Negotiable Instruments Law (Atty.
Amago Discussion)
404 (A.Y. 2018-2019)
August 7, 2018 (from Margil, Sandee, Ela))
1. History of NIL
The use of Negotiable Instruments dates back as early as the Tang
Dynasty. Chinese were known for trading. It would have been
dangerous to bring large sums of money while trying also to bring
products. They thought it would be safer to bring a representation
of such cash.
It was the United Kingdom who first made a codified law on
negotiable instruments, because of its widespread use, the
thinkers at that time found that there was a need to provide for a
uniform practice on the usage of negotiable instruments. So, they
drafted the Bill of Exchange Act in 1882.
BEA became the basis of the law in the US. In 1896, they drafted
the basis of the Negotiable Instruments Law (NIL) in the Philippines
which is the US Uniform Negotiable Instruments Law of 1896. The
Uniform NIL was under the initiative of the American Bar
Association and American Banker’s Association. The US has
several states and several and separate laws within each state and
they wanted to have a uniform law in relation to the use of
commercial papers.
UNIL was the basis of the Philippine NIL or Act No. 2031 which
was drafted in February 3, 1911 and published in the Official
Gazette on March 4, 1911 effective 90 days after on June 2, 1911
The NIL is just copied from the US, and because the US copied it
from the UK, there are cases where the Philippine Supreme Court
has based on what was decided in the UK and US.
UNIL in the US was further amended by the Uniform Commercial
Code, Art 3 of that Code specifically states that the UNIL should
only govern negotiable instruments. So, if it’s not a negotiable
instrument, it is not covered by the UNIL. In the Philippines, it is
also very specific that Negotiable Instruments Law (NIL) will only
govern negotiable instruments. You have to determine then if the
instrument is negotiable to know whether NIL will be applied.
2. What are the uses of Negotiable Instruments?
1. It is a substitute for money
- A negotiable instrument, while it is not money, is a
substitute for money, which makes transactions more
convenient as you can use it in the exchange of goods and
services. Although it is not a legal tender in the technical
sense, but similar to money, it gets to be exchanged for
possible goods or services. It becomes a storage of value.
- Although in case of negotiable instruments, it only has value
if the person who issued the instrument has the capacity to
make good of the promise or order he made, but still, it has
value. Checks however, still cannot be considered as legal
tender.
2. It is a medium of exchange
- You get to transfer a negotiable instrument and
conveniently get the goods that you wanted. Instead of
bringing a lot of cash with you, and risk bringing the money,
you get to have the goods that you want.
3. 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. The value of a negotiable
instrument is dependent on a person’s ability to make good
of the promise or order, hence, the negotiable instrument
represents his credit or liability.
1
4. It is a means of making immediate payment
- More or less the same with exchange.
- Instead of you paying cash, you can use a check to pay for
the goods or services that you want to avail.
- You “tender” payment but it does not really mean it
extinguishes the obligation
It must be emphasized that negotiable instruments are NOT legal
tender. Checks, even if managerial checks, are not legal tender. In
Philippine law, only money is legal tender. But checks will have the
effect of payment once it is encashed.
Exception: Once there is negligence on the part of the person to
which the check was issued, to encash the check within a
reasonable time, and the check is impaired through no fault of the
one who issued it, then there is already payment.
3. What are the Characteristics of Negotiable
Instruments?
1. Negotiability
- It is convenient to deal with it since it can be transferred
from one person to another.
- 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 the personal
defenses of prior parties (persons before you).
- Where it gets to be transferred and the one who holds
it, holds it free from the defenses of prior parties. Naa
nakay imong own shoes.
2. 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. This is
important because people will never allow themselves
to deal with a NI if they do not have a contract separate
from other previous contracts. If you are not able to
receive payment from the person primarily liable, at
least you can go after the parties who were bound to the
instrument.
- As one person takes possession of the instrument, he
gets to have a contract separate from all other. That’s
why you have different rights and you can have better
rights than the persons before you. As one person gets
to be added to the trail of exchanges involving the same
instrument, additional contracts are added as well. You
get to be governed by a separate contract for every time
and instrument is transferred from one hand to another.
- So there is a primary contract (the contract on the face
of the instrument) and it accumulates the second
contract, third contract, etc (as it gets passed from one
hand to another). Basically, there is as many contracts
as there are parties.
- This is an amazing feature of a negotiable instrument.
The use of a negotiable instrument is for you to be able
to make transactions without necessarily dealing with
cash but just based on the promise or credibility of the
person who drafted it. People accept it on the order of
someone, on their belief on this someone who made it.
It then gets to be handed to even persons who might not
even know that particular person who drafted it.
Something gets to be exchanged by just mere words or
mere credibility or reputation of another.
- What is the primary contract?
- The NI itself that contains the contract so the
original parties have the primary contract. The
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
secondary contract is the one created after it is
transferred.
4. Distinguish assignment from negotiability. You can
only assign rights that you have thus if you don’t have a
right over the object, you cannot assign a right even if
there is physical transfer. The spring cannot rise higher
than its source.
5. How would you know when an instrument is
negotiable or not? Used in commercial transactions
6. What are the Types of Negotiable Instruments?
(Technically there are only two since a check is just a
special kind of bill of exchange.)
1. Promissory Note
- Pertains to a promise; note pertains to it being written
down on a piece of paper.
- Pertains to the unconditional promise of the maker to
pay a sum certain in money to order or to bearer.
- Ex: “I promise to pay A or bearer 1M upon demand.
Signed, B.”
In this case, B made the promise. The unconditional
promise is to pay a sum certain in money which is 1M.
He will pay it upon demand. A or bearer gets to receive
the payment.
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.
2. Bill of Exchange
- Is an order; you command someone to do it for you;
addressed to a particular person.
- It is an unconditional order by the drawer addressed to
the drawee to pay the value as stated in the instrument.
- Issued by a drawer to order a payment to be made. The
drawer orders someone to make the payment.
- Has to have a drawee or the person you order to pay
the value as stated in the instrument.
- Ex: “To X, pay 1M pesos to A or bearer upon demand.
Signed,B.”
Here, the drawer is B. But this time, the one who will pay
(drawee) is X and the one who gets to receive payment
is A or bearer. A or bearer can get 1M upon demand.
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.
3. Check
- Actually it is still a bill of exchange
- Special kind of bill of exchange in which the drawee (the
one who is ordered to pay) is always the bank and is
payable upon demand (when you go to the bank).
- If it is post-dated, then payment can be demanded on
the date indicated in the check. Nevertheless, it is
payable on demand.
2
7. What is the difference between the bill of exchange
and promissory note? PN—unconditional promise, only
2 parties (maker and payee); BOE—unconditional order,
3 parties (drawer, drawee and payee)
8. What are the incidences in the life of a Negotiable
Instrument?
1. Promissory Note
a) Preparation and signing of the instrument. The
instrument is signed by the maker.
b) Issuance - you then issue the instrument, ideally, to
the payee. The moment you give to the instrument to
the person after it is prepared (the first time), that is
when it is issued.
c) Negotiation – when it is once again given to someone
else (not for the first time), you don’t talk about
issuance anymore, this is now negotiation.
Two forms of negotiation (depends on the type of
instrument):
- If it is a bearer instrument – negotiated by mere
delivery.
- If it is an order instrument – negotiated upon
indorsement coupled with delivery.
d) Presentation for payment – present the instrument
to the person who made the instrument.
If maker:
- Makes good with the payment (honors the
instrument) – instrument is deemed
discharged. All parties are no longer liable on the
instrument. The instrument ceases to be a
negotiable instrument and is now a mere scrap
of paper.
- Does not make good with the payment –
instrument is dishonored by non-payment
2. Bill of Exchange
a) Preparation and signing of the instrument. The
instrument is signed by the drawer.
b) Issuance.
c) Negotiation.
d) Presentation for acceptance - In case of a BOE,
before payment can be demanded, the person has to
go the drawee first and present it for acceptance, not
yet for payment. You have to give an opportunity first
to the drawee (the one ordered to pay) to accept the
order or not because it is possible that the one who
issued the order just merely wrote the name of the
drawee even if they don’t really know the drawee
(Example: bill of exchange ordering Jaime Zobelle de
Ayala to pay nya di diay to sila kaila sa nag-issue sa
instrument).
- If accepted – once the instrument has then
become mature, you can now present the bill of
exchange for payment.
- If not accepted – the instrument is considered
dishonored for the first time. The instrument is
then deemed dishonored by non-acceptance.
Once it is dishonored, there are several
processes you have to follow. There is this
notice of dishonor required to be presented to
persons who are secondarily liable so that they
will continue to be liable for the instrument. If you
do not issue this notice, your right ceases there
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
with respect to those persons who are
secondarily liable. You cannot go after them
anymore, you just have to wait until the person
who is primarily liable will pay you (the one who
made the instrument).
Remember, if you do not ask for the BOE back
after acceptance, it will be considered
dishonored for not being accepted if wala ka
kadawat balik sa BOE.
e) Presentation for payment – present the instrument
to the drawee.
If drawee:
- Makes good with the payment (honors the
instrument) – instrument is deemed
discharged. All parties are no longer liable on the
instrument. The instrument ceases to be a
negotiable instrument and is now a mere scrap
of paper.
- Does not make good with the payment –
instrument is dishonored by non-payment.
One obligation of the holder in the event of dishonor, is that you
give notice of dishonor to all the parties who became a party to the
instrument. Otherwise, they will also be discharged from their
liability. The reason for this is so that the other parties will know of
such dishonor and they can know whether they are liable or not
and in order to hold all those parties secondarily liable (the one
who is primarily liable is the drawee who accepted the BOE since
he is the one who was ordered and not the drawer; he is called the
drawee-acceptor)
NOTE the difference between a promissory note and a bill of
exchange:
• For promissory note, you can immediately present it for
payment upon maturity (whether upon demand or when
the period as stated in the instrument arrives).
• For a bill of exchange, you have to present it for
acceptance first before you can present it for payment.
9. 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.
10. When is an Instrument Negotiable?
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 otherwise indicated therein with
reasonable certainty.
3
August 10, 2018
1. Do the requisites in Sec 1 apply to all negotiable
instruments? Distinguish between a promissory note and a
bill of exchange. Sec 1(a-d) apply to both promissory note
and bill of exchange. Sec 1(e) applies only to bill of exchange.
Distinguish: PN—only a maker, only unconditional promise;
BOE—only drawer, only unconditional order, add “where the
instrument is addressed to a drawee, he must be named or
other indicated therein with reasonable certainty”
Do not confuse the “order” mentioned in the second element
(because this is the order made by the drawer) with the
“order” mentioned in the fourth element (because this is the
order ordered by the payee and subsequent holders).
2. What are the requisites of a promissory note to be
negotiable?
a. It must be in writing and signed by the maker
b. Must contain an unconditional promise 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
3. What are the requisites of a bill of exchange to be
negotiable.
a. It must be in writing and signed by the drawer
b. Must contain an unconditional 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 otherwise indicated therein with reasonable
certainty.
4. What is the difference between maker and a drawer? A
MAKER is the one who makes a promise to pay in a PN. He
is personally liable to pay. A DRAWER is the one who issues
a BOE to order a payment to be made. He orders someone to
make the payment.
Maker or drawer does not have to be the one who writes, as
long as he or she is the one who signs.
5. What is the difference between PROMISE and ORDER TO
PAY? A PROMISE pertains to a PN, the parties are the maker
and payee, and it is the person primarily liable who obliges
himself on the instrument.
An ORDER pertains to a BOE, the parties are the drawer,
drawee and payee, and it refers to a person directing another
person or himself to pay on the instrument. It requires an
additional act on the person primarily liable (accepting the
instrument)
Sec. 30. What constitutes negotiation. - An instrument is
negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
August 14, 2018
1. “Must be in writing AND signed by the maker or drawer”,
when it says “must be in writing”, does it preclude
stamping? There is no requirement as to how it must be
written for as long as the words are visible.
4
The basics of a “condition” is if past event (it must not be known
by parties) and if future event (it may or may not happen). It is
important to know this because of the “unconditionality” of the
promise or order to pay a sum certain in money (no such word
as unconditionality, gihimo ra na Atty for emphasis).

2. Can I write the negotiable instrument in this table?

Technically speaking, yes. The law is not specific as to the
material to be used for as long as it can be transferred from one
hand to another.
The determination is at the time the instrument was written or
prepared. If it was written in an immovable, then it can never
be a negotiable instrument. If it was placed in a table, yes it
complies with Section 1, but who would accept it? It goes down
to acceptability. It is negotiable under Section 1 but it cannot be
accepted under usual practices.
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.

3. If it requires writing can it be typed? Yes, it can be printed,
typewritten or stamped, as long as there is a manifestation in
physical form the language of your obligation. The only
requirement is that it must be in writing.
4. If the instrument says, “I promise to pay bearer P1M
[signed with a butterfly mark only]”, is it negotiable? It is
negotiable because it complies with the requirements under
Section 1. Although the signature is not conventional, it does
not affect its negotiability as long as the intent to be bound is
apparent. It may affect acceptability of the instrument, however
if you don’t comply with the usual practices. It is a question of
acceptability, not negotiability.
11. What about if “payable OUT of a particular fund” like
“payable from my savings”? Not negotiable because there is
a condition placed on the promise or order to pay. There is a
condition that the particular fund does exist and that the fund is
sufficient to pay. It goes down to whether the savings exist and
if they are sufficient. When you make a promise or an order, it
extends to your general credit and not just to a particular portion
of your credit.
12. Mention a case that emphasizes the non-negotiability of
an instrument that says it is payable out of a particular
fund. See Metrobank case

There is no requirement that the maker or drawer be named for

the instrument be negotiable. However, it is difficult for the
instrument to be further negotiated because subsequent
parties won’t know who the maker or drawer is. The most ideal
set-up is to write your name in cursive as your signature. What
matters is the intention of the maker to be bound, the location
and the form of the signature are not important.

5. Where should the signature be located? The signature may

appear in any part of the instrument. There is no requirement
on where the signature should be placed, provided that such
signature signifies the intention by the maker or drawer to be
bound by the instrument.

6. What kind of signature is required? There is no requirement

as long as there is intent to be bound that can be inferred. But
of course, if you will run counter to the usual practices of a
particular place, then it may prevent the instrument from being
accepted. It can affect the acceptability of the instrument but it
will not affect negotiability.

7. What is a condition? A condition is any future event which

may or may not happen. It could also refer to a past event not
known to the parties which give rise to an obligation or
extinguishes an obligation. To make it NOT NEGOTIABLE, the
condition must be put to the promise or the order to pay.

8. So, what is unconditional? It is not contingent on the

happening of a future event or a past event not known to the
parties, or plainly, not subject to any condition.

9. Is death a condition? Death is not a condition since everyone

is certain to die. It is just a period

10. What about death because of cancer? It is a condition. Not

everyone is certain to die because of cancer.

VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
August 17, 2018
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.
1. What if the NI reads, “I promise to pay A or his order
P10,000 on or before August 16, 2018”, is this negotiable?
Is it unconditional? Yes, it is a negotiable instrument and has
an unconditional promise to pay a sum certain in money.
2. What if the NI reads, “I promise to pay A or his order
P10,000 on or before August 16, 2018 payable from my
savings”, is this negotiable? Is it unconditional? No, it is
not negotiable because of the phrase “payable from my
savings”. It has an indication that it be payable out of a
particular fund (Sec 3B)
3. What if the NI reads, “To: X Pay P10,000 to the order of A
from my salary”, is this negotiable? same answer as above.
Remember, the promise or order is not anymore unconditional
when the amount is to be taken out of a particular fund (Sec 3b)
because in that case, the fund may not exist or it may not be
sufficient to pay off the amount.
4. Discuss the case.
Metropolitan Bank & Trust Company vs. Court of Appeals
G.R. No. 88866 February, 18, 1991
Facts:
Eduardo Gomez opened an account with Golden Savings and
deposited 38 treasury warrants from Philippine Fish Marketing
Authority. All warrants were subsequently indorsed by Gloria
Castillo as Cashier of Golden Savings and deposited to its Savings
account in Metrobank branch in Calapan, Mindoro. They were sent
for clearance. Meanwhile, Gomez is not allowed to withdraw from
his account, later, however, “exasperated” over Floria repeated
inquiries and also as an accommodation for a “valued” client
Metrobank decided to allow Golden Savings to withdraw from
proceeds of the warrants. In turn, Golden Savings subsequently
allowed Gomez to make withdrawals from his own account.
Metrobank informed Golden Savings that 32 of the warrants had
been dishonored by the Bureau of Treasury and demanded the
refund by Golden Savings of the amount it had previously
withdrawn, to make up the deficit in its account. The demand was
rejected. Metrobank then sued Golden Savings.
Issue:
1. Whether or not Metrobank can demand refund agaist
Golden Savings with regard to the amount withdraws to
make up with the deficit as a result of the dishonored
treasury warrants.
2. Whether or not treasury warrants are negotiable
instruments
Held:
No. Metrobank is negligent in giving Golden Savings the
impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw. Without
such assurance, Golden Savings would not have allowed the
withdrawals. Indeed, Golden Savings might even have incurred
5
liability for its refusal to return the money that all appearances
belonged to the depositor, who could therefore withdraw it anytime
and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that
Golden Savings deposited them to its account with Metrobank.
Golden Savings had no clearing facilities of its own. It relied on
Metrobank to determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld from Gomez
until Metrobank allowed Golden Savings itself to withdraw them
from its own deposit. It was only when Metrobank gave the go
signal that Gomez was finally allowed by Golden Savings to
withdraw from them from his own account.
Metrobank cannot contend that by indorsing the warrants in
general, Golden Savings assumed that they were genuine and in
all respects what they purport to be,” in accordance with Sec. 66 of
NIL. There was no question of Gomez’s identity as payee or
indorser, but the treasury warrants were dishonored allegedly
because of the forgery of the signatures of the drawers. Moreover,
NIL is not applicable to non negotiable instruments like treasury
warrants so Metrobank cannot contend that by indorsing the
warrants in general, Golden Savings assumed that they were
genuine and in all respects what they purport to be.
The indorsement was made by Gloria not for the purpose of
guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing.
No. The treasury warrants are not negotiable instruments. Clearly
stamped on their face is the word: non negotiable.” Moreover, and
this is equal significance, it is indicated that they are payable from
a particular fund, to wit, Fund 501. An instrument to be negotiable
instrument must contain an unconditional promise or orders to pay
a sum certain in money. The indication of Fund 501 as the source
of the payment to be made on the treasury warrants makes the
order or promise to pay “not conditional” and the warrants
themselves non-negotiable. There should be no question that the
exception on Section 3 of NIL is applicable in the case at bar.
5. Why was the secretary persistent? In order to be cleared and
to allow Mr. Gomez to withdraw
6. What was the term used in the case? Exasperated.
Metrobank did not wait until the treasury warrants had been
cleared because it was exasperated over the persistent
inquires of Gloria Castillo about the clearance and wanted to
“accommodate” a valued client.
7. What was the reason why it was not cleared? There was
forgery in the signatures of some payees
8. What did the SC discuss about the nature of treasury
warrants? “The treasury warrants are not negotiable
instruments. Clearly stamped on their face is the word: non
negotiable.” Moreover, and this is equal significance, it is
indicated that they are payable from a particular fund, to wit,
Fund 501. An instrument to be negotiable instrument must
contain an unconditional promise or orders to pay a sum certain
in money. As provided by Sec 3 of NIL an unqualified order or
st
promise to pay is unconditional though coupled with: 1 , an
indication of a particular fund out of which reimbursement is to
be made or a particular account to be debited with the amount;
nd
or 2 , a statement of the transaction which give rise to the
instrument. But an order to promise to pay out of particular fund
is not unconditional. The indication of Fund 501 as the source
of the payment to be made on the treasury warrants makes the
order or promise to pay “not conditional” and the warrants
themselves non-negotiable. There should be no question that
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
the exception on Section 3 of NIL is applicable in the case at
bar.”
However, not all treasury warrants are non-negotiable, it was
only in that case that such were payable out of a particular fund
making it non-negotiable.
9. What if the NI reads, “To: X Pay P10,000 to the order of X
and reimburse yourself from my account with you”, is this
negotiable? negotiable now (Sec 3a). the condition is imposed
not on the order to pay but on the reimbursement which has
nothing to do with the NI anymore
10. What other instruments were discussed by the SC in the
cases in our syllabus that were considered non-
negotiable?
1. Postal money orders (Phil. Education Co. Inc v Soriano)
- Not negotiable because the money order was for a public
benefit in the exercise of a governmental function and it is
not for commercial transactions.
ü For an instrument to be negotiable, it must be used
for commercial transactions so sir emphasizes the
need to include this in the definition as provided in
Section 1
- Not negotiable because postal money orders are not
unconditional promises because it is subject to the
restriction of not having more than one indorsement. It is
payable only to the person specified therein and not
payable to order or bearer.
Phil. Education Co. Inc v Soriano
FACTS:
In April 1958, a certain Enrique Montinola was purchasing ten
money orders from the Manila Post Office. Each money order was
worth P200.00. Montinola offered to pay the money orders via a
private check but the cashier told him he cannot pay via a private
check. But still somehow, Montinola was able to leave the post
office with the money orders without him paying for them.
Days later, the missing money orders were discovered. Meanwhile,
the Philippine Education Co., Inc. (PECI) presented one of the
missing postal money orders before the Bank of America, as it was
received by it as part of its sales receipts. The money order was
initially credited and so P200.00 was deposited in PECI’s account
with the bank. But then later the post office, through Mauricio
Soriano (Chief of the Money Order Division of the Post Office),
advised the bank that the money order was irregularly issued
hence the P200.00 was debited back from PECI’s account.
PECI is now invoking that the money order was duly negotiated to
them and thus they are entitled to the amount it represents.
ISSUE:
Whether or not postal money orders are negotiable instruments.
HELD:
No. Postal money orders are not negotiable instruments. The
rationale behind this rule is the fact that in establishing and
operating a postal money order system, the government is not
engaging in commercial transactions but merely exercises a
governmental power for the public benefit. In fact, postal money
orders are subject to a lot of restrictions limiting their negotiability.
2. Special withdrawal slips (Firestone Tire and Rubber Co. v
CA)
- SC said special withdrawal slip is not a NI, although SC did
not get to discuss further
6
- Withdrawal slips only become NI if it is seen that the funds
to which they are to be withdrawn from have sufficient funds
to cover the amount
Firestone Tire and Rubber Co. v CA
FACTS:
Fojas Arca and Firestone Tire entered into a franchising agreement
wherein the former had the privilege to purchase on credit the
latter’s products. In paying for these products, the former could pay
through special withdrawal slips. In turn, Firestone would deposit
these slips with Citibank. Citibank would then honor and pay the
slips. Citibank automatically credits the account of Firestone then
merely waited for the same to be honored and paid by Luzon
Development Bank. As these were the circumstances, Firestone
believed in the sufficient funding of the slips until there was a time
that Citibank informed it that one of the slips was dishonored. It
wrote then a demand letter to Fojas Arca for the payment and
damages but the latter refused to pay, prompting Firestone to file
an action against it.
ISSUE:
WON LDB should be held liable for damages suffered by
Firestone, due to its allegedly belated notice of non-payment of the
subject withdrawal slips? NO
RULING:
The withdrawal slips, at the outset, are non-negotiable. The
essence of negotiability which characterizes a negotiable paper as
a credit instrument lies in its freedom to be a substitute for money.
The withdrawal slips in question lacked this character. Hence, the
rule on immediate notice of dishonor is nonapplicable to the case
at hand. Thus, the bank was under no obligation to give immediate
notice that it wouldn't make payment on the subject withdrawal
slips. Citibank should have known that withdrawal slips are not
negotiable instruments. It couldn’t expect then the slips be treated
like checks by other entities. Payment or notice of dishonor from
LDB couldn’t be expected immediately in contrast to the situation
involving checks. Citibank generally was not bound to accept the
withdrawal slips as a valid mode of deposit. Nonetheless, it
erroneously accepted the same as such and thus, must bear the
risks attendant to the acceptance of the instruments. Firestone and
Citibank could not now shift the risk to LDB for their committed
mistake.
3. Pawn tickets (Serrano v CA)
Serrano v CA
FACTS:
Serrano purchased jewelry from Ribaya worth 48,500. She then
pawned this through her secretary, Rocco, who absconded with
the amount and the pawn ticket which stipulated that it was
redeemable “on presentation of the bearer.” Serrano was then
informed 3 months later that the same ticket was being sold by
Long Life Pawnshop. She proceeded to the shop and informed the
Pawnbroker and GM of Long Life, Yu An Kiong, of her predicament
and asked him to hold on to the jewelry. Serrano went to the Manila
Police Department to report the loss and to file a complaint for
qualified theft which was later changed to Estafa against Rocco.
On the same day, Detective Mateo went to the pawnshop and
informed the Pawnbroker of the complaint and asked the latter to
notify the police in case the jewelry was redeemed. However, the
day after, the GM permitted a certain Tomasa de Leon to redeem
the Jewelry as she was holding the appropriate pawnshop ticket,
to redeem the jewelry.
ISSUE:
WON the pawn ticket was a negotiable instrument? NO
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
HELD:
Yu An Kiong, the pawnbroker, was informed by both Serrano and
police that the jewelry was stolen or involved in an embezzlement
of the proceeds of the pledge. Thus, he became duty bound (Art
21, NCC) to hold the jewelry and give notice to both Serrano and
the police. That the pawn ticket stated that the pawn was
redeemable by the bearer, did not dissolve this duty. Yu An Kiong
was, of course, entitled to demand payment of the loan extended
on the security of the pledge before surrendering the jewelry, upon
the assumption that it had given the loan in good faith and was not
a “fence” for stolen articles and had not conspired with Rocco or
de Leon. He acted in reckless disregard of that duty in the instant
case and must bear the consequences, without prejudice to its
right to recover damages from Rocco. Moreover, the SC held that
the pawn ticket was not a Negotiable Instrument under the NIL. Nor
was it a Negotiable Document under Article 1507 of the Civil Code
because a pawn ticket is an evidence of the contract of pledge and
should be governed by the rules on pledge.
11. What if the NI reads, “I promise to pay A or his order
P10,000 on or before August 16, 2018 and reimburse
yourself from my salary”, does it change anything from the
previous example? Yes, in this case, it makes the document
negotiable. The reimbursement is not based on the particular
fund. It does not affect the promise which is still considered
unconditional.
12. What if the NI reads, “I promise to pay A or his order
P10,000 on or before August 16, 2018 based on the terms
of our contract”, is it negotiable? No, not negotiable. As
provided in Sec 3(b), the statement of the transaction which
gives rise to the instrument still renders it negotiable but not
when the instrument says BASED on the terms of their
transactions. There is a condition that is placed on the promise
or order to pay. You will have to resort to extrinsic evidence
before you are able to determine if it is a negotiable instrument.
13. What if the NI reads, “To: X Pay P10,000 to the order of A
based on our contract”? Negotiable. it merely says that the
instrument was because of the contract Y had with X. Lahi if
muingon ka’g based on the terms of our contract.
(from 403)
14. What if the NI reads, “I promise to pay A or his order
P10,000 on or before August 16, 2018 if I die”, is that
negotiable? Not negotiable because you are not certain if you
will really die on or before August 16, 2018
15. What if it says if you die of cancer (repeated na ni)? Still
conditional because not everyone is sure to die of cancer.
7
August 20, 2018
1. Give an example of a BOE—“To A. Pay to the order of X
P10,000. Sgd B”. What do we mean by sum certain in
money? There is clarity as to the amount to be received by the
holder of the instrument. You can determine the amount on its
face or that which can be computed without resorting to any
extrinsic evidence
Sec. 2. When 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 a
current rate
(e) with costs of collection or an attorney’s fee,
incase payment shall not be made at maturity
With interest
1. “To A. Pay to the order of X P10,000 with interest. Sgd B”.
Is that negotiable? Yes, even if there was no indication as to
the rate of interest, it is presumed to be paid with the legal
interest of 6% (BSP Circular 799, Series of 2013; took effect on
July 1, 2013).
Even if an interest rate is added, it still complies with the
requirement that it is a sum certain in money because
additional statements with legal interest does not affect the
negotiability of the NI. However, if there is no specific legal
interest rate, it is still a common commercial knowledge that the
legal interest rate is at 6%.
Herein, because there is no date of the instrument stated, it is
deemed dated on the date of first issuance. Without a date
when the instrument matures, it is deemed payable on demand.
The interest is computed as 6% per annum from default. This
is computed through PRT (principal x rate x time) where Time
is reckoned from the date of the issuance up to the date of the
default.
2. What is the rationale of the law to still regard the sum as
certain when the interest rate is not given? Because the rate
of interest is considered to be understood as the legal rate as
provided in BSP Circular 799. It is a common commercial
knowledge. So, di ra ka kailangan muresort to extrinsic
evidence.
As to Installments
- should specify amount of installment; AND
- specific due date of each installment
3. “To A. Pay to the order of X P10,000 payable in 2 equal
monthly installments”. Sgd B”. Is that negotiable?
(SAME AS THIS)
4. What if the NI reads, “I promise to pay A or his order
P10,000 in 2 equal monthly installments”, is that
negotiable?
No, not negotiable. It does not contain a due date for each
monthly installment. It should contain exact dates, along with
the amount to be paid on each installment date. IOW, there is
no definite date as to payment
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
In the previous example, it says “in 2 equal monthly
installments”, is that enough to know the amount of
installment due? Yes, because 10k divided in 2 equal monthly
installments is 5k so mahibawan ra. But ang problem lang jud
didto na example is that walay due date for each monthly
installment even if you can really ascertain the value to be paid
5. What is the rule then on what should be contained in an NI
with stated installments to be negotiable? It should state the
amount of installment due and due date.
6. Can you not make it payable on demand? That rule doesn’t
apply in installments because there is “monthly”. That indicates
that it is not undated. Monthly pa na, di jud gihapon ka kibaw
when ka musugod pay. What if I’ll pay on December 1 pa.
How would you correct it? “To A. Pay to the order of X
P10,000 payable in 2 equal monthly installments due on
September 1, 2018 and October 1, 2018. Sgd B”.
If you only state “Sept 1”, many would believe na sufficient na
siya. BUT the phrase does not say SUCCESSIVE MONTHLY
INSTALLMENTS so naa gihapon uncertainty as to the due
date. It must be a provision that does not leave room for
interpretation.
Note: If the instrument does not contain a date, it is now
presumed as payable on demand.
As to default in payment of installment
7. What if the NI reads, “TO BPI: Pay Ms. A or order P10,000
on equal installments on Dec 1, 2018 and Jan 1, 2019. Upon
default, the entire amount must be paid”, is that
negotiable? Yes, it is negotiable. It does not affect negotiability
if there is a provision that says the whole amount will become
due when there is default.
Acceleration clause
8. What is an acceleration clause? When you default in one
installment, the whole amount becomes due.
9. Does that affect the certainty of the sum? No, it will not affect
because acceleration clause only applies when there is default.
It does not make an instrument payable upon contingency
because the time of payment will surely come.
Note: Acceleration at option of holder—instrument is non-
negotiable.
As to exchange
- Specify:
ü Currency
ü Exchange rate
- Denomination or currency must be stated
10. Does that the exchange stipulation applicable both inland
and foreign bills? Yes, the law was superseded in the sense
that you can transact other than Philippine peso. But
historically, this provision was only made to apply with foreign
bills.
11. “To A. Pay to the order of X P10,000 based on the current
rate”. Sgd B”. Is that negotiable?
(SAME AS)
12. What if the NI reads, “TO BPI: Pay Ms. A or order P10,000
based on the current exchange rate on August 16, 2018”,
8
is that negotiable? No, not negotiable. it may comply with
stating “current exchange rate” but it does not state a currency.
For there to be an exchange rate, you must know the
currencies involved.
It should read as, “TO BPI: Pay Ms. A or order P10,000 based
on the current exchange rate on August 16, 2018 of
Philippine Peso to US Dollars” and “To A. Pay to the order
of X P10,000 based on the current rate of Philippine Peso
to USD”. Sgd B”.
As to attorney’s fees
- Not affect negotiability when there is an imposition of
attorney’s fee, it presupposes that the obligation has become
due and demandable. Once due and demandable, it ceases
to be negotiable. The stipulation of attorney’s fee and
collection cost becomes irrelevant to an already-non-
negotiable instrument
13. What if the NI reads, “TO BPI: Pay Ms. A or order P10,000
based on the current exchange rate on August 16, 2018
and attorney’s fees”, is that negotiable? Not negotiable
because first, there is no currency specified, and the stipulation
of attorney’s fees does not depend on the maturity of the
instrument. Attorney’s fees should only be made payable when
payment is not made at maturity, otherwise it renders the sum
not certain in money already.
14. “To A. Pay to the order of X P10,000 with 15% attorney’s
fees if not paid at maturity.” At the date of maturity, is this
NI still negotiable? Yes, it is negotiable. The sum is certain in
money, 10k up to maturity. “Upon maturity” without a date is
still considered payable on demand. Again, here there is no
relevance for certainty in sum after maturity kay di naman
negotiable ang NI.
For the NI to be negotiable containing Attorney’s fees, it
should only be applicable if not paid after maturity.
Otherwise, it renders the sum uncertain. It is negotiable
only because the instance happens after the maturity of
the instrument. The sum may not be certain but because it
happens after maturity, it is already a non-issue.
15. Is there an instance when attorney’s fees is present even
before maturity? Yes, when the instrument is stolen. Nya ma
forced mo to go into legal conflicts because of it
Sec. 7. When payable on demand—An instrument is payable
on demand:
(a) when it is so expressed 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.
16. (From 403) What if the NI reads, “I promise to pay A or
bearer 10,000”, is that negotiable? Not negotiable, there is
no currency indicated
17. (From 403) What if the NI reads, “I promise to pay A or
bearer P10,000”, is that negotiable? Now negotiable. Even
if there is no date indicated, it is deemed payable on demand
Payable on demand
EXPRESSED to be payable on demand
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
18. What if the NI reads, “I promise to pay A or bearer
P10,000 upon demand”, is that negotiable? Yes, it is
negotiable and is payable on demand as it is expressed on
the NI. Even if walay upon demand, considered gihapon na
payable on demand because of Sec 7(b).
At sight
- Payable as soon as it is seen by the party primarily liable
(drawee)
- Applies only to BOE
- This is when it is presented to the drawee for acceptance.
What is required is that it is to be presented for acceptance.
19. Is “at sight” only applicable to BOE? At sight is for
presentment of acceptance. So, it is only applicable to BOE
where there is a drawee. It then cannot be applied to a PN.
whereas PRESENTATION is applicable to both—PN and
BOE
On presentation
- When the NI is presented to the drawee or maker for payment
- Both PN and BOE
No time for payment is expressed
20. What if the NI reads, “I promise to pay A or bearer
P10,000”, is that negotiable? Yes, it is negotiable even
without a date indicated. It is presumed as payable on
demand.
An instrument which is overdue
- When the instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting or
indorsing it, payable on demand
- It only payable on demand to those persons:
ü Issuing
ü Accepting
ü Indorsing
- When someone negotiated the NI now, indorsed it or incase
of BOW, someone must have accepted it even the date
stated has already lapsed, then the NI is deemed payable on
demand.
- Usually predicated on a certain event not known to the one
issuing, accepting or indorsing. The payment cannot be
demanded right then and there because since they do not
know that the certain event already happened, it is not
considered payable on demand
“To A. Pay to the order of X P10,000 upon demand” or even
without “upon demand” it is still payable on demand.
What is the implication of this last paragraph on section 7? It
only refers to immediate parties. It is payable on demand only to
certain parties. Immediate parties are those who are privy to the
transactions.
9
August 23, 2018
21. “I promise to pay X or bearer P1M. Sgd by B”.
Negotiable? What kind of instrument? Negotiable
instrument, bearer and demand instrument
22. “I promise to pay X or bearer P1M on August 1,2018. Sgd
by B” What happens to the instrument now? When B
made that instrument on August 2, 2018, it is as to him
payable on demand. Also, even when issued by X to another
person, Y after that date, it is as to him payable on demand
because nilapas naman sad si August 1, 2018
Payable at a fixed time
“To A. Pay to the order of B the amount of P10k on December 25,
2018. Sgd C”
Sec. 4. Determinable future time; what constitutes. – An
instrument is payable at a determinable future time, within the
meaning of this Act, which expressed to be payable:
(a) at a fixed period after date or sight
(b) on or before a fixed or determinable future time
specified therein;
(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
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect.
Payable at a determinable future time
At a fixed period after date or sight
23. What if the NI reads, “I promise to pay A or bearer
P10,000, 30 days after date”, is that negotiable? Yes,
negotiable. Date here means the date of instrument. When
there is no date indicated, it pertains to the date when the
instrument was issued. You don’t have to mention another
date in the terms of the instrument because “date” here is the
date of the Instrument as indicated (usually sa top)
On or before a fixed or determinable future time
Example:
On or before a fixed future time
“I promise to pay A or bearer P10,00 on or before Dec 10, 2018”
“I promise to pay A or bearer P10,00 on or before Christmas Day
2018”
On or before a determinable future time (sayop daw ang example
ni De Leon)
“I promise to pay A or bearer P10,00 on or before 10 days before
Christmas 2018”
On or at a fixed period after the occurrence of a specified
event which is certain to happen
Example:
The NI reads, “I promise to pay A or bearer P10,000, 15 days after
his father’s death”
Herein, it is determinable since the event of his father’s
death is certain to happen.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
24. What if the NI reads, “I promise to pay A or bearer
P10,000, 5 days before his death”, is that negotiable? Not
negotiable. The law states AFTER the occurrence of a
specified event certain to happen. (Also, unsaon nimo
pagkahibaw 5 days before his death..)
Here, the sum will always be overdue. By the time of his
death, the period to pay has already lapsed
25. (From 403) What if the NI reads, “I promise to pay A or
bearer P10,000, 5 days after his death from malaria”, is
that negotiable? Not negotiable. The death is predicated
that it be caused by malaria which qualifies as a condition not
certain to happen.
Sec. 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 or to his order. It may be drawn payable to
the order of:
(a) Payee who is not the maker, drawer or drawee
(b) Drawer or maker
(c) Drawee
(d) 2 or more payees jointly
(e) One or some of several payees
(f) Holder of an office for the time being
Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable
certainty.
26. What are the forms of an order instrument? (1) payable to
the order of a specified person (e.g. pay to the order of X);
and (2) or to him or his order (e.g. pay X or his order)
10
August 28, 2018
DISCUSSION ONLY (MAKEUP CLASS)
Sec. 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 or to his order. It may be drawn payable to
the order of:
(a) Payee who is not the maker, drawer or drawee
(b) Drawer or maker
(c) Drawee
(d) 2 or more payees jointly
(e) One or some of several payees
(f) Holder of an office for the time being
Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable
certainty.
27. Who are the possible payees of an order instrument?
(a) Payee who is not the maker, drawer or drawee
(different parties are involved)
“To A. Pay to the order of B the amount of P10k. Sgd C”
“I promise to pay to the order of B the amount of P10k.
Sgd C”
(b) Payee is the Drawer or maker
“To A. Pay to the order of C the amount of P10k. Sgd C”
“I promise to pay to the order of C the amount of P10k.
Sgd C”
(c) Payee is the Drawee
“To A. Pay to the order of A the amount of P10k. Sgd C”
(d) Payee are 2 or more payees jointly (both the payees
will have to sign the NI when they want to negotiate
since NI’s have to be negotiated in its entirety)
“To A. Pay to the order of B and D the amount of P10k.
Sgd C”
“I promise to pay to the order of B and D the amount of
P10k. Sgd C”
(e) Payee are one or some of several payees
“To A. Pay to the order of B or D the amount of P10k. Sgd
C”
“I promise to pay to the order of B or D the amount of
P10k. Sgd C”
(f) Payee is the Holder of an office for the time being
“To A. Pay to the order of the President of the USC Lex
Circle (A.Y. 2018-2019) the amount of P10k. Sgd C”
“I promise to pay to the order of the President of the USC
Lex Circle (A.Y. 2018-2019) the amount of P10k. Sgd C”
The payee has to be indicated therein with reasonable
certainty, otherwise, the instrument may be a bearer
instrument or not negotiable for failure to comply.
- Best to indicate the position of the person to comply with the
requisite that the payee is named with reasonable certainty
Sec. 9. When payable to bearer—The instrument is payable to
bearer:
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
(a) When it is expressed to be so payable
(b) When it is payable to a person named therein or
bearer
(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
(d) When the name of the payee does not purport to
be the name of any person
(e) When the only or last indorsement is an
indorsement in blank
(A and B are the only true bearer instruments; C, D, and E are
order instruments but defective)
When it is expressed to be so payable
“To A. Pay to bearer the amount of P10k. Sgd C”
“I promise to pay the bearer the amount of P10k. Sgd C”
When it is payable to a person named therein or bearer
To A. Pay to X or bearer the amount of P10k. Sgd C”
“I promise to pay X or bearer the amount of P10k. Sgd 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
- Person has to know the person is fictitious or non-existing. If
he really believed the person exists, it will be non-negotiable
because no person can then negotiate it
- Must be the intention of the person making it negotiable as a
bearer instrument
When the name of the payee does not purport to be the name
of any person
- “Pay to Cash”—no word of negotiability, therefore non-
negotiable. It should have been “PAY TO THE ORDER OF
CASH”
When the only or LAST indorsement is an indorsement in
blank
- Order instrument in its face without a doubt but it so
happened that the last person who negotiated failed to
indicate the payee for the next negotiation. By such, the order
instrument is converted into a bearer instrument
- Operative word is LAST! If the last indorsement is not in
blank, then Sec 9 is not applicable
- “once a bearer instrument is always a bearer instrument”—
only applies when the NI is a bearer instrument in the first
place
- indorsement is usually found at the back (at the back no need
to put words of negotiability anymore)
ü ONLY THE FACE OF THE INSTRUMENT
DETERMINES NEGOTIABILITY
- Striking out—usually true when there is a blank indorsement
where all other indorsements after the blank indorsement are
stricken out (to be discussed later)
“Payable to the order of bearer”
- Can fall under “D” as the bearer does not purport to be the
name of anyone and it is the bearer who will negotiate.
Caltex v CA
(not discussed)
Facts:
Security bank issued Certificates of Time Deposits to Angel dela
Cruz. The same were given by Dela Cruz to petitioner in
connection to his purchase of fuel products of the latter. On a later
date, Dela Cruz approached the bank manager, communicated the
loss of the certificates and requested for a reissuance. Upon
11
compliance with some formal requirements, he was issued
replacements.
Thereafter, he secured a loan from the bank where he assigned
the certificates as security. Here comes the petitioner, averred that
the certificates were not actually lost but were given as security for
payment for fuel purchases. The bank demanded some proof
of the agreement but the petitioner failed to comply. The
loan matured and the time deposits were terminated and then
applied to the payment of the loan. Petitioner demands the
payment of the certificates but to no avail.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the
sum of
PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 &
00 CTS Pesos, Philippine Currency, repayable to said depositor
731 days.
after date, upon presentation and surrender of this certificate, with
interest
at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
—————————— ———————————
AUTHORIZED SIGNATURES
Held:
CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor.
And who, according to the document, is the depositor? It is the
"bearer." The documents do not say that the depositor is Angel de
la Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are to be
repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount
to Angel de la Cruz only, it could have with facility so expressed
that fact in clear and categorical terms in the documents, instead
of having the word "BEARER" stamped on the space provided for
the name of the depositor in each CTD. On the wordings
of the documents, therefore, the amounts deposited are
repayable to whoever may be the bearer thereof.
Thus, petitioner's aforesaid witness merely declared that Angel
dela Cruz is the depositor "insofar as the bank is concerned,"
but obviously other parties not privy to the transaction between
them would not be in a position to know that the depositor is not
the bearer stated in the CTDs. Hence, the situation would require
any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of
the parties thereto through facts aliunde. This need for resort to
extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the
elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
The next query is whether petitioner can rightfully recover on the
CTDs. This time, the answer is in the negative. The records reveal
that Angel de la Cruz, whom petitioner chose not to implead in this
suit, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose
and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in
reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered
as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner's own
authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent
Security Bank Caltex Credit Manager, wrote: "...These
certificates of deposit were negotiated to us by Mr. Angel dela
Cruz to guarantee his purchases of fuel products." This
admission is conclusive upon petitioner, its protestations
notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying
thereon
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; or
(b) Does not specify the value given, or that any value
has been given therefor; or
(c) Does not specify the place where it is drawn or the
place where it is payable; or
(d) Bears a seal; or
(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 statue
requiring in certain cases the nature of the consideration to
be stated in the instrument.
If there is an omission that does not affect Section 1 then it does
not affect the instrument’s negotiability.
It is not dated;
Don’t confuse the date of the NI (when the NI was made, drafted
or issued) and the date of maturity. Remember also the
presumption that if the NI is undated, the date of the NI is the date
of its issuance. As to negotiability, the fact that the NI is undated
does not affect negotiability.
Does not specify the value given, or that any value has been
given therefor
The NI is presumed to have been issued or negotiated for a
consideration. It does not matter if the consideration is mentioned
or not in the NI. Consideration is presumed.
Does not specify the place where it is drawn or the place
where it is payable
For a BOE, the debtor is the passive party. As discussed in
Oblicon, the debtor is the passive party while the creditor is the
active party. The debtor is the passive party because he will merely
wait until the creditor collects the credit. Herein, it is the drawee or
maker who is principally liable for the NI. If no place of payment is
indicated, it is understood as the debtor’s place of residence or
business.
12
Bears a seal
Seal is not usually practiced here but in the UK (where we copied
our law).
Designates a particular kind of current money in which
payment is to be made
If you want the obligation to be paid in another currency, then it will
still not render the NI non-negotiable
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 thereof.
You can always make use of the words, “holder”, “possessor”
instead of bearer. You can use “acknowledge to pay”, “bind to pay”
instead of promise. For as long as naay words of negotiability then
it is a NI that complies with Section 1. (Ang important ra jud is that
the terms used in the NI complies with the requisites in Section 1)
Sec. 11. Date, presumption as to. — Where the instrument or
an acceptance or any indorsement thereon is dated, such date
is deemed prima facie to be the true date of the making,
drawing, acceptance or indorsement, as the case may be.
If the NI is UNDATED, there is a presumption that when the NI or
its acceptance or any indorsement thereon is dated, that date is
the true date.
If the NI, however is DATED, then that is considered the true date
of the NI, like if there is a date indicated or written on the instrument
for its acceptance, indorsement or issuance. Whatever is stated
there then we presume na mao na ang true date. Only when the
NI is undated na Sec 11 applies.
Ang problem is when the NI is undated and someone else inserted
a wrong date, this will affect the rights of parties.
What if the parties wanted to antedate the NI? It is allowed and
does not affect negotiability. Same as when the parties agreed to
postdate it. Antedating or postdating is valid and does not affect
negotiability EXCEPT when it is used for an illegal or fraudulent
purpose. An illegal purpose is apparent is antedating when you
want to impose an increase of payment for interest. An illegal
purpose for postdating is when you want to make it seem you had
sufficient funds in your account at that time when you issued the
check when you did not have any (see BP 22). These will render
the instrument INVALID but still NEGOTIABLE. Certain rights can
still arise from it.
Insertion of wrong date (PERSONAL)
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.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
There are 2 instances when the date of the instrument may be
inserted:
- Where an instrument expressed to be payable at a fixed period
after date is issued undated
- Where the acceptance of an instrument payable at a fixed
period after sight is undated
It is important to indicate the date of the NI to know the
maturity date of the NI.
“I promise to pay C or order P1M 10 days after date. Sgd. Y”
- here “after date”, we don’t even know the date of the NI so we
need to insert it
- the authority is not a blanket authority. It is only an authority to
put a true date on the NI
- Sec 13—“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”
ü So who is the holder in due course?
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 been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
All conditions in Sec 52 MUST concur; must memorize Sec 52
- In the exam, you would have to determine if the holder is a
holder in due course BUT ALSO REMEMBER SEC 59, where
every holder is presumed to be a HIDC
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, 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 rules does
not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.
EXAMPLE:
“I promise to pay C or order P1M 10 days after date. Sgd. Y”
Flow of negotiation:
Y—X—A (wrongly added the wrong date August 20) – B—C—
D to its tenor, and that if it be dishonored and the necessary
Here, there was an insertion of a wrong date by A. In the exam,
Atty. will ask the rights of D in relation to the other parties.
We have to take note of the different parties:
Prior Parties before the defect—Y, X (parties before the defect)
Perpetrator—A (perpetrator of the defect)
Subsequent Parties—B, C (parties after the defect)
This is when we determine what kind of defense is insertion
of wrong date?
ü What is a personal defense?
A defense that CANNOT be raised against a HIDC
ü What is a real defense?
A defense that CAN be raised against all holders
13
In that case, we can presume that D is a HIDC
ü there is no other information provided so the presumption
(Section 59) applies. Therefore, as to him the NI is valid
and whatever the date is in the NI, that is to him the true
date
D can ask payment from Y because D is a HIDC. Y cannot
refuse payment because Y cannot raise the personal defense
of insertion of wrong date.
X cannot refuse payment. He still cannot raise the personal
defense of insertion of wrong date
A is the party AT THE DEFECT. He cannot raise defenses
anymore because ONLY PARTIES BEFORE THE DEFECT
CAN RAISE DEFENSES.Moreover, A has to be held liable
because he is the perpetrator and should be penalized for the
consequences of his action. Ultimately, siya ang liable
B and C can still be liable to pay but because they are parties
after the defect, they cannot raise the personal defense
anymore. So you go to the warranties (Sec 66). They are made
liable for the general warranties that they made as a general
indorser.
Sec. 65. Warranty where negotiation by delivery, and so forth.
— Every person negotiating an instrument by delivery or by a
qualified indorsement warrants —
(a) That the instrument is genuine and in all respects
what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee. The provisions of subdivision (c) of this section do
not apply to persons 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; and
(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
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.
START OF RECITATIONS
1. What if D is NOT A HOLDER IN DUE COURSE? What
are his rights in relation to prior parties?
Assuming that C is a HIDC, then we can say that D becomes
a holder through a holder in due course.
However, if C is proven not to be a HIDC then the shelter
principle does not apply. In that case (C and D are not
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
holders in due course)—
Y can raise the personal defense of insertion of wrong date
since D is not a holder in due course. Y can refuse payment
X has the same liability as Y (raise the personal defense of
insertion of wrong date)
D can go after the 3 parties. A is the one ultimately liable
because he is the perpetrator of the fraud and must be
penalized for all consequences of his action
B and C can be made liable because they made the general
warranties under Section 66
2. What do you understand of shelter principle? (second
sentence of Sec 58)
Sec. 58. When subject to original defenses. — 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
illegally 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 (2 things must
concur)
ü He must derive title from a HIDC
ü He himself must not be a party to the fraud or illegality
- there must be another analysis in determining if the holder is
not in due course or whether he complied with the requisites
under Sec 58. SEE IF THE SHELTER PRINCIPLE IS
APPLICABLE so the holder can exercise the same rights as
the HIDC
ü So basically, see first if the holder is a holder in due
course as when all the facts given make it clear that he is
a Holder in Due Course
ü If the facts are incomplete or insufficient to conclude he is
a HIDC, see if the presumption under Sec 59 applies
ü If it does not, see if the immediate prior party before him
was a HIDC and whether the shelter principle can apply,
so he can be a Holder through a Holder in Due Course
ü Lastly, if dili na jud—then maybe he really is not a Holder
in Due Course (therefore a Holder Not in Due Course)
3. In the same example above, can the shelter principle
apply to D? D derived his title from C and C is presumed
a HIDC. Provided, D is not a party to the fraud or illegality,
he may enjoy the rights under Sec 58. The shelter
principle may apply. D is a holder through a holder in due
course.
4. So what are D’s rights pertaining to prior parties (so
if D is a holder through a holder in due course)?
Y and X cannot raise the personal defense of insertion of
wrong date since D is a holder through a holder in due
course. Y and X cannot refuse payment
A is the one ultimately liable because he is the perpetrator
of the fraud and must be penalized for all consequences
of his action
B and C can be made liable because they breached their
warranties as general indorsers
5. What if C is not a HIDC? Will your answer change?
14
Yes, D will not be considered a holder through a holder in
due course. Considering that C is not a holder in due
course, the shelter principle cannot apply to favor D.
6. What will be D’s rights if the shelter principle does not
apply?
D cannot demand payment from Y and X since they can raise
the personal defense of insertion of wrong date. Y and X can
refuse payment
A is the one ultimately liable because he is the perpetrator of
the fraud and must be penalized for all consequences of his
action.
D can demand payment from B and C at the maturity of the
instrument, referring to the “wrong” date indicated as the true
date. They are made liable because of the general warranties
they made that the instrument is genuine and in all respects
what it purports to be (warranty includes intending the date
wrongfully inserted as the true date as against them)
Remember:
- PARTIES PRIOR TO THE DEFECT—can raise the
defenses
- PARTIES AFTER THE DEFECT—cannot raise the
defenses (can be made liable on the general warranties
made by them; Sec 65-66)
ü HERE, A, B and C as general indorsers, warrant that
the instrument is genuine and in all respects what it
purports to be.
7. How will that change if it is a bearer instrument? The
presumption is D is a holder in due course absent any
other information.
D will go after Y because Y is the one primarily liable. D
has to go after Y first kay siya man liable on payment. Y
cannot raise the personal defense of insertion of wrong
date because D is a holder in due course.
NO more relation to X and B as they are strangers to the
transaction since this is a BEARER INSTRUMENT. The
negotiation is by delivery. Do you think D would know X,
A and B? Their names won’t be seen at the back of the
instrument. X, as the payee does not even know you. He
did not extend any warranties to you. It is only C who
extended such warranties to D as the instrument here is
negotiated by mere delivery.
If it is a bearer instrument, you can only go after the
immediate transferor and the only exception is the
party who is primarily liable. D can only go after C
because he is the one who delivered the instrument to
him (see Sec 65, par 2).
Sec. 65 par 2— But when the negotiation is by
delivery only, the warranty extends in favor of no
holder other than the immediate transferee. The
provisions of subdivision (c) of this section do not
apply to persons negotiating public or corporation
securities, other than bills and notes.
D can go after A because he is the perpetrator of the fraud
and must be penalized for all consequences of his action.
A is the one ultimately liable.
8. What if D is not a holder in due course and the shelter
principle does not apply?
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
D will go after Y because Y is the one primarily liable.
However, Y can now raise the personal defense of
insertion of wrong date because D is a holder not in due
course.
NO more relation to X and B as they are strangers to the
transaction since this is a BEARER INSTRUMENT. The
negotiation is by delivery. They did not extend any
warranties to D. It is only C who extended such warranties
to D as the instrument here is negotiated by mere
delivery.
D can only go after C because he is the one who delivered
the instrument to him (see Sec 65, par 2) and extended
warranties to him.
D can go after A because he is the perpetrator of the fraud
and must be penalized for all consequences of his action.
A is the one ultimately liable.
15
September 3, 2018 (Activity)
September 4, 2018
9. What is the rule on the insertion of a wrong date?
There are 2 instances when the date of the instrument may be
inserted:
- Where an instrument expressed to be payable at a fixed
period after date is issued undated
- Where the acceptance of an instrument payable at a fixed
period after sight is undated
It is important to indicate the date of the NI to know the
maturity date of the NI. The true date must be inserted. The
problem arises when the wrong date is the one inserted.
When a wrong date is inserted on the instrument, it is to be
regarded as the true date with regard the HIDC.
The effect of the wrong date is that it will not avoid the
instrument in the hands of the HIDC. Because the insertion of
the wrong date does not avoid the instrument, that means the
personal defense of insertion of a wrong date cannot be
interposed on a HIDC
10. Example of an instrument of which we can insert a
date. Give all the facts.
“I promise to pay X or order P10k 30 days after date.
Sgd. Y”
Y—X—A (inserted the wrong date of August 16, 2018,
true date is September 4, 2018 ) —B—C
Basically:
True date: September 4 (Maturity: October 4)
Inserted date: August 16 (Maturity: September 16)
In effect, the liability of Y to pay becomes earlier
because of the inserted wrong date
ü C is presumed a holder in due course—
C may collect from Y on September 16, 2018 even though
the true maturity date is still on October 4, 2018. Y cannot
refuse payment because he cannot set up the personal
defense of insertion of a wrong date against C because C
is a holder in due course. X cannot also refuse payment
for the same reason.
B can be made liable for payment because of the warranty
he made as a general indorser that the instrument is
genuine and in all respects, what it purports to be.
A is held ultimately liable because he is the perpetrator of
the fraud and should be held liable for all the
consequences of his actions. A is also liable because he
warranted the same warranties as B as a general indorser.
11. Will your answer change if C knows the defect when
it was negotiated to him? No, C still enjoys all the rights
of a HIDC because absent any other fact, B is presumed
a HIDC so the shelter principle as to C will apply, making
C a holder through a holder in due course
12. If B knows about the defect and C knows about it at
the time it was negotiated, will your answer change?
Yes, C becomes a HNIDC. In that situation, Y and X can
set up the personal defense of insertion of a wrong date
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
because C is not a HIDC.
B can still be held liable for the warranties he made as a
general indorser.
A is also liable because he is the perpetrator of the fraud
and he warranted the same as B as a general indorser.
13. If this is a bearer instrument, how will your answer
change? It will change the effect upon X because X is not
the immediate transferor to C. X, not the immediate
transferor, he does not warrant anything to C. (Be
CAREFUL of using immediate transferor and immediate
parties—lahi sila)
ü C is presumed a holder in due course—
C can go after Y and he can be made to pay because he
is the one primarily liable as the maker. Y cannot raise the
personal defense of insertion of wrong date against C
because he is a HIDC.
C can go to B because B is the immediate transferor. B is
held liable because of the warranties he made to C.
C can go after A because he is the perpetrator of the fraud
(A is the one ultimately liable for the consequences of his
actions) and not because he made any warranty. In a
bearer instrument, only the immediate transferor can be
made liable for any breach of his warranties
If it is a bearer instrument, only the immediate transferor
warrants that the instrument is genuine and in all respects
what it purports to be.
ü If C is a holder through a holder in due course—
the answer is the same because C enjoys the rights of a
holder in due course.
ü If C is not a holder in due course and B is not a holder
in due course—
Y cannot anymore be held liable because he can raise the
personal defense of insertion of wrong date against C.
B can still be held liable because he made the warranties
to C as the immediate transferor.
A can also still be held liable because he is the perpetrator
of the fraud.
Incomplete but delivered instrument (PERSONAL)
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.
16
Two instances when the party has authority to fill in
the blanks in the instrument:
(1) Instrument is wanting in any material particular
• E.g. material particulars are found in Sec 125—
date, sum payable either principal or interest,
time or place of payment, number or the relations
of the parties, medium or currency in which
payment is to be made or which adds a place of
payment where no place of payment
Sec. 125. What constitutes a material alteration. - Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) 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.
• Basically anything that affects the liability of the
parties is a material particular
What happens if there is failure to fill in the
lacking material particular? Sec 14 only applies to
a failure to fill in the amount that is left blank. It will
not become a defect of incomplete but delivered
instrument if the failure to fill in is any other blank.
(2) Person is in possession of a signature on blank
paper intended to be a negotiable instrument
Section 14 ONLY contemplates an instance where the
amount is not inserted or the instrument has a blank
portion for the amount. If the date is the one that is
supposed to be inserted, Sec 13 applies NOT SEC 14.
There must be delivery in this instrument that was
delivered and incomplete as to the amount. The person
being given the instrument has prima facie authority to fill
up the blank for the amount. It has to filled up strictly in
accordance with the authority given and within
reasonable time.
“Blank paper”—not contemplates a blank paper with
your signature. There are no words of negotiability. This
must be contemplating a pro forma negotiable instrument.
It gives a party to the instrument the authority to fill out—
must be filled up strictly in accordance with the authority
given and within reasonable time.
What happens if the amount is not filled out strictly in
accordance with the authority given and within
reasonable time? The defect of incomplete but delivered
instrument arises. The effect is “Sec 14— 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.” That
portion is Sec 14 tells us that that is a personal defense
because it is still considered valid in the hands of a HIDC.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
14. Example of incomplete but delivered instrument.
“I promise to pay X or order P______. Sgd. Y”
17
course, absent any other facts, B is presumed a holder in
due course and the shelter principle applies to C making C
a holder through a holder in due course.

Y—X—A (inserted 100k)—B—C
Y only intended to pay 10k but A inserted 100k.
ü C is presumed a holder in due course—
C may go after Y. Y can be made to pay because he
cannot raise the personal defense of incomplete but
delivered instrument against C who is a HIDC. C may go
after X for the same reason as Y.
C may go after A because he is perpetrator of the fraud
and he warrants that the instrument is genuine and in all
respects what it purports to be. A must suffer the
consequences of all his actions.
B can be made liable because of the warranty he made as
the general indorser that the instrument is genuine and in
all respects what it purports to be.
ü If C is not a holder in due course and B is not a holder
in due course—
Y cannot anymore be held liable because he can raise the
personal defense incomplete but delivered instrument
against C.
B can still be held liable because he made the warranties
to C as the immediate transferor.
A can also still be held liable because he is the perpetrator
of the fraud and warranted that he had good title to the
instrument.
Reminder:
To be a holder through a holder in due course:
ü He must derive title from a HIDC
ü He himself must not be a party to the fraud or illegality

ü C is not a holder in due course—
ANSWER above is still the same because absent any
other facts, B is still presumed a HIDC so the shelter
principle applies. C will then be considered a holder
through a holder in due course. Being such, C will enjoy
the rights of a holder in due course.
When will the shelter principle not apply?
ü His immediate transferor must have known about the
defect and a party to the fraud (if the immediate
transferor knows about the defect and is a party to the
fraud—he is not a HIDC)

ü C is not a holder in due course and B is not a holder in

due course—
C can go after Y but Y can set up the personal defense of
incomplete but delivered instrument against C because C
is not a holder in due course. Same goes for X who cannot
be held liable to pay for the same reason as Y.

B can be made liable because of the warranty he made as

the general indorser that the instrument is genuine and in
all respects what it purports to be.

C may go after A because he is perpetrator of the fraud

and he warrants that the instrument is genuine and in all
respects what it purports to be. A must suffer the
consequences of all his actions.

15. What if it is a bearer instrument?

ü C is presumed a holder in due course—

C can go after Y and he can be made to pay because he
is the one primarily liable as the maker. Y cannot raise the
personal defense of incomplete but delivered instrument
against C because he is a HIDC.

C can go to B because B is the immediate transferor. B is

held liable because of the warranties he made to C.

C can go after A because he is the perpetrator of the fraud

and not because he made any warranty. The warranty he
made is under Sec 66 (that the instrument is genuine and
in all respects what it purports to be). If it is a bearer
instrument, only the immediate transferor warrants that the
instrument is genuine and in all respects what it purports
to be. A is the one ultimately liable and should suffer the
consequences of all his actions.

ü If C is a holder through a holder in due course—

The answer is the same because C enjoys the rights of a
holder in due course. Even if C is not a holder in due

VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
September 10, 2018
“I promise to pay X or order 10k _______. Sgd. Y”
Y—X – A (inserted August 16, 2018)—B—C
1. Is there a need to insert a date in the above
instrument? No, the instrument above is considered as
payable on demand. The insertion of the date by A does
not give rise to any personal or real defense.
2. Change the instrument. “I promise to pay X or order 10k
30 days after date. Sgd. Y”
3. State the rights of C in relation to prior parties. See
discussion above (Insertion of Wrong Date—Personal
Defense)
4. What else was discussed? Incomplete and delivered
instrument (Personal Defense)
5. What was the example given? “I promise to pay X or
order P______. Sgd. Y”
Y—X – A (inserted 100k when only 10k was intended by
Y)—B—C
6. Is that a negotiable instrument? Even if the amount is
in blank, it will still be considered a negotiable instrument
when the drawer or maker has an intention to make the
instrument negotiable and delivered to person other than
the drawer or maker.
“Section 14—… 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”
7. State the rights of C against the prior parties. See
discussion above (Incomplete and Delivered—Personal
Defense)
Complete but undelivered instrument (PERSONAL)
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.
Warranty violated by indorsers under Sec. 16—
1. That he has good title to it
(There is no issue as to its genuineness because the instrument is
already complete.)
18
As indorsers of the negotiable instrument, you can go after
them because as indorsers, they made general warranties to
the transferee.
8. What kind of presumption in the delivery?
- If delivered to a HIDC—conclusive presumption;
- If delivered to a holder not in due course—
rebuttable presumption
9. How can you rebut? Prove that there was no delivery or
no delivery was made; Prove that the delivery for a special
purpose and not for the purpose of transferring the
property in the instrument; Prove that the delivery was
conditional. If properly rebutted, the personal defense can
still be raised.
10. If the instrument is complete in all its content but it
was left on the table by Y. It was stolen by X and
further negotiated it to A—B—and C.
“I promise to pay X or order P10k. Sgd. Y”
Y—X (stole the instrument)—A—B—C
Here, it is a complete but undelivered instrument.
11. Rights of C to prior parties.
ü C is presumed a holder in due course—
C may go after Y. Y can be made to pay because he
cannot raise the personal defense of a complete but
undelivered instrument against C who is a HIDC.
C may go after X because he is perpetrator of the fraud
and he warrants that he has a good title to the instrument.
X must suffer the consequences of theft.
A and B can be made liable because of the warranty they
made as the general indorsers that they have good title to
the instrument.
ü C is not a holder in due course—
ANSWER above is still the same because absent any
other facts, B is still presumed a HIDC so the shelter
principle applies. C will then be considered a holder
through a holder in due course. Being such, C will enjoy
the rights of a holder in due course.
ü C is not a holder in due course and B is not a holder
in due course—
C cannot go after Y because Y can set up the personal
defense of complete but undelivered instrument against
C because C is not a holder in due course.
C may go after X because he is perpetrator of the fraud
and he warrants that he has a good title to the instrument.
X must suffer the consequences of theft.
A and B can be made liable because of the warranty they
made as the general indorsers that they have good title to
the instrument.
12. What if the instrument is a bearer instrument?
Discuss the rights of C to prior parties.
ü C is presumed a holder in due course—
C can go after Y and he can be made to pay because he
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
is the one primarily liable as the maker. Y cannot raise the
personal defense of complete but undelivered instrument
against C because he is a HIDC.
C can go to X because he is the perpetrator of the theft
and must be made liable for the consequences of his
actions. X is further held liable for the warranty he made
as a general indorser that he has good title to the
instrument.
C can go after B for the warranty he made as the
immediate transferor that he has good title to the
instrument. If it is a bearer instrument, only the immediate
transferor warrants that he has good title to it.
ü If C is a holder through a holder in due course—
The answer is the same because C enjoys the rights of a
holder in due course. Even if C is not a holder in due
course, absent any other facts, B is presumed a holder in
due course and the shelter principle applies to C making C
a holder through a holder in due course.
ü If C is not a holder in due course and B is not a holder
in due course—
Y cannot anymore be held liable because he can raise the
personal defense complete but undelivered instrument
against C who is not a HIDC.
B can still be held liable because he made the warranty to
C as the immediate transferor.
X can also still be held liable because he is the perpetrator
of the theft and he warrants that he has good title to it.
Incomplete and undelivered instrument (REAL)
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.
Warranty violated by indorsers under Sec. 15—
(1) That the instrument is genuine and in all respects what it
purports to be
(2) That he has good title to it
13. What is the effect if the instrument is not complete
and not delivered? The instrument is an invalid contract
in the hands of any kind of holder (Real Defense)
14. For all parties—it’s not a valid contract to all parties?
Not a valid contract in the hands of any kind of holder BUT
ONLY against parties prior to the defect. Parties
subsequent to the defect are still liable because of the
warranties they made as indorsers (that the instrument is
genuine and in all respects what it purports to be and that
he has a good title to it). However, it depends if the
negotiation is by delivery or indorsement.
15. How will you categorize this defense? Real Defense
19
September 11, 2018
1. Question of Binuya.
X made an incomplete negotiable instrument but it
was stolen by Y. Y issued the incomplete negotiable
instrument to A who was supposed to put 10k as the
amount. A, however filled out the amount as 100k and
issued it to B. B negotiated it to C. Discuss the rights
of C in relation to prior parties.
X—Y(stole the incomplete instrument)—A (inserted
100k instead of 10k)—B—C
Defenses available:
X—Y: incomplete and undelivered (REAL)
Y—A: incomplete but delivered (PERSONAL)
ü C is presumed a holder in due course—
This example is simple because C is presumed a holder
in due course. The personal defect can be set aside and
only X cannot be held liable because of the real defense
he can set up.
C cannot go to X because X can set up the real defense
of incomplete and undelivered instrument.
C can go to Y, A and B because they all warrant that they
have good title to it. A and B are further liable for the full
amount of 100k because they also warranted the
instrument to be genuine and in all respects what it
purports to be. However, A is also ultimately liable as the
perpetrator of the fraud by inserting the wrong amount.
Y can also be liable for the full amount because he is the
perpetrator of the theft and should be held liable for all
consequences of his actions. Y cannot recover the 90k
difference from A because he cannot go to court with
unclean hands (in pari delicto).
2. Akeem’s question.
X issued a (complete and) negotiable instrument to Y.
Y negotiated it to A. In the hands of A, it was stolen
by B. Is it still a complete but undelivered instrument?
The non-delivery refers to any delivery where the
instrument was delivered not for negotiation. Where the
instrument was stolen by B from A, A and all other prior
parties (X and Y) can all raise the defense of complete but
undelivered instrument.
Material Alteration (REAL)
Sec. 124. Alteration of instrument; 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.
Sec. 125. What constitutes a material alteration. - Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) 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.
3. What is material alteration? Any alteration on the
instrument that changes or affects the liabilities of the
parties (see Sec 125—what is altered)
If there is a material alteration, the instrument is
avoided only against parties prior to the defect or
those who did not consent to the material alteration.
But, we learned that material alteration is a real
defense because even in the hands of HIDC, it can
still be raised as a defense. However, there is a
different effect in the sense the prior party is still
made to pay but only according to the original tenor
of the instrument. So, the HIDC can get an amount,
just not the altered instrument.
4. “I promise to pay X or order P1M. Sgd. Y” What if the
date was changed? No material alteration because even
if the date of the instrument was changed, it does not
change the liability of Y to pay on demand the 1M.
Basically, there is no change on the liability of Y. Date
there has to be one that changes the liability of Y (e.g.
date of maturity or date of instrument when instrument is
payable after date). Also, take note when Sec 13 applies
(insertion of wrong date only in the 2 instances
applicable).
Although if you examine this in a deeper level, you can
argue that this changes liability of the party to see if there
was reasonable time for presentment of payment since
the date. But, for purposes of Sec 124-125, this does not
contemplate a material alteration
20
would be no payment. Ordinarily, this Section refers
to a change in the amount of the instrument. How
would then you distinguish this from Sec 14? Sec 14
contemplates a pro forma instrument where the amount
of the instrument is left blank. Sec 124 contemplates an
instrument where there is an amount but it was altered
without the assent of the parties liable. It is to maintain the
integrity of the instrument. There has to be a more
stringent consequence when the amount is altered
compared to where an amount is inserted. In Sec 14,
there is after all the authority to fill out the amount. In Sec
125, there is no authority to change or alter the material
particular. In Sec 124—you cannot enforce the altered
amount but only the amount in its original tenor. That’s
how you can say Sec 124 is more stringent
9. “To: X. Pay A or order P10k. Sgd. Y” (unfinished
example)
When there are material alterations to the instrument:
Rule 1— Prior Parties before defect
- Prior party who did not consent to the alteration will only be
made to pay according to the original tenor of the instrument
when in the hands of a HIDC
- Prior party who did not consent can raise the real defense of
material alteration when in the hands of a holder not in due
course
Rule 2— Does not discharge instrument as against (liable for
the full amount):
- Party who made the alteration (liable as the one who altered
and warranted the genuineness of the instrument)
- Party who assented to the alteration (liable because he
assented the alteration)
- Party who indorsed subsequent to alteration (liable as
indorsers)

5. If you were the one primarily liable to pay the NI, why
would you question the instrument that was altered?
Because it affects my liability to pay

6. Give me an example where the change of date affects

the liability of parties where Sec 124 is applicable not
Sec 13.

“I promise to pay X or order P10k 30 days after

December 1, 2018. Sgd. Y” Upon negotiation, one of
the parties changed the date to November 1, 2018.
In that instance, the liability of Y is hastened.

7. What if in that example, the instrument is in the hands

of a holder in due course? Y can raise the defense of
material alteration but he can be made to pay upon the
original tenor of the instrument. If in the hands of a holder
not in due course and the shelter principle does not apply,
the holder cannot receive payment from the parties prior
to the defect who did not assent to such alteration.
However, the holder may claim payment from the
indorsers because they warranted that the instrument is
genuine and in all respects what it purports to be.

8. De Leon did not mention that if the date is altered, Sec

13 is applicable not 124? Anyway, same2 ra man daw
ang effect with little differences. There would still
payment in the hands of a holder in due course but if
in the hands of a holder not in due course, there

VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
September 14, 2018
1. What is spoliation? Material alteration done by a
stranger
2. What is its effect? same as when the material alteration
is done by a party since the law does not distinguish who
made the material alteration. The real defense of material
alteration can still be raised by the prior party who did not
assent to the alteration
3. Does it need to be a fraudulent alteration? No
distinction made by the law if the alteration is done in
good faith or by fraud. The defense of material alteration
is still applicable
4. Example of BOE.
“To: A. Pay to Y or order P20k. Sgd. X”
X—Y—B (altered the amount to 100k; presented to A
for acceptance who accepted it)— B—C—D
Discuss the rights of D:
ü C is presumed a holder in due course (same answer if
shelter principle applies)
As an acceptor and the one primarily liable, A is compelled
to pay the instrument according to the tenor of his
acceptance
“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”
X and Y cannot be compelled to pay the amount of 100k
because they can raise the real defense of material
alteration even against D who is presumed a holder in due
course. Presuming D is a holder in due course, X and Y
can still be made liable for 20k (according to the original
tenor of the instrument).
D can go to B and C who can be made liable because they
are indorsers who warranted that the instrument is genuine
and in all respects what it purports to be. B and C can be
made liable up to 100k or only 80k IF D was able to collect
20k from X and Y.
B can further be held liable as the one ultimately liable
because he is the perpetrator of the fraud who must be
liable for all the consequences of his fraudulent actions.
ü C is a holder NOT in due course (and the shelter
principle does not apply)
As an acceptor and the one primarily liable, A is compelled
to pay the instrument according to the tenor of his
acceptance
X and Y cannot be compelled to pay the amount of 100k
because they can raise the real defense of material
alteration against D who is not a holder in due course even
for 20k.
D can go to B and C who can be made liable because they
21
are indorsers who warranted that the instrument is genuine
and in all respects what it purports to be. B and C can be
made liable up to 100k.
B can further be held liable as the one ultimately liable
because he is the perpetrator of the fraud who must be
liable for all the consequences of his fraudulent actions
5. Akeem’s Question
A promissory note was made by X. The negotiation is
as follows:
X—Y—A (altered 100k instead of 10k)—B (corrected
back to 10k)—C—D
No more material alteration because the same naman
ang effect sa original tenor of the instrument when D goes
to X for payment. X cannot say na nay material alteration
kay it’s the same content in the instrument when he
negotiated it.
6. Phil’s Question.
Promissory note (bearer instrument) was made by X
for 10k. The negotiation is as follows:
X—Y—B (altered it to 100k instead of 10k)—C (stole
the instrument)—D
In this case, B may be considered innocent because while
he altered it, he never negotiated the altered instrument.
The one ultimately liable is C who stole the instrument
and further negotiated it.
What if, we change the facts:
X—Y—B (altered it to 100k instead of 10k) )—C—
D(stole the instrument)—E—F
If this is an order instrument, D has to forge the signature
of C for him to have the rights to the instrument and then
further negotiate it. So here, there has to be forgery. But
let’s make it easier—let’s make it a bearer instrument
which can be negotiated by mere delivery. What are the
rights of F?
ü F is presumed a holder in due course (same answer if
shelter principle applies)
For sure, F cannot go to Y because this is a bearer
instrument. Y did not warrant anything to F.
However, F can go to X but X can only be made liable for
the original tenor of the instrument since X can raise the
real defense of material alteration. X cannot raise the
personal defense of complete but undelivered instrument
because E and F are holders in due course.
F can go to E because as the immediate transferor, he
warrants that the instrument is genuine and in all respects
what it purports to be and that he has good title over it
Ultimately, F can collect the full amount from B and D who
are responsible for the material alteration and theft,
respectively. They should be liable FOR ALL
CONSEQUENCES of their actions.
ü E and F are not holders in due course
F cannot collect from X because as the party prior to the
material alteration, he can raise the real defense of
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
material alteration against F who is not a HIDC. X can also
raise the personal defense of complete but undelivered
instrument since they are not HIDC.
F can go after E because of the warranties he made as the
immediate transferor of the bearer instrument
(genuineness and good title)
Ultimately, F can collect the full amount from B and D who
are responsible for the material alteration and theft,
respectively. They should be liable FOR ALL
CONSEQUENCES of their actions.
Morals of the story:
- All prior parties to a certain defect can raise the
defenses available to them whether personal or
real or both, EXCEPT if the prior party is the one
responsible for any fraudulent act
- If you are the one responsible for A FRAUD, you
can be liable for all the changes in the instrument
due to other kinds of fraud done by subsequent
parties. You can never use any defense as the
perpetrator of a fraud
ü (e.g. B who altered the instrument to
100k. C further altered it to 200k. B can
still be liable up to 200k since he should
be liable for ALL the consequences of
his action)
Forgery (REAL)
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 the party
against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.
1. What is forgery? Counterfeit-making or fraudulent
alteration of a writing and may consist in the signing of
another’s name with intent to defraud.
Intent to defraud distinguishes forgery from innocent
alteration or spoliation. Spoliation is a material alteration
done by a stranger. The effect of spoliation is the same
as the effect of a material alteration.
There is no presumption of forgery.
2. What is the difference between forgery and material
alteration under Sec. 124? Forgery pertains to the
signature to the one liable being altered. Material
alteration under Sec 124 is the alteration that changes the
liabilities of the parties by the change of anything under
Sec 125.
Although both are real defenses, in material alteration, the
holder in due course can collect from the one primarily
liable up to the original tenor of the instrument. However,
in forgery, the holder in due course cannot collect
anything from the one primarily liable.
MOST IMPORTANT: In forgery, there is intent to defraud.
22
In material alteration, the alteration may be done without
fraud but if done innocently, the law does not
distinguish—it can still make a party liable. Forgery can
only be raised in an order instrument.
3. What is the effect of forgery?
Signature is wholly inoperative. The instrument is not
totally void—only the forged/ unauthorized signature
is inoperative.
4. Effects of a forged signature.
(1) The signature is wholly inoperative
(2) There is no right to retain the instrument
(3) There is no right to give a discharge therefor
(4) There is no right to to enforce payment against any
party (unless party is estopped)
(Rationale: the current holder could have only acquired
rights over the instrument by virtue of the forged signature
which is inoperative)
EXCEPTIONS:
Persons who are precluded from setting up the
defense of forgery.
They are precluded from setting up this defense BUT they
may still recover damages
(1) Those estopped (through their acts, silence or
negligence)
(2) By their Warranty that the instrument is genuine and
in all respects what it purports to be
a. Indorsers
b. Acceptors
c. Persons negotiating by delivery
5. Forms of forgery.
(1) Fraud in factum or fraud in esse contractus—
“Fraud amounting to Forgery”. Party makes it appear
that there was the intention to issue a NI through the
signature of another person BUT THERE REALLY
WAS NO SUCH INTENTION TO EXECUTE A NI.
(2) Duress amounting to forgery—
One is forced to sign the instrument out of force,
threat, undue influence, etc
(3) Fraudulent impersonation—
Person issued the NI because he was made to
believe that the person asking for the NI is the person
whom he really intends to issue a NI
Fraud NOT considered as Forgery:
(1) Fraud in inducement—
Intention to sign a NI but for a different consideration
akin to a failure of consideration. When there is a
failure of consideration, it is only a personal defense.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
September 17, 2018
6. Effects of a forged signature.
(5) The signature is wholly inoperative
(6) There is no right to retain the instrument
(7) There is no right to give a discharge therefor
(8) There is no right to to enforce payment against any
party (unless party is estopped)
PROMISSORY NOTE FORGED
Signature of MAKER is forged
(1) PRIOR PARTY (MAKER)
Not liable. He can raise the real defense of forgery
(2) SUBSEQUENT PARTIES
a. Indorser
Liable. They warrant that the instrument is
genuine and in all respects what it purports to be
and that they have good title to it
b. Person Negotiating By Delivery (PNBD)
Liable if immediate transferor. He warrants
that the instrument is genuine blabla
c. Forger
Liable. Forgery is penalized. He must be liable
for all the consequences of his actions
Signature of the INDORSER is forged
(1) PRIOR parties—
a. Order Instrument
Not liable. They can raise the real defense of
forgery
b. Bearer Instrument
Liable. The forged indorsement is not necessary.
When you forge a signature of the indorser on a
bearer instrument, it will not affect the nature of
the BEARER instrument. It can always be
negotiated by mere delivery. All parties may then
be held liable. Forgery there is irrelevant. Thus,
both the real defense of forgery and the personal
defense of complete but undelivered instrument
cannot be raised in case the holder is a HIDC
OR Not Liable if the holder is not a HIDC and the
shelter principle does not apply because while he
cannot raise the real defense of forgery in the
signature of the indorser, the prior party can still
raise the personal defense of complete but
undelivered instrument
(2) SUBSEQUENT parties—.
a. Indorsers subsequent to the forgery
Liable. They warrant that the instrument is
genuine and in all respects what it purports to be
b. Person Negotiating By Delivery (PNBD)
Liable if immediate transferor. He warrants that
the instrument is genuine and in all respects what
it purports to be
c. Forger
Liable. Forgery is penalized. He must be liable
for all the consequences of his actions
23
2. Give me a negotiable instrument.
“I promise A or bearer P10k. Sgd. X”
This is a PN (bearer). What was forged was the
signature of the MAKER.
X—F(F forged the signature of X)—A—B—C—D
ü D is presumed a HIDC (applies to any holder)
X is not liable because he can set up the real defense of
forgery. X here is not even considered a party to the
instrument.
A and B cannot be liable because they did not warrant
anything to D (this is a bearer instrument).
C is liable as the immediate transferor and has warranted
that the instrument is genuine and in all respects what it
purports to be and that he has a good title to it.
F is the one ultimately liable because he is the perpetrator
of the fraud/ forger and must be liable for all the
consequences of his actions.
If D is not a HIDC, or even if the shelter principle does
not apply, the answer above will still apply regardless
of the holder of the instrument. You cannot go after
the maker because he is not a party to the instrument.
Forgery is a real defense.
3. What if the instrument above is an order instrument?
The liabilities of A and B will change because as
indorsers, they have made certain warranties
ü D is presumed a HIDC (applies to any holder)
X is not liable because he can set up the real defense of
forgery. X here is not even considered a party to the
instrument.
A, B and C can be made liable because as indorsers, they
warrant that the instrument is genuine and in all respects
what it purports to be and that they have good title to it.
F is the one ultimately liable because he is the perpetrator
of the fraud/ forger and must be liable for all the
consequences of his actions.
The status of the holder does not matter. The same
rule applies. X can always raise the real defense of
forgery, and the indorsers will always be liable for the
warranties they made in the order instrument.
4. What if the forgery happens in the indorsement?
X—A—F (stole from A, forged A’s indorsement, and
negotiated it to B)—B—C—D
Still a PN (Bearer) like the example above. Take note,
other than the real defense of forgery, there is always
a personal defense of complete but undelivered
instrument (since F stole it from A)
ü D is presumed a holder in due course
X is liable because forgery in an indorsement in a bearer
instrument is unnecessary to the title of the holder. X also
cannot raise the personal defense of complete but
undelivered instrument because D is a HIDC.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
A and B cannot be made liable because they did not
warrant anything to D as this is a bearer instrument. A
also cannot raise the personal defense of complete but
undelivered instrument because D is a HIDC.
C is liable as the immediate transferor and warranted that
the instrument is genuine and in all respects what it
purports to be and that he has a good title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions.
Here, this is a forged instrument. Supposedly, the
forged signature is wholly inoperative. In this case,
while the instrument is in the hands of D, D cannot go
after the parties prior to the forgery because they can
always raise the real defense of forgery unless they
are precluded from doing so. BUT, in this case, this
is a bearer instrument. Forgery of an indorsement
does not affect the rights of any parties. This
instrument can be enforced as if there was no forgery
because indorsement in a bearer instrument is
unnecessary to the title of the holder. In effect, the
parties prior to the forgery of the indorsement in a
bearer instrument are precluded from raising the real
defense of forgery.
MORAL OF THE STORY:
FORGERY IN THE INDORSEMENT OF A BEARER
INSTRUMENT IS IMMATERIAL TO THE LIABILITY OF
THE PARTIES. This is because indorsements in a bearer
instrument is unnecessary.
ü D is not a HIDC
Same explanation above since the shelter principle
applies
HOWEVER, THERE IS ANOTHER DEFENSE THAT
CAN BE RAISED HERE—COMPLETE BUT
UNDELIVERED INSTRUMENT AS A NEVER
NEGOTIATED THE INSTRUMENT TO B BECAUSE IT
WAS STOLEN BY F. So, although the general rule is
that the effects of the real defense of forgery apply to
all kinds of holders, here the liability changes for
some parties who can raise the personal defense of
complete but undelivered instrument to D (if C and D
are not HIDC)
ü D is not a HIDC and C is not a HIDC
The answer will change in relation to X. X can raise the
personal defense of complete but undelivered instrument
because D is not a HIDC. He cannot be made liable for
the amount even if he cannot raise the real defense of
forgery because of this personal defense.
D cannot go after A because A did not warrant anything
to D (bearer instrument man ni so immaterial na mu
discuss ta na A can raise the personal defense of
complete but undelivered instrument)
5. What if this is an ORDER instrument? Will your
answer change?
Here, the indorsement in the order instrument is the
one that is forged.
If there is forgery in the negotiation, parties prior to the
forgery can raise the real defense of forgery but if there is
no delivery, they can also raise the personal defense of a
24
complete but undelivered instrument.
ü D is presumed a holder in due course (same if shelter
principle applies)
X is not liable because he can raise the real defense of
forgery in the indorsement. (Additionally, X cannot raise
the personal defense of complete but undelivered
instrument because D is a HIDC.)
A is not liable because he can raise the real defense of
forgery in the indorsement. The personal defense of
complete but undelivered instrument also cannot be set
up against D since D is a HIDC.
B and C can be made liable (as indorsers) because they
warranted that the instrument is genuine and in all
respects what it purports to be and that they have good
title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions.
ü D is not a HIDC and C is not a HIDC
X can raise the real defense of forgery (in the
indorsement) and the personal defense of complete but
undelivered instrument because D is not a HIDC. He
cannot be made liable for the amount.
A cannot be liable because he can raise the real defense
of forgery in the indorsement and can also raise the
personal defense of complete but undelivered instrument.
B and C can be made liable (as indorsers) because they
warranted that the instrument is genuine and in all
respects what it purports to be and that they have good
title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions.
BILL OF EXCHANGE FORGED.
Signature of DRAWER is forged
(1) PRIOR PARTY (DRAWER)
Not liable. He can raise the real defense of forgery,
whether it is an order or bearer instrument. Besides
if it is a bearer instrument, there is no privity of
contract between the holder and drawer
(2) SUBSEQUENT PARTIES
a. Drawee (depends on when he accepts the
instrument)
Liable if he accepted AFTER the forgery
because he then warrants the genuineness of
the signature of the drawer.
Not liable if he accepted BEFORE the forgery
because he can raise the real defense of forgery
of the signature of the drawer
Same rules if it is a bearer or order instrument.
b. Indorser
Liable. He warrants the genuineness (blabla) of
the instrument and that he has good title to it.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
c. PNBD
Liable if immediate transferor. He warrants
the genuineness (blabla) of the instrument.
d. Forger
Liable. Forgery is penalized. He must be liable
for all the consequences of his actions
Signature of INDORSER is forged
(1) PRIOR PARTY TO FORGERY
a. Order Instrument
Not liable. He can raise the real defense of
forgery.
b. Bearer Instrument
Liable. The forged indorsement is not
necessary to the title of any holder. Indorsement
in a bearer instrument is irrelevant.
(2) SUBSEQUENT PARTIES
a. Drawee (depends on when he accepts the
instrument)
Liable if he accepted AFTER the forgery
because he then engages himself to pay the
instrument according to the tenor of his
acceptance
Not liable if he accepted BEFORE the forgery
because he can raise the real defense of forgery
of the signature of the indorser
(Please see notes during the makeup class
regarding the obligation of the indorser to
ascertain the genuineness of the signatures of
prior indorsements)
b. Indorsers subsequent to Forgery
Liable. They warrant the genuineness (blabla)
of the instrument.
c. PNBD
Liable if immediate transferor. He warrants
the genuineness (blabla) of the instrument.
d. Forger
Liable. Forgery is penalized. He must be liable
for all the consequences of his actions
Signature of DRAWEE is forged
(3) PRIOR PARTY (DRAWEE and DRAWER)
Not liable. He can raise the real defense of forgery.
Especially the drawee, he cannot be liable because
he is not a party to the instrument. If it’s not the fault
of the drawer that there was forgery, then he cannot
be held liable.
Liable if they are precluded to raise the real defense
of forgery (see Make up class notes on Negligence
as a bar to raise the defense of forgery)
(4) SUBSEQUENT PARTIES
e. Indorser
Liable. He warrants the genuineness (blabla) of
the instrument and that they have good title to it.
Remember if bearer instrument, the indorsers
except the immediate transferor cannot be liable
for the warranties they made because there is
no privity of contract between them and the
25
holder.
f. PNBD
Liable if immediate transferor. He warrants
the genuineness (blabla) of the instrument and
that they have good title to it.
g. Forger
Liable. Forgery is penalized. He must be liable
for all the consequences of his actions
6. Example of BOE.
“To: A. Pay to X or order P10k. Sgd. B”
F(forged the instrument to make it appear that B
made the instrument)—X—C(presented it to A for
acceptance; A accepted)—D—E
Take note: this is a BOE Order instrument.
ü E is presumed a holder in due course (same for all
holders)
A can be made liable because he is the one primarily liable
as the drawee who accepted the instrument. He warranted
the genuineness of the signature of the drawer, B (see Sec
62). He then engages to pay according to the tenor of his
acceptance. If you warrant the signature of the drawer is
genuine, you cannot retract—that’s why A is precluded
from raising the defense of forgery,
B is not liable because B is not a party to the instrument.
His forged signature is wholly inoperative. He can raise the
real defense of forgery.
X, C and D can be made liable (as indorsers) because they
warranted that the instrument is genuine and in all respects
what it purports to be and that they have good title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions.
ü E is not a HIDC and D is not a HIDC
Same answer except B can also raise the personal
defense of complete but undelivered instrument. Worthy to
note, B is never a party to the negotiation.
7. What if this is a BEARER instrument?
It will change in relation to X and C who cannot be made
liable. They did not warrant anything to E because this is
a bearer instrument. X and C are not immediate
transferors.
ü E is presumed a holder in due course (same for all
holders)
A can be made liable because he is the one primarily liable
as the drawee who accepted the instrument. He warranted
the genuineness of the signature of the drawer, B (see Sec
62). He then engages to pay according to the tenor of his
acceptance.
B is not liable because B is not a party to the instrument.
His forged signature is wholly inoperative. He can raise the
real defense of forgery.
D can be made liable (as the immediate transferor)
because he warranted that the instrument is genuine and
in all respects what it purports to be and that they have
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
good title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions.
ü E is not a HIDC and D is not a HIDC
Same answer except B can also raise the personal
defense of complete but undelivered instrument.
Additional notes by Ela:
Summary of the Rules of Forgery.
Determine where the forgery happens (then cut those parties
before and after the forgery)
(1) Parties BEFORE the forgery—cannot be held liable
(because they can set up the real defense of forgery)
(2) Parties AFTER the forgery—can be held liable (because
they warranted the instrument)
Forgery is a real defense because it mentions any party. The status
of the holder is therefore immaterial unless other (personal)
defenses are also available. Effect is the SAME FOR ALL
PARTIES.
There is no presumption of forgery.
Application of Sec 23. Only on two cases:
(1) Signature is affixed by one who does NOT claim to act as
an agent and has no authority to bind the person whose
signature is forged
(2) Signature is affixed by one who purports to be an agent (still
no authority to bind)
26
September 18, 2018
8. Last example.
“To: A. Pay to X or order P10k. Sgd. B”
F(forged the instrument to make it appear that B
made the instrument)—X—C(presented it to A for
acceptance; A accepted)—D—E
Take note: this is a BOE Order instrument.
ü E is presumed a holder in due course (same for all
holders)
A can be made liable because he is the one primarily liable
as the drawee who accepted the instrument. He warranted
the genuineness of the signature of the drawer, B (see Sec
62). He then engages to pay according to the tenor of his
acceptance. If you warrant the signature of the drawer is
genuine, you cannot retract—that’s why A is precluded
from raising the defense of forgery,
B is not liable because B is not a party to the instrument.
His forged signature is wholly inoperative. He can raise the
real defense of forgery.
X, C and D can be made liable (as indorsers) because they
warranted that the instrument is genuine and in all respects
what it purports to be and that they have good title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions.
ü E is not a HIDC and D is not a HIDC
Same answer except B can also raise the personal
defense of complete but undelivered instrument. Worthy
to note, B is never a party to the negotiation.
NOTE: If the instrument bears a forged instrument of a
drawer, it seems that whoever is the holder cannot go
after the drawer since he can raise the real defense of
forgery. The holder can go after the drawee if he accepted
the instrument because by doing so, he warranted that
the signature of the drawer is genuine.
9. What if the instrument is a bearer instrument?
It will change in relation to X and C who cannot be made
liable. They did not warrant anything to E because this is
a bearer instrument. X and C are not immediate
transferors. See complete example above (#7,
September 17, 2018)
10. What if the forgery happens in the signature of the
indorser?
“To: A. Pay to X or order P10k. Sgd. B”
B—X (presented it to A who accepted it)—C—F(stole
the instrument, forged the signature of C as the
indorser)—D—E
ü E is presumed a holder in due course (same for all
holders)
A cannot be made liable because as the drawee who
accepted the instrument, all he warranted was the
genuineness of the signature of the drawer, B not the
genuineness of the signature of the indorser. A can
therefore raise the real defense of forgery as he is a party
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
prior to the forgery. His acceptance does not include the
signatures of the indorser.
B, X and C are not liable because they can raise the real
defense of forgery in the indorsement. B, X and C are
parties prior to the forgery
D can be made liable (as indorser) because he warranted
that the instrument is genuine and in all respects what it
purports to be and that he has good title to it.
13. Then, we have the issue of the drawee-bank and
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions
11. What if the instrument is a bearer instrument
(remember, C’s signature as the indorser is forged)?
ü E is presumed a holder in due course (same when
shelter principle applies)
A is liable because an indorsement in a bearer instrument
is immaterial. He cannot raise the real defense of forgery
of the signature of the indorser because indorsement is
unnecessary in the transfer of title of a bearer instrument.
B is not liable because there is no privity of contract there
since A accepted the BOE. There is no warranty extended
by B to E.
X and C are not liable because they did not warrant
anything to E as this is a bearer instrument
D is liable (as immediate transferor) because he warranted
that the instrument is genuine and in all respects what it
purports to be and that he has good title to it.
F is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions
ü E is not a HIDC and D is not a HIDC
Same answer except A can raise the personal defense of
complete but undelivered instrument as E is not a HIDC.
By the personal defense, A cannot be made liable even if
he cannot raise the real defense of forgery in the signature
of the indorser.
B, X and C are still not liable (same reasons above)
D is liable (same reason above)
F is liable (same reason above)
NOTE: Personal defense of complete but undelivered
instrument only applies where there is theft of the
instrument and therefore, no delivery (observation ra ni)
12. “To: A. Pay to X or order P10k. Sgd. B”
B—X (forged the signature of A)—C—D—E
ü E is presumed a holder in due course (same for all
holders)
A cannot be made liable because he can raise the real
defense of forgery of his signature. His signature is wholly
inoperative. He is not a party to the instrument.
B cannot be made liable because he is a party prior to the
forgery. He can raise the real defense of forgery in the
27
signature of the drawee.
C and D can be made liable (as indorsers) because they
warranted that the instrument is genuine and in all respects
what it purports to be and that they have good title to it.
X is ultimately liable because he is the perpetrator of the
fraud/ forger and must be liable for all the consequences
of his actions
collecting bank.
Discussion on the case of Republic Bank v Ebrada.
Bureau of Treasury (drawer)—Martin Lorenzo (Martin
Lorenzo’s signature was forged as indorser)—Ramon
Lorenzo—Adelaida Domiguez—Mauricia Ebrada—
PBC (drawee)
This is an order instrument that was a check issued
by the BT to Martin Lorenzo. The issue is WON PBC
can claim from Ebrada as Ebrada claims that she is a
HIDC.
There was an emphasis that the forged signature is the
only signature that is inoperative. All other signatures
after the forged signature are still valid and genuine
indorsers. In this case, drawee-bank can get
reimbursement from the cash disbursed to Ebrada.
Ebrada warranted the genuineness of the indorsements
made prior and PBC, in effect relies upon the fact that
Ebrada complied with her duty of ascertaining the
genuineness of the prior indorsers. PBC is a drawee-bank
and it only warrants the genuineness of the signature of
the drawer NOT the signatures of any of the indorsers.
PBC supposedly has a BT account. But, PBC is the one
that made the advancement of payment to Ebrada. What
PBC has to do is return the money taken from the BT
account given to Ebrada. Then, PBC can ask
reimbursement from Ebrada because it is not the one
liable for the forgery as it did not warrant the genuineness
of any of the indorsements. But, Ebrada in this case—(not
finished)
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
September 22, 2018 (Make-up class)
Signature of the Indorser is Forged in the BOE (and where the
drawee may be held liable if he accepted the instrument after
there has been forgery)
Although if you read the cases, what is always mentioned by the
SC is that there is always an obligation on the part of the indorser
to ascertain that all prior indorsements are genuine. But, take note
if you happen to be the drawee and there is a holder, the holder is
not an indorser just yet since he just accepted the instrument. If he
goes to the drawee, in a way, he is not obligated to ascertain the
genuineness of all other indorsements UNLESS it is a collecting
bank (because a collecting bank sort of guarantees genuineness
of all prior indorsements). Ordinarily, if you are just a holder of a
BOE, when you present the instrument to the drawee who has
accepted the instrument, he should be held liable for why would we
have accepted the instrument when it already bears the forged
signature. By accepting the instrument after the forgery, the
drawee then accepted it including the forged signature. All third
parties after that should not be considered as covered by the
requirement on ascertaining the genuineness of all prior
indorsements.
In Ibrada case, SC said the drawee-bank can claim reimbursement
from the holder/ Ibrada even if she claimed to be a HIDC because
she is supposed to and is obligated to ascertain the genuineness
of all prior indorsements. There is an obligation on the part of the
holder presenting the instrument to the drawee to ascertain that all
prior indorsements are genuine. It seems that the SC is saying that
the drawee is not held liable if that is the case.
But, if you look at the order of liability, the drawee should be held
liable. Anyway, the case did not mention anymore whether you can
go to the drawee and compel him to pay in that case because it
was already an after-fact where the drawee may be allowed to go
after the holder who received the payment. But, it should have
been the drawee should go after the forger if he knows that there
is already forgery since all other parties also do not know anything
about the forgery. That should have been the better/ more
equitable ruling. But, again in that case, the SC allowed the drawee
to go after the holder who may be a HIDC.
As a rule, if the drawee accepted the instrument AFTER the
forgery, it should be compelled to pay because it engages
itself to pay according to the tenor of its acceptance including
the forged signature. People would most likely accept a BOE
once there is an acceptor who has accepted the instrument. If
he accepted it prior to the forgery, on the part of the holder,
he will not anymore ascertain all other indorsements prior to
what has been accepted already by the drawee.
It just so happened that in that case, the bank was not given the
opportunity to accept it. He accepted it after the forgery but still, it
was paid. You can also argue in that sense na Ibrada is the one
who presented the instrument to the drawee-bank, the drawee-
bank may have accepted it but Ibrada should have had the
opportunity to ascertain the genuineness of prior indorsements.
Basically, in this case, in a situation where the drawee-bank has
been given the chance to accept the BOE AFTER the forgery and
then after that, the instrument was still further negotiated
(negotiated after having been accepted), there would have been
more sense in requiring the drawee to pay the holder rather than
the holder being held liable to go after all prior indorsements. Let
me illustrate.
What is peculiar to Ibrada case:
X (Bureau of Treasury/ DRAWER)—A—B—C (Ibrada is C who
28
presented the instrument to the drawee, D)—D (drawee-bank)
The drawee-bank after having paid Ibrada and then supposedly
going after the drawer/ BOT, BOT/ drawer then claimed about the
forgery on the signature of the payee because the payee was
already dead. The drawee-bank is then contemplating on going
after Ibrada. Ibrada then said “you cannot go after me because I
am a HIDC.”
The SC said that the drawee-bank should then be allowed to claim
reimbursement from Ibrada because when she presented the
instrument to the drawee, Ibrada should have already ascertained
the genuineness of all other indorsements as there is no obligation
on the part of the drawee to look after them.
But, in a situation where (same example but facts are a
changed a bit):
X—A—B—C (presented to D/ drawee)—D (accepted; after
acceptance, it was still negotiated)—E—F (presented back to
D for payment)
If F goes to D, D should be liable to pay because it would be unfair
on the part of F who has accepted the instrument because of the
view that it has already been accepted by D/ drawee. In the Ibrada
case man gud, there was a simultaneous acceptance and
payment, but in this example, there was just acceptance (and then
payment in another time). It should not be the obligation of F to
ascertain anymore whether all these prior indorsements prior to the
acceptance of the drawee are genuine. Perhaps, F is still required
to ascertain the genuineness of the signature of E but as to all other
prior indorsements when it has already been accepted by D, it
seems to be unfair already on the part of F if he will still not be able
to collect from D (after all, D already engages himself to pay
according to the tenor of his acceptance).
Take into consideration the case of Ibrada but differentiate it from
an instance where this example happens where there is further
negotiation after having been accepted.
Basically, if the drawee accepted the instrument AFTER the
forgery, he should be liable (because he then engages himself
to pay according to the tenor of his acceptance including the
forged signature). But, if the drawee accepted BEFORE the
forgery, he should be able to raise the real defense of forgery.
The obligation of the indorser to ascertain all prior
indorsements and when the drawee has accepted the
instrument should both be considered. As when the
instrument has already been accepted by the drawee, the
indorser should not be obligated to look into the genuineness
of the indorsements prior to the acceptance.
Negligence to Preclude a Party from Raising the Real Defense
of Forgery
In most cases that you will read, the most common exception is
always negligence because it will preclude you from raising the real
defense of forgery.
If there is forgery in a check and it involves a collecting bank
and a drawee-bank, who should be held liable? It depends on
where the forgery is!
If the forgery is in the signature of the DRAWER, general rule is
that the drawee-bank is liable for accepting the check because it
supposed to have admitted the genuineness of the signature of the
drawer UNLESS there is negligence of the drawer. In that case,
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
the drawee should not be held liable because the drawer caused
with his negligence for the forgery to happen, but it does not
automatically exonerate the liability of the drawee. At best, the SC
will just consider the negligence of the drawer to apportion the loss
or damages.
If the forgery is in the signature of the INDORSER, the collecting
bank should be liable as a general rule UNLESS there is
negligence on the part of the drawee-bank (not the drawer because
the drawer and the collecting bank have no privity of contract).
Negligence on the part of the drawee-bank consists on the failure
to advise the collecting bank of the forgery within 24 hours from the
clearing of the check. The collecting bank would be liable but it is
not precluded from going after parties prior to it.
Again, if there is forgery in the signature of the drawer, the
drawee-bank not the collecting bank is liable for accepting the
check unless the drawer is negligent. But, between a
collecting bank and a drawee-bank, the collecting bank is held
liable if there is forgery in the signature of the indorser unless
the drawee-bank is considered negligent.
Minority (REAL BUT PERSONAL TO THE MINOR)
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.
If there is minority in one of the parties, it is a defect on the
instrument. It does not avoid the instrument (as provided in Sec
22—“passes the property therein”). It remains valid and
enforceable. But, it gives rise on the part of the minor to raise the
real defense of minority. It is a real defense (regardless of the
status of the holder) but it is personal on the part of the minor. All
other parties cannot raise that defense, only the minor can raise it.
Example, there is a PN issued by X in favor of A who is a
minor. A indorsed the instrument to B and then finally to C.
Can C go after X? Yes, because X cannot raise any defense in
that case. The defense of minority can only be raised by A.
Ultra Vires Acts of the Corporation (REAL BUT PERSONAL
TO THE CORPORATION)
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for this
purpose; and the authority of the agent may be established as
in other cases of agency.
Sec. 20. Liability of person signing as agent, and so forth. -
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of
words describing him as an agent, or as filling a
representative character, without disclosing his principal,
does not exempt him from personal liability.
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
29
that from want of capacity, the corporation or infant may incur
no liability thereon.
If there is someone who purports to represent the corporation
but the corporation did not authorize such a person, will the
corporation be held liable? No, the corporation can raise the real
defense of ultra vires acts, but the person who signed will be
considered personally liable.
How can you then get away with the payment of the liability of
the corporation if you happen to be just an agent of the
corporation? You indicate whether you are really an agent or not,
but of course this goes without saying that this will only happen if
you really are authority. If you are not authorized, then the
corporation can always raise the real defense of ultra vires acts.
If you are authorized though and you want to get away with
the liability so that the corporation will be held liable in case
there will be defects in the instrument later on, what will you
do? You sign the instrument by (1) indicating the name of principal
you are representing and (2) in which capacity you are signing.
There has to be this 2 information available at the time you make
the indorsement so you will not be held liable. You can indicate
what capacity you are signing but putting “agent” or “X corporation
signed by Mr. A, agent”.
Procuration (also in relation to being an agent)
Sec. 21. Signature by procuration; effect of. - A signature by
"procuration" operates as notice that the agent has but a
limited authority to sign, and the principal is bound only in
case the agent in so signing acted within the actual limits of
his authority.
Procuration means there is a limit to the authority granted. It could
be that the authority granted is merely for collection. If it is merely
for collection, the instrument cannot be further negotiated unless
the other subsequent parties will have to be the one collecting in
behalf of the agent who was originally authorized to make
collection.
You will learn later on that one of the restrictive indorsements is
limiting the authority of the person to negotiate the instrument. One
way is limiting the power as to just merely collecting on the
instrument. It does not make the instrument non-negotiable but the
person who will receive the instrument after the restrictive
indorsement will only exercise the rights of the one who was really
restricted in the first place.
Example, if A was just authorized to make collection, if A
negotiates the instrument to B and to C, the rights of B and C are
merely for collection even if it is not indicated.
If there is procuration, it behooves the person dealing with the
instrument to inquire as to the limit of the liability. You would know
there is procuration by the words, “Per proc” or “PP”.
The effect of indorsement by procuration is that there is a limit on
the liability and it requires the person dealing with the instrument
to inquire on the limits of the liability. So, if you committed a mistake
as you did not ask on the limits of authority, then you are estopped
from claiming that there is a limit on the liability of the agent.
Same with cross-checks. If there is a cross-check, it obligates the
person dealing with the cross-check to inquire as to the limits of
the person indorsing a cross-check. We’ll get to that later on.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
Consideration
Want of Consideration (PERSONAL)
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.
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.
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.
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.
Consideration is one which can support any simple contract. It
should be one of value. That’s why you can read in your readings,
“valuable consideration”. You would know that there is a value if it
is sufficient to support a simple contract.
If the instrument is issued without mentioning as to whether there
is consideration, the presumption is that there is consideration. It
could be goods of any kind, cash or services. Services have to be
currently rendered or have already been rendered (NO FUTURE
SERVICE because it will render the instrument conditional).
If the instrument is issued for a consideration, then whoever issued
it for a consideration has a lien on the instrument equivalent to what
may have been considered as the value of the instrument. But, it
is also possible that it is not for the full amount.
Example, a past debt can be a valuable consideration. If the
past debt of the debtor is only 500k and then he gave the
creditor an instrument worth 800k, there is a partial
consideration there. The effect is that the person who received the
instrument will have to hold the entire proceeds of the instrument
(including the portion where there is no valuable consideration) in
trust for the person who gave him the instrument. It becomes a
defense pro tanto/ pro-rated. It is a defense that there was partial
consideration given so it is only up to the amount where the
consideration was not given. It means that you have a lien on the
instrument equivalent to the debt and to hold the extra value as a
trustee. There, you will hold the extra 300k in trust by the person
who received the proceeds for the person who gave him the
instrument. The parties who are able to raise the defense of want
of consideration can only raise this defense only up to the amount
of 300k (the amount not given consideration for)
It’s possible that the person who gave the instrument to further
negotiate the instrument. As to those persons being negotiated
with, the value of the instrument is really 800k. For example, the
one who gave the instrument to you is the maker, the maker will be
liable to pay the holder 800k but the maker can go after you for the
30
extra 300k you have held in trust for him. Remember, the lien you
only had to the instrument was only 500k as the amount of your
credit.
Don’t consider this as inadequacy of the price. There really is an
understanding there that that is how much you will be entitled to. If
for example, the instrument was issued to you for 600k and you’ve
agreed that the value of the service you’ve rendered is really 600k,
then the value of your service is really 600k even if the real value
of your service is only 500k. There is no partial consideration there
because there is an agreement by the parties. There was a bad
bargain, you can’t just say the value is just 500k when the parties
have agreed that the value of the service is 600k. It was stupid for
the maker to agree that the service was worth 600k when it should
have been just 500k.
Generosity
Example, your ninang gave you a check for 1M. There is no
consideration there. So, don’t accept! He can use it as a defense
that there is no consideration. Love under NIL (or even generosity
or affection) is not a valuable consideration. Not being a valuable
consideration, it is tantamount to no consideration.
If there is no consideration, it is a personal defense. It does not
render the instrument invalid. The person who may have issued it
without a consideration can raise the personal defense of want of
consideration. Parties prior to the want of consideration can also
raise that personal defense.
Failure of consideration (PERSONAL)
It is the same defense as want of consideration.
Example: X gave a check to Y for a genuine diamond ring but
Y only gave X a fancy ring. X can then raise the personal defense
of failure of consideration. X cannot be compelled to pay on that
check. But of course, because this is a personal defense, if that
check has already been indorsed to a HIDC, it cannot be raised
against such a holder.
Illegal Consideration (PERSONAL)
X gave Y a check to become his mistress. Y negotiated to Z
who does not know about the arrangement. Can Z go after X?
Yes, X is precluded from raising the defense of illegal consideration
as he is the one who caused the illegality. Thus, X can be held
liable. As to them in fact, the check is supposedly invalid because
there is no valid contract, but X should not be allowed to profit from
his own actions. That’s why innocent parties shall not be affected
If X negotiated a check to Y for the sale of construction
materials. Y negotiated to his mistress, Z. Z negotiated it to A.
Can A go after X? Without any other fact stated, A is presumed a
holder in due course. Being so, X can be compelled to pay to A
because the personal defense of illegal consideration between Y
and his mistress cannot be raised against a HIDC. Class, if it is
illegal, is there consideration? There is none! It’s the same as when
there is no consideration at all. That’s still considered a personal
defense.
A can also go after Y as he is the party who caused the illegal
consideration. You can go after the guilty party as they are
precluded from raising any defense but if there is a party prior to
such illegality, then that person prior can raise the personal
defense of want of consideration only against a HNIDC where the
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion) 31
404 (A.Y. 2018-2019)
shelter principle does not apply.
Accommodation in the indorser.
If A was not a holder in due course and the mistress is also not a
HIDC, X can then raise the personal defense of want of X issued an instrument to Y. X and Y have not so good credit
consideration. standing. So, Y negotiated it to Z who has good credit
standing. Z then becomes an indorser even if he did not
Summary of the Defenses actually receive any value for the instrument. Z did not give
anything also to receive the instrument. Z indorsed it to
DEFECT/DEFENSE SECTION TYPE OF DEFENSE Atlantic. Atlantic accepted it. X is still primarily liable. When X
Insertion of a Wrong Date Sec 13 PERSONAL does not pay, Atlantic will go after Y, then go after Z. Although the
Incomplete but Delivered Sec 14 PERSONAL most likely situation is Atlantic going after Z because he knows he
Complete but Undelivered Sec 16 PERSONAL has good credit standing. Z is the accommodation indorser where
Incomplete and Y was the one accommodated.
Sec 15 REAL
Undelivered
Material Alteration Sec 124 REAL There are a lot of cases involving accommodation parties. But just
Forgery Sec 23 REAL take not of the rule that between an accommodation party and the
REAL (but personal accommodated party, the one primarily liable in relation to third
Minority Sec 22
to the minor) parties is always the accommodation party. But, between the
Ultra Vires Acts of the REAL (but personal
Sec 22 accommodation party and the accommodated party, it is the
Corporation to the corporation)
accommodated party that is primarily liable.
Want of Consideration
(and Failure of Sec 28 PERSONAL
Consideration) This is the exception on the rule that the discharge of the
instrument is caused by the one primarily liable for the instrument.
In the instance of accommodation, if the payment is made by the
accommodated party, it would still cause a discharge on the
Accommodation instrument.

Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder, at the time
of taking the instrument, knew him to be only an
accommodation party.
Are all holders for value, holders in due course? No. A holder
for value may know an infirmity or defect about the instrument
making him not a holder in due course. Therefore, in that case, it
is susceptible to all personal defenses. This is important
because, the liability of the accommodation party is towards
all holders for value, not necessarily HIDC (even if that holder
for value knows at the time of negotiation the accommodation
arrangement)

X negotiated an instrument to Y because Y is a very good
friend who has poor credit standing (no consideration there).
X is a very wealthy individual that anyone who is shown an
instrument where X is primarily liable, that person would
accept such an instrument. Y wanted to buy construction
materials from Atlantic Hardware. Y negotiated it to Atlantic
Hardware. Atlantic accepted the check because it bears the
signature of X. Between X and Y in relation to Atlantic, X is
primarily liable. As to third parties, the accommodation party
continues to be primarily liable. Third parties who do not know
about the arrangement between X and Y or even if they know, it
does not matter. To third parties, the person who is primarily liable
will always be the one primarily liable even if supposedly here,
there was no consideration on the instrument.
However, between an accommodation party (X) and the
accommodated party (Y), the accommodated party (Y) is still liable.
Are all holders in due course, holders for value? Yes, because
a HIDC cannot be a HIDC if he was not a holder for value.
But, then again when you talk of want of consideration, it can
be raised against a Holder Not in Due Course since this is a
personal defense.
Negotiation
Sec. 30. What constitutes negotiation. - An instrument is
negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.

What if Y gave 5k to X to use X’s name, and X accepted.

Between X and Y (wa’y apil third parties sa ha), Y as the
accommodated party is still primarily liable. The 5k consideration
was given for the use of X’s name not as the consideration for the
instrument. The term “therefor” in Sec 29, refers to the instrument.
If he receives value for something else not for the instrument,
between the accommodated party and accommodation party, the
accommodated party is still liable because he did not give any
consideration for the instrument. Although as to third parties, the
accommodation party will still be primarily liable.
But, it depends ha, what if he is just an accommodation indorser.
An accommodation indorser is not primarily liable on the
instrument.
It happens when the instrument is delivered or delivered with
indorsement (depends on the kind of instrument). There is
negotiation only when the purpose of transferring the instrument is
to constitute the receiver as a holder. If not, there is no negotiation.
Example, I show you a check but you ran away with it. There is no
negotiation. If there is no negotiation, there is a personal defense
(want of delivery).
What if it was delivered without an indorsement? If delivered
but not indorsed, there is no negotiation when it is an order
instrument. There is no personal nor real defense because in the
first place, there is no negotiation. The person who received it is
not a holder at all. What he may receive though are only the rights
of the person who delivered it/ immediate transferor. He is merely

VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
his agent. It is as if the instrument is negotiated as when a non-
negotiable instrument is transferred. You merely exercise the rights
of your source. If the rights of that source is that a holder not in due
course, then you will be susceptible to all defenses.
If there is no negotiation, it is just assignment. If there is mere
assignment, Civil Code will apply not NIL. However, it may give rise
to the right of the transferee to compel indorsement of the
instrument if the purpose is really to make him a holder of the
instrument. Here, we are talking of an order instrument that needs
indorsement and delivery for negotiation (because if it is a bearer
instrument, it can be negotiated just by delivery). Most likely, what
happens is that the instrument is just issued as a guaranty. In
guaranty, there is no negotiation. It just mere assignment. If later
on, that guaranty will have to be enforced because of the unpaid
obligation, then you can compel the debtor to indorse the
instrument to you so you can become a holder
Sec. 31. Indorsement; how made. - The indorsement must be
written on the instrument itself or upon a paper attached
thereto. The signature of the indorser, without additional
words, is a sufficient indorsement.
Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire instrument.
An indorsement which purports to transfer to the indorsee a
part only of the amount payable, or which purports to transfer
the instrument to two or more indorsees severally, does not
operate as a negotiation of the instrument. But where the
instrument has been paid in part, it may be indorsed as to the
residue.
Sec. 33. Kinds of indorsement. - An indorsement may be either
special or in blank; and it may also be either restrictive or
qualified or conditional.
Sec. 34. Special indorsement; indorsement in blank. - A
special indorsement specifies the person to whom, or to
whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further
negotiation of the instrument. An indorsement in blank
specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Sec. 35. Blank indorsement; how changed to special
indorsement. - The holder may convert a blank indorsement
into a special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character
of the indorsement.
How do you make an indorsement? Indicate ordinarily at the
back of the instrument your signature and to whom you want to
negotiate it to.
Example, at the back of the instrument, if X was to indorse it to Y,
X will add: “To: Y. Sgd X.” If Y then wants to negotiate it to Z, Y
should then add: “To: Z. Sgd. Y”
These indorsements are valid because the words of negotiability
are found in the face of the instrument. Indorsements do not
require words of negotiability. This kind of indorsement in the
example is a special indorsement. A special indorsement indicates
the person to whom the instrument is to be transferred plus the
signature of the indorser.
What if Z only signed the instrument without indicating to
whom he is negotiating (e.g. “Sgd. Z”)? It will be converted to a
bearer instrument by such blank indorsement. A blank indorsement
32
just contains a signature of the indorser.
Can you convert a blank indorsement to a special
indorsement? Yes, by indicating a contract consistent with the
intention of the party indorsing. Example, if the instrument in the
previous example was issued to A. A can convert the blank
indorsement of Z into a special indorsement by placing the name
to whom it is negotiated. You just add “To: A”. The instrument
would then be reverted to an order instrument because special
indorsement naman sad siya. It’s not anymore a bearer instrument
because of the blank indorsement because by converting it to a
special indorsement, it is now back to being an order instrument.
Could you make an indorsement in a separate paper? Yes, this
is called an allonge.
Sec. 36. When indorsement restrictive. - An indorsement is
restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use
of some other persons.
But the mere absence of words implying power to negotiate
does not make an indorsement restrictive.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. -
A restrictive indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could
bring;
(c) to transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
Sec. 38. Qualified indorsement. - A qualified indorsement
constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of
similar import. Such an indorsement does not impair the
negotiable character of the instrument.
Sec. 39. Conditional indorsement. - Where an indorsement is
conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or
his transferee whether the condition has been fulfilled or not.
But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject
to the rights of the person indorsing conditionally.
Restrictive indorsement, Qualified indorsement and
Conditional indorsement. In these 3 types of indorsements, it
presupposes that the indorsement should have been special
indorsements. There cannot be a blank indorsement that is
qualified, etc.
Effect of a special indorsement but it is restrictive. It does not
make the instrument non-negotiable right away.
Sec 36a, “prohibits the further negotiation of the
instrument”— It is in Sec 36a that makes the instrument non-
negotiable. If it says, “Pay to Y only. Sgd. X”, this makes the
instrument non-negotiable. The intention of X there is that the
instrument cannot be paid to anyone else but Y. This is a restrictive
indorsement. Y can assign this instrument but not negotiate it.
Sec 36b, “constitutes the indorsee the agent of the
indorser”— Example, “Pay to Y for safeguarding. Sgd. X” or “Pay
to Y for collection. Sgd. X”. The obligation of Y is just to collect for
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
safeguarding. Y can negotiate the instrument further however, the
limits of his authority will trickle to the succeeding indorsers. If then
Y indorses it as, “Pay to Z. Sgd. Y.” The right of Z will only be for
collection even if it is not mentioned anymore because there is
already a restrictive indorsement.
Sec 36c, “vests title in the indorsee in trust for or to the use of
some other persons”—Example, “Pay to Y in my trust. Sgd. X”
and then the indorsement that follows reads, “Pay to Z. Sgd. Y.”
That is possible but if ever there is payment made to Z, Z will hold
it in trust for X. The limit of the authority of Y or the one who was
originally restricted will trickle to the succeeding indorsers.
Y can transfer the instrument EXCEPT in Sec 36a where there is
no right to transfer. The rights of an indorsee are still (1) to receive
payment, and (2) to bring any other action thereon that the indorser
could bring. In Sec 36a, there is no right of an indorsee to transfer
his rights as such indorsee as provided in Sec 37c because in Sec
36a, there is no right to transfer the instrument that exists.
However, for Sec 36b and c, the indorsers can transfer to
subsequent indorsees. The subsequent indorsees can exercise all
the rights under Sec 37. So, in Sec 36b and c, there can be
negotiation, but the subsequent indorsees will only exercise the
rights under the restrictive indorsement.
We stopped here. We did not get to discuss Qualified Indorsement.
33
September 24, 2018
Sec. 36. When indorsement restrictive. - An indorsement is
restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use
of some other persons.
But the mere absence of words implying power to negotiate
does not make an indorsement restrictive.
Sec. 47. Continuation of negotiable character. - An instrument
negotiable in its origin continues to be negotiable until it has
been restrictively indorsed or discharged by payment or
otherwise.
1. What are the 3 forms of restrictive indorsement and
give an example?
(1) “prohibits the further negotiation of the
instrument”
- Example: “Pay to A only. Sgd B”
This is the only restrictive indorsement that makes
the instrument non-negotiable for all purposes
because this prohibits the further negotiation of the
instrument. Whoever holds this instrument will only
be able to assign it, he cannot negotiate it
Clearly the intention of the last indorser was to make
the instrument non-negotiable because payment can
only be made to A. The effect of this instrument being
transferred is a mere transfer or assignment, not a
negotiation. The transferee is considered a mere
assignee never a holder in due course, and the
assignee holds this instrument holds it subject to the
defenses of prior parties.
(2) “constitutes the indorsee the agent of the
indorser”
- Example: “Pay to Y for safeguarding. Sgd. X” or
“Pay to Y for collection. Sgd. X”.
This does not render the instrument non-negotiable.
It merely restricts the power of the indorsee to
negotiate it. Succeeding indorsers only get to
negotiate based on the authority given as the
restriction trickles to the subsequent indorsees.
Even if the indorsement does not mention the
limitation in authority, it is still understood that the
limits of authority of Y which is for collection only will
still trickle to the subsequent indorsees.
Example: “Pay to Mr. Debalucos for collection.
Sgd. Mr. Dela Cerna” and then Mr. Debalucos
indorses the instrument as follows: ““To: Mr.
Pepito. Sgd. Mr. Debalucos”
Even if the indorsement just says that, the limitation
in the authority of Debalucos will still trickle down to
Mr. Pepito even if there are no words indicating the
restrictive indorsement. What Mr. Pepito acquires is
only the right to collect for the instrument in behalf of
Mr. Dela Cerna
The legal basis is found in the last paragraph of Sec
37 (“…But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
indorsement”). This of course, only applies to Sec
36b and c, not Sec 36a because Sec 36a makes the
instrument non-negotiable.
(3) “vests title in the indorsee in trust for or to the
use of some other persons”—
- Example: “To: B, in trust for A. Sgd. C” and then
B indorses the instrument as follows: “To: D, in
trust for A. Sgd. B”
As an effect, the subsequent indorsees will still hold
the instrument in trust or to the use of A, in that
example. The limitation imposed upon B by C will
trickle down to the subsequent indorsees of B, who
is D in this case.
Whoever holds the instrument subsequent to the
restrictive indorsement, holds it subject to the
authority of the restriction given. Even if it doesn’t
mention the restriction, it still applies.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. -
A restrictive indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could
bring;
(c) to transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
2. What are the rights of the restrictive indorsee? The
rights of the restrictive indorsee is provided in Sec 37:
(1) To receive payment on the instrument
(2) Sue thereon in his name
(3) Negotiate the instrument except when it is prohibited
The restrive indorsee holds the instrument as if any other
holder (The exception is Sec 36a where there really is no
negotiation).
Sec. 38. Qualified indorsement. - A qualified indorsement
constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of
similar import. Such an indorsement does not impair the
negotiable character of the instrument.
3. How about a qualified indorsement? Does it hold the
instrument non-negotiable? This does not impair the
negotiable character of the instrument, (Sec 38—“such an
indorsement does not impair the negotiable character of
the instrument”)
4. What is this qualified indorsement? Qualified
indorsement is an indorsement where the indorser’s
liability to subsequent indorsees is limited.
A qualified indorsement constitutes the indorser as a
mere assignor of the title of the instrument. He is not liable
to make payment in case of insolvency of the parties
liable to the instrument. He does not guarantee the
solvency of the person primarily liable unless he knows of
such insolvency.
By adding to the indorser’s signature the words “without
34
recourse”, the subsequent indorsee cannot compel the
indorser making such indorsement to pay if the person
primarily liable fails to because he is insolvent
5. Examples of a qualified indorsement. How do you
make a qualified indorsement? “Pay to A without
recourse. Sgd. B” or ““Pay to A sans recourse. Sgd. B”
B, the qualified indorser cannot be compelled to pay the
subsequent indorsee/s if the party primarily liable is
insolvent as he does not warrant the solvency of prior
parties. A cannot go back to him to require payment.
(1) “Without recourse”
(2) “Sans recourse”
(3) “At indorsee’s own risk”
(4) Words of similar import to “without recourse”
6. What is the effect?
(1) It makes the indorser a mere assignor to the
instrument
(2) Limits the liability of the indorser
(3) Does not impair the negotiable character of the
instrument
The qualified indorser does not warrant the solvency of
the person primarily liable on the instrument unless he
knows of his insolvency. A qualified indorsement shows
the the unwillingness of the indorser to be answerable for
the solvency of prior parties (“a prudent precaution”;
especially so when the note has a long time to run before
it matures)
THE QUALIFIED INDORSER IS NOT LIABLE IF THE
REASON IS INSOLVENCY UNLESS HE HAS
KNOWLEDGE OF SUCH INSOLVENCY (OR WHEN
THE INSOLVENCY IS ALREADY PUBLIC
KNOWLEDGE).
7. However, when is the qualified indorser still liable if
the instrument is dishonored by non-
acceptance/payment?
The qualified indorser may still be required to pay if the
reason for non-payment is due to the breach of his
warranties as a qualified indorser under Sec 65.
When it is dishonored due to:
(1) Forgery
(2) Lack of good title to the indorsed instrument
(3) Lack of capacity to contract of prior parties
(4) Fact that the instrument was valueless or not valid at
the time of the indorsement which fact was known to
him
8. What do you understand by “recourse”? a resort to a
person who is secondarily liable after the default of the
person who is primarily liable
9. Who is referred here as without recourse? It is the
indorser. The indorser negotiates it to the indorsee but the
indorsee cannot go back to him in case the indorsee
would not be paid due to the insolvency of the one
primarily liable
10. Is that absolute? The liability is limited only to the
solvency of the one primarily liable. Look at Sec 65
(warranties of a qualified indorser and person negotiating
by delivery) and Sec 66 (warranties of a general indorser)
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
Sec. 65. Warranty where negotiation by delivery, and so forth.
— Every person negotiating an instrument by delivery or by a
qualified indorsement warrants —
(a) That the instrument is genuine and in all respects
what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee. The provisions of subdivision (c) of this section do
not apply to persons 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 —
(c) The matters and things mentioned in
subdivisions(a),(b) and (c) of the next preceding
section; and
(d) 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.
11. What is the difference between the warranties of a
qualified indorser and a general indorser?
- In Sec 65(d) which talks about the qualified
indorser— “…that he has no knowledge of any
fact which would impair the validity of the
instrument or render it valueless”.
- In Sec 66(b) which talks about the general
indorser—“…that the instrument is at the time
of his indorsement is valid and subsisting”.
Under Sec 65, it requires knowledge on the part of the
indorser of a fact that would impair the validity of the
instrument for the indorser to breach his warranty. In Sec
66, whether there is knowledge or not, if the instrument is
impaired or rendered valueless, it is still a breach of the
general indorser’s warranty.
When the indorser has breached his warranty, whether
as a general or qualified indorser, he can be held liable
for such breach
12. When is the qualified indorser liable even if the
primary party is unable to pay because of
insolvency? When the qualified indorser knew of the
insolvency of the person primarily liable, then he is still
liable.
Basically, If you are a qualified indorser, you will not be
required to pay the amount of the instrument in case there
is insolvency on the part of the person who may be
required to pay the instrument UNLESS the qualified
indorser knew of the insolvency of the person liable
(knowledge of the insolvency is the breach of warranty
under Sec 65d)
Additionally, the qualified indorser is also made liable for
non-payment when the dishonor is due to forgery, lack of
35
good title to the indorsed instrument, and lack of capacity
to contract of prior parties.
THE QUALIFIED INDORSER CAN BE LIABLE FOR THE
AMOUNT FOR ANY BREACH OF WARRANTY HE
MADE UNDER SEC 65
13. A—B—C (made a qualified indorsement to D)—D—E.
E went to A for payment but A cannot pay because of
bankruptcy. To whom should E go? E can go D
because under Sec 66(b), the general indorser/D makes
a warranty to E that D will pay E in case the instrument is
dishonored or unpaid. D makes a promise to make
payment in case the instrument is not paid (as seen in
Sec 66, last paragraph)
14. Can E go after C? No, E cannot go after C because C
did not make a warranty to make payment in case the
person liable to pay (A) cannot pay because of
insolvency. C can only be held liable if the non-payment
is due to breach of warranties under Sec 65 but not
insolvency which the indorser did not know about.
15. What if A was publicly known to be insolvent, can E
go after C? Yes, under Sec 65(d), E can go after C
because of C’s breach of warranty that he has no
knowledge of any fact that impairs the validity of the
instrument. Because A is publicly known to be insolvent,
C is presumed to have known of such fact. In such case,
C is presumed to know such fact that impaired the validity
of the instrument.
E can go after C not because of “sans recourse” but
because C made that qualified indorsement despite the
public fact that A is insolvent
16. What if A was not publicly known to be insolvent but
C knew A was insolvent? All the more C can be held
liable. Now, C really has actual knowledge of the
insolvency of A. If in the previous example (A’s insolvency
is public knowledge), we just imputed knowledge on C to
make him liable, all the more that here C should be liable
because he personally knows of A’s insolvency.
Sec. 39. Conditional indorsement. - Where an indorsement is
conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or
his transferee whether the condition has been fulfilled or not.
But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject
to the rights of the person indorsing conditionally.
17. How about conditional indorsement? Indorser
imposes some other conditions to his liability or on the
indorsee’s right to collect the proceeds of the instrument
18. Does it render the instrument non-negotiable? No, the
instrument can still be negotiated and the condition on the
indorsement will not affect the negotiability of the
instrument.
However, the condition must be on the indorsement not
on the instrument itself (otherwise, a condition would be
placed on the instrument therefore rendering the
instrument non-negotiable because the promise to pay a
sum certain in money becomes in effect, conditional)
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
19. Effect of a conditional indorsement. It has no effect on
the further negotiation of the instrument.
20. Could the condition be disregarded? The person
primarily liable can disregard the condition and make
payment but the conditional indorsee will hold the
proceeds in trust for the conditional indorser until the
condition is fulfilled. If the condition is not fulfilled, you can
request for a refund.
21. Is it the same as restrictive indorsement? No. The
conditional indorsement only affects the conditional
indorsee (not anymore the subsequent indorsees), unlike
the subsequent indorsements under a restrictive
indorsement. The condition therefore is not passed on to
the subsequent indorsees.
Example, “To A, if he passes NIL. Sgd. B.” The
negotiation is as follows: A—C—D. A will hold the
instrument subject to the condition that he will pass NIL.
C and D will not be affected of the conditional
indorsement. The condition “if he passes NIL” will not
trickle to the subsequent indorsees unlike the subsequent
indorsees under restrictive indorsement. If the condition
is unfulfilled, A can be compelled to pay the subsequent
indorsees.
A issued the instrument to C and D without any
consideration. Can B refuse payment to D because A
did not pass NIL? Yes, he is justified to refuse payment.
But, it depends if D is a HIDC and not a HIDC and the
shelter principle does not apply because it is only a
personal defense of want of consideration.
D can go after A. A makes a risk when he negotiates the
instrument with a conditional indorsement before the
condition is fulfilled because in the case that the condition
does not happen, A is liable to D.
22. What if the instrument has already matured and the
grade for NIL has not been submitted yet. Can B make
payment? Yes, B can make payment to D, disregarding
the condition. However, if the condition is not fulfilled, B
can go to D and get the payment because the person who
receives such payment will always hold it in trust for the
person who made the conditional indorsement. If the
condition is not fulfilled, you can request for a refund
The legal basis is in Sec 39—“… But any person to whom
an instrument so indorsed is negotiated will hold the
same, or the proceeds thereof, subject to the rights of the
person indorsing conditionally”
I think in conditional indorsement, subsequent indorsees
will not be subjected to the condition imposed, but in case
the condition is disregarded and payment is made, the
“person” (so either the conditional indorsee or his
transferee) will hold the proceeds in trust subject to the
rights of the conditional indorser (who is the “person
indorsing conditionally”).
36
September 25, 2018
1. CLARIFICATION ON THE CONDITIONAL
INDORSEMENT
“Pay A if he will marry X. Sgd. Y”
then “Pay to B. Sgd. A”
then “Pay to C. Sgd. Z”
When Atty first discussed it, he said that the condition in
the conditional indorsement would not trickle down to the
subsequent indorsees, however there is a clarification.
Yes, these individuals will not be bound by the condition
but “not bound” in the sense that their further indorsement
of the instrument would not state the condition. Because
it is mentioned in the law that whoever receives the
proceeds of the instrument actually holds it in trust for the
person who may have indorsed it conditionally. Such that,
if the condition is not fulfilled, it goes out actually to the
rights of the parties subsequent to the conditional
indorsement.
It seems that all these subsequent indorsees (B and C)
are still bound by the condition but the last person who is
supposed to receive the proceeds will hold it in trust for
the person primarily liable subject to the fulfillment of the
condition. When the condition is not fulfilled, the person
who made such condition can demand payment from the
person whom he indorsed the instrument; maybe the
subsequent parties may be compelled for subsequent
payments to the person from whom they received the
instrument.
Example, if the condition is not fulfilled, Y will go to A to
ask back the payment because the condition is not
fulfilled. Then A will go to B who will go to C. It will follow
the order of liability.
Sec. 41. Indorsement where payable to two or more persons.
- Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse
unless the one indorsing has authority to indorse for the
others.
2. Can there be 2 or more indorsers? What’s the
requirement? There can be 2 or more indorsers if there
are 2 or more payees in the instrument.
That’s why we can have 2 or more indorsers because
when 2 or more payees are indicated in the instrument
then all the payees must indorse the instrument together
(Multiple Indorsement) UNLESS they are partners or one
is authorized to indorse it for all of them.
General Rule: All the payees must indorse the instrument
together
Exception:
(1) They are partners
(2) One is authorized to indorse in behalf of all the
payees
Sec. 42. Effect of instrument drawn or indorsed to a person
as cashier. - Where an instrument is drawn or indorsed to a
person as "cashier" or other fiscal officer of a bank or
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
corporation, it is deemed prima facie to be payable to the bank
or corporation of which he is such officer, and may be
negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer.
Sec. 44. Indorsement in representative capacity. - Where any
person is under obligation to indorse in a representative
capacity, he may indorse in such terms as to negative
personal liability.
3. If the instrument is addressed to a person holding a
position in an entity like a corporation, the intention
there is you have to infer that this instrument is
intended for this entity represented by the person
holding that position. It is then for the benefit of the
person to whom the instrument is indorsed to make
sure that the instrument goes to the entity or
corporation. Otherwise if he has to make an
indorsement, what is required of him? He must
indicate or indorse that “negative liability”. He has to
indorse in a way that negates personal liability. You
indicate the name of your principal and your capacity for
signing. That’s how you negate your personal liability
Again, if it is paid or drawn against the position, that
doesn’t mean that the person who holds that position is
the one who may be held liable or entitled to the proceeds
of the instrument. In that case, he has to make sure that
the instrument goes to the real owner or he has to
negotiate in the sense that he clearly indicates that he is
acting as a mere representative. To negate personal
liability, he must indicate his principal and in which
capacity he signing.
Sec. 43. Indorsement where name is misspelled, and so forth.
- Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his proper signature.
4. What if there is a mistake? Indorse according to your
misspelled name but you correct aside from signing the
instrument. Correct what has to be corrected.
Sec. 45. Time of indorsement; presumption. - Except where an
indorsement bears date after the maturity of the instrument,
every negotiation is deemed prima facie to have been effected
before the instrument was overdue.
5. When do you make the indorsement? As to the time as
when it is indicated. If it is not indicated, then the
presumption is that it was indorsed before or at the time
of its maturity.
Sec. 46. Place of indorsement; presumption. - Except where
the contrary appears, every indorsement is presumed prima
facie to have been made at the place where the instrument is
dated.
6. Where was the instrument indorsement? At the place
where the instrument is dated.
Example: the instrument is dated as follows: “Cebu City,
Jan 10, 2018.” Here, we can say that the instrument was
37
issued at Cebu City.
Of course that’s very simple, you just look at that place
that is mentioned. But what if it’s not mentioned? Then
you go to the presumption of when the instrument was
dated. That means the place of the instrument is where
the instrument was issued.
Sec. 49. Transfer without indorsement; effect of. - Where the
holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.
7. What if the instrument that requires to be indorsed
was not indorsed, just merely delivered (this
presupposes it is an order instrument)? There is no
negotiation. It becomes a mere assignment or transfer of
the instrument. The subsequent transferee holds it
subject to all the defenses against the transferor (real or
personal). The transferee then will just step in the shoes
of the transferor—he is never a holder in due course
This is where we distinguish between negotiation and
assignment, and who is the holder and who is the
assignee.
However, under the law, if you happen to be such
assignee/ transferee in such a case, you can demand the
indorsement from your transferor.
8. When is the determination of when you are deemed a
HIDC? Is it from the time the instrument was delivered
to you or at the time it was indorsed? As of the time
when the instrument actually indorsed to you. If by that
time, the holder already had notice of the defect, then he
cannot be deemed a HIDC.
It is possible that the instrument was delivered to you
without any indorsement and without any knowledge on
your part of any defect. But, when the instrument is
already indorsed to you, you already knew and were
aware of the defect, in that case, you cannot be
considered a HIDC anymore. This is because by the time
the instrument was indorsed to you, you already had
knowledge of the defect of the instrument notwithstanding
the fact that when the instrument was physically delivered
to you, you did not know of any defect or infirmity.
Sec. 40. Indorsement of instrument payable to bearer. - Where
an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders
as make title through his indorsement.
9. “I promise to pay A or bearer 10k. Sgd. B”
The instrument was negotiated:
B(issued)—A(delivered but actually was stolen by C)—
C(indorsed; thief)—D(indorsed)—E(delivered)—F
B refused to pay because between B and C, there was
really no delivery since C stole the instrument from
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
A. To whom can F go after?
(However, guys, remember the defect here is complete
but undelivered instrument. As against a holder in due
course, B, as the maker supposedly should be liable
because he cannot raise the personal defense of
complete but undelivered instrument. But, in this
example, Sir made us believe na no point making F
recover from B because he already refused payment)
F can go to E since he is the immediate transferor and he
warranted that the instrument is genuine and in all
respects what it purports to be and that he has good title
to it.
F can go to C since C stole the instrument and should be
liable for all the consequence of his actions
38
11. When can you trace your title to the instrument?
When there has been a series of unbroken indorsements.
This means the instrument has to be continually indorsed
(despite being a bearer instrument) until you get title
thereto. The moment there is a break in the chain of
indorsements, then you cannot trace your title to those
prior indorsers and those prior indorsers are not
compelled by the holder.
Sec. 48. Striking out indorsement. - The holder may at any time
strike out any indorsement which is not necessary to his title.
The indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved from
liability on the instrument.

F cannot go to D because F cannot trace title of the
instrument from C and D because C and D negotiated the
instrument through indorsement when the instrument
could have been negotiated by mere delivery. F merely
acquired title of the instrument through E’s delivery.
However, C is still liable because he is the thief
Sec. 50. When prior party may negotiate instrument. - Where
an instrument is negotiated back to a prior party, such party
may, subject to the provisions of this Act, reissue and further
negotiable the same. But he is not entitled to enforce payment
thereof against any intervening party to whom he was
personally liable.

10. “To: A. Pay to B or order P10k. Sgd. C” 12. Order instrument was indorsed as follows:

C (issued)—B (presented for acceptance to A who
accepted; thereafter, indorsed by special indorsement)—
D (SI)—E (BI)—F (D)—G (D)—H
H wants to go to A for payment but A cannot make
payment because he is insolvent. Discuss the rights
of H
H can go after B, D and E supposedly even if they do not
have knowledge of the insolvency. As indorsers, they
warrant that they will pay in case the person primarily
liable cannot pay because of insolvency. They actually
warranted the solvency of the person primarily liable
H cannot go after G even if he is the immediate transferor
because he did not breach any of the warranties under
Sec 65. He did not know of A’s insolvency in the first place
H cannot go after F because F did not warrant anything
to him
A (issued)—B (SI)—C (SI)—D (BI)—E (D)—F (SI)—G
(BI)—D
If a party becomes a holder twice, D can no longer go
after E, F and G. He is reverted to his original position so
he cannot go after E, F and G because they were not prior
parties when he became a party the first time. Otherwise,
it becomes a continuous cycle of demands
D’s remedy is that he can go after the prior parties (A, B
and C) and he can strike out E, F and G because they are
not necessary to his title. Subsequent parties to him (E, F
and G) will just be stricken out because after all he will not
be able to go after them man sad. Of course there can be
no striking out if there was no indorsement, as when it is
just delivered. The effect of striking out is that those
parties stricken out will be freed from liability as against
D. The indorsement of D to E will be stricken out. In effect,
F and G will be freed from liability.

It requires that before the indorser becomes liable as an

indorser, the holder should first be able to trace title to
such indorser. In the first example (bearer instrument), F
cannot trace his title to C and D. This is why C and D
cannot be made liable. Sec 40 only applies to an
instrument when it is originally a bearer instrument.

In the second example, the instrument although originally

an order instrument, Sec 40 cannot apply because this
instrument was merely converted into a bearer
instrument. In the second example which is originally an
order instrument, the indorsement made extends to all
parties subsequent. The warranties are extended to all
subsequent holders even if it was already converted into
a bearer instrument by virtue of the blank indorsement
made. That is why E who made the blank indorsement is
still made liable. H can continually go after B, D and E
who indorsed the instrument because this is originally an
order instrument

Once a bearer instrument, always a bearer instrument

regardless of the indorsements made.

VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
September 28, 2018
1. Additional note on a Mistake in the indorsement.
There really is no need to correct but if the indorsee
deems it necessary to correct then he can correct by
correcting the error and signing thereafter
2. What are the rights of the assignee under Sec 49? He
can demand the indorsement of his transferor. It is also
important to remember that the determination of when he
becomes a holder in due course is by the time the
indorsement to him is actually made (not when the
instrument was delivered to him).
3. Gempesaw Case (CASE FOR FORGERY IN A
CHECK).
DOCTRINE: The drawer’s negligence may preclude him from
raising the real defense of forgery. By his negligence, the
liability of the drawee may be proportionally reduced. In this
case, the drawee was also found negligent.
Gempesaw v CA
Natividad Gempesaw is a businesswoman who entrusted to her
bookkeeper, Alicia Galang, the preparation of checks about to be
issued in the course of her business transactions. From 1984 to
1986, 82 checks amounting to P1,208,606.89, were prepared and
were supposed to be delivered to Gempesaw’s clients as payees
named thereon. However, through Galang, these checks were
never delivered to the supposed payees. Instead, the checks were
fraudulently indorsed to Alfredo Romero and Benito Lam.
Note: What Galang issued were checks that were above the
amount due to the supplier so she could get the excess. Otherwise,
the suppliers not paid would have been bugging Gempesaw for
payment. Galang paid the suppliers in cash para iyaha ang sobra.
ISSUE:
Whether or not the bank should refund the money lost by reason
of the forged indorsements
HELD:
NO. Gempesaw cannot set up the defense of forgery by reason of
her negligence. As a rule, a drawee bank (in this case the
Philippine Bank of Communications) who has paid a check on
which an indorsement has been forged cannot charge the drawer’s
(Gempesaw’s) account for the amount of said check. An exception
to this rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check is
stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of
his cancelled check. A different situation arises where the
indorsement was forged by an employee or agent of the drawer, or
done with the active participation of the latter.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act as
a prudent businessman would under the circumstances. In the
case at bar, Gempesaw relied implicitly upon the honesty and
loyalty of Galang, and did not even verify the accuracy of amounts
of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements,
she apparently did not carefully examine the same nor the check
stubs and the returned checks, and did not compare them with the
same invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as
bases for the checks. With such discovery, the subsequent
forgeries would not have been accomplished. It was not until two
39
years after Galang commenced her fraudulent scheme that
Gempesaw discovered that eighty-two (82) checks were wrongfully
charged to her account, at which she notified the Philippine Bank
of Communications.
We hold that banking business is so impressed with public interest
where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost
diligence. Surely, respondent drawee Bank cannot claim it
exercised such a degree of diligence that is required of it. There
is no way We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely vicarious but primary
wherein the defense of exercise of due diligence in the selection
and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable
to share the loss with the petitioner on a fifty-fifty ratio in
accordance with Article 172 which provides:
Responsibility arising from negligence in the performance
of every kind of obligation is also demandable, but such
liability may be regulated by the courts according to the
circumstances.
Thus, the fact that petitioner's negligence was found to be the
proximate cause of her loss does not preclude her from recovering
damages.
4. Samsung Case (CASE FOR FORGERY IN A CHECK)
DOCTRINE: The drawee is liable if there is forgery in the
signature of the drawer because it admits the genuineness of
the signature of the drawer.
Samsung Construction Co v FEBTC and CA
Samsung Construction held an account with Far East Bank. One
day a check worth 900,000, payable to cash, was presented by
one Roberto Gonzaga in the Makati Branch of Far East Bank. The
check was certified to be true by Jose Sempio, the assistant
accountant of Samsung, who was also present during the time the
check was cashed. Later however it was discovered that no such
check was ever approved by the Samsung’s head accountant, the
president of the company also never signed any such check.
Samsung/Jong (check was stolen by Sempio who delivered it
to Gonzaga)----Cash (Gonzaga)—FEBTC (for presentment and
acceptance which FEBTC did)
Samsung went to the bank and spoke with the manager who
promised him that the amount would be returned but it was
never returned (that’s why we have a case here)
ISSUE:
Whether or not Far East Bank is liable to reimburse Samsung for
cashing out the forged check, which was drawn from the account
of Samsung
HELD:
Far East Bank is liable for reimbursement. Sec. 23 of the
Negotiable Instrument Law states that a forged signature makes
the instrument “wholly inoperative”. If payment is made the drawee
(Far East) cannot charge it to the drawer’s account (Samsung).
The fact that the forgery is clever is immaterial. The forged
signature may so closely resemble the genuine as to defy detection
by the depositor himself. And yet, if the bank pays the check, it is
paying out with its own money and not of the depositor’s. This rule
of liability can be stated briefly in these words: “A bank is bound to
know its depositor’s signature.” The accusation of negligence on
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
the part of Samsung was not clearly proven. Absence of proof to
the contrary, the presumption is that the ordinary course of
business was followed.
NOTE:
NBI was believed by the RTC rather than the PNP to say that there
was forgery. This is why SC believed the NBI because the RTC is
a trier of facts who actually saw the testimonies and demeanor of
the witnesses. Additionally, the SC believed Jung because he
himself said that there was forgery. Because there was no other
evidence presented, the SC believed his testimony.
Also, there was no negligence on the part of Samsung because
there was no evidence presented by FEBTC proving such
negligence. As such, the SC had to apply the presumption that any
other businessman would be cautious in dealing with his
transactions. “Employers do not possess the preternatural gift of
cognition as to the evil that may lurk within the hearts and minds of
their employees”
There was negligence however, on the part of FEBTC. When the
bank officers called Jong and he did not answer, the officers
referred Sempio (who was the thief) to ascertain the genuineness
of the signature. Instead of relying on their SOPs, they just relied
on what Sempio said. This is why it cannot pin the liability on
Samsung.
The general rule was applied as the exception cannot apply since
there was no negligence on the part of the drawer as in the case
of Gempesaw
5. Associated Bank case (CASE FOR FORGERY IN A
CHECK).
DOCTRINE: There was forgery in the signature of the indorser.
The collecting bank should be held liable for having
ascertained the genuineness of the signature of prior
indorsers. However, the drawer may be made liable
proportionally for his negligence.
Associated Bank v CA
The Province of Tarlac was disbursing funds to Concepcion
Emergency Hospital via checks drawn against its account with the
Philippine National Bank (PNB). These checks were drawn
payable to the order of Concepcion Emergency Hospital. Fausto
Pangilinan was the cashier of Concepcion Emergency Hospital in
Tarlac until his retirement in 1978. He used to handle checks
issued by the provincial government of Tarlac to the said hospital.
However, after his retirement, the provincial government still
delivered checks to him until its discovery of this irregularity in
1981. By forging the signature of the chief payee of the hospital
(Dr. Adena Canlas), Pangilinan was able to deposit 30 checks
amounting to P203 k to his account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it
demanded PNB to reimburse the said amount. PNB in turn
demanded Associated Bank to reimburse said amount. PNB
averred that Associated Bank is liable to reimburse because of its
indorsement borne on the face of the checks:
“All prior endorsements guaranteed ASSOCIATED BANK”
Province of Tarlac (issued a check for CEC but was given to
Pangilinan)—Pangilinan (forged the signature of the Cashier
of CEC)—AB—PNB (paid the check to AB)
Province of Tarlac now asks for reimbursement. PNB made a
complaint impleading Associated Bank
40
ISSUE:
What are the liabilities of each party?
HELD:
The checks involved in this case are order instruments. Liability of
Associated Bank
Where the instrument is payable to order at the time of the forgery,
such as the checks in this case, the signature of its rightful holder
(here, the payee hospital) is essential to transfer title to the same
instrument. When the holder’s indorsement is forged, all parties
prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is
deposited and which indorses the check upon presentment with
the drawee bank (PNB), is such an indorser. So even if the
indorsement on the check deposited by the banks’s client is forged,
Associated Bank is bound by its warranties as an indorser and
cannot set up the defense of forgery as against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB)
unreasonably delayed in notifying the collecting bank (Associated
Bank) of the fact of the forgery so much so that the latter can no
longer collect reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank
(PNB), is under strict liability to pay the check to the order of the
payee (Provincial Government of Tarlac). Payment under a forged
indorsement is not to the drawer’s order. When the drawee bank
pays a person other than the payee, it does not comply with the
terms of the check and violates its duty to charge its customer’s
(the drawer) account only for properly payable items. Since the
drawee bank did not pay a holder or other person entitled to receive
payment, it has no right to reimbursement from the drawer. The
general rule then is that the drawee bank may not debit the
drawer’s account and is not entitled to indemnification from the
drawer. The risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the
customer/drawer (Tarlac Province) to exercise ordinary care that
substantially contributed to the making of the forged signature, the
drawer is precluded from asserting the forgery.
In sum, by reason of Associated Bank’s indorsement and
warranties of prior indorsements as a party after the forgery, it is
liable to refund the amount to PNB. The Province of Tarlac can ask
reimbursement from PNB because the Province is a party prior to
the forgery. Hence, the instrument is inoperative. HOWEVER, it
has been proven that the Provincial Government of Tarlac has
been negligent in issuing the checks especially when it
continued to deliver the checks to Pangilinan even when he
already retired. Due to this contributory negligence, PNB is only
ordered to pay 50% of the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated
Bank (by reason of Associated Bank’s warranties), PNB can ask
the 50% reimbursement from Associated Bank. Associated Bank
can ask reimbursement from Pangilinan but unfortunately in this
case, the court did not acquire jurisdiction over him.
6. Republic v CA (CASE ON MATERIAL ALTERATION)
DOCTRINE: General rule is that the drawee-bank is liable for
its negligence to comply with the 24-hour clearing house rule
unless compliance of the same would still allow the fraud to
happen.
VANILLAELA
Negotiable Instruments Law (Atty. Amago Discussion) 41
404 (A.Y. 2018-2019)

Republic v CA

On January 25, 1966, San Miguel Corporation (SMC) issued a

P240.00 check in favor of Roberto Delgado against SMC’s account
with the First National City Bank (FNCB). Delgado fraudulently
changed the amount written on the check to P9,240.00. Delgado
made a check deposit with Republic Bank. Republic Bank
accepted the check and endorsed it to FNCB by stamping on the
back of the check “all prior and/or lack of indorsement guaranteed“.
The check cleared and FNCB paid Republic Bank P9,240.00. On
April 19, 1966, SMC notified FNCB that the check involved was
forged. FNCB refunded SMC the amount of the check. On May 19,
1966, FNCB informed Republic bank about the forgery, by then
Delgado withdrew his account from Republic Bank. On August 15,
1966, FNCB demanded Republic Bank to refund the amount of the
check.

ISSUE:
Whether or not Republic Bank should refund the amount to FNCB

HELD:
No. The 24-hour clearing house rule embodied in Section 4(c) of
Central Bank Circular No. 9, as amended, applies to this case. This
rule mandates banks that after a clearing, all cleared items must
be returned not later than 3:00 PM of the following business day.
It is true that when an endorsement is forged, the collecting bank
or last endorser, as a general rule, bears the loss. But the
unqualified endorsement of the collecting bank on the check
should be read together with the 24-hour regulation on clearing
house operation. Thus, when the drawee bank (FNCB) fails to
return a forged or altered check to the collecting bank (Republic
Bank) within the 24-hour clearing period, the collecting bank is
absolved from liability.

SAMPLE QUESTION:

A DELIVERS A BEARER INSTRUMENT TO B. B SPECIALLY

INDORSES IT TO C WHO LATER ON INDORSES IN BLANK TO
D. E STEALS THE INSTRUMENT FROM D AND FORGED THE
SIGNATURE OF D. E NEGOTIATES THE INSTRUMENT TO F
WHO KNEW ABOUT THE FORGERY.

A (DELIVERED)—B (SI)—C (BI)—D—E(STOLE FROM D AND

FORGED SIGNATURE OF D)—F (KNEW ABOUT THE
FORGERY)

ANSWER:

F CANNOT ENFORCE PAYMENT AGAINST ALL THE PRIOR

PARTIES. WHILE THIS IS A BEARER INSTRUMENT AND
INDORSEMENT IS UNNECESSARY, ALL PARTIES CAN RAISE
THE PERSONAL DEFENSE OF WANT OF DELIVERY AS F IS
NOT A HOLDER IN DUE COURSE

TIP:
Just stick to the general rules for the exam. Remember ha,
when there is contributory negligence, the liability between
the parties should be apportioned.

VANILLAELA