NEGOTIABLE INSTRUMENTS LAW Atty.
Bernardino Amago l For the exclusive use of EH 404 2016-2017
PRELIMINARIES
HISTORY OF NEGOTIABLE INSTRUMENTS LAW
The use of Negotiable Instruments dates back as early as the
Tang Dynasty.
It is not surprising that NIL originated from Chinese tradition. After all,
they are known for trading. Their trades extended beyond their own
community. Lawlessness must have been a common theme, thus it
would have been dangerous to bring large sums of money while you are
trying to also bring your products. This must have led to the idea that
instead of bringing actual cash, it would be safer to bring a
representation of such cash.
The practice trickled to the Middle East, then to Europe.
It was in London where the law was first codified under the English Bill
of Exchange Act of 1882, which is the precursor or model law of the US
known as the US Uniform Negotiable Instruments Law of 1896.
However, not all states accepted the US Uniform until negotiable
Instruments Law. They believed that there was a need to further
improve the Law. Thus, they enacted the U.S Uniform Commercial Code
which actually is the basis of most commercial laws of the Philippines
(and the world for that matter)
Example: Laws on Letters of Credit here in the Philippines is largely
based on the US Uniform Negotiable Instruments Law
Negotiable Instruments Law in the Philippines
The Philippines has copied most of the US Negotiable Instruments Law
with the exception of certain provisions which even US courts had a hard
time making a stand on. This was the basis for the creation of our own
Negotiable Instruments Law. Thus, under Act 2031 on Feb 3 1911, our
Negotiable Instruments Law came to fruition, which became effective
on June 2, 1911.
Relevance of studying the history of NIL
Knowing the period during which a particular law is enacted will help
people understand why the words or language found therein were the
ones used in the enactment of the law. The practices of the period and
culture of that time will help in understanding the law as a whole.
NIL APPLICABLE ONLY TO NEGOTIABLE INSTRUMENTS
The NIL is only applicable to Negotiable Instruments
Topics such as negotiable documents of title (under Sales) has no
application in NIL because the same is covered under the Civil Code.
The adjective and substantive aspects, the remedies of the parties are
found in the NIL itself. It is therefore imperative to determine whether
a document is negotiable or non-negotiable
Take note: NIL will only find relevance if the instrument is negotiable (If
it is not, other laws such as the Civil Code may apply)
Purpose of NIL
To facilitate and regulate commercial transactions.
Example: It would be inconvenient to bring 1M pesos to a buyer of a
parcel of land, and having to count the money in front of the purchaser.
This was born out by the circumstances of the time considering that
trade was already popular beforehand.
1|U N I V E R S I T Y O F S A N C A R L O S
FUNCTIONS OF NEGOTIABLE INSTRUMENTS
What are the functions of negotiable instruments?
1. It is a substitute for money
2. It is a medium for exchange
3. It is a medium of credit transactions
4. It is a means of making immediate payment
It is a substitute for money
A negotiable instrument, while it is not money, is a substitute for money,
eliminating the risk of dealing in cash.
To illustrate the difference between money and a negotiable instrument:
1. Money, when transferred because of a particular transaction
results to termination if it is considered payment. However, for
negotiable instruments, that which is transferred is not considered
payment unless encashed.
2. Money retains its value even if transferred to multiple individuals.
In contrast, a check (which is a negotiable instrument) which is
transferred to multiple individuals, wherein one becomes
bankrupt, results in the loss of value when it reaches the last
person.
Nevertheless, the purpose of the law is to place negotiable instruments
on such footing that they would be freely accepted like money without
question in commercial transactions and thereby facilitate trade.
It is a medium for exchange
It allows transactions to be closed and allows exchange of assets to
happen even if there is no actual cash. It thus increases the purchasing
medium in circulation, doing away with the active handling of money
and the need to physically count bills and coins whenever payment is
made in financial transactions.
To illustrate:
You would be willing to give to another party your assets (ex. A car) by
the simple exchange or handing down of a check. This check represents
the value of money.
It is a medium of credit transactions
The instrument is a representation of one’s credit. It is called credit
because it takes into account one’s ability to pay, one’s wealth or
reputation.
When one does not receive cash in itself, credit actually ensues.
Example: One can receive an instrument which is payable after 30 days
only, and you are still willing to close the transaction. With the passage
of time, you are actually allowing credit to happen.
Credit presupposes that there has been no actual payment of money
yet, but despite such facts, the transaction is deemed closed or
perfected.
It is a means of making immediate payment
Payment here does not mean that of the Civil Code. Rather, payment in
the sense that the transaction has been completed, is closed, with the
mere transfer of that instrument as a representation of payment.
Example: X can transfer his whiteboard marker to Y, if Y gives a piece
of paper saying that Y owes X P1 million payable to X or to his order.
When the paper is given to X, X deems it as payment. Thus, X in effect,
gives the white board marker.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
What are the characteristics of negotiable instruments?
1. Negotiability
2. Accumulates secondary contracts
NEGOTIABILITY
Negotiability refers to the quality or attribute of an instrument to be
transferrable from one person to another, and whoever holds that
instrument, holds such against defenses of prior parties.
Example: A extended a loan of 1M to B which B should pay 30 days
after. Before 30 days, A assigned his rights to C. What is his right? The
right to collect the amount of 1M pesos to B. But instead of saying that
he has 1M worth of rights, he says that he actually 2M and assigns such
right to C.
Question: When C goes to B to enforce his right, will B be compelled
to pay the amount of 2M pesos?
Ans – No. Because C only steps into the right of A which only has a right
to the extent of 1M.
TN: The situation does not apply when A stole a negotiable instrument
from B in the amount of 1M and then negotiates said instrument to C
(hands down the instrument to C).
Question: If C goes to B to demand payment of 1M pesos, can B allege
that A stole it from B, so he should not pay C?
Ans – No. Because the negotiable instrument has the characteristic of
Negotiability. Thus, it is free from the defenses of prior parties. The
instrument will remain payable to C.
ACCUMULATES SECONDARY CONTRACTS
The most important feature of negotiable instruments is the
accumulation of secondary contracts as they are transferred from one
person to another. Once an instrument is issued, additional parties can
become involved.
Example: A issues a negotiable instrument in favor of B. B negotiates
to C. C negotiates to D, and then D to E. A and B have a contract. B and
C also enters into another contract. The same for C to D. And then from
D to E. (A total of 4 contracts)
Question: If the instrument has already matured, where can E go for
payment?
Ans – E can go to any of the parties for payment. He can go to A for
payment. If A refuses, E can go to either B, C, D because E already holds
an instrument which holds all the contracts which the previous parties
entered into prior to his contract (referring to E). It is as if E has
contracts with B, C, and D. This is because it can accumulate secondary
contracts (save for certain limitations).
NEGOTIABLE INSTRUMENT DEFINED
What is a negotiable instrument?
A negotiable instrument is one used in commercial transactions and
which complies with all the elements of negotiability provided for under
Section 1 of the Negotiable Instruments Law.
Does it have be negotiated before it becomes negotiable?
Yes. It has to be negotiated before it becomes negotiable. It has to be
used in a commercial transaction. If it is not used for a commercial
transaction, while it bears all the elements under Section 1, it cannot be
considered a negotiable instrument.
2|U N I V E R S I T Y O F S A N C A R L O S
FORM OF NEGOTIABLE INSTRUMETS
Relevant provision
Section 1. Form of Negotiable Instruments. – An instrument to be
negotiable must conform to the following requirements:
a) It must be in writing and signed by the maker or drawer
b) Must contain an unconditional promise or order to pay a sum
certain in money
c) Must be payable on demand, or at a fixed or determinable future
time
d) Must be payable to order or to bearer
e) Where the instrument is addressed to a drawee, he must be named
or other indicated therein with reasonable certainty.
IT MUST BE IN WRITING AND SIGNED
BY THE MAKER OR DRAWER
MUST BE IN WRITING
Form of writing
Any form of writing will do. It can also be printed, typewritten, or
stamped, as long as there is a manifestation in physical form the
language of your obligation.
Material
There is no requirement as to the material used. It can be on any
material as long as it can be transferred from one hand to another.
SIGNED BY THE MAKER OR DRAWER
Difference between maker and drawer
 A maker is the one who makes a promise to pay in a promissory
note. He is personally liable to pay.
 A drawer is the one who issues a bill of exchange to order a
payment to be made. He orders someone to make the payment.
TN: Maker or drawer does not have to be the one who writes, as long
as he/she is the one who signs.
Location of the signature
The signature may appear in any part of the instrument. It can appear
at the back or on the face of the instrument. There is no requirement
on where the signature should be placed.
It can be signed anywhere provided that such signature signifies the
intention by the maker or drawer to be bound by the instrument
Type of signature
There is no requirement, as long as there is intent to be bound.
 If the signature was a heart: Valid
 If the signature was “Taylor Swift”: Still Valid
There is no requirement as to what signature you’ll place, for as long as
that mark or signature or whatever initials you place are indicators of
your intent to be bound by the instrument.
TN: But of course, if you will run counter to the usual practices of a
particular place, wherein you’re supposed to make a signature using
your name or at least one that is artistic enough not to indicate it as any
other person’s name, then it may prevent the instrument from being
accepted. It can affect the acceptability of the instrument if you don’t
comply with the usual practices. Then again, as to whether it will affect
negotiability, it will not.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017

MUST CONTAIN AN UNCONDITIONAL PROMISE OR AN INDICATION OF A PARTICULAR FUND OUT OF WHICH

ORDER TO PAY A SUM CERTAIN IN MONEY REIMBURSEMENT IS TO BE MADE OR A PARTICULAR ACCOUNT TO BE
DEBITED WITH THE AMOUNT
UNCONDITIONAL PROMISE OR ORDER TO PAY
What about if “payable out of a particular fund?”
Non-negotiable. There is a condition placed on the promise or order to
Condition
pay. There is a condition that the particular fund does exist and that the
Any future event which may or may not happen. It could also refer to a
fund is sufficient to pay.
past event not known to the parties which give rise to an obligation or
extinguishes an obligation.
When you are trying to make a promise or an order, it extends to your
general created and not just to a particular portion of a credit.
TN: To make it not negotiable, the condition must be put to the promise
or the order to pay.
Section 3 says that if there is a fund specified for which a payment for
the obligation will be made, it will make the instrument conditional.
Unconditional
It is not contingent on the happening of a future event; not subject to
What about if “Reimburse from a particular fund?”
any condition.
A statement specifying the particular fund from which reimbursement
can be made or that fund which may be debited or deducted or a
Promise v. Order to Pay
statement of the transaction does not affect the character of order of
promise as being unconditional.
Promise Order
The condition is imposed not on the order to pay but on the
Pertains to a promissory note Pertains to a bill of exchange. reimbursement which has nothing to do with the negotiable instrument
anymore. The existence of the fund does not extend to the order to pay.
It only extends to the reimbursement. Therefore, whether or not there
Parties – maker and payee. Parties – Drawer, Drawee, and is a monthly salary, there is still a requirement to pay.
Payee.
A STATEMENT OF THE TRANSACTION WHICH GIVES RISE TO THE
INSTRUMENT.
Refers to a person directing
It is the person primary liable another person or himself to pay What about if “Subject to the terms of a loan contract?”
who obliges himself on the on the instrument; requires an If I am the holder of that instrument and I do not know what the loan
instrument additional act on the person contract provides then I may not able to demand payment. It may also
primarily liable- that is, by be easy for the loan-maker to say that there is no loan contract or that
accepting the instrument the terms are not complied with. It is made to depend on a separate
contract and it sets a condition. It makes the promise conditional.

Is death a condition? What about if “Arose from a loan contract?”

No. Death is not considered a condition because everyone is certain to You are made to promise to pay because of a loan contract. Whether or
die. It is the exact time when death will happen is uncertain but death not the contract exist does not matter. It is merely stating a transaction
itself is certain. It is just a period. which brings about the promise to pay.

What about death because of cancer? The promise to pay here already exists whether or not the loan contract
It is a condition. While everyone dies, it may not be of cancer. It is exists. The instrument can stand on its own. It will not affect the
uncertain to happen that a person dies because of cancer. negotiability.

Statements added to the instrument which do not affect its
negotiability
There may be statements added to the instrument but which cannot
affect its negotiability and cannot affect the promise or order being
unconditional.
TN: Section 3 (b) provides that the statement of a transaction that gives
rise to the instrument will not affect the character of being unconditional
of the promise or the order.
THE SUM MUST BE CERTAIN IN MONEY

Relevant provision When is sum considered certain in money?

Sec. 3. When promise is unconditional. - 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
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
A sum is certain in money if it can be determined on its face or that
which can be computed without resorting to any extrinsic evidence.
Example: “Sum of 1,000,000” – It is determinable but the question is in
what form is the 1,000,000? You have to indicate whatever the currency
is. You have to indicate the full amount including the denomination of
the amount.
Statements added to the instrument which do not affect its
negotiability
There may be statements added to the instrument but which cannot
affect its negotiability and cannot affect the sum being certain in money.

3|U N I V E R S I T Y O F S A N C A R L O S
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Relevant provision
Sec. 2. What constitutes certainty as to sum – The sum payable is a sum
certain within the meaning of this Act, although it is to be paid:
(a) With interest
(b) By stated installments
(c) By stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall become
due
(d) With exchange, whether at a fixed rate or at the current rate
(e) With costs of collection or an attorney's fee, in case payment shall
not be made at maturity.
PROVISION FOR INTEREST
A provision for interest may be added and it cannot also affect the sum
being certain in money.
Effect if interest rate is not stated
It is negotiable. A mere phrasing “with interest” is deemed not to affect
the character of the sum. It still renders the sum certain in money.
Interest, under business transaction, could refer to legal interest. So the
rate could just be 6%. The requirement of when it is supposed to run
starts after the maturity of the instrument. This is still negotiable.
BY STATED INSTALLMENTS
A provision that the instrument be payable in stated instalments –
specifying the amount of the instalment and the due date for each
instalment. In addition, acceleration clause may be added.
If there is a stated installment, it must specify two things:
1. The amount of each installment
2. Due date of each installment
What about if “through monthly installments, first payment is
July 1?”
Some authors would say it complies. Atty. A’s position is that it does not
comply because the second installment date is not mentioned. They
just made the inference that when you say monthly, it means the next
month. This is not necessarily true. Monthly could actually mean on a
per month basis. This is still not certain. But you can argue both ways.
Acceleration clause
A clause stating that when an obligor defaults on his obligation it would
make the entire obligation due and demandable. It does not affect the
negotiability of an instrument.
Extension clause
A clause stating that an extension to fulfill the obligation is allowed.
Does an extension clause render the instrument non-negotiable?
It depends on whose option the extension is given.
 If the extension is at the option of the holder – whether or not the
period is specified, it does not matter. If the holder wants to
demand it after 100 years, so be it.
 If it is on the part of the maker – then you have to specify as to
how long because it will render the amount not certain in money
anymore.
PROVISION ON PAYMENT ON CURRENT EXCHANGE RATES
A provision on payment on current exchange rates may also be added
but it has to be made sure what currencies are involved. So you can
provide a current rate, that it presupposes where the instrument will be
drawn and where the instrument will be payable. If you do not know
where the instrument drawn, then it would be best if the currency rate
be specified.
4|U N I V E R S I T Y O F S A N C A R L O S
Ex. 48 pesos= 1 dollar, and not just say current rate.
PROVISION ON COLLECTION COSTS AND ATTORNEY’S FEES
A provision on collection costs and attorney’s fees may also be added
provided that they are only due after the instrument has been due.
Does it affect the sum being certain in money?
It does. But the instrument has already become non-negotiable, it being
already due. Therefore, it is already irrelevant.
IT MUST BE PAYABLE ON DEMAND OR AT A FIXED
OR DETERMINABLE FUTURE TIME
PAYABLE ON DEMAND
Relevant provision
Section 7. When payable on demand. - An instrument is payable on
demand:
(a) Where it is expressed or to be payable on demand, or at sight or
on presentation
(b) In which no time for payment is expressed
Where an instrument is issued, accepted or indorsed when overdue, it
is as regards the person so issuing, accepting or indorsing it, payable on
demand.
Where it is expressed or to be payable on demand, or at sight
or on presentation
Example: I promise to pay P10,000 on demand.
TN: “At sight” applies only to Bills of Exchange where there is a drawee.
“At sight” vs. “Upon Presentation”
A. Purpose of “at sight” is for it to be presented to the drawee for
acceptance. When it is accepted by the drawee, that’s when he
obliges himself to pay on the instrument.
B. “Upon presentation” is for the purpose of payment. It is applicable
to both promissory notes and bill of exchange requiring payment
from persons primarily liable.
In which no time for payment is expressed
If the instrument does specify a date as to when it is payable, it is
deemed payable on demand
Where an instrument is issued, accepted, or indorsed when
overdue, it is as regards the person so issuing, accepting or
indorsing it, payable on demand.
This is when an instrument is payable on demand only to certain parties.
The type of parties referred to here are “immediate parties”
Immediate parties – those who are privy to the transactions.
Example: I promise to pay 1 M to bearer 10 days after Y dies.
X ---- A --- B --- C --- D
7/2 7/15 7/16 7/20
7/5 Y dies
Delivery 10 days after the death of Y
When it was delivered on the 15th, it was already demandable but not
payable on demand because the period has not yet lapsed.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017

Delivery beyond 10 days from the death of Y
It is only after the 15th that it has already become payable on demand
because that is when the period has lapsed. That is when the last
paragraph that “the instrument is issued, accepted, or indorsed when it
is overdue” only applies.
(b) On or before a fixed or determinable future time specified
therein; or
(c) On or at a fixed period after the occurrence of a specified
event, which is certain to happen, though the time of
happening be uncertain,

The parties may be knowledgeable about such fact but not automatically
because if this instrument is transferred to C, the word used there is
indorsed, and the example above is a bearer instrument, that means
you cannot see at the back as to when the instrument was actually
indorsed or when it is transferred.
Beyond 10 days from death, but bearer is without knowledge of death
of Y
But, let’s say, it was transferred on the 16th but C does not know Y is
already dead. Can you say that the instrument is payable on demand in
relation to C who later transferred on the instrument to D on 7/20?
An instrument payable upon a contingency is not negotiable, and the
happening of the event does not cure the defect.
Example of payable before a fixed future time
To Bank A
Pay to the order of Floro 30 days before December 25, 2016.
Sgd X
IT MUST BE PAYABLE TO ORDER OR TO BEARER

Ans – No, because C is not an immediate party even if they are actually, PAYABLE TO ORDER
in terms of proximity, very close to B. B, is probably the only one, who
knows that Y has already died on 7/5. So that’s means after 10 days of Relevant provision
his death, payment may already be due, hence can be demanded. Section 8. When payable to order. – The instrument is payable to order
where it is drawn payable to the order of a specified person or to him
But because C doesn’t know it, in relation to D, D cannot demand or his order. It may be drawn payable to the order of ----
payment to C right there and then. The instrument as to C, cannot be
considered payable on demand, for the purpose of application of the last (a) A payee who is not maker, drawer, or drawee; or
paragraph of section 7. (b) The drawer or maker; or
(c) The drawee; or
The last paragraph, therefore, tells us that there could be an instance (d) Two or more payees jointly; or
when an instrument is payable on demand only to certain parties. (e) One or more several payees; or
(f) The holder of an office for a time being.
If the instrument was indorsed
It would have been easier if the instrument had been indorsed, because Where the instrument is payable to the order of the payee must be
it is very easy to say that this party is considered an immediate party named or otherwise indicated therein with reasonable certainty.
because you can see the date when it was indorsed.
A payee who is not the maker, drawer or drawee
PAYABLE ON A FIXED FUTURE DATE The payee or that specified person could be another person other than
If it states a fixed future date as to when it is payable. the drawer, maker or drawee.

Payee is not the maker

To Bank A
Payable to Mr. Floro or order 1 M on Dec. 25, 2016
I promise to pay Php 1,000,000 to Y or his order.
Sgd. X Signed, X.

Is the example above even a negotiable? Payee is not the drawer. X is the drawer and A is the drawee. This is
There are two views: (Gray area according to Sir) also an example of an instrument payable to a payee who is neither a
drawer nor a drawee.
1. Can actually be considered a negotiable instrument because while
it is merely an acknowledgment of a debt, but if it contains words
of negotiability, it can be considered a negotiable instrument. To: A
Because for what purpose will you actually inform the bank if not Pay Php 1,000,000 to the order of P.
to demand payment. Signed, X.

2. May not be a negotiable instrument because it does not state a

particular demand. The drawer or maker

TN: But again, because of the words of negotiability, this may be

I promise to pay Php 1,000,000 to X or his order.
considered a negotiable instrument.
Signed, X.
PAYABLE ON A DETERMINABLE FUTURE TIME
To: A
Relevant provision
Pay Php 1,000,000 to the order of X.
Section 4. An instrument is payable at a determinable future time within Signed, X.
the meaning of this Act, which is expressed to be payable ----

(a) At a fixed period after date or sight; or

5|U N I V E R S I T Y O F S A N C A R L O S
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017

The drawee not really exist), then it will not become a bearer instrument for failure
to comply with Sec 9c. The intention of the party making or drawing the
To: A instrument matters.
Pay Php 1,000,000 to the order of A.
When this happens, the instrument is not also an order instrument. This
Signed, X. is a non-negotiable instrument because it is neither payable to order nor
bearer. The intent of the drawer of maker is important.
Two or more payees jointly
We emphasize the conjunction which denotes that there are two I promise to pay Php 1M to Superman or order.
separate credits in this case. Signed, X.

To: A
Pay Php 1,000,000 to the order of P and C.
Signed, X.
One or more several payees
We emphasize the conjunction “or”.
To: A
Pay Php 1,000,000 to the order of P or C.
Signed, X.
Si
The holder of an office for the time being
The position must be occupied by only one person otherwise it will
render the payee undeterminable. If it is an order instrument, it is
required that it must be payable to a payee who is named or indicated
with reasonable certainty.
To: A
Pay Php 1,000,000 to the order of the President of the
USC - Lex Circle.
Signed, X.
Si
PAYABLE TO BEARER
Relevant provision
Sec. 9. When payable to bearer. — The instrument is payable to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable; or
(d) When the name of the payee does not purport to be the name
of any person; or
(e) When the only or last indorsement is an indorsement in blank.
When it is expressed to be so payable
I promise to pay Php 10 to bearer.
Signed, B.
When it is payable to a person named therein or bearer
I promise to pay Php 10 to Mr. X or bearer.
Signed, B.
When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable.
Note that it must be an order instrument and that the maker or drawer
knows that Superman is fictitious or non-existent. If B signed it believing
that Superman really existed (even if we all know that Superman does
When the name of the payee does not purport to be the name
of any person.
“Pay to cash” is something which has ripened into a practice that is now
considered acceptable. Supposedly, this should not be a negotiable
instrument because there a no words of negotiability.
Bearer or order are words of negotiability and if you don’t see them
there, then that is not a negotiable instrument. It should apply to “cash”
alone and not to any other word which does not purport to be a name
of a person. Sec 9d also contemplates an order instrument but it became
a bearer instrument because you cannot specify who that person is.
To: A
Pay to cash Php 1M.
Signed, X.
Name doesn’t purport to be a name of a person.
In this case, the drawer knows that there is no need to make an order;
whoever holds the instrument can already demand payment for such an
instrument.
Because you made an instrument knowing that it can never indorsed by
the order of a person, then there must be intention to deliver that
instrument solely and whoever holds it will have a right.
To: A
Pay to the King of the Pacific Ocean or order Php 1M.
Signed, X.
Take note:
 “Pay to Bear” will not make the instrument negotiable because of
the lack of the words of negotiability.
 “Pay to Payroll” is not a negotiable instrument because it will violate
section 1 as it does not contain words of negotiability. The only case
decided on the basis of this section is about pay to cash. De Leon is
just making an analogy.
Important: A bearer instrument can be negotiated by mere delivery
while an order instrument can be negotiated by indorsement coupled
with delivery.
Who will endorse here? The bear will not be able to indorse. The
intention must be for that instrument to be negotiable by mere delivery.
In all these instances, except for Sec 9 A and B, they are order
instruments but because of certain defects or circumstances, they
became bearer instruments instead.

6|U N I V E R S I T Y O F S A N C A R L O S
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
When the only or last indorsement is an indorsement in blank.
A blank indorsement is one which does not specify the person who will
be receiving the instrument. At the back of the instrument, you will see
the mere signature of the current holder of the instrument.
If it is not specific as to whom the instrument will be transferred, the
intention of the party holding the instrument was to transfer it to
anyone.
Pay to A
LC
Pay to B
A it will not be subject to the defenses of prior parties. Thus, even if
Sgd B (indorsed in blank)
TN: Once a bearer instrument, always a bearer instrument. The example
above will change the order instrument into a bearer instrument.
How can you convert an order instrument into a bearer instrument? You
indorse it in black. Once indorsed, it will become a bearer instrument.
Even if there is a subsequent special indorsement, it will not change the
nature of the bearer instrument.
Example: (SI = special indorsement, BI= blank indorsement)
A (SI) – B (SI) – C (BI) – D (SI) – E (SI) – F (BI) – G (SI) – H-I-J
In the above example, the last indorsement was made in blank by F to
G. If G negotiates it by special indorsement to H, can it still be
considered a bearer instrument?
There were two blank indorsements with special indorsements in
between. Under the law, only when the last indorsement is in blank will
it convert an order into a bearer instrument. In this case, the last
indorsement is special (from G to H). Technically this does not convert
the instrument but because there has been a blank indorsement, H can
actually strike out the previous special endorsements and it will be
considered a bearer instrument. After striking out D, E and G’s
indorsement, the last endorsement will be in blank.
Once an instrument is converted to a bearer instrument, it is already a
bearer instrument forever. In this case, H can just deliver it to I and
then from I to J.
WHERE THE INSTRUMENT IS ADDRESSED TO A DRAWEE, HE
MUST BE NAMED OR OTHERWISE INDICATED THEREIN
WITH REASONABLE CERTAINTY
This requirement is applicable only to bills of exchange
This is because drawees are present only in bills of exchange. There is
no drawee in a promissory note.
TN: In effect, if it is a bill of exchange and there is no drawee, the
instrument is not negotiable.
Caltex Philippines v. Court of Appeals
Facts: Angel Dela Cruz was able to get a certificate of time deposit from
the Security Bank and Trust Company. After, it was alleged that Angel
gave this to Caltex as a guarantee for its purchases from Caltex of fuel
products.
Angel went back to Security Bank saying that he lost the certificates and
was asking for replacements. After complying with the bank
requirements, he was given replacements. Per his instruction, the bank
7|U N I V E R S I T Y O F S A N C A R L O S
was instructed to apply the proceeds to the loan of Angel with Security
Bank.
Caltex comes bearing the original securities to inspect and check the
validity of the time deposits. The bank told them that they already
applied the proceeds to the loan of Angel dela Cruz.
Caltex filed a case against Security Bank saying that they should pay
Caltex with the proceeds. The certificates of time deposit were
negotiable instruments and the bank should be liable upon presentation
of such.
Caltex want to classify as negotiable? Caltex can claim payment because
of the warranty that the maker will pay the holder of the instrument and
Security Bank says that it already paid the instrument, Caltex now could
just make the defense that even if the bank already paid it, they are still
holding the instrument, free from the prior party Angel.
Issues:
1. Whether the certificate of time deposits are negotiable.
2. Whether Security Bank is liable.
Held:
Whether the certificate of time deposits are negotiable.
Yes, because of the words bearer and depositor. The certificates state
“this is to certify that depositor has deposited amount in the bank and
we promise to pay bearer or depositor this amount”. If the bank really
wanted to pay Angel only, the bank should have just used Angel dela
Cruz only and not the words bearer and depositor.
Another important word on the face of the instrument is “repayablee”.
This matters because this should be a promise to pay which means that
this could be a negotiable instrument.
Whether Security Bank is liable
No. While they are negotiable instruments, Security Bank is not liable.
This is because in order for Caltex to receive payment, there should have
been a valid negotiation of a bearer instrument.
Mere delivery would have sufficed but the Caltex officers said that they
received it as a form of a guaranty so it was not really delivered as a
negotiation.
For the negotiability of the instrument, it is to be ascertained that you
were a party to it. At the very least, you should be a holder of the
instrument. In this case, Caltex cannot be a holder because the
instrument was just deliver not for purposes of constituting Caltex as
the holder but merely as a guarantee. They cannot assert their right as
holders.
TN: This case tells us that you just have to look at the face and the
language used in the instrument to determine its negotiability.
Philippine Education Co. Inc v. Soriano
Facts: Enrique Montinola purchased money orders from Manila Post
Office. He offered to pay a private check but they were not generally
accepted as payment for money orders according to the teller who
instructed him to see the Chief of the Money Order Division. However,
Montinola did not go there, instead he managed to leave with the 10
money orders and his check.
On the same day, there was notification to all banks not to receive the
money orders. The Bank of America received the notice three days after.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
One of the money orders was deposited with them and cleared with the
Bureau of Posts.
The Chief of Money Order Division notified the Bank of America that the
money order had been irregularly issued and in view thereof, the
amount it represented had been deducted from the bank’s clearing
account. The Bank of America wanted the chief to reconsider the
decision regarding the deduction of the amount from the clearing
account of the Bank of America but the request was denied hence there
was an action filed.
The lower court ordered to countermand the notice given to the Bank
of America and sided with the bank. It ordered the money division to
reimburse the amount that was credited to the clearing account.
The Philippine Educators became a party to the case because they
acquired the money orders from Montinola which then deposited them
in the bank.
The bank cleared the amount and it was released to Phil Educators.
There was however an adverse notice that the money order was stolen
and that the amount cleared would be deducted from the bank’s clearing
account. The bank complained about the act of the money order
division.
Issue: Whether the postal money orders were negotiable instruments.
Held: No. The Supreme Court referred to the US authorities regarding
the value of the money order. Since our laws laws were patterned after
them and the constructions or interpretations made by them are given
weight.
In reference to the US decision, they ruled that the government is not
involved in commercial transactions but are merely exercising
governmental power for the benefit of the public. The money orders are
not considered negotiable instruments.
An instrument to be negotiable must contain an unconditional promise.
The fact that it is from the government which imposes several
restrictions is contrary to the very nature of a negotiable instrument.
Reasons why postal money orders are not negotiable:
1. The money order was for a public benefit in exercise of a
governmental function and it is not for commercial transactions.
We have said that for an instrument to be negotiable, it must be
used for commercial transactions so sir emphasizes the need to
include this in the definition of as provided in Section 1
2. Postal money orders are not unconditional promises because it is
subject to the restriction of not having more than one indorsement.
Further, it is payable only to the person specified because of this,
it is not payable to order or bearer.
TN: Postal money orders, as they stand now, are not negotiable
instruments.
Metro bank v. Court of Appeals
Facts: Eduardo Gomez had some treasury warrants that were all drawn
from Philippine Fish Marketing Authority and they were payable to
Gomez. Some of them were indorsed by their respective payees followed
by Gomez as second indorser. They were indorsed by cashier Gloria of
Golden Savings and deposited in Metrobank.
Phil FMA -> Gomez -> Golden Savings -> Metro Bank
Gloria, the employee of Golden Savings was insistent in following-up
whether the treasury warrants were cleared with Metro Bank. The latter
8|U N I V E R S I T Y O F S A N C A R L O S
cleared the amount hence Golden Savings released the value to Gomez.
Metro Bank’s reason was because it was an accommodation of a valued
client.
Actually, it was not an accommodation but they were just exasperated
by Gloria’s repeated demands. After clearing the amount, MB informed
Golden Savings that the warrants were not honored by the Bureau of
Treasury. They demanded for a refund for the money it released to
Golden Savings. When this was rejected, Metro Bank sued Golden
savings but judgment was rendered in favor of Golden Savings.
Issue: Whether the treasury warrants are negotiable instruments.
Held: No. The treasury warrants, in this case, are said to be non-
negotiable because they are payable out of a particular fund which sets
a condition to the unconditional promise to pay.
On the face of the instrument, it was stamped “non-negotiable” and that
it is payable out of a particular fund: Fund 501. If you condition the
payment on the existence or sufficiency of the funds, the promise or the
order is rendered conditional so it will not comply with Section 1’s
requirement.
The Supreme Court ruled in favor of Golden Savings. Metrobank was
negligent in giving Golden Savings the impression that the treasury
warrants were cleared. Without such assurance, Golden Savings could
not have made the withdrawals in favor of Gomez.
They also faulted Metro Bank. The signatures of the instrument were
actually forged. The act of Metro Bank was extra-ordinarily carelessness.
They should have waited for the clearance.
TWO TYPES OF NEGOTIABLE INSTRUMENTS
TWO GENERAL TYPES OF NEGOTIABLE INSTRUMENTS
1. Promissory note (PN)
2. Bill of exchange (BOE)
TN: Need only to memorize Section 1 in order to know the definitions.
Relevant provisions
Sec. 184. Promissory note defined. – A negotiable promissory note
within the meaning of this Act is an unconditional promise in writing
made by one person to another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to the maker’s own
order, it is not complete until indorsed by him.
Sec. 126. Bill of exchange defined – 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.
Parties to a PN and BOE
Promissory Note Bill of Exchange
Maker Drawer
Payee Drawee
Holder Payee
Holder
Who is a holder?
Person who holds the instrument (may also be a party to the instrument)
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Can a PN be an order instrument? Can a BOE be a bearer
instrument?
Yes on both. As defined in Section 1, “payable to order or to bearer”.
Initially, the word “order” in the second requirement and the “order”
mentioned in the 4th requirement are different.
Even if a BOE is the one referred to as the unconditional order, the
“order” mentioned in section 4 is the order to be made to the payee and
whoever holds that instrument. The “order” under the 2nd requirement
is the order to be made by the drawer of that instrument.
CHECKS
Relevant provision
Sec. 185. Check defined. – A check is a bill of exchange drawn on a bank
payable on demand. Except as herein otherwise provided, the provisions
of this Act applicable to a bill of exchange payable on demand apply to
a check.
Is there always a drawee?
Yes, which is a bank. One of the elements of a bill of exchange is that
“where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.” The drawee here
is always a bank, otherwise, it is most likely not a check.
TERMS, ADDITIONS, OMISSIONS
TERMS WHEN SUFFICIENT
When are the terms considered sufficient?
You need not use the terms provided under Sec. 1. You can have your
own terms for as long as they have similar phraseology and intent.
Relevant provision
Sec. 10. Terms, when sufficient. - The instrument need not follow the
language of this Act, but any terms are sufficient which clearly indicate
an intention to conform to the requirements hereof.
ADDITIONS NOT AFFECTING NEGOTIABILITY
Additions not affecting negotiability
Relevant provision
Sec. 5. Additional provisions not affecting negotiability. - An instrument
which contains an order or promise to do any act in addition to the
payment of money is not negotiable. 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
(b) Authorizes a confession of judgment if the instrument be not
paid at maturity
(c) Waives the benefit of any law intended for the advantage or
protection of the obligor
(d) Gives the holder an election to require something to be done in
lieu of payment of money.
But nothing in this section shall validate any provision or stipulation
otherwise illegal.
There are additions whereby the maker or drawer uses the instrument
as security or collateral, that doesn’t change the fact that the instrument
remains negotiable.
9|U N I V E R S I T Y O F S A N C A R L O S
AUTHORIZES THE SALE OF COLLATERAL SECURITIES IN CASE THE
INSTRUMENT BE NOT PAID AT MATURITY
Why will sale of collateral not affect the negotiability of an
instrument?
Because the sale of the collateral happens only after the maturity of the
instrument. It does not affect the negotiability of the instrument as long
as the requisites are still there.
If the sale of the collateral happens before the maturity of the
instrument, can it affect the negotiability of the instrument?
Yes. It has to happen after, otherwise, the instrument loses its character
of negotiability because said collateral could not be the same as the
amount stated when it is sold and it happens prior to maturity.
Example:
I promise to pay X or order 1M pesos on Dec. 1, 2016. In case the
instrument is not paid at maturity, he can sell the ring which is
pledged as a security for this instrument.
Sgd. Y
This is negotiable. The additional provision does not affect the
negotiability of the instrument because the sale of the collateral will only
happen after maturity.
The moment the maturity period has elapsed, the instrument becomes
non-negotiable in its full commercial sense. Thus, any sale of collateral
thereafter is irrelevant.
AUTHORIZES A CONFESSION OF JUDGMENT IF THE INSTRUMENT BE
NOT PAID AT MATURITY
This does not affect the negotiability of the instrument becomes the
confession happens only after the instrument’s maturity.
Is confession of judgment illegal?
Confession of judgment as it stands now is illegal according to U.S.
Jurisprudence because it bargains a person’s day in court and right to
appeal. However, it does not affect the negotiability of an instrument.
Cognovit actionem is valid
You confess guilt on the act alleged. You accept the obligation and
admitted that there was no payment made. You will do this after the
action is filed in court. This is what happens actually during arraignment.
You don’t bargain your day in court. You simply give in to the order to
save expenses.
Relicta verification is valid
Here, the pleading is being abandoned. A confession of judgment by
withdrawal of the defense. This is likewise valid because you do the
same after the action is filed in court.
TN: Both happens after the case or action has been filed. The
justification of the Supreme Court in the case of PNB v. Manila Oil will
not apply. You did not bargain your day in court in both instances. After
all, there is an action filed.
WAIVES THE BENEFIT OF ANY LAW INTENDED FOR THE ADVANTAGE
OR PROTECTION OF THE OBLIGOR
Example: When the obligor (debtor) waives the benefit of the “No
demand, no delay” principle under Obligations and Contracts.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Example:
“I promise to pay A or order 100 pesos on December 1, 2016
without need of demand.
Sgd. Alphonso Floro”
The abovementioned example is a waiver of the benefit of any law
intended for the advantage or protection of the obligor.
GIVES THE HOLDER AN ELECTION TO REQUIRE SOMETHING TO BE
DONE IN LIEU OF PAYMENT OF MONEY
A. If the option is with the holder – the instrument is negotiable
B. If the option is with the promissor – the instrument is non-
negotiable (because the holder cannot compel him to make
payment in money)
OMISSIONS, SEAL, PARTICULAR MONEY
Omissions, seal, particular money not affecting negotiability
Relevant provision
Sec. 6. Omissions; seal; particular money. - The validity and negotiable
character of an instrument are not affected by the fact that:
(a) It is not dated
(b) Does not specify the value given, or that any value had been
given therefor
(c) Does not specify the place where it is drawn or the place where it
is payable
(d) Bears a seal
(e) Designates a particular kind of current money in which payment
is to be made.
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.
CURRENT MONEY
Refers to the money which can be exchanged in relation to the value of
the instrument. Simply, it is the exchange rate of the currencies involved
in the transaction.
Example: If it says that it is 10, 000 pesos but the parties agreed that
they would want dollars instead, even if the exchange rate was not
stipulated there, supposedly, you cannot receive the current money that
you have agreed upon. Still, it will not render the instrument non-
negotiable because exchange rates are deemed common commercial
knowledge under the law. You can refer to the internet or go to the bank
and ask whatever the exchange rate is.
OMISSION AS TO THE DATE
Omitted date here refers to the date when the instrument was drawn or
made, and not the date when the instrument is supposed to be paid.
Omission of date will not render the instrument non-negotiable because
dates are essentially not necessary. In fact, date is not an element under
Section 1.
Presumption if not dated
If not dated, the date when the instrument was issued is presumed to
be the true date. Presumption is you issued the instrument on the same
day you made it.
Relevant provision
Sec. 11. Date, presumption as to. – Where the instrument or an
acceptance or any indorsement thereon is dated, such date is deemed
10 | U N I V E R S I T Y O F S A N C A R L O S
prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
Antedating and postdating
A. Antedated – instrument is date earlier than the date of its issuance.
B. Postdated – instrument is dated earlier than the date of its
issuance.
GR: The antedating or postdating of an instrument will not affect its
validity or negotiability.
XPN: If the antedating or postdating was made for an illegal or
fraudulent purpose. Here, the negotiability of the instrument is not
affected, however, it will invalidate the instrument.
TYPES OF HOLDERS
Who are the different types of holders?
1. Holder in due course
2. Holder through a holder in due course
3. Holder not in due course
HOLDER IN DUE COURSE
HOLDER IN DUE COURSE
Relevant provision
Sec. 52. What constitutes a holder in due course. – 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
(b) That he became the holder of it before it was overdue, and
without notice that it had previously dishonoured, if such was the
fact
(c) That he took in good faith and for value
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.
TN: Mnemonics: COFI
THAT IT IS COMPLETE AND REGULAR UPON ITS FACE
A. Complete – when it complied with all the formalities under Sec 1.
B. Regular – when the face of the instrument does not give any
doubts as to its authenticity, i.e. erasures, superimpositions and
even blanks.
TN: “In writing and signed by the maker” – the maker does not need to
be the one to write the instrument; the maker only needs to sign.
THAT HE BECAME THE HOLDER OF IT BEFORE IT WAS OVERDUE, AND
WITHOUT NOTICE THAT IT HAD PREVIOUSLY DISHONOURED, IF SUCH
WAS THE FACT
When is an instrument overdue?
1. If the time provided already lapsed
(If payable on demand, date of maturity is date of presentment)
2. If an instrument is a promissory note, after the lapse of reasonable
time from its date of issuance
Ex. I promise to pay X or order 1M. Sgd Y. When is it overdue?
Under Sec 53, if ever the instrument is presented after reasonable
time reckoned from its issuance date, you will no longer be a
holder in due course.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Without notice that it had previously dishonored
It is possible that an instrument is dishonoured even before it becomes
overdue, as when there is non-acceptance by a drawee.
Example: A BoE which is supposed to be presented for acceptance but
the drawee does not accept it, even before it reaches the maturity date.
The person who ought to be primarily liable on the instrument will not
pay on the instrument. So there is no person from whom you can
demand. It is deemed dishonored in this case.
THAT HE TOOK IN GOOD FAITH AND FOR VALUE
A. In good faith – simply absence of bad faith.
B. For value – when there is a consideration sufficient to support a
simple contract.
Ex. I have an obligation to you worth 10M, it has been 5 years since I
took the loan. I never paid. All of a sudden I issued a negotiable
instrument, a check worth 1M and you gave me 1 peso. Is that for value?
Ans – 1 peso is not sufficient to support a simple contract compared to
the 1M check. Then, it is a case to case basis.
TN: In negotiable instruments law, love is not a sufficient consideration.
THAT AT THE TIME IT WAS NEGOTIATED TO HIM HE HAD NO NOTICE
OF ANY INFIRMITY IN THE INSTRUMENT OR DEFECT IN THE TITLE OF
THE PERSON NEGOTIATING IT.
Infirmity
An instrument worth 100k on its face, but it was written by your friend
whom you know would issue an instrument worth 10k. There was an
alteration made in the instrument. Alterations can be considered as an
infirmity.
Defect
1. The instrument was negotiated to a person on account of murder.
(This is a defect in the title)
2. When you pay for an instrument worth 1M but you paid for it at
1,000pesos. (This is also a defect in your title)
3. When you stole the instrument. (This is the most common case)
When notice of infirmity or defect makes one a holder not in
due course
Notice of any defect in the instrument will only affect the status as the
holder in due course if it is acquired at the time the instrument was
negotiated. If it is after that, then it will already be irrelevant.
HOLDER NOT IN DUE COURSE
HOLDER NOT IN DUE COURSE
A holder not in due course is a holder of an instrument where any of the
four conditions are not met.
Sec 53 is just one instance when one is not a holder in due course
specifically on an instrument payable on demand. And the reason for
that is because he failed to comply with the second requirement that he
became the holder of the instrument before it becomes overdue.
Relevant provision
Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable length
of time after its issue, the holder is not deemed a holder in due course.
Distinction between a holder in due course and not a holder in
due course?
They differ on their rights.
11 | U N I V E R S I T Y O F S A N C A R L O S
A. Holder in due course – holds the instrument free from the personal
defenses of prior parties.
B. Holder not in due course – holds the instrument not free from any
defenses of prior parties. They are subject to the same defenses
as if it were non-negotiable.
Relevant provision
Sec. 58. When subject to original defense. - In the hands of any holder
other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. But a holder who derives
his title through a holder in due course, and who is not himself a party
to any fraud or illegality affecting the instrument, has all the rights of
such former holder in respect of all parties prior to the latter.
HOLDER THROUGH A HOLDER IN DUE COURSE
HOLDER THROUGH A HOLDER IN DUE COURSE
Can a holder not in due course be able to acquire the rights of
a holder in due course and acquire the same status of a holder
in due course?
Yes, pursuant to the shelter principle (Second sentence of Section 58)
Relevant provision
Section 58. But a holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affecting
the instrument, has all the rights of such former holder in respect of all
parties prior to the latter.
Example:
“M” drafted a BEARER instrument in favor of “P”, “P” Negotiated it to
“A” then in the hands of “A”, it was stolen by “X” and was negotiated
again by “X” to B, then B negotiated it to C. Eventually C negotiated it
to D.
M ---> P ---> A (stolen by X) ---> X ---> B ---> C ---> D
Can D collect from M?
Yes. D can collect from M. In the absence of any other information in
the given example, a holder is deemed a holder in due course. Thus, he
is free from any personal defenses of prior parties.
If D is not a holder in due course, can he still collect from M?
Yes. D can still collect provided that he is not party to the fraud or
illegality (theft) affecting the instrument which caused a defect on the
title. C is presumed to be a holder in due course and D derives this title
from C under the Shelter Principle.
D is now called a holder through a holder in due course by virtue of the
shelter principle. Shelter in the sense that C shelters D. C’s rights thus
extend to D.
If C is neither a holder in due course, can D still collect from M?
No. D cannot collect from M. D having acquired the instrument from C
who is not a holder in due course, the shelter principle does not apply.
D, being a holder not in due course holds the instrument subject to any
defenses of prior parties. Thus, M now can raise defenses.
PRESUMPTION OF HOLDER IN DUE COURSE
Every holder is deemed prima facie to be a holder in due course.
Relevant provision
Sec. 59. Who is deemed holder in due course. - Every holder is deemed
prima facie to be a holder in due course; but when it is shown that the
title of any person who has negotiated the instrument was defective,
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
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. 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 will the presumption not apply?
The presumption that every holder is a holder in due course does not
apply whenever there is any defect in any of the title of the person who
negotiated the instrument. It need not be the person from whom he
acquired it.
Any defect automatically precludes the presumption. Burden of proof is
now shifted to the person who claims that he acquired the title as a
holder in due course.
Important: In order for the shelter principle to apply, the holder does
not have to prove that he is a holder in due course. He just needs to
prove that the person from whom he acquired the instrument is a holder
in due course and that he is not a party to any of the defect or the
illegality or fraud.
Does he need to be a party to the defect or mere knowledge
would suffice?
Knowledge will not affect the shelter principle. The provision is clear that
“he himself is not a party to any fraud or illegality”.
DEFECTS OF A NEGOTIABLE INSTRUMENT
Different kinds of defects of a negotiable instrument:
1. Insertion of a wrong date (Personal defense)
2. Incomplete but undelivered instrument (Personal defense)
3. Incomplete and undelivered instrument (Real defense)
4. Complete but undelivered instrument (Personal defense)
5. Forgery of signature (Real defense)
6. Material alteration (Personal defense)
INSERTION OF A WRONG DATE
INSERTION OF A WRONG DATE (PERSONAL DEFENSE)
Relevant provision
Sec. 13. When date may be inserted. - Where an instrument expressed
to be payable at a fixed period after date is issued undated, or where
the acceptance of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of issue or
acceptance, and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the instrument in the hands of
a subsequent holder in due course; but as to him, the date so inserted
is to be regarded as the true date.
Effect when instrument is not dated
The fact that an instrument is not dated does not affect its negotiability.
Besides, the law provides instances when date may be inserted.
Two instances when date may be inserted
1. When the instrument is payable at a fixed period after date but
was issued undated
2. When the instrument is payable at a fixed period after sight but the
acceptance was undated
TN: The date is inserted not for purposes of making the instrument
negotiable, but simply to determine its maturity date.
Effect of insertion of a wrong date
Insertion of a wrong date in the instrument will not avoid the instrument
in the hands of a Holder in Due Course, because as to him, the date
inserted in the instrument is the true date.
12 | U N I V E R S I T Y O F S A N C A R L O S
This is a personal defense
The fact that it will not avoid the instrument in the hands of a holder in
due course tells us that this is a personal defense. Thus, it cannot be
raised as a defense against him.
Example:
I promise to pay P 1 Million to X or order.
Sgd. Y
Can date be inserted?
No. The law only provides for two instances when the date may be
inserted. Here, the instrument is payable on demand. The insertion of
date is not necessary. There is no authority to insert a date.
However, you ought to know when the instrument was issued for the
computation of reasonable time. This is to know whether or not the
holder is a holder in due course or a holder not in due course. As
provided under Section 53.
Relevant provision
Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable length
of time after its issue, the holder is not deemed a holder in due course.
I promise to pay P 1 Million to X or order 30 days after date.
Sgd. Y
Can date be inserted?
Yes. This falls under the first instance where date may be inserted. The
instrument is payable at a fixed period after date but was issued
undated.
TN: The Instrument is a promissory note thus, there is no need for
acceptance. There is no drawee ordered to pay the payee so no one will
accept it.
POSTDATED ORDER INSTRUMENT
Example of postdated order instrument (Scenario 1)
I promise to pay P 1 Million to X or order 30 days after date.
Sgd. Y
Flow of the promissory note:
YXABCD
Facts: Instrument came from Y. Y issued to X. X issued to A. A inserted
July 16, 2016 when the true date is actually July 1, 2016. A negotiated
instrument to B. B issued to C. C indorsed to D. D presented payment
on July 31, 2016 (30 days after true date so instrument matured)
TN: Facts above apply to all instances under Scenario 1.
How to analyze the rights of a holder against prior parties:
1. Determine the type of defect or infirmity
2. Determine the defense applicable (real or personal)
3. Determine the type of holder (HDC, HTHDC, HNDC)
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
IN THE HANDS OF A HOLDER IN DUE COURSE
A. Type of defect – Insertion of a wrong date
B. Defense applicable – Personal defense
C. Type of holder – Holder in due course
Rights of D in relation to prior parties (parties prior to the
insertion of the wrong date)
1. D can demand payment from Y – The personal defense of an
insertion of a wrong date cannot be raised by Y against D as it is
not available against a HDC.
2. D can demand payment from X – same reason.
Rights of D in relation to subsequent parties
D cannot yet demand payment from B and C. As indorsers, what they
indorsed as genuine and in all respects what it purports to be is July 16,
2016. As to them, they cannot be compelled to pay just yet. They can
only be compelled to pay 30 days after July 16, 2016.
TN: Here, B and C negotiated the instrument by indorsement because it
is an order instrument.
Rights of D in relation to the perpetrator of the fraud
D can demand payment from A because A was the perpetrator. He was
the one who inserted the wrong date and committed the fraud. We do
not tolerate fraud in any commercial transaction.
Relevant provisions
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 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.
Sec. 66. Liability of general indorser. - Every indorser who indorses
without qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and
(c) of the next preceding section
(b) (b) That the instrument is, at the time of his indorsement, valid
and subsisting;
And, in addition, he engages that, on due presentment, it shall be
accepted or paid, or both, as the case may be, according to its tenor,
and that if it be dishonored and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.
IN THE HANDS OF A HOLDER THROUGH A HOLDER IN DUE COURSE
A. Type of Defect: Insertion of Wrong Date
B. Kind of Defense: Personal Defense
C. Type of Holder: Holder through a Holder in Due Course
13 | U N I V E R S I T Y O F S A N C A R L O S
Same facts, information available:
D is not a holder in due course.
If the current holder is not a holder in due course, he can still acquire
the rights of a holder in due course if:
1. The preceding holder is a holder in due course
2. The current holder is not a party to the fraud or illegality
If the two requirements are complied with, the current holder although
not a holder in due course has all the rights of a holder in due course
under the Shelter Principle and the personal defense is not available
against him.
Absent any information about C, C is presumed a holder in due course.
If D is not a party to the fraud or illegality, he is now considered a holder
through a holder in due course and he has acquired the rights of C who
is a holder in due course.
IN THE HANDS OF A HOLDER NOT IN DUE COURSE
A. Type of defect – Insertion of a wrong date
B. Defense applicable – Personal defense
C. Type of holder – Holder not in due course
Same facts, information available:
Both D and C are not holders in due course.
Since C is not a holder in due course, the Shelter Principle cannot apply.
Rights of D in relation to prior parties
1. D cannot demand payment from Y – Y can raise the personal
defense of insertion of a wrong date as it is available against a
holder not in due course.
2. D cannot demand payment from X – same reason.
Rights of D in relation to subsequent parties
D cannot demand payment from B and C – As indorsers, what he
indorsed as genuine and in all respects what it purports to be is July 16,
2016. As to them, they cannot be compelled to pay just yet. They can
only be compelled to pay 30 days after July 16, 2016.
Rights of D in relation to the perpetrator of the fraud
A is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction.
TN: Good faith or bad faith in the insertion of wrong date does not
matter. The law did not distinguish whether it is done in good faith or
bad.
ANTEDATED ORDER INSTRUMENT
Example of Antedated order instrument (Scenario 2)
I promise to pay P 1 Million to X or order 30 days after date.
Sgd. Y
Flow of the promissory note:
YXABCD
Facts: Instrument came from Y. Y issued to X. X issued to A. A inserted
July 1, 2016 when the true date is actually July 16, 2016. A negotiated
instrument to B. B issued to C. C indorsed to D. D presented instrument
for payment on July 31, 2016 (30 days after July 1, the true date as to
D, so instrument matured)
TN: Facts above apply to all instances under Scenario 2.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
IN THE HANDS OF A HOLDER IN DUE COURSE
A. Type of Defect: Insertion of Wrong Date
B. Kind of Defense: Personal Defense
C. Type of Holder: Holder in due course
Rights of D in relation to prior parties (parties prior to the
insertion of the wrong date)
1. D can demand payment from Y – The personal defense of an
insertion of a wrong date cannot be raised by Y against D as it is
not available against a HDC. ((Y can’t say to D that the true date
for me is July 16, 2016, so instrument has not yet matured)
2. D can demand payment from X – same reason.
TN: Y and X are compelled to pay D on July 31,2016 even though in
fact it is a date earlier than the true date stated by them. This is the
main difference of a negotiable instrument compared to an ordinary
instrument. Being negotiable, the holder holds the instrument free
from defenses of prior parties. The remedy of Y and X is to go after A.
Rights of D in relation to subsequent parties
D can compel both B and C to pay. Both took the instrument when it
was dated July 1, 2016. B and C negotiated instrument by indorsement
because it is an order instrument. As indorsers, they warrant that the
instrument is genuine and in all respects what it purports to be. 30 days
already lapsed after July 1, 2016, thus they can be compelled.
TN: B and C can be compelled due to Section 65 and 66. Not because
they don’t have a personal defense, but because at the time they took
the instrument, it was already defective (Insertion of a wrong date of
July 1, 2016). Thus, they warrant the instrument as genuine and in all
respects what it purports to be.
Rights of D in relation to the perpetrator of the fraud
A is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction.
IN THE HANDS OF A HOLDER THROUGH A HOLDER IN DUE COURSE
Same rights as a holder in due course if the requirements are complied
with (see discussion above)
IN THE HANDS OF A HOLDER NOT IN DUE COURSE
A. Type of defect – Insertion of a wrong date
B. Defense applicable – Personal defense
C. Type of holder – Holder not in due course
Same facts, information available:
Both D and C are not holders in due course.
Since C is not a holder in due course, the Shelter Principle cannot apply.
Rights of D in relation to prior parties
1. D cannot demand payment from Y – Y can raise the personal
defense of insertion of a wrong date as it is available against a
holder not in due course.
2. D cannot demand payment from X – same reason.
Rights of D in relation to subsequent parties
D can compel both B and C to pay. Both took the instrument when it
was dated July 1, 2016. B and C negotiated instrument by indorsement
because it is an order instrument. As indorsers, they warrant that the
instrument is genuine and in all respects what it purports to be. 30 days
already lapsed after July 1, 2016, thus they can be compelled.
14 | U N I V E R S I T Y O F S A N C A R L O S
Rights of D in relation to the perpetrator of the fraud
A is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction.
TN: True date can only apply to a holder in due course. Since this is a
holder not in due course, D can’t rely on the true date. Moreover, D
collects from B and C not because the instrument has become due and
demandable but because they are indorsers and they warrant that the
instrument is genuine and in all respects what it purports to be dated
on July 1,2016.
INCOMPLETE BUT DELIVERED
INCOMPLETE BUT DELIVERED (PERSONAL DEFENSE)
Relevant provision
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting
in any material particular, the person in possession thereof has a prima
facie authority to complete it by filling up the blanks therein. 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.
In order, however, that any such instrument when completed may be
enforced against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with the authority
given and within a reasonable time. But if any such instrument, after
completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority given and within
a reasonable time.
A party has authority to fill in the blanks in the instrument
when:
1. The instrument is wanting in any material particular
2. Person is in possession of a signature on blank paper intended to
be a negotiable instrument
TN: These 2 instruments in relation to Section 14 are delivered. They
are presumed to be delivered or negotiated. So we now have an
incomplete but delivered instrument.
The instrument is wanting in any material particular
There is an authority to fill up the instrument with whatever is the
missing material particular.
Signature on blank paper intended to be a negotiable
instrument
There is an authority to fill up the instrument with any amount. The
authority to fill the blanks is only limited to the amount but must be
completed as a negotiable instrument.
TN: The presumption is it is a pro-forma instrument, not just a blank
paper with signature. It is deemed to be completed as a negotiable
instrument so all that is to be added is the amount.
Requirements for inserting amount
1. Blank paper with signature
2. Intention to make the instrument negotiable
3. Delivery to person other than the drawer or maker
This is a personal defense
This can be raised by parties prior to its completion, when what is
inserted in the incomplete instrument is not what is intended by them
who made it. After the completion of the instrument, whatever is added
is deemed to be added in accordance with the authority given. And when
it is in the hands of a holder in due course, it is valid and effectual for
all purposes.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
ILLUSTRATIONS
BILL OF EXCHANGE ORDER INSTRUMENT (Scenario 1)
To: A July 16, 2016
Pay to X or order P 100,000 on December 1, 2016 with interest of
______.
Sgd. Y
Flow of Bill of Exchange:
Y  X  B  C  D E
A
Facts: Instrument was issued by Y to X. Since it’s a Bill of Exchange, Y
presented the instrument for acceptance to A, A accepted it. X further
negotiated it to B. B inserted the interest rate of 20% when the true
intention of Y is the interest of 2%. B negotiated it to C, and C to D, and
D to E.
TN: Facts above apply to all instances under Scenario 1.
IN THE HANDS OF A HOLDER IN DUE COURSE
A. Type of Defect: Incomplete but delivered
B. Kind of Defense: Personal Defense
C. Type of Holder: Holder in due course
TN: Absence of any information, there is a presumption that E is a holder
in due course. Therefore, interest as to him is 20%.
Rights of E in relation to prior parties
TN: In a Bill of Exchange, the person primarily liable is the drawee.
1. E can demand payment from A – A cannot raise the defense of
incomplete but delivered against E who is a holder in due course.
(primarily liable)
2. E can demand payment from Y – same reason (secondarily liable)
3. E can demand payment from X – same reason
Rights of E in relation to subsequent parties
E can demand payment from both C and D because as indorsers, they
warrant that the instrument is genuine and in all respects what it
purports to be.
Rights of E in relation to the perpetrator of the fraud
B is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction. Also, B is an
indorser who warrant that the instrument is genuine and in all respects
what it purports to be.
IN THE HANDS OF A HOLDER THROUGH A HOLDER IN DUE COURSE
Same rights as a holder in due course if the requirements are complied
with (see discussion above).
IN THE HANDS OF A HOLDER NOT IN DUE COURSE
A. Type of defect – Incomplete but delivered
B. Defense applicable – Personal defense
C. Type of holder – Holder not in due course
Same facts, information available:
Both E and D are not holders in due course. Since D is not a holder in
due course, the Shelter Principle cannot apply.
15 | U N I V E R S I T Y O F S A N C A R L O S
Rights of D in relation to prior parties
TN: In a Bill of Exchange, the person primarily liable is the drawee.
1. E cannot demand payment from A – A has a personal dense of an
incomplete but delivered instrument. A can raise it against E who
is a holder not in due course.
2. E cannot demand payment from Y – same reason
3. E cannot demand payment from X – same reason
Rights of E in relation to subsequent parties
E can demand payment from both C and D because as indorsers, they
warrant that the instrument is genuine and in all respects what it
purports to be.
Rights of E in relation to the perpetrator of the fraud
B is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction. Also, B is an
indorser who warrant that the instrument is genuine and in all respects
what it purports to be.
BILL OF EXCHANGE BEARER INSTRUMENT (Scenario 2)
To: A July 16, 2016
Pay to X or bearer P 100,000 on December 1, 2016 with interest
of ______.
Sgd. Y
Flow of Bill of Exchange:
Y  X  B  C  D E
A
Facts: Instrument was issued by Y to X. Since it’s a Bill of Exchange, Y
presented the instrument for acceptance to A, A accepted it. X further
negotiated it to B. B inserted the interest rate of 20% when the true
intention of Y is the interest of 2%. B negotiated it to C, and C to D, and
D to E.
TN: Facts above apply to all instances under Scenario 2.
Important: When a bearer instrument is delivered, the warranty
extends to the immediate transferee only.
Reason: If it is a bearer instrument, one would not know who the parties
to the instrument are. The only known persons are the person primarily
liable (the one who will accept instrument), and the person who
negotiated the instrument to you.
Relevant provision
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 no holder other than the immediate transferee.
IN THE HANDS OF A HOLDER IN DUE COURSE
A. Type of Defect: Incomplete but delivered
B. Kind of Defense: Personal Defense
C. Type of Holder: Holder in due course
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Rights of E in relation to prior parties
1. E cannot demand payment from Y, X and A.
Rights of E in relation to subsequent parties
1. E can demand payment from D – D as an immediate transferee
warrants that the instrument is genuine and in all respects what it
purports to be.
2. E cannot demand payment from C – C is not an immediate
transferee. C did not warrant that the instrument is genuine and in
all respects what it purports to be.
Rights of E in relation to the perpetrator of the fraud
B is ultimately liable as he is the one who caused the fraud and the law
does not tolerate fraud in any commercial transaction. Also, B is an
indorser who warrant that the instrument is genuine and in all respects
what it purports to be.
INCOMPLETE AND UNDELIVERED INSTRUMENT
INCOMPLETE AND UNDELIVERED (REAL DEFENSE)
Relevant provision
Sec. 15. Incomplete instrument not delivered. – Where an incomplete
instrument has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in the hands of any
holder, as against any person whose signature was placed thereon
before delivery.
This is a real defense
Real defense because it mentions that it will not be a valid contract in
the hands of any holder (including holders in due course).
How will it affect the rights of the parties:
HOLDER IN DUE COURSE
A. Prior parties – Not liable
B. Subsequent parties
1. Indorsers – liable because they warrant that the instrument is
genuine and in all respects what it purports to be AND they
also warrant that they have good title to it.
2. Person negotiating by delivery – liable if immediate transferor
because the warranty that the instrument is genuine and in
all respects what it purports to be and that he has a genuine
title over it only extends to the immediate transferee (current
holder).
3. Perpetrator – liable because we do not tolerate fraud in any
commercial transactions.
HOLDER THROUGH A HOLDER IN DUE COURSE
Same rules apply because he gets whatever rights the holder in due
course have. (shelter principle)
HOLDER NOT IN DUE COURSE
Same rules apply because this is a real defense.
What warranties are violated by the indorser if the instrument
is not delivered? (SEC. 65 (b))
(b) That he has a good title to it
TN: In addition to the warranty that the instrument is genuine and in all
respects what it purports to be, they also violate the warranty that they
have a good title to it. Thus, if the issue is incomplete and undelivered
instrument, it is not enough that the warranty violated is the
genuineness of the instrument. You must also mention that the warranty
of having a good title to it is being violated.
16 | U N I V E R S I T Y O F S A N C A R L O S
ILLUSTRATIONS
PROMISSORY NOTE ORDER INSTRUMENT
I promise to pay X or his order _______.
Sgd Y.
Flow of Promissory note:
YXCAB
Placed P1M
Facts: An instrument was made by Y in favor of X, which was stolen by
C before delivery was made. C thereafter placed an amount of 1M and
indorsed it to A who indorsed it to B.
Rights of B in relation to prior parties
Y cannot be held liable because it is a real defense and because it is
such, it can be raised as a defense against those who are holders in due
course and holders not in due course.
Rights of B in relation to subsequent parties
A can be held liable because as an indorser, he warrants that:
1. The instrument is genuine and in all respects what it purports to
be
2. He has good title to it
Rights of B in relation to the perpetrator of fraud
C will be liable as the perpetrator. We do not tolerate fraud in
commercial transactions. He is also liable as an indorser because as an
indorser he warrants that the instrument is genuine and that he has
good title to it.
Rights of B in relation to the one whose signature was forged
X will not be held liable because he is not a party to the instrument. But,
if he is pursued by B, he can raise the defense that the instrument was
incomplete and undelivered. After all, he was not a party to the
negotiable instrument. You can only go after parties to the instrument
BILL OF EXCHANGE BEARER INSTRUMENT
To: B July 16, 2016
Pay to X or bearer P 100,000 on December 1, 2016.
Sgd. Y
Flow of Bill of Exchange
YXAFECD
B Placed P1M
Facts: Y made instrument in favour of X, X presented instrument to B
for acceptance and was returned to X. X further negotiated the
instrument to A and while in the hands of A, the said instrument was
stolen by F who wrote the amount of 1M and delivered the instrument
E. But before it was stolen by F, the said instrument was already signed
by A. F delivered instrument to E then delivered it to C then to D.
Rights of D in relation to the drawee, B (primarily liable)
B cannot be held liable because he can set up the real defense of
incomplete but undelivered instrument.
Rights of D in relation to prior parties
Parties prior to the defect cannot be held liable because they are not
precluded from raising the real defense of an incomplete but an
undelivered instrument. In addition, Y, X and A did not make a warranty.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Rights of D in relation to subsequent parties
1. C is liable because he is an immediate transferor. When he
delivered the instrument to D, he warranted that the instrument is
(a) genuine and in all respects what it purports to be and that (b)
he has a good title to it.
2. E is not liable because his warranty only extends to C.
Rights of D in relation to the perpetrator of fraud
F is liable because he is the perpetrator, we do not tolerate fraud in
commercial transactions.
COMPLETE BUT UNDELIVERED INSTRUMENT
COMPLETE BUT UNDELIVERED (PERSONAL DEFENSE)
Relevant provision
Sec. 16. Delivery; when effectual; when presumed. - Every contract on
a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between
immediate parties and as regards a remote party other than a holder in
due course, the delivery, in order to be effectual, must be made either
by or under the authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the delivery may be
shown to have been conditional, or for a special purpose only, and not
for the purpose of transferring the property in the instrument.
But where the instrument is in the hands of a holder in due course, a
valid delivery thereof by all parties prior to him so as to make them liable
to him is conclusively presumed. And where the instrument is no longer
in the possession of a party whose signature appears thereon, a valid
and intentional delivery by him is presumed until the contrary is proved.
How will it affect the rights of the parties:
HOLDER IN DUE COURSE
A. Prior parties – Liable because they cannot raise the personal
defense of a complete but undelivered instrument.
B. Subsequent parties
1. Indorsers – Liable because they warrant that they hold good
title to the instrument
2. PNBD – Liable if he is the immediate transferor
3. Perpetrator – Liable because theft is punishable by law
HOLDER THROUGH A HOLDER IN DUE COURSE
Same rules as the HDC by virtue of the shelter principle, which provides
that he acquires the right of a HDC.
HOLDER NOT IN DUE COURSE
A. Prior parties – Not liable because they can set up a personal
defense of complete but undelivered.
B. Subsequent parties – same rules as HDC
1. Indorsers – Liable because they warrant that they hold good
title to the instrument
2. PNBD – Liable if he is the immediate transferor
3. Perpetrator – Liable because theft is punishable by law
PRESUMPTION ON DELIVERY
PRESUMPTION ON DELIVERY
In the hands of a holder in due course
There is conclusive presumption of delivery. It cannot be rebutted by
any evidence to the contrary. The issue of non-delivery cannot be raised
because it is a personal defense – that which you cannot raise against
a holder in due course.
17 | U N I V E R S I T Y O F S A N C A R L O S
Relevant Provision
Sec. 16 – “But where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him so as to make
them liable to him is conclusively presumed.”
In the hands of a holder not in due course
The presumption of delivery is rebuttable.
Relevant Provision
Sec. 16 – “And where the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and intentional delivery
by him is presumed until the contrary is proved.”
Q. If the instrument is in the hands of a holder not in due course, what
can be shown by a person who may be required to pay?
1. Show that there was no authority to deliver (No delivery)
2. If there was delivery, such delivery was conditional or for a special
purpose
Relevant provision
“As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual, must
be made either by or under the authority of the party making, drawing,
accepting, or indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for a special purpose
only, and not for the purpose of transferring the property in the
instrument…”
CONDITIONAL AND SPECIAL DELIVERY
CONDITIONAL AND SPECIAL DELIVERY
1. For conditional delivery – Conditional delivery is one where
there is an authority to deliver, however, it is subject to a
condition.
Example: The maker issued an instrument in favor of A subject to
the condition that A should pass the bar exams.
TN: The condition must not be stated in the negotiable instrument
otherwise it will place a condition on the negotiable instrument
making it non-negotiable.
2. For special purpose
Example: M is the maker. He kept it in his drawer. M gave X the
authority to give the instrument to A for safekeeping.
ILLUSTRATIONS
BILL OF EXCHANGE BEARER INSTRUMENT
To: A July 16, 2016
Pay to X or bearer P 10,000 on December 1, 2016.
Sgd. Y
Flow of Bill of Exchange
YXBCD
A
Facts: The instrument is in the hands of Y and was stolen by X. It was
presented to A for acceptance and was returned to X, X subsequently
negotiated the instrument to B, C then D.
Rights of D in relation to the one who stole the instrument
X is liable because the law penalizes theft.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Rights of D in relation to subsequent parties
1. C is liable because he is the immediate transferor
2. A is liable because the defense of complete but undelivered
instrument cannot be raised against D who is a holder in due
course.
Relevant provision
Sec. 62. Liability of acceptor. - The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his
acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
BILL OF EXCHANGE ORDER INSTRUMENT
To: A July 16, 2016
Pay to X or bearer P 10,000 on December 1, 2016.
Sgd. Y
Flow of Bill of Exchange
YXBCD
A
Facts: The instrument is in the hands of Y and was stolen by X. It was
presented to A for acceptance and was returned to X, X subsequently
negotiated the instrument to B, C then D.
HOLDER IN DUE COURSE
Rights of D in relation to prior parties
Y is liable because he cannot raise the personal defense of a complete
but undelivered instrument against a holder in due course.
Rights of D in relation to subsequent parties
B and C will be liable because they warrant that they have a good title
to the instrument.
Rights of D in relation to the one who stole the instrument
X can be held liable because theft is punishable under the law
HOLDER NOT IN DUE COURSE
Rights of D in relation to subsequent parties
1. A is liable because he cannot raise the personal defense of a
complete but undelivered instrument
2. B and C are liable because as indorsers they warrant that they have
a good title to it
Rights of D in relation to prior parties
Y is not liable because he can raise the personal defense of a complete
but undelivered instrument.
Rights of D in relation to the one who stole the instrument
X can be held liable because theft is punishable under the law.
FORGERY
FORGERY (REAL DEFENSE)
Relevant provision
Sec. 23. Forged signature; effect of. - When a signature is forged or
made without the authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless
18 | U N I V E R S I T Y O F S A N C A R L O S
the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.
Forgery defined
Counterfeiting or making alterations to the instrument with the intent to
defraud.
Section 23 only pertains to forgery of the signature.
Thus, if there is alteration in the amount and there is intent to defraud,
it cannot be considered as forgery in relation to Sec 23 but it could be
forgery in relation to NIL.
FORMS OF FORGERY COVERED UNDER SEC 23
FORMS OF FORGERY COVERED UNDER SECTION 23
1. Fraud in factum or fraud in esse contractus (Fraud amounting
to forgery) – Where the party makes it appear that there was
intention to issue a negotiable instrument through the signature of
another person. Here, there really was no intention to issue a
negotiable instrument, but there is a person who makes it appear
that there is a negotiable instrument.
Example: You brought with you a blank piece of paper and asked
Kobe Bryant to sign the paper. When you returned home, you wrote
on the piece of paper:
“I promise to pay Mr. Divinagracia 1M pesos.
Love lots,
Kobe Bryant.”
There really was no intention on the part of Kobe Bryant to issue a
negotiable instrument, but Charles made it appear that it was the
intention of Kobe Bryant to issue a negotiable instrument.
Will Sec 14 apply in that case—incomplete but delivered instrument?
No, because the signature was for autograph purposes and not to
issue a negotiable instrument. Section 14 is only applicable in issuing
a negotiable instrument.
2. Duress amounting to forgery – When one is forced to sign
instrument out of force, threat, undue influence etc.
Example: Pearl was held at gunpoint by Mr. Cabatana and so Charles
was forced to issue a negotiable instrument.
3. Fraudulent Impersonation – When the person issued a
negotiable instrument by being made to believe that the person
asking for the negotiable instrument is the person whom he really
intends to issue a negotiable instrument.
Example: You look to your left and thought you saw Scarlet
Johansson, the person in your left (Tess Tan) made it seem that
she is Scarlet Johansson.
This is an example of fraudulent impersonation because there was
really an intent to issue a negotiable instrument, but not to Tess,
rather to Scarlet Johansson. However, if Charles really knew that
Tess is not Scarlet Johansson, then there is no fraudulent
impersonation.
FRAUD NOT CONSIDERED FORGERY UNDER SECTION 23:
1. Fraud in inducement – When there is an intention to sign a
negotiable instrument but for a different consideration.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Example: Kobe Bryant intended to issue a negotiable instrument in
favour of Mr. Divinagracia because the latter is said to be selling
authentic Jordan shoes. It turned out that the pair is not authentic.
In that case, there is only fraud in inducement because there was
really an intention to issue a negotiable instrument.
TN: Look at the intention of the parties.
A. If the intention is to make a negotiable instrument – fraud in
inducement
B. If there is no intention – Fraud in Factum or Fraud in esse
contractus or fraud amounting to forgery
MCQ Question:
Which of the following is not a real defense?
A. Fraud in factum
B. Fraud in esse contractus
C. Fraud amounting to forgery
D. Fraud in inducement
EFFECTS OF FORGERY
EFFECTS OF FORGERY
1. Only the signature is inoperative and not the entire instrument
2. It cuts off the liabilities of the parties prior to the forgery
3. Subsequent parties cannot have the right to retain the instrument
4. There is no right to discharge therefore
5. No right to enforce payment thereof against any parties prior
thereto
RULES IN RELATION TO FORGERY
Take note: Forgery is a real defense because it mentions any party.
Also, being a real defense, the status of the holder is immaterial, unless
other defenses (personal) are also available. Thus, the rules below apply
to all types of holder – HDC, HTHDC, HNDC.
PROMISSORY NOTE
Signature of the Maker is forged
A. Prior party (maker) – he is not liable because he can raise the real
defense of forgery
B. Subsequent parties –
1. Indorser – liable because they warrant that the instrument is
genuine and in all respects what it purports to be
2. PNBD – liable if immediate transferor because he warrants to
the immediate transferee that it is genuine and in all respects
what it purports to be
3. Forger – liable because forgery is penalized under the law
Signature of Indorser is forged
A. Prior parties
1. Order instrument – not liable because they can raise the real
defense of forgery
2. Bearer instrument– liable because the forged indorsement is
not necessary to the title of a HDC or to any holder for that
matter.
TN: When you forge the signature of the indorser in a bearer
instrument, it will not affect the nature of the instrument
being a bearer instrument. It can always be negotiated by
mere delivery. Thus, all prior parties may be held liable as
forgery is irrelevant in a bearer instrument.
19 | U N I V E R S I T Y O F S A N C A R L O S
B. Subsequent parties
1. Acceptor – Not liable because he only warrants the
genuineness of the drawer’s signature and not the indorser.
2. Indorsers subsequent to the forgery – liable because they
warrant that the instrument is genuine and in all respects
what it purports to be
3. PNBD – liable if immediate transferor because he warrants
that the instrument is genuine and in all respects what it
purports to be.
4. Forger – liable because forgery is penalized by law
BILL OF EXCHANGE
Signature of the drawer is forged
A. Prior party (drawer) – not liable because the real defense of
forgery can be raised.
B. Subsequent parties
1. Acceptor – liable (because he warrants the genuineness of
the signature of the drawer)
2. Indorser – liable because they warrant that the instrument
is genuine and in all respects what it purports to be
3. PNBD – liable if immediate transferor because he warrants
to the immediate transferee that it is genuine and in all
respects what it purports to be
4. Forger – liable because forgery is penalized under the law
Signature of Indorser is forged
A. Prior parties
1. Order instrument – not liable because they can raise the real
defense of forgery
2. Bearer instrument– liable because the forged indorsement is
not necessary to the title of a HDC or to any holder for that
matter.
TN: When you forge the signature of the indorser in a bearer
instrument, it will not affect the nature of the instrument
being a bearer instrument. It can always be negotiated by
mere delivery. Thus, all prior parties may be held liable as
forgery is irrelevant in a bearer instrument.
B. Subsequent parties
1. Acceptor – Not liable because he only warrants the
genuineness of the drawer’s signature and not the indorser.
2. Indorsers subsequent to the forgery – liable because they
warrant that the instrument is genuine and in all respects
what it purports to be
3. PNBD – liable if immediate transferor because he warrants
that the instrument is genuine and in all respects what it
purports to be.
4. Forger – liable because forgery is penalized by law
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
ILLUSTRATIONS
PROMISSORY NOTE BEARER INSTRUMENT
I promise to pay X or bearer P10,000.
Sgd. T
Flow of Promissory note
TFXABC
Forged T’s signature
Facts: T’s signature was forged by F before it was delivered to X. X
negotiated the instrument to B, B then to C.
Rights of C in relation to prior parties
T is not liable because he can raise the real defense of forgery.
Rights of C in relation to subsequent parties
1. B is liable because he is the immediate transferor. C can only go
after B because B is the immediate transferor and he warrants that
the instrument is genuine and in all respect what it purports to be.
2. X and A are not liable because they did not make the same
warranty to C.
Rights of C in relation to the forger
F, the forger is liable because forgery is penalized
Flow of Promissory note
TXAFBCD
Forged A’s signature
Facts: What if the forgery happens in the hands of A. The bearer
instrument was signed by T, negotiated to X then negotiated to A. It
was then stolen by F, then negotiated to B, C then D.
Rights of D in relation to prior parties
1. T is primary liable because it is a bearer instrument and the
signature of the indorser is not necessary.
2. X is not liable because this is a bearer instrument and he is not the
immediate transferor.
3. A is not liable because it was him whose instrument was stolen,
but if we follow the law, it seems that A can be liable in a bearer
instrument because he allowed the instrument to be stolen. But
there are authors who would say that the person to whom the
instrument was stolen should not be held liable.
TN: If it is a bearer instrument, you can only go after the person
primarily liable, the immediate transferor and the forger.
PROMISSORY NOTE ORDER INSTRUMENT
Rights of C in relation to subsequent parties
All the indorsers will be liable because as indorsers they warrant that
the instrument is genuine and in all respect what it purports to be.
Rights of B in relation to prior parties
1. T is not liable because it can raise the defense of forgery
2. X and A cannot be liable because they can raise the real defense
of forgery
Rights of B in relation to subsequent parties
B and C are liable because as indorsers, they warrant that the instrument
is genuine and in all respects what it purports to be
20 | U N I V E R S I T Y O F S A N C A R L O S
Rights of B in relation to the forger
F is liable because he is a forger and should be penalized under the law
TN: Same rule applies if B is a HTHDC or a HNDC because it is a real
defense.
PN BEARER INSTRUMENT WITH TWO DEFECTS
Instrument: Promissory Note; Payable to Bearer
Holder: Not in due course
Defects: Forgery of signature of indorser and complete but undelivered
instrument
Facts: You have a promissory note payable to bearer, signed by M in
favor of P who delivered the instrument to A. In the hands of A, the
instrument was stolen by F who forged the signature of A for whatever
purposes it is necessary. The instrument was delivered to B, then to C,
then to D who knew about the forgery. C also knows about the forgery.
Discuss the rights of D.
This is a bearer instrument, thus, indorsement is not necessary. The
current holder is a mere holder not in due course. The defects are
forgery and complete but undelivered instrument.
Rights of D in relation to prior parties (M and P)
1. M cannot be held liable to D. Supposedly, M can be held liable
because forgery cannot be raised as a defense as indorsement is
not necessary to the title of D. However, M can raise another
defense—the personal defense of a complete but undelivered
instrument.
2. P cannot be held liable to D. P is not the immediate transferor.
Since this is a bearer instrument, D can only go after prior parties
other than the person primarily liable if he happens to be the
immediate transferor, which P is not to D.
TN: P will not be held liable only in relation to D, but if D collects
payment from C, who in turn collects from B, then to A, A will now collect
from P. P, in this sense, will still be liable.
TN: This is the exception to the general rule that supposedly, if there is
forgery in the signature of the indorser, prior parties should not have
been liable as they can raise the defense of forgery. More so because
this is a bearer instrument and indorsement is not necessary to the title
of the current holder.
Rights of D in relation to the immediate transferor
C can be held liable since he is the immediate transferor. It is only him
who warrants to D that the instrument is genuine and in all respects
what it purports to be, and that he holds good title to it.
Rights of D in relation to the forger
Ultimately, F can be held liable because he is the forger. Forgey is
punishable by law.
Summary:
Holder D can only go to C, immediate transferor, and F who is ultimately
liable.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017

PN BEARER INSTRUMENT WITH TWO DEFECTS
Instrument: Promissory Note; Payable to Bearer
Holder: Holder through a holder in due course
Defects: Forgery of signature of indorser and complete but undelivered
instrument
Defense: Real defense
favor of Concepcion Emergency Hospital. However, they found out that
the hospital did not receive the amounts covered by the check.
The Province of Tarlac (drawer) purportedly issued a check in favor of
Concepcion Emergency (payee). Supposedly, the check is to be
accepted by PNB (drawee). In the hands of Concepcion Emergency, the
instrument was delivered to Fausto Pangilinan, the administrative officer
and cashier of payee hospital, who forged the signature of the Director
of Concepcion Emergency and negotiated the instrument to the
Associated Bank (collecting bank). Associated Bank indorsed the check
to PNB.

Issue: Who among the parties will bear the risk of loss due to forgery?

Held: The Associated Bank shall bear 50% and the Province of Tarlac
shall also bear 50%.
Facts: Same facts but C is a HDC. Applying the shelter principle, D can
be considered a HTHDC; personal defenses cannot be raised against him
Liability as an indorser and as a collecting bank
since he acquires the rights of a HDC.
Associated Bank, as an indorser, is liable because it warrants the
genuineness of the instrument and in all respects what it purports to be.
Rights of D in relation to prior parties
More importantly, as the collecting bank, it warrants all prior
1. M can be held liable. The defect is that it is complete but
indorsements. It cannot claim that the instrument was forged as a
undelivered instrument, at the same time, there is forgery. M can
general rule. If there is a forgery in the signature of the indorser, the
supposedly raise the personal defense that it was complete but
drawee bank should not be held liable. The drawer is also not liable
undelivered against a HNDC. However, M cannot raise the same
being a prior party. Subsequent parties are liable.
against D who is now a HTHDC. Moreover, indorsement is not
necessary to the title of D so defense of forgery of the signature of
This case is an exception. In case of holding Associated Bank as solely
an indorser is not also available.
responsible for the loss, it also took into consideration the negligence of
2. As regards other parties, the same rules as the previous example
the Province of Tarlac.
applies (See HNDC, defect of forgery and complete but undelivered
instrument).
Drawer is liable when he is guilty of negligence by allowing the
fraud to happen
The only thing that will change if you have a HTHDC or HDC as opposed
The drawer, Province of Tarlac, is liable because it is guilty of
to a HNDC and if you have a bearer instrument and the defect is forgery
contributory negligence. It allowed Faustino, who already retired for
to the signature of the indorser is that the person primarily liable, M in
three years and who was no longer connected to the hospital, to collect
the instance case, can be held liable.
the checks. It is precluded from raising the defense of forgery, being a
negligent party.
Summary:
D can collect from M C and F who is ultimately liable.
Drawee is not liable
PNB is not liable. It’s just that since it already debited the account of
PERSONS LIABLE IN FORGERY
Province of Tarlac, it is made to reimburse the Province of Tarlac for
Parties subsequent to the forgery can be held liable because of certain
50% since the liability of the latter is only 50%. Another 50% must be
warranties. Parties prior to the forgery are not liable, unless, they are
collected from Associated Bank.
precluded from raising the defense of forgery.
Q. In what instance where bank is liable even if there is
Prior parties precluded from raising the defense of forgery
forgery?
1. Parties in estoppel – those who by their acts, silence or negligence
are estopped from setting up the defense of forgery.
Rules in clearing
2. Acceptors if there is forgery in the drawer’s signature – also by
Bank can be held liable when they violate the 24-hour clearing
estoppels because they made a warranty that the signature is
regulations under the Philippine Clearing House Corporation and under
genuine
Central Bank Circular.
3. Prior parties in relation to a bearer instrument
4. Negligent party
The reasons for this are to assure that there is sufficiency of funds and
to allow the collecting bank to go after the forger. It could happen that
CASES the bank has not yet allowed the encashment.
FORGERY OF AN INDORSEMENT IN AN ORDER INSTRUMENT
This rule was not applied in this case because even if PNB informed
Associated Bank within 24 hours from knowing that there was forgery,
Associated Bank v. CA
Associated Bank could not have gone after the forger still. At that time,
Pangilinan’s account was already depleted. The spirit of the regulation
would have been rendered useless.

Facts: The Province of Tarlac maintains a current account with PNB
where the provincial funds are deposited. They issue several checks in
Atty. Amago: This is something unusual. PNB should have also been
liable with the sharing 50, 20 and 30% because they did not comply
with the 24-hour regulation. For exam purposes, a bank can be held
liable if they failed to comply with the 24-hour clearing regulation and
this is an instance when it is precluded from raising the defense of
forgery.

21 | U N I V E R S I T Y O F S A N C A R L O S
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
FORGERY OF DRAWER’S SIGNATURE
Samsung Construction v. FEBTC
Facts: We have
one check
(owned by
Samsung, signed
by Jong) to be
presented to FEBTC (drawee bank) by Gonzaga (the payee). The check
which was presented had the forged signature of Jong who was the
signatory of Samsung. This check was claimed in the hands of Mr. Kyu.
Gonzaga (payee) took hold of one of the checks of Samsung purportedly
bearing the signature of Jong who went to FEBTC. FEBTC considered
the check as valid since it bore the signature of Mr. Jong.
However, since the amount exceeded P100, 000, the approval of
Samsung officers was required. FEBTC presented the check to Ms. Velez,
Senior Assistant Cashier, who tried to call Mr. Jong. They were not able
to reach Mr. Jong, nonetheless, Ms. Velez considered the instrument as
one which bore the genuine signature of Mr. Jong.
The check was transferred to Syfu, another officer of Samsung, who
took hold of the check. She then saw Sempio, the assistant accountant
of Samsung, and asked him about the signature on the check. Sempio
confirmed the signature. The check was for the purchase of equipment.
Held: The party that should be liable is the drawee because the latter
warrants the genuineness of the signature of the drawer absent the fact
that the drawer is negligent, and the mere fact that the employee of the
drawer was the forger, does not mean that the drawer is negligent since
the latter do not possess the preternatural gift of cognition as to the evil
that may lurk within the hearts and minds of their employees.
The GENERAL RULE is being applied here. The drawee-acceptor is liable
in this case because the forgery is in the signature of the drawer. As a
rule, being the drawee-acceptor, you warrant the genuineness of the
signature of the drawer.
An EXCEPTION is when the drawer, instead of the drawee, will be held
liable if the drawee can prove that the drawer was negligent in this case
(similar to the case of Gempesaw).
FIRST PREMISE:
If there is forgery, it has to be proven first.
Samsung alleged that there was forgery. On the other hand, FEBTC
denied there was forgery.
Samsung presented NBI as an expert, while FEBTC presented PNP as an
expert. RTC believed NBI over PNP, and SC affirmed that the NBI is
more experienced in the field of forgery detection.
Furthermore (and more importantly since emphasized by sir), Mr. Jong
himself stated that the signature in the check was indeed forged. While
it is self-serving for Mr. Jong to state that his signature was forged, the
SC stated that he had to be believed because if there was any person
to say if there was forgery, it should have been the owner of the
signature being forged. Therefore, there is indeed forgery in this case.
SECOND PREMISE:
Now that there is forgery, the drawer had to be proven to be
negligent for the drawee not to be liable.
In this case, Samsung was NOT liable because:
The bare fact that the forgery was committed by an employee of
the party whose signature was forged cannot necessarily imply that
such party’s negligence was the cause for the forgery. Employers
22 | U N I V E R S I T Y O F S A N C A R L O S
do not possess the preternatural gift of cognition as to the
evil that may lurk within the hearts and minds of their
employees. (emphasis by Amago on the Bold Words)
Just because your employee is the one who committed the fraud or
forgery that does not automatically mean that the employer is negligent.
The SC even stated that even if you placed the check on your table, that
bare fact does not in itself prove negligence.
Furthermore, Samsung in this case presented the procedures they
employed to safeguard their checks while FEBTC did not even submit
what kind of diligence had to be observed by Samsung (drawer) in this
case.
Therefore there was no negligence on the part of the drawer, and the
general rule stands: The drawer should not be liable for the forgery of
their own signature, but the drawee, who warranted the genuineness of
the check, who should be liable.
FORGERY OF PAYEE’S SIGNATURE
Gempesaw v. CA
Facts: Gempesaw signed the check prepared by Alicia Galang along
with the vouchers. The check is payable to various suppliers (payees of
the check). The check was forged—signature of the payees were forged
in favor of Alicia Galang.
Gempesaw was a businessman who had several grocery stores. He had
a bookkeeper named Alicia Galang whom he trusted that every time
Gempesaw had transactions, all he did was sign a check and give it to
Galang, entrusting her with it.
After two years, Gempesaw found out with the bank that there were
several withdrawals from his account which he did not approve. There
were 82 checks which were more than the amount of the obligations
that were cleared and paid by the banks to the indorsee.
Gempesaw asked the bank to reimburse him with those amounts that
were not authorized to be withdrawn from his account, so Gempesaw
sued the bank for the amount
The encashment was made as follows:
Alicia Galang went to Mr. Boon, chief accountant of the drawee bank. In
accordance with the internal rules of the PBC, only the branch manager
should accept a check if there is a second indorsement.
Since there is forgery in the signature of the indorsers (payees), the rule
is:
If there is forgery in the signature of the indorsers, only
subsequent indorsers are liable to the current holder of the
instrument. Drawee acceptor is not liable; Drawer is also not
liable.
Held: Galang is not the only one liable. Drawee bank is also liable
because of contributory negligence. Both must be liable 50-50.
Gempesaw – she just allowed Galang to prepare, encash the check,
along with the supporting documents, without even checking it. It took
her 2 years to check on the bank statements, even if these bank
statements were given to her on a monthly basis.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
GR: Negligent persons are one of those parties precluded from using the
defense of forgery.
Drawee bank (PBC) – Considered as negligent for having violated its
own internal rules. It should not have been Mr. Boon who accepted the
check but it should have been the branch manager.
FORGERY OF INDORSER’S SIGNATURE
Republic v. Ebrada
Facts:
Ebrada was holding a check that was from the Bureau of Treasury.
Ebrada went to Republic Bank to encash the check. Upon encashment,
he gave the money to Dominguez, then to Domino. The Bureau of
Treasury called the bank informing them that the check was forged
because Mr. Lorenzo has already been dead for more than 10 years.
Bureau asked the bank to return the money and the bank asked Ebrada
to return the money but the latter refused.
Ebrada’s defense is that he is a holder in due course, and that the bank
is negligent in accepting the check.
Held:
Drawee bank can recover because although drawee bank was negligent
in failing to detect the forgery, the cashier had performed his duty, the
forgery would have been detected.
In this case, there is forgery in the signature of the indorser. As a rule,
if the forged signature is that of an indorser, person liable is the
subsequent parties. Drawee and drawee should not be held liable except
when there is negligence.
In this case, the general rule is applied. Liability should be in the hands
of the person who caused the loss to happen.
Under the rules, if the DRAWEE bank pays on a forged signature,
granting that it is not the signature of the DRAWER, the DRAWEE bank
can go after the person whom the bank made payment. So in this case,
the DRAWEE bank can go after Ebrada.
However, Ebrada remitted the money right away to Adelaida
Dominguez. While Ebrada cannot go after drawer and drawee bank, but
she can go after subsequent parties. She can go after Dominguez from
whom she received the instrument.
It follows that Dominguez could go after Ramon R. Lorenzo, then
Lorenzo to Martin Lorenzo (who in this case already died for more than
11 years).
MATERIAL ALTERATION
Relevant Codal Provision
Sec. 124. Alteration of instruments; effect of – Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
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, he may enforce
payment thereof according to its original tenor.
23 | U N I V E R S I T Y O F S A N C A R L O S
MATERIAL ALTERATION
It is any alteration which changes the liability of a party. If the
modification and alteration in the check number will not affect the
liability of any party, it is not deemed a material alteration.
Relevant Codal Provision
Sec. 125. What constitutes a material alteration – Any alteration which
changes the:
1. The date
2. The sum payable, either for principal or interest
3. The time or place of payment
4. The number or the relations of the parties
5. The medium or currency in which payment is to be made
6. Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect
of the instrument in any respect, is a material alteration.
Date
It can affect the liability of a party in the sense that payment is hastened.
Amount
Decrease or increase in the amount is material. It will definitely change
the liability.
Time
This is synonymous to date. The place of payment would require you
to go somewhere. It is an additional expense on the part of the debtor.
It requires an additional act on the debtor.
Number or the relations of the parties
Because there are more than one party, they could be jointly liable so
the demand of payment should be to each of them. It could be altered
from solidary and you make it joint, or from joint and you make it
solidary, there is a different legal implication on whom you can demand
payment from.
Adding a place where no space is specified
There is an additional act to be done by the party.
Insertion of a date on a blank portion is not material alteration
What will apply is Sec. 13 instead of Sec. 124 because there is really an
intention to put a date there. It just so happens that there is no date
placed. There will be material alteration if you change whatever was the
date inserted.
Relevant Codal Provision
Sec 13. When date may be inserted – Where an instrument expressed
to be payable at a fixed period after date is issued undated, or where
the acceptance of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of issue or
acceptance, and the instrument shall be payable accordingly. The
insertion of a wrong date does not avoid the instrument in the hands of
a subsequent holder in due course; but as to him, the date so inserted
is to be regarded as the true date.
MATERIAL ALTERATION IS A REAL DEFENSE
REAL DEFENSE
This is because you cannot enforce the instrument as it is. Prior parties
to the material alteration can raise it as a defense. They can make
payment but it is not the payment based on the amount in the
instrument presented to them. Instead, they can only be demanded to
pay the original tenor of the instrument.
Atty. Amago: This should have been a hybrid defense—both a personal
and a real defense—because it can be raised against a holder in due
course, although he can still receive payment based on the original tenor
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
of the instrument. So it’s not like any other real defense. But authors
would classify it as real defense. So it is a real defense then.
LIABILITY OF PARTIES
ONLY PRIOR PARTIES ARE LIABLE
The law provides that it is only the prior parties who can be held liable
to the extent of the original tenor. So as to a holder not in due course,
prior parties are never liable on the instrument. That is why it is
considered as a real defense.
It is a hybrid defense because as to a holder in due course, you can still
hold prior parties liable to the extent of the original tenor. All the rest
will be the same for the holder in due course, holder through a holder
in due course, and holder not in due course.
FEBTC v. Gold Palace Jewellery Co.
UOB Tagoe Gold FEBTC
(Dr) (P300-P380k) Palace (Collecting Bank)
LBP
(De)
Facts: Samuel Tagoe purchased from Gold Palace several pieces of
jewelry valued at P258,000. In payment thereof, Tagoe offered Foreign
Draft issued to it by United Overseas Bank (UOB), addressed to Land
Bank (LBP) and made payable to Gold Palace for P380,000.
Prior to releasing the items, Gold Palace told Tagoe to wait for the draft
to be cleared and thereafter deposited the instrument to its account with
FEBTC. FEBTC, being the collecting bank, presented the instrument to
LBP, the drawee bank, and the latter cleared the same. Consequently,
UOB’s account with LBP was debited and Gold Palace’s account was
credited.
Tagoe collected the purchased items from Gold Palace and the latter
even gave a change.
Weeks after, LBP informed FEBTC that the instrument was materially
altered from P300,000 to P380,000. LBP asked FEBTC to return the
money which the latter did and debited account of Gold Palace without
informing the latter. Since portion of the amount was already withdrawn
by Gold Palace, FEBTC demanded for the remaining amount to satisfy
the P380,000 it has refunded to LBP. Gold Palace did not heed demand
so FEBTC filed action for sum of money.
Issue: Whether Gold Palace is liable.
Held: No. Gold Palace is not liable.
Gold Palace exercised due diligence when it waited for the check to be
cleared before the items were released to Samuel Tagoe. This is a case
of negligence on the part of LBP. FEBTC can go after LBP or Samuel
Tagoe who is ultimately liable.
But if this case is decided on the reason of material alteration alone, the
following shall be liable to FEBTC:
(1) Samuel Tagoe shall be liable for P380,000 because he caused the
alteration.
(2) LBP shall be liable for P380,000 because as an acceptor of the
check, he warrants to pay the check and engages to pay the
instrument in accordance with the tenor of its acceptance. So
when it accepted the check after FEBTC presented it, it accepted
the amount of P380,000 and so it should be held liable for that
amount. What LBP can do is only to debit the account of UOB for
24 | U N I V E R S I T Y O F S A N C A R L O S
the amount of P300 only which is the original amount of the
check. LBP can get the P379,700 from Samuel Tagoe.
Atty. Amago: However, the case was not decided based on Material
Alteration because it was FEBTC who filed a case against Gold Palace.
That changed the matter that's why it did not mention material
alteration in relation to LBP. It just said that FEBTC can go after LBP
and/or Samuel Tagoe. LBP is liable because, being the drawee-acceptor,
it engaged to pay based on the tenor of its acceptance, it accepted the
amount of P380,000, so it should be held liable for it.
While a particular party can be liable only for the original tenor of the
instrument, don't stop there in relation to subsequent parties because if
they will only fake the original tenor of the instrument, then subsequent
parties may still be held liable for the remaining amount.
Additional illustration
Maker (M) drafted an instrument worth P1,000 and transferred it to
Payee (P). P transferred it to A who altered the check from P1,000 to
P10,000 and negotiated it to B then B to C who is a holder in due course
(HDC).
Implications:
(1) C can compel M to pay the amount to the extent of P1,000 which
is the original tenor of the instrument.
(2) Since C can only get P1,000 from M, C can collect the balance of
P9,000 from the subsequent parties liable starting from B to A.
(3) C cannot go after P because M already paid the P1,000 and P is not
a party to the alteration. If M cannot pay C, P can be compelled to
pay for P1,000. Moreover, had the instrument been a bearer
instrument, P is still NOT liable.
(4) C can go after B and require the payment of P9,000 because C
already got the P1,000 from M.
(5) C can go after A or B to the extent of P9,000 if M already paid
P1,000. If B only paid P4,500, C can still go after A to collect the
balance of P4,500. This is without prejudice to B’s right to collect
P4,500 (the amount it paid to C) from A because A is ultimately
liable, being the perpetrator.
SUMMARY:
HOLDER IN DUE COURSE
1. Prior parties – liable only according to the original tenor
2. Subsequent parties:
a. Indorser – liable
b. PNBD – liable if immediate transferor
c. Perpetrator – ultimately liable
HOLDER THROUGH HOLDER IN DUE COURSE
Same
HOLDER NOT IN DUE COURSE
1. Prior parties – not liable
2. Subsequent parties:
a. Indorser – liable
b. PNBD – liable if immediate transferor
c. Perpetrator – ultimately liable
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
SEQUENCE IN ENFORCEMENT OF PAYMENT
SEQUENCE FROM WHOM TO DEMAND OR ENFORCE PAYMENT
Promissory note
1. The holder must go first to the Maker, the person primary liable
2. If the maker is unable to pay, the holder must go to the person
from whom it acquired the instrument, the immediate transferor or
indorser of C, i.e., B.
3. Then to the next indorsers A, then P.
Bill of Exchange
1. The holder must go first to the drawee, the person primary liable
2. If the drawee dishonors the instrument, go to the drawer
3. If the drawer is unable to pay, then the holder can go to the person
from whom it acquired the instrument, the immediate transferor or
indorser
4. Then to the next indorsers.
Atty Amago: If it is an order instrument, the holder can just go to any
of the indorsers. But in practice, the holder, after going to the person
primarily liable, should go to the person from whom he acquired the
instrument as he gave out a consideration out of the instrument and yet
it turns out to be of no or less value
Atty. Amago’s Tips:
When answering, make sure that you set the premise. Don’t just say "M
can be held liable to the extent of the original tenor of the instrument,
then B can also be held liable because he warrants the...". You must
include in the answer the amount of liability.
Answer in this manner:
If M already paid the amount of P1,000 then the excess of P9,000 can
be collected from other subsequent parties. If the HDC of the instrument
can collect/enforce payment from the prior parties only to the extent
original tenor of the instrument, the excess can be collected from the
other parties subsequent from the defect.
MINORS AND CORPORATION
Relevant Codal Provision
Sec. 22. Effect of indorsement by infant or corporation. – The
indorsement or assignment of the instrument by a corporation or by an
infant passes the property therein, notwithstanding that from want of
capacity the corporation or infant may incur no liability thereon.
MINORS
MINORITY AS A REAL DEFENSE
General rule: Minority is a real defense but it can only be raised by the
minor himself. The holder of the instrument cannot make the minor
liable.
Exception: The minor makes representation to the public that he is of
legal age when in truth and in fact, he is a minor. The minor already
committed fraud and cannot be allowed to raise the defense of minority.
CORPORATIONS
ULTRA VIRES ACTS
A corporation cannot be held liable for the ultra vires acts of its
representative. But the representative can be held personally liable as
he did the act beyond the scope of given authority.
The representative of the corporation can only be authorized through a
Board Resolution from BOD. Where acts of issuing negotiable
instrument and negotiating such are not among those provided in the
25 | U N I V E R S I T Y O F S A N C A R L O S
resolution, they are considered ultra vires or beyond the scope of its
authority.
The act of the representative, even if approved by the Board of
Directors, is itself ultra vires if the act of negotiating the instrument is
not one of those acts granted to it, incidental, implied or stated under
its charter documents or the Articles of Incorporation submitted to SEC
for the purpose of registration.
Reason: In dealing with the corporation, it is incumbent upon the
clients to make inquiries as to the extent of the authority granted to the
representative. Good practice suggests that clients must ask the
notarized Board Resolution or Secretary Certificate attested by the
President.
PERSONAL TO THE PARTY CONCERNED
The defense is peculiar in nature as it is personal to the party. It can
only be raised by such particular party only.
TN: Parties subsequent to the minors or corporation can be held liable
because they made a warranty that all prior parties have the capacity to
contract.
AMBIGUITY
Relevant Codal Provision
Sec. 17. Construction where instrument is ambiguous. – Where the
language of the instrument is ambiguous, or there are omissions therein,
the following rules of construction apply:
(a) Where the sum payable is expressed in words and also in figures
and there is discrepancy between the two, the sum denoted by
the words is the sum payable; but if the words are ambiguous or
uncertain, reference may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of interest,
without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be
dated as if the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at his
election;
(f) 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, he is to be deemed an indorser;
(g) Where an instrument containing the words “I promise to pay” is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon.
APPLICABLE ONLY IN CASE OF DOUBT
The rules in this section are applicable only when the instrument in
question is ambiguous, uncertain or when there are omissions. If the
terms are clear, the instrument must be enforced as it reads.
Sums expressed in words and figures different
When there is a discrepancy between the sum expressed in words and
sum expressed in figures, the former controls.
Reason: It is easier to change the figures or to commit a mistake on
them than when the amount is written in words.
Words ambiguous or uncertain
GR: Words outweigh figures.
XPN: When the words are ambiguous or uncertain, reference may be
had to the figures to determine the true amount.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
Example: The check bears the figures P365.00 and the amount written
is “three sixty five pesos” – the marginal figures control.
Date when stipulated interest to run not specified
A. If the date when the stipulated interest is to run is not specified –
the interest runs from the date of the instrument
B. If undated – interest runs from the date of issue
C. If there is no rate of interest – legal rate of interest 6% (Circular
No. 799)
Instrument undated
An undated instrument is considered dated as of the date of its issue.
Issue – first delivery of the instrument complete in form, to a person
who takes it as holder.
Written and printed provisions in conflict
In case of conflict between the written and printed provisions, the
former prevail.
Reason: The written words are deemed to express the true intention of
the maker or drawer because they are placed there by himself. On the
other hand, printed forms are prepared without any particular contract
in view.
Whether instrument bill or note in doubt
In case of doubt as to whether an instrument is a bill or a note, the
holder may treat either at his election.
Example:
To: W
I promise to pay P or order P10,000.
Sgd. Y
This is ambiguous because the promise to pay indicates that it is a PN
but the fact that it is addressed to W (a drawee) indicates that it is a
BoE. In which case, the holder may treat the instrument as either at his
election.
Capacity in which person signed in doubt
In case of doubt as to what capacity the person making the instrument
intended to sign – he is to be deemed an indorser.
TN: This applies only when there is doubt due to the ambiguous location
of the signature.
Instrument signed by two or more persons
An instrument with the words “I promise to pay” signed by two or more
persons – gives rise to solidary liability. Thus, any one of the signers
may be held liable for the whole amount of the instrument.
TN: However, if “we promise to pay” and signed by two makers imparts
only joint liability.
Where the name of the payee is not a name of a person
If the instrument says, I promise to pay to the order of P or bearer 1M
signed X. It should be treated as bearer instrument because it is issued
to the order of a name which is not purported to be a name of any
person.
26 | U N I V E R S I T Y O F S A N C A R L O S
CONSIDERATION
Consideration
An inducement to a contract, that is, the cause, price or impelling
influence which induces a contracting party to enter into a contract.
PRESUMPTION OF CONSIDERATION
Relevant Codal Provision
Sec. 24. Presumption of consideration. – Every negotiable instrument is
deemed prima facie to have been issued for a valuable consideration;
and every person whose signature appears thereon to have become a
party thereto for value.
Consideration
Any prestation sufficient to support any contract in favor of the party to
an instrument, such as a maker or indorser, and it may consist in giving,
doing, or not doing.
Prestation – obligation to give, to do or not to do.
Presumption of consideration
If the negotiable instrument does not provide for a consideration, the
instrument is still valid because consideration is always presumed. It
need not be stated in the negotiable instrument.
TN: The presumption that consideration exists is only prima facie. Thus,
it can be rebutted by evidence to the contract. The evidence must be
convincing to overthrow the presumption. It is not overcome by a mere
denial of receipt of the consideration.
WHAT CONSTITUTES VALUE
Relevant Codal Provision
Sec. 25. Value, what constitutes. – Value is any consideration sufficient
to support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time.
Valuable consideration
Anything which requires a party to give, to do or not to do as a condition
for issuing a negotiable instrument.
TN: Love, affection or moral obligation is not a valuable consideration.
They are not considered as valuable consideration enough to support a
negotiable instrument. But they can support a simple contract like
donation. However, for the purposes of Negotiable instrument law, they
are not valuable considerations.
Pre-existing debt
A pre-existing debt can be a valuable consideration. The discharge of
such debt is a valuable consideration for a negotiable instrument. It
must be shown that the holder has given up the pre-existing debt or the
right to sue.
Future debt is not a valuable consideration
Future debt cannot be a considered as valuable consideration because
at the moment you issue the instrument, there is no consideration yet.
Pre-existing debt of an insolvent estate is not a valuable consideration
If a widow of an insolvent estate issued a negotiable instrument to pay
the debt of the decedent, the instrument is not deemed issued for a
consideration if it is issued against the insolvent estate because when
the estate is insolvent, it means that all pre-existing debts are cancelled.
Debt is cancelled along with the death of the decedent.
Whoever issued the instrument does not matter because with the
insolvency of the estate, all pre-existing debts are deemed cancelled.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
It doesn’t matter whether one has the capacity. What matters is the
reason of the issuance of the instrument. The consideration is the reason
why you are issuing the negotiable instrument.
If you are issuing it for a pre-existing debt of an insolvent decedent,
then the instrument is deemed not issued for a consideration for after
all there is no debt to speak of.
Security for pre-existing debt
The transfer of negotiable instruments as security for pre-existing debt
is a valuable consideration.
Example: M owes P1, 000 payable today. M fails to pay in cash. He
issues a check for said amount to P who accepts the same. Here, the
consideration for the check is the pre-existing debt of M.
If the negotiable instrument is issued to a person as a security for a
certain debt, while there is no negotiation of a negotiable instrument
(issued only as a security not negotiated in the sense of negotiation
under the NIL) it doesn’t mean that you can’t go after the negotiable
instrument after all this instrument was used as a security. You are not
a party to the instrument but you can have a claim to the instrument.
Example: If the instrument amounted to P1M, the debt is P500K, and
there is a P1M promissory note used to secure the P500K debt, whoever
is the creditor to whom this PN was delivered as security of such debt
can have a claim on the negotiable instrument but he is not a party to
the instrument.
After the obligation has matured, you can ask whoever is the maker of
the instrument to negotiate the instrument to you.
HOLDER FOR VALUE
Relevant Codal Provisions
Sec. 26. What constitutes holder for value. – Where value has at any
time been given for the instrument, the holder is deemed a holder for
value in respect to all parties who become such prior to that time.
Sec. 27. When lien on instrument constitutes holder for value – Where
the holder has a lien on the instrument, arising either from contract or
by implication of law, he is deemed a holder for value to the extent of
his lien.
Holder for value – one who has given a valuable consideration for the
instrument issued or negotiated to him.
Take note:
1. The holder is deemed as such not only as regards the party to
whom value has been given by him but also in respect to all those
who became parties prior to the time when value was given.
2. He is presumed a holder for value until the contrary is shown.
3. Absence of consideration is a personal defense (can only lie against
a holder not in due course)
Where a holder has lien on instrument
One who has taken a negotiable instrument as collateral security for a
debt has a lien on the instrument.
TN: As such holder of collateral security – he would be a pledgee
(governed by the provisions of the Civil Code)
Extent of lien
A. If the amount of the instrument is more than the debt secured by
such instrument – the pledgee is a holder for value to the extent
of his lien. (The surplus shall be delivered to the pledgor)
27 | U N I V E R S I T Y O F S A N C A R L O S
B. If the amount of the instrument is less than or the same as the
debt secured by such instrument – the pledgee is a holder for value
for the full amount and may thus recover all.
Rules in case defenses are available
A. If there are existing defenses between the pledgor and the party
liable on the instrument – pledgee can collect on the instrument
only to the extent of the amount of the debt.
B. If the defenses of the party liable on the instrument are real
defenses – pledgee cannot recover anything.
EFFECT OF WANT OF CONSIDERATION
Relevant Codal Provision
Sec. 28. Effect of want of consideration. – Absence or failure of
consideration is a matter of defense as against any person not a holder
in due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or
otherwise.
This is a personal defense
If ever there is lack of consideration as in the case where the instrument
is given freely to the payee, it can be raised as a defense only against a
person not a holder in due course.
ABSENCE OR WANT OF CONSIDERATION
Total lack of any valid consideration for the contract, in consequence of
which the alleged contract must fall.
Example: M makes a Promissory Note to P in payment for a parcel of
land which does not exist.
As between the parties, there can be no recovery on the note as there
is absence of consideration. But if P indorses the note to A, a holder in
due course, A can recover from M because absence of consideration is
only a personal defense not available against a HDC.
Insufficiency of consideration is not a defect in the instrument
Example: The consideration is P1 for P100K negotiable instrument. This
can amount to a donation since it is not issued for a valuable
consideration. But in that sense, where the amount is so low that it can
be deemed a donation, it can amount to lack of consideration.
FAILURE OF CONSIDERATION
Failure or refusal of one of the parties to do, perform or comply with the
consideration agreed upon. In other words, something was agreed upon
as consideration but for some cause, such agreed consideration failed
to materialize.
Example: You engage in a sale of parcel of land (ought to be inherited
from parents) and then such was sold by your parents days after your
transaction.
1. This is want or lack of consideration because:
A. You cannot sell an inheritance
B. You don’t own the property. You cannot sell what you do not
own.
2. But, if you were authorized in the first place but it was sold by
another broker – there is only failure of consideration.
TN: Nonetheless, any of the two may still be considered as a personal
defense.
NEGOTIABLE INSTRUMENTS LAW Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017

Want of Consideration Right to present parol evidence to prove accommodation

If not authorized in the first place or there is really no valuable One of the problems in this undertaking is that you may not know if one
consideration or you issue a negotiable instrument on the basis of love is an accommodation party or not, thus it is an established principle
and affection, there is want of consideration. under NIL that an accommodation party can present parol evidence.

Failure of Consideration
You have the authority but after a condition is set and you can’t deliver,
there is failure of consideration.
Rule in case of partial failure of consideration
In case of partial failure of consideration, this would bar recovery only
pro tanto.
Example: If only 2/3 portion of the land was delivered, there would be
a partial failure of consideration which would bar recovery only pro
tanto. Hence, P could recover only 2/3 of the note as M is not liable to
the extent of the 1/3 which is the price of the undelivered portion.
The accommodation party is permitted to show by parol evidence which
party he accommodated. Otherwise, if this was not allowed, an
accommodated party may enforce payment of the instrument against
the accommodation party.
General rule: Negotiable instrument is a contract and one can’t present
parol or oral evidence. The contract itself is already the evidence of what
was agreed upon. A party is precluded from saying anything against the
stipulations of the contract.
Exception: Parol evidence may be used to present proof as an
accommodation party.

ACCOMMODATION PARTY AND ITS LIABILITIES Accommodation party and regular party distinguished

Relevant Codal Provision Accommodation party Regular party

Sec. 29. Liability of accommodation party. – An accommodation party is Signs an instrument without
receiving value therefor Signs the instrument for value
one who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of Signs an instrument for the
lending his name to some other person. Such a person is liable on the purpose of lending his name to Does not sign for that purpose
instrument to a holder for value, notwithstanding such holder at the time some other person
of taking the instrument know him to be only an accommodation party. May always show by parol Cannot disclaim or limit his
evidence that he is only such personal liability as appearing
Accommodation Party on the instrument by parol
Person who: evidence
1. Signed the instrument as a maker, drawer, acceptor or indorser. Cannot avail of the defense of
2. Without receiving any value absence or failure of May avail of said defense
3. For the purpose of lending his name to the instrument. consideration against a holder against a holder not in due
not in due course course
Example: Atty. Amago – has good credit; Mr. Divinagracia – has no good After paying the holder, may
credit. For him to be able to loan from the bank, Atty. Amago will issue ask sue for reimbursement from May not sue any subsequent
a negotiable instrument in his favor so that he can offer it as a security the accommodated party, party for reimbursement
for his loan from the bank. although a subsequent party

Important: Issue on want of consideration is not a defense available

to an accommodation party against holders for value who are also
holders in due course.

Accommodation party’s defense of want of consideration

It is possible that one is a HNDC but is a holder for value. One is a
HNDC not for the reason that he did not receive value for the negotiable
instrument but due to other reasons (i.e. taking the instrument when
overdue). You are a holder for value but not a holder in due course.

In this case, an accommodation party may raise the defense of want of

consideration applying Sec. 28. (If there is want of consideration, you
can raise it against a holder not in due course) Sec. 29 is only applicable
to holders for value who are also holders in due course.

Meaning of “without receiving value therefor”

Means that no value has been received for the negotiable instrument
and not “without receiving payment for lending his name”.

Being an accommodation party doesn’t mean that you don’t accept any
value at all. You don’t receive any value for negotiating the instrument
but for purposes of lending one’s name, you may.

Example: M is given P1, 000 in consideration of lending his name, but

not for the promissory note he signs, M does not lose his status as an
accommodation party.

28 | U N I V E R S I T Y O F S A N C A R L O S