. The object of certifying a check. the drawer is totally discharged from liability on the instrument. and in the transfer of balances form one house and one bank to another. Checks drawn upon banks or bankers. it goes back to the bank for redemption and is extinguished by payment. and (3) if obtained by the holder. Thus. But the letters “O. that check is good. effect of. and shall continue good. they make up no inconsiderable portion of the circulation and thus performed as useful. the courts are disposed to be governed rather by the circumstances under which the plaintiff received the check than by the precise age of the instrument—that is good or bad faith exercised the prime consideration. you may certify the check and retain the money for me until this check is presented. it discharges persons secondarily liable. CERTIFICATION OF CHECKS Sec. I will not take the money. It is an understanding that the check is good then. No particular form is required but it must be in writing. the purchase of property.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW Of course. In well-regulated banks. to debit that account with the amount. The transferee takes it with same readiness and sense of security that he would take the notes of the bank. valuable. that they have been set apart for its satisfaction. The bank virtually says.
. on all the principles of estoppel. If the drawee accepts the paper after seeing it. In this connection. Acceptance and payment—are entirely different. and for all intents and purposes. and then permits it to go into circulation as genuine. The certification has the same effect as if the holder had drawn the money re-deposited it and taken a certificate of deposit for it. 188. A check drawn upon the bank in the usual form. Payment of a check do not amount to an acceptance so as to make the bank liable to the payee. the drawer and the indorsers are discharged. not accepted or certified by its cashier to be good. and the bank is not liable to the holder unless and until it accepts or certifies the check. it ceases to possess the character. does not constitute a transfer of any money to the credit of the holder. Only the indorsers at the time of the certification are discharged. or certification. If the check is not presented for payment within the period. and it is still necessary to make presentment for payment which is not necessary in the case of a non-acceptance. The drawer of a check contracts that it will be paid on presentment but not that it will be certified. The implied contract between them being that the bank shall discharge the 121 LEX SOCIETAS VERITAS. When a check is certified. of a check.K. OBJECTIVE AND EFFECTS OF CERTIFICATION Sec. the transfer of the corresponding funds from the credit of the depositor to that of the payee is co-extensive with the life of the check. Agbayani: When the certification is obtained by the holder. On the other hand. by the certification of a check. Indorsers subsequent to the certification are not discharged. In the Philippines. the drawer and all indorsers are discharged from liability thereon. which in this case is 90 days. there is no privity of contract between the drawee bank and the payee. in the following cases. Acceptance is a promise to pay in the future and continues the life of the bill. it has been held that the relation existing between a depositor and a bank is that of a creditor and debtor.” with the initials of the cashier of a bank written upon the face of a check drawn on that bank is not under modern banking practice.NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW presentation. VNITAS. the payee or holder becomes the depositor of the drawee bank with rights of one is such relation. it becomes invalid and the funds are automatically restored to the credit of the drawer though not as a current deposit but as a special deposit. or holder of the check. LIABILITY OF DRAWEE BANK Sec. The contract between a banker and a depositor is that of deposit. Thus. the funds represented by the check are transferred from the credit of the drawer to that of the payee or holder. There is therefore no necessity of notice of dishonor by non-acceptance or non-certification. It is a separate contract from that stated in the check that may be drawn by the depositor agaisnat the depository bank. he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the acceptance. and represents so much money on deposit. Before acceptance or certification. A check of itself is not an assignment of the funds of the drawer in the bank. Panlilio v David – The letters “O. The reason for the rule that a certification obtained by the holder discharges the drawer and indorsers is that the moment the check is certified the funds cease to be under the control of the original depositors and the pass under the control of the person who procures the certification of the check drawn in his favor Where the certification is not obtained by the holder but by others such as the drawer and indorsers. Agbayani: When the holder procures the check to be certified “the check operates as assignment of a part of the funds to the credit of the drawer bank. mere payment of the paper at the termination of its course does not act as an estoppel. they are not discharged. Where the holder of a check procures it to be accepted or certified. Payment is the final act which extinguish a bill. 189. the bank is not liable and the holder has no right to sue the drawee bank on the check. the drawers and indorsers are not discharged: 1) Where the certification is obtained by the drawer. Without acceptance or certification. VIRTVS. When check operates as an assignment. A certified check has a distinctive character as a species of commercial paper and performs important functions in banking and commercial business. As stated. . Certifications of check are not made in such manner. even when the drawer procures the certification at the instance of the payee 2) Where the certification is obtained by a person who is neither holder nor drawer. as provided by the statute. This is the theory on which the law discharging the drawer and indorsers upon certification is based. the practice is to certify only at the request of the drawer. Effect where the holder of check procures it to be certified. Accordingly.A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank. But where the certification states the check is to be void if not presented in 90 days from the date of acceptance. The check becomes a basis of credit—an easy mode of passing money from hand to hand and answers the purposes of money. payable to the holder on demand. or to perform the functions. certification differs from acceptance in that the refusal of the drawee bank to certify does not amount of a dishonor of the check.
3) And while the holder has no right of action against the drawee bank which refuses to pay. And as to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a 3rd party. without justifiable cause. and failing in which he cannot. v Tuason de Paterno – Under banking laws and practice. .NEGOTIABLE INSTRUMENTS LAW REVIEWER– SEBASTIAN DLSU LAW indebtedness by honoring such checks as the latter may draw upon it and cannot debit the depositor’s account with payment not made by his order or direction. Such right of action. however. Temperate and moderate damages are proper not for indemnification of loss suffered but for the vindication or recognition of a right violated or invaded. Accordingly.” the checks became “obsolete as the account subject thereto is considered null and void in accordance with Executive Order No. By virtue of the contract of deposit between a banker and its depositor. dispute the correctness of payments thereafter made by it on similar checks. the latter became the depositor of the drawee bank with rights and duties of one in such relation. if the drawee dishonors the check issued by the drawer. or none. nor has the payee of such a check any right to the actual balance on deposit to the credit of the drawer. by the exercise of proper care. they became invalid and the funds were automatically restored to the credit of the drawer though not as a current deposit but as special deposit. he is not a party to instrument. the transfer of the corresponding funds from the credit of the depositor to that of the payee had to be co-extensive with the life of the checks. a verbal notice is sufficient. Gregorio Araneta. for all intents and purposes. This rule. the drawer is not entitled to moral damages. 49 of the President of the Philippines. the drawer has a right of action against the drawee bank so refusing. which in this case was 90 days. by certification the funds represented by check were transferred from the credit of the maker to that of the payee or holder. it is his duty to examine such checks which have been charged to his account. But a bank is under no obligation to make part payment to the amount of the funds on deposit. But where a drawer issues a check that is dishonored by the drawee bank upon a mistake but rectifies it within 4 hours and the payee was paid in full. thus permitting preference. but negligence of the depositor in drawing a check will not excuse the paying bank unless it is misled by such negligent act.” . the latter may countermand payment before its acceptance or certification.END OF REVIEWER 122 LEX SOCIETAS VERITAS. and. As a check of itself does not operate as an assignment of the funds to the credit of the drawer. the drawee is liable to the drawer for damages. assumes that the bank itself has not been guilty of negligence in making the payment for when. and if they disclose forgeries and alterations. on the basis of the contractual relation between him as a drawee (depository) and the drawer (depositor). the drawee is obligated to pay the persons designated by the drawer to be paid by the drawee. he can blame no one but himself and in such case he cannot hold the bank liable for the consequences of his own negligence in that respect. VNITAS. to report them to the bank. Inc. it could have discovered the alteration or forgery. 2) Neither has the holder a right of action against the drawer where the drawee bank refuses to accept or certify the check but he has a right of action against the drawer where the drawee bank refuses to pay. he is not entitled to recover. or pay a check: 1) The holder has no action against it as a check is of itself not an assignment of the funds of the drawer in the hands of the drawee bank. is not based on the check drawn but on the original contract of deposit between them. it is his duty to examine such checks within a reasonable time. if his failure results in detriment to the bank. VIRTVS. and in the absence of a rule of the bank that stop orders must be in writing. if funds to pay all are insufficient. If the checks were not presented for payment within that period. Where the checks were never collected and the amount against which they were drawn was not used or claimed. the payer bank may not select checks for payment. The order to stop payment must be communicated to the bank before the check to which it refers has been paid. However. however. on a check drawn by the depositor for an amount in excess of such funds. and. All of the checks presented to a bank for payment in a bundle through a clearing house must be paid. Where the drawee bank refuses to certify. and. if the drawer of a check is first in fault and if his negligence contributes directly to its wrongful and fraudulent appropriation. it must bear the loss notwithstanding that the depositor failed in his duty to examine the accounts. and since the account “was opened during the Japanese occupation and in Japanese currency. the banker agrees to pay checks drawn by the depositor provided that the said depositor has money in the hands of the bank. and the drawee bank is not liable on the check until it has accepted or certified it. And the depositor may maintain an action against the bank not only for a breach of contract but also for a tort. or accept. it has been held that he has a right of action against the bank for its refusal to pay such check in the absence of notice to him that the bank has applied the funds deposited in extinguishment of past due claims held against him. When a depositor’s passbook has been written up and returned to him with cancelled checks which have been charged to his account. Where a drawer of a check has prepared his check so negligently that it can be easily altered without giving the instrument a suspicious appearance and alterations are afterwards made. accept or certify a check. The drawee is not liable on a check as until accepted or certified by him.
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